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Subject: Economics

  • Risks involved in investment in cryptocurrencies

    Context

    We are witnessing the change where the cult of savers has changed into investors. They are looking for a good return and willing to take the risk.

    Changing the behaviour of the savers

    • There is a new wave of savings and investments in the country that is evolving quite fast.
    • Crypto exchanges assure you that they are safe.
    • But it is the exchange that is safe, not the value of the coin, which will be driven by the market.
    • The equity boom is on, and all the unicorns have delivered excellent results.
    • That’s why bank deposits are no longer on our plates.
    • Banks discouraging deposits: Interestingly, banks today are discouraging deposits with low rates as this is the only way they can manage their balance sheets.
    • Low-interest rate: There are few deployment avenues and paying 5 per cent interest to savers and investing the deposits at 3.35 per cent in the reverse repo auction is a sub-optimal game.

    How safe is investment in cryptocurrencies?

    • From equities, there has been a swift shift to cryptos, which is still a grey area.
    • The regulators/government are wondering what to do. The issue will be discussed in the winter session of Parliament.
    • But investments have been made and there is no stopping this global wave.
    • Currency with no underlying asset: Making money on a currency that has no underlying asset like a metal or other currency and is traded on faith is unique; especially Bitcoin, whose originator is not known by face but by just a name.

    Gaming as a skill

    • There is another door to a new kind of gaming where you make money by making teams and following the matches.
    • The law was first silent, and then confused.
    • But it finally accepted gaming as a skill.
    • Logically, soon we should be able to bet on matches too, if all this is in order.

    Conclusion

    We are witnessing a change in the pattern of holding onto money, where savings get transformed to investment and risk appetite changes from conservative to aggressive. Will this change? Probably not, in the near future, as long as conventional deposits continue to give inferior returns.

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  • UNCITRAL Model for Cross Border Insolvency

    The Ministry of Corporate Affairs (MCA) has published a draft framework for cross-border insolvency proceedings based on the UNCITRAL (United Nations Commission on International Trade Law) model under the Insolvency and Bankruptcy Code.

    About Insolvency and Bankruptcy Code (IBC)

    • The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
    • It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
    • The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

    Cross border insolvency proceedings

    • Cross-border insolvency proceedings are relevant for the resolution of distressed companies with assets and liabilities across multiple jurisdictions.
    • A framework for cross-border insolvency proceedings allows for the location of such a company’s foreign assets, the identification of creditors and their claims.
    • This helps establishing payment towards claims as well as a process for coordination between courts in different countries.

    Current status of foreign stakeholders and courts in other jurisdictions under IBC

    • While foreign creditors can make claims against a domestic company, the IBC currently does not allow for automatic recognition of any insolvency proceedings in other countries.
    • Current provisions under the IBC do not allow Indian courts to address the issue of foreign assets of a company being subjected to parallel insolvency proceedings in other jurisdictions.

    The UNCITRAL model

    • The UNCITRAL model is the most widely accepted legal framework to deal with cross-border insolvency issues.
    • It has been adopted by 49 countries, including the UK, the US, South Africa, South Korea and Singapore.
    • The law allows automatic recognition of foreign proceedings and rulings given by courts in cases where the foreign jurisdiction is adjudged.
    • Recognition of foreign proceedings and reliefs is left to the discretion of domestic courts when foreign proceedings are non-main proceedings.
    • The model law deals with four major principles of cross-border insolvency:
        • Direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor.
        • Recognition of foreign proceedings & provision of remedies.
        • Cooperation between domestic and foreign courts & domestic and foreign insolvency practitioners.
        • Coordination between two or more concurrent insolvency proceedings in different countries. The main proceeding is determined by the concept of Centre of Main Interest (COMI).
          • The COMI for a company is determined based on where the company conducts its business on a regular basis and the location of its registered office.
      • It is designed to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration.

    Issues with Indian framework

    • The framework for cross-border insolvency adopted in India may require reciprocity from any country which seeks to have its insolvency proceedings recognized by Indian courts.
    • This would allow Indian proceedings for foreign corporate debtors to be recognized in foreign jurisdictions.

    Back2Basics: UNCITRAL

    • It is an affiliate organization to the UN made up of business and legal professionals.
    • This group develops model standards and procedures for dealing with issues affecting international business.
    • Perhaps most notably, UNCITRAL promulgated the Convention on International Sale of Goods (CISG).
    • The CISG is a model law commonly used as the governing provisions in contracts between parties from different nations.

     

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  • Jaitapur Nuclear Power Project

    If built on time, Jaitapur Project in Maharashtra would be the largest nuclear power generating station in the world by net generation capacity, at 9,900 MW.

    Jaitapur Nuclear Power Project

    • Jaitapur Project is a proposed nuclear power plant in India.
    • The power project is proposed by Nuclear Power Corporation of India (NPCIL) and would be built at Madban village of Ratnagiri district in Maharashtra.
    • It is being built with technical cooperation from France.

    Project description

    • It is proposed to construct 6 European Pressurized Reactors designed and developed by Framatome (former Areva) of France, each of 1650 MW, thus totaling 9900 MW.
    • These are the third generation pressurized water reactors (PWR).
    • The cost of building the plant is about ₹20 crore (US$2.7 million) per MW electric power compared with ₹5 crore (US$660,000) per MW electric power for a coal power station.
    • A consortium of French financial institutions will finance this project as a loan. Both French and Indian government will give sovereign guarantee for this loan.

    Issues with the project

    (I) Liability for nuclear damage

    • The lack of clarity on the Civil Liability for Nuclear Damage Bill 2010 passed in Indian Parliament in August 2010 is a hurdle in finalizing deal.
    • This Civil Liability for Nuclear Damage Bill 2010 has a clause that deals with the legal binding of the culpable groups in case of a nuclear accident.
    • It allows only the operator (NPCIL) to sue the manufacturers and suppliers. Victims will not be able to sue anyone.

    (II) Clearance issue

    • Environmental effects of nuclear power and geological issues have been raised by anti-nuclear activists of India against this power project.
    • Even though the Maharashtra state govt completed land acquisition in 2010, only few people had accepted compensation cheques.

    (III) Seismicity of the area

    • Since Jaitapur is a seismically sensitive area, the danger of an earthquake has been foremost on the minds of people.
    • According to the Earthquake hazard zoning of India, Jaitapur comes under Zone III. This zone is called the moderate Risk Zone and covers areas liable to MSK VIII.
    • The presence of two major creeks on the proposed site has been ignored while clearing the site.

    (IV) Nuclear waste disposal

    • It is not clear where the nuclear waste from the site will be shipped for recycling or removed for disposal.
    • The plant is estimated to generate 300 tonnes of used nuclear fuel each year.

     

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  • Emulating Amul’s success across other agricultural commodities

    Context

    Many wish for legendary “Milk Man of India” Verghese Kurien’s presence in our midst today as the conflict between the Central government and the farming community on the issue of the farm laws appears to be still unresolved.

    Adopting cooperative model

    • Kurien won the farmers over with his professional integrity and his vision of a central role for farmers in India’s journey of development.
    • It is on that foundation that Kurien went on to design his idea of Amul as a co-operative.
    • He turned it over the years into a global brand, and later launched the White Revolution that would make India the largest milk producing nation in the world.
    • Central to Kurien’s vision was the co-operative model of business development.
    • Kurien’s fascination for the co-operative model was also influenced by Gandhian thinking on poverty alleviation and social transformation.
    • Kurien could borrow from the ideas and the practices of the corporate world.
    • In areas such as innovations in marketing and management, branding and technology, the private sector excels and sets benchmarks for businesses across the world to follow and adopt.
    • Innovations and evolving technologies: At the same time, Amul was steadily emerging as a laboratory, developing significant innovations and evolving technologies of its own, and these have strengthened its competitive power against multinational corporations.

    Challenges facing cooperative movements in India

    • Amul’s success has not been the catalyst for similar movements across other agricultural commodities in India.
    • Bypassing digital revolution: India’s digital revolution has bypassed the agriculture sector.
    • The cooperative movement in India is in a state of flux.
    • Decline of cooperative movement: India has suffered due to lack of professional management, adequate finance and poor adoption of technology.

    Conclusion

    This is truly a moment to reflect on Verghese Kurien’s remarkable legacy and the unfinished task he has left behind.

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  • Is crypto mania more a symptom than a cause?

    Context

    The draft legislation on crypto currency being introduced in Parliament and the stance of the RBI suggest that consideration is being given to banning crypto currencies in India.

    What fascination with crypto reveals about our society?

    • It is about faith in that value is largely a matter of belief.
    • It is about politics because money is always about the allocation of power.
    • The money itself may not be material, but it is still embedded in a materiality.
    • The fact that money is subject to politics is actually the advantage of money.
    • It allows a modicum of collective control over our future, and allows distributive questions to be posed.
    • It is mania because the alchemy of creating something out of nothing is always deeply alluring.
    • Cheap money: The global economy is awash with cheap money.
    • Seeking return: In an Indian context small savers are desperate for return.
    • In this context it is easy for the powerful to misallocate money and the small saver to express desperation by speculation.

    Background

    • Faced with the inflation of the 1970s, thinkers like Friedrich Hayek theorised about reasserting the dominance of private currencies, protected from the state.
    • Crypto currencies are a fascinating technological innovation.
    • Part of their initial attraction was that they promised a new governance order. 
    • It is at the confluence of faith, politics, and psychological mania.
    • Solving the problem of trust: This project crucially depended on solving the problem of “trust” on which every currency depends.
    • Crypto seemed to solve that problem, with its decentralised architecture and community and self-verification protocols.

    How cryptocurrency poses challenges to the state?

    • No state was going to let go of its power to assert control over the monetary system.
    • Significance of fiat money: The sustenance of state-sponsored fiat money is one of the great achievements of modern state formation and the foundation of its power and legitimacy.
    • Cryptocurrency requires material infrastructure: There was a delusion, as if crypto is conjured out of thin air: It actually requires substantial material infrastructure, which a state could always control.
    • States can shut down mining as China has done.

    Way forward

    • We allow people to invest in all kinds of things. Why ban this, especially now that so many investors are in it?
    • Analyse the risk to the financial system: The answer to this question depends on how much risk the existence of crypto assets pose to the stability of the rest of the financial system.
    • Insulate financial system: One answer is if you can insulate the financial system from the gyrations of crypto markets there are few systemic risks.
    • This is why it was a good idea of the RBI to prohibit the entanglement of financial institutions with this market.
    • Instead of just focussing on issues of fraud, money laundering, and private risks, the RBI’s case would be strengthened if it spelled out the systemic risks that crypto might pose to the stability of the real economy.
    • Avoid ban with exception scenario: For political economy reasons, the RBI should avoid a scenario where it bans but then carves out exceptions.
    • Ensuring that trade does not go offshore: The second thing is that if it somehow allows Indians to invest then it has to ensure that trade does not go offshore. 
    • Not fully banning and allowing it offshore will be the worst of both worlds.

    Challenges in insulating the crypto market

    • In practice the insulation of crypto markets will be difficult to achieve.
    • Political economy: The first reason is political economy. Once you have a large number of investors, and some influential ones, they will be a vested interest in their own right, potentially demanding the socialisation or mitigation of losses.
    • Impact of volume: The second reason is that it is difficult to pretend that a major new class of assets, especially if volumes grow, does not have systemic effects on the rest of the economy.

    Consider the question “What are the risks and advantages provided by the cryptocurrencies? Suggest the approach India should adopt in dealing with cryptocurrencies.”

    Conclusion

    As the RBI makes the case for banning crypto, we also need to ask, why it is alluring in the first place. What does this mania reveal about our politics and economics?

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  • NITI Aayog’s Multidimensional Poverty Index (MPI)

    The Government think-tank NITI Aayog has released the National Multidimensional Poverty Index (MPI).

    Multidimensional Poverty Index (MPI)

    • This baseline report of India’s first-ever national MPI measure is based on the reference period of 2015-16 of the National Family Health Survey (NFHS)- 4.
    • It uses the globally accepted and robust methodology developed by the Oxford Poverty and Human Development Initiative (OPHI) and the United Nations Development Programme (UNDP).
    • It captures multiple and simultaneous deprivations faced by households.

    Parameters used

    • The NMPI is calculated using 12 indicators — nutrition, child and adolescent mortality, antenatal care, years of schooling, school attendance, cooking fuel, sanitation, drinking water, electricity, housing, assets and bank account,
    • They have been grouped under three dimensions namely, health, education and standard of living.

    Why NFHS-4?

    • Data collected during the NFHS-4 (2015-2016) corresponds to the period before the full roll out of new governments’ flagship schemes.
    • Hence it serves as a useful source for measuring the situation at baseline i.e. before large-scale rollout of nationally important schemes.

    How is the data used?

    • The national MPI 2021 is calculated using the household microdata collected at the unit-level for the NFHS-4 that is used to derive the baseline multidimensional poverty.
    • Further, the country’s progress would be measured using this baseline in the NFHS-5, for which the data was collected between 2019 and 2020.
    • The progress of the country with respect to this baseline will be measured using the NFHS-5 data collected in 2019-20.

    Key highlights NMPI

    • As per the index, 51.91% of the population in Bihar is poor, followed by Jharkhand (42.16%), Uttar Pradesh (37.79%), Madhya Pradesh (36.65%) and Meghalaya (32.67%).
    • On the other hand, Kerala registered lowest population poverty levels (0.71%), followed by Puducherry (1.72%), Lakshadweep (1.82%), Goa (3.76%) and Sikkim (3.82%).
    • Other States and UTs where less than 10% of the population are poor include Tamil Nadu (4.89%), Andaman & Nicobar Islands (4.30%), Delhi (4.79%), Punjab (5.59%), Himachal Pradesh (7.62%) and Mizoram (9.8%).

     

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  • Finance Ministry backs three-rate GST structure

    The Government can rationalize the GST rate structure without losing revenues by rejigging the four major rates of 5%, 12%, 18% and 28% with a three-rate framework of 8%, 15% and 30%, as per a National Institute of Public Finance and Policy (NIPFP) study.

    GST Slabs

    • In India, almost 500+ services and over 1300 products fall under the 4 major GST slabs.
    • These comprise rates of 5%, 12%, 18%, and 28%. The GST Council periodically revises the items under each slab rate to adjust them according to industry demands and market trends.
    • The updated structure ensures that the essential items fall under lower tax brackets, while luxury products and services entail higher GST rates.
    • The 28% rate is levied on demerit goods such as tobacco products, automobiles, and aerated drinks, along with an additional GST compensation cess.

    Why harmonize GST slabs?

    • Multiple rate changes since the introduction of the GST regime in July 2017 have brought the effective GST rate to 11.6% from the original revenue-neutral rate of 15.5%.
    • Merging the 12% and 18% GST rates into any tax rate lower than 18% may result in revenue loss.
    • The nature of rate changes has also meant that over 40% of taxable turnover value now falls in the 18% tax slab, thus any move to dovetail that slab with a lower rate will trigger losses.

    What next?

    • Restructuring GST rates is a timely idea to improve revenues.
    • It is important to sequence the transition to the new rate structure so as to minimize the costs associated with tax compliance, administration, and economic distortions.

     

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  • The growth and inclusion potential of India’s telecom sector

    Context

    Shortly after the Cabinet announced nine structural and procedural reforms in September to address the deep financial woes of telcos, Vodafone Idea and Bharti Airtel hiked their tariff.

    About the package for telecom sector

    • The telecom relief package announced by the government in September supports proposals that have been repeatedly presented to the government by the regulator, industry associations and think tanks.
    • Risk of duopoly: With the risk of a duopoly looming large, the government was pushed to take up these long-pending decisions that included nine key changes.
    • Provisions in the package: Besides providing immediate relief on payment of licence fee and penalties due to the government, the package increased FDI limits, extended licence tenure to 30 years from 20, removed charges on spectrum-sharing and proposed timelines for spectrum auctions.
    • The package will undoubtedly have a positive short-term impact and perhaps safeguard competition in the future.

    Reforms and  challenge of addressing the inequality

    • From socialist to market-oriented economy: In July this year, we celebrated three decades of India’s 1991 reforms, one that catapulted India from being a socialist economy with a heart but no trickle-down, to a market-oriented economy with a mind but also very little trickle-down.
    • Inequality has been a feature of both models.
    • The 2018 Oxfam report showed that 10 per cent of the richest Indians took home 77.4 per cent of wealth (compared to 73 per cent the year before).
    • Moreover, 58 per cent of India’s wealth was in the hands of 1 per cent of the country’s population.
    • Changes in the modes of distribution: In the pre-1991 period, the principal modes of redistribution were taxation and public sector operations.
    • In the post-1991 period, it has been a combination of taxation, technology, smartphones and the associated direct benefit transfers.

    Role of telecom sector in addressing the challenge of achieving growth and inclusion

    • High growth dividend of telecom sector: Every 10 per cent increase in investment in telecom, for example, leads to a 3.2 per cent increase in GDP growth for India.
    • Not only is the growth dividend positive, it is large.
    • Mobile as a mean of financial integration: At the same time, the mobile phone has become a means for sophisticated financial integration, as shown by the expanding usage of pre-paid payment instruments and mobile banking.
    • The Jan-Dhan Yojana (JDY) attempts to include the marginalised and unbanked through technology.
    • As of October 2021, a total of 440 million bank accounts have been opened and more than 310 million RuPay cards have been issued under the latter, indicating the large unmet demand for banking services.
    • Making transfers predictable and targeted: The Jan-Dhan-Aadhaar-Mobile (JAM) trinity ties the Aadhaar number to an active bank account, making income transfers predictable and targeted.
    • There is already evidence that payments through Aadhaar-linked bank accounts have increased efficiency and reduced leakages.

    Way forward

    • Predictable and less erratic telecom policy: The benefits of digitalisation could have been much larger and more widespread had telecom policy been more predictable and less erratic.
    • That Indian reforms more often than not happen on the back of a crisis is true for the telecom sector.
    • The principal motive of the New Telecom Policy of 1999 was to rescue the deeply indebted sector of its own reckless bidding by replacing the fixed licence fee system with a revenue-sharing regime.
    • In hindsight, it was the right thing to do since it threatened business continuity.
    • The move to auction spectrum “for all times to come” in 2008 was necessitated by the administrative bungling in spectrum assignment.
    • Quick adaptation: A question we pose is why did it take a crisis — a grave one at that — to push the needle on policy change?
    • It is a a reasonable expectation of policy to adapt quickly and not wait for a crisis to emerge.

    Consider the question “Telecom sector could play an important role in achieving the growth with inclusion. In context of this, examine the challenges facing the sector and suggest the measures to deal with these challenges.”

    Conclusion

    The seemingly naïve question about the adaptation in policies may not be as credulous for the intensely dynamic digital markets. For there is no point shutting the stable door after the horse has bolted.

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  • Risks involved in over-valued unicorns

    Context

    The biggest-ever initial public offering (IPO) in India fell flat on its face on the first day of its listing in the stock exchange, with shares being traded at prices less than 27% of the IPO price.

    Rise of unicorns in India and factors driving it

    • Unicorns in diverse sectors: There has been a unicorn gale in India in recent years, covering diverse sectors from fintech to cloud kitchen.
    • Growth in digital payment is reflected in the fintech sector that has contributed the most to the unicorn list.
    • Factors driving growth: An ecosystem which combines thriving digital payments, a growing smartphone user base and digital-first business models adopted by many start-ups has driven expectations of investors, resulting in large-scale fund flows into new business ventures.
    • Growing smartphone user: Expectations are high as the country has around 640 million Internet users, of which 550 million are smartphone users.
    • Growing digital payments: Digital payment has seen a growth of 30.19% as of March 31, 2021 and by the end of September 30, the unified payments interface (UPI) registered 3.5 billion transactions amounting to ₹6.54 trillion.

    FinTech and EdTech leading unicorns

    • American investment firms Tiger Global and Sequoia Capital have been the major investors, providing very quick follow-up rounds of funds across all stages and sectors.
    • Fundamental financial performance of the business is not factored in these decisions which could lead to biased valuations.
    • Idea of disruptive technologies: The idea of disruptive technologies has become a buzzword for characterising start-ups.
    • The idea was that start-ups with limited resources can aim at technology disruption by inventing an entirely new way of getting something done.
    • The story is similar in educational technologies (EdTech) as well.
    • The novel coronavirus pandemic has been a blessing in disguise for EdTech firms, as it is this external environment that is pushing the industry, giving it an acceleration by four to five years.
    • Too many acquisitions with big ambitions to grow inorganically puts pressure on the balance sheet in the years to come as some of the new acquisitions are likely to fail.
    • Even, EdTech firms with reasonably good business models are highly overvalued due to abundant liquidity.
    • Cost of achieving behaviour change: Almost every second advertisement on primetime television is either of a digital payment firm or EdTech platform.
    • New firms in services will have to indulge in this process for a longer period than firms in other industries such as transportation as these firms have to bring about a particular kind of change that customers are significantly comfortable using the service.
    • Firms burn cash to give massive discounts to customers in the hope that people will get so habituated to these platforms that they will remain active even when the prices are hiked.
    • To some extent this worked in the context of mobile telephone services as Indians have got hooked to mobile phones and reoriented spending to buy more sophisticated smartphones and data.
    • But in other services this does not seem to work so easily.
    • The projection flaw: Data by the Centre for Monitoring Indian Economy (CMIE) points to this flaw of over-optimistic demand projections as there are just about 23 million households which earn more than ₹5 lakh per year i.e., less than ₹42,000 a month, which is about 7% of all Indian families.
    • It is only this class which can be coaxed to behavioural changes — i.e. people who can afford various kinds of goods and services.
    • If firms want to go beyond this 7% of households they have to offer bigger discounts, burning more cash, with the possibility that once the discounts are reduced, customers drop off.

    Consider the question “India is witnessing the unicorn boom in the starts-ups. However, valuation of these unicorns has raised concerns. In light of this, examine the factors driving the rise of unicorns in India and why their valuation raises concerns?”

    Conclusion

    We are witnessing new unicorns emerging every month, which are products of inflated valuations to tap more funds to burn more cash. These valuations are solely on the basis of future earnings, with virtually no profits to show in the present.

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  • Bharat Gaurav Scheme to promote Tourism

    To tap the huge potential of tourism, the Railways has announced the ‘Bharat Gaurav’ Scheme.

    Bharat Gaurav Scheme

    • Under this Scheme, theme-based tourist circuit trains, on the lines of the Ramayana Express, can be run either by private or State-owned operators.
    • Till now, the Railways had passenger segments and goods segments.
    • Now, it will have a third segment for tourism under the Bharat Gaurav.
    • The scheme has been developed after extensive stakeholder discussions and a lot of State Governments, including Odisha, Rajasthan, Karnataka and Tamil Nadu, have shown interest.

    Key features

    • Service providers, who can be an individual, company, society, trust, joint venture or consortium will be free to decide themes/circuits.
    • They will offer an all-inclusive package to tourists including rail travel, hotel accommodation and sightseeing arrangement, visit to historical/heritage sites, tour guides etc.
    • They have full flexibility to decide the package cost.
    • The service providers will also be able to design/furnish the interior of the coaches based on the theme and put branding or advertising inside and outside of the train.

     

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