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Subject: Economics

  • Why crypto currency legislations needs careful consideration

    Context

    The government has decided to introduce a bill that seeks to prohibit all private cryptocurrencies in India.

    Background of the bill

    • In 2018, the three-judge bench of the Supreme Court set aside the RBI circular that prevented crypto exchanges from dealing with the formal financial system on grounds of proportionality.
    • Purpose of the bill: The current bill now attempts to define the rules of the game so that the RBI, tax authorities, SEBI and other agencies have much better legal guidance in deciding the course of action with respect to VCs in their respective domains.
    • The rules can, therefore, range from a ban to controlled interaction with the formal financial system.

    Issues involving cryptos

    • Issues involving cryptos can be seen at three levels, each of which is equally important.
    • The first is its impact on sovereignty.
    • The second is its interaction with financial markets.
    • Third is the value proposition that the entire concept of crypto brings to the economic debate.
    • Incorporation of price stability mechanism: Some of the variants of cryptos such as the stable coin clearly indicate that these are attempts to create systems of money that incorporate features of price stability that imply a parallel monetary system.
    • Diluting the sovereign function of money creation: Unrestricted co-opting of VC clearly dilutes the sovereign function of money creation, clearly impacting the revenues of RBI.
    • Concerns pertaining to money laundering, terrorist threats and narco-trading also come under this category given the high value and anonymity offered by cryptocurrencies.

    Challenges in cryptocurrencies interaction with the formal system

    • As of now cryptos have been recognised as assets or commodities and as a medium of exchange. Their role as units of account or legal tender is rather limited.
    • They may offer a store of value given their short supply. From a banking point of view, certain issues do arise.
    • Since VCs are not legal tenders, they cannot be used in the discharge of debt.
    • Thus, banks cannot accept VCs to close a loan account.
    • Second, can banks lend in fiat by accepting VCs as collateral assuming the VC is an asset?
    • Incompatible with the fractional system of banking: At a deeper level, the very idea of VCs and the way they are designed are incompatible with the fractional system of banking.
    • The fluctuations in interbank liquidity require that money supply adjusts to system requirements.
    • If money supply undergoes compositional change in favour of VCs, this ability will be curtailed thus accentuating the crisis.
    • In financial markets, crypto such as ICOs bring another set of issues.
    • The ICO is a creature that disrupts the very concept of limited liability in corporate finance.
    • ICOs are, at times, designed in such a way that the beneficial owner identity is concealed.
    • SEBI is yet to convey a position on various issues surrounding this idea.
    • Issues with making VCs medium of exchange: VCs have emerged as a medium of exchange and many countries have permitted VC ATMs.
    • But how does this proposition fare given that considerable advances have been made in the payment systems domain in India.
    • Is it worthwhile that additional competition is introduced in a market that is hyper-competitive?
    • It will have impact on existing investments in mobile payment and UPI technology.
    • Impact on poor states: It is well known that the Indian population exhibits significant behavioural divergences in their savings and credit behaviour across regions.
    • Such wide behavioural changes have profound implications on bank strategies and product designs.
    • In the past, there have been several instances of states having low per capita income being more prone to chit fund investments that have negatively impacted the savings of many poor households.
    • The issue of consumer protection needs to be addressed and the current laws may have to be reviewed considering this innovation.

    Conclusion

    The bill must meet many important objectives. While there are obvious concerns of money laundering and benami transactions, there are equal concerns with respect to company laws, payment systems and banking, securities and other commercial laws.

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    Back2Basics: About Stablecoin

    • Stablecoins bridge the worlds of cryptocurrency and everyday fiat currency because their prices are pegged to a reserve asset like the U.S. dollar or gold.
    • This dramatically reduces volatility compared to something like Bitcoin and results in a form of digital money that is better suited to everything from day-to-day commerce to making transfers between exchanges.

    What is ICO?

    • ICO stands for “initial coin offering,” and refers to a formerly popular method of fundraising capital for early-stage cryptocurrency projects.
    • In an ICO, a blockchain-based startup mints a certain quantity of its own native digital token and offers them to early investors, normally in exchange for other cryptocurrencies such as bitcoin or ether.

  • Bank Deposit Insurance Programme

    The PM has addressed depositors during a programme titled ‘Depositors First: Guaranteed Time-bound Deposit Insurance Payment up to ₹5 Lakh’.

    Deposit Insurance Programme

    • The bank savings are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act providing full coverage to around 98 per cent of bank accounts.
    • Earlier, account holders had to wait for years till the liquidation or restructuring of a distressed lender to get their deposits that are insured against default.
    • Last year, the government raised the insurance amount to Rs 5 lakh from Rs 1 lakh.
    • Prior to that, the DICGC had revised the deposit insurance cover to Rs 1 lakh on May 1, 1993 — raising it from Rs 30,000, which had been the cover from 1980 onward.

    What are new changes?

    • Earlier, out of the amount deposited in the bank, only Rs 50,000 was guaranteed, which was then raised to Rs 1 lakh.
    • Understanding the concern of the poor, understanding the concern of the middle class, we increased this amount to Rs 5 lakh.
    • If a bank is weak or is even about to go bankrupt, depositors will get their money of up to Rs five lakhs within 90 days.

    Significance of the scheme

    • Earlier account holders could not access their own money for up to 8-10 years after financial stress at banks.
    • The new changes would give confidence to depositors and strengthen the banking and financial system.
    • Now, depositors can get insurance money within 90 days, without waiting for the eventual liquidation of the distressed banks.

     

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  • What true MSP means

    Context

    Amid the demand for a guarantee of MSP, many commentators fail to understand the true spirit of the demand for a legal MSP.

    How demand for legal backing for MSP is misinterpreted?

    • Mandatory enforcement of price above MSP: The demand has been interpreted as a mandatory enforcement of trade in agricultural produce, including private trade to be necessarily at or above the MSP for that crop.
    • Nationalisation of agricultural trade: Another interpretation is the nationalisation of agricultural trade whereby the government promises to buy all the crop produced at MSP.
    • Commentators have been using these two interpretations to project large estimates of government expenditure needed to implement.
    • They fail to understand the true spirit of the demand for a legal MSP.

    Current nature of MSP

    • It is not an income support program: By definition MSP is not an income support programme.
    • Intervention to stabilise prices: It is designed to be used as government intervention to stabilise prices, to provide remunerative prices to farmers.
    • Public procurement program to meet requirements of NFSA: Currently, it is no more than a public procurement programme to meet the requirements of the National Food Security Act (NFSA).
    • Only rice and wheat procured: As against the official announcement of MSP for 23 crops, only two, rice and wheat are procured as these are distributed in NFSA.

    Larger context of demand for legal backing to MSP

    • Droughts and declining commodity prices: In addition to the twin droughts of 2014 and 2015, farmers have also suffered from declining commodity prices since 2014.
    • Impact of demonetisation and GST: The twin shocks of demonetisation and hurried rollout of GST, crippled the rural economy, primarily the non-farm sector, but also agriculture.
    • Impact of pandemic: The slowdown in the economy after 2016-17 followed by the pandemic has ensured that the situation remains precarious for majority of the farmers.
    • Increased input prices: Higher input prices for diesel, electricity and fertilisers have only contributed to the misery.
    • In this context, the demand for ensuring remunerative prices is only a reiteration of the promise by successive governments to implement the Swaminathan Committee report.

    What should be the true nature of MSP?

    • Intervene to stabilise price: A true MSP requires the government to intervene whenever market prices fall below a pre-defined level, primarily in case of excess production and oversupply or a price collapse due to international factors.
    • It does not require the government to buy all the produce but only to the extent that creates upward price pressures in the market to stabilise prices at the MSP level.

    Way forward

    • Mechanism for market intervention: What is needed is a mechanism to monitor the prices.
    • While such a mechanism already exists, a policy for requisite market intervention is missing.
    • Use MSP as incentive to achieve nutritional security and reduce import dependence: MSP can also be an incentive price for many of the crops which are desirable for nutritional security such as coarse cereals, and also for pulses and edible oils for which we are dependent on imports. 
    • Include pulses, edible oil and millets in PDS: Despite repeated demands from food activists, there has not been any progress in including pulses, edible oils and millets in PDS.
    • A guaranteed MSP then is nothing more than restoring the true spirit and functions of MSP, applicable to a broad range of crops and all sections of farmers.

    Issues

    • The current MSP regime has no relation to prices in the domestic market.
    • Its sole raison d’être is to fulfil the requirements of NFSA making it effectively a procurement price rather than an MSP. 
    • It is basically a lack of understanding of what agriculture needs and above all a lack of political commitment to ensure remunerative prices to farmers.

    Conclusion

    An efficient and functional MSP is certainly the least that the government can do to protect a sector which remains the largest employer and a refuge for the poor and vulnerable as was seen during the pandemic.

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  • Goods and Services Tax as an unfinished agenda

    Context

    Seen purely from a revenue point of view and as a fiscal policy tool, India’s GST is still on a rocky road.

    Background

    • The GST was launched by India on the midnight of July 1, 2017.
    • Benefits of GST: Hailed as a landmark reform in India’s tax history, it was expected to improve tax-GDP ratio, end tax cascading, enhance efficiency, competitiveness, growth, and ensure lower prices.
    • Fiscal federalism: It was also projected as a watershed in India’s fiscal federalism.
    • the States have forgone a substantial part of their own tax revenue.
    • States were in turn guaranteed a GST compensation assuring 14% growth in their GST revenue during the initial five years.
    • India’s GST architecture: India’s GST architecture is built on the firm foundations of a GST Council and the GST Network (GSTN).
    • GST Council as due federal process: The first is the key decision-making body, chaired by the Union Finance Minister with a Minister of State in charge of Finance and the Finance Ministers of States as members.
    • This is envisaged as a due federal process to protect the interests of the States.

    Unresolved issues

    [1] Revenue neutrality not achieved

    • India’s GST paradigm stands on two key pillars: revenue neutrality and GST compensation for the States.
    • The assured revenue neutrality remains a mirage and many States have experienced a declining tax-GDP ratio.
    • Decline in tax to GDP ratio of state: In the case of major 18 States, the ratio of own tax revenue to GDP has declined.
    • While the share of the Centre in total GST increased by 6%, that of States put together lagged behind with only a 4.5% increase.
    • Stark differences between the Revenue Neutral Rates (RNR) for the producing States and consumption State have been observed. States producing exempted food grains also lost out.
    • Since the rates were lower under GST vis-à-vis the VAT regime, revenue neutrality was not adhered ab initio.
    • The problems were compounded with massive evasion following the dismantling of check posts, and later on fake invoices, that grew by leaps and bounds.
    • Experience of other countries: The South African experience illustrates how zero-rating and large exemptions have defeated revenue goals.
    • Canadian experience shows that GST could be improved by limiting zero rating, tax-exemptions and harmonising tax rates.
    • The resilience of the economy at the time of rolling out of GST is critical for its wider reception as the Australian experience shows.

    [2] Not conducive to co-operative federalism

    • While the States collectively forewent 51.8% of their total tax revenue, the Centre surrendered only 28.8%.
    • Yet, GST is shared equally between the Centre and States despite two expert committees recommended for a higher share for the States.
    • Given the revenue neutrality failure and the host of other issues, many of the States are left with no option except to depend on GST compensation.
    • This is not conducive to sustainable co-operative federalism.

    [3] Need for revenue sharing formula for IGST

    • Although IGST is a key source of revenue for many of the States, the clearing house mechanism and the process therein remains unknown territory.
    •  It was pointed out that GST is discriminatory to manufacturing States, indicating the need for a revenue sharing formula that duly incentivises exporting States by sharing IGST revenue among three parties instead of two.

    [4] Other issues

    • Swift functioning of Input tax credit: The Malaysian experience demonstrates the need for swift and transparent functioning of the input tax credit system through a flawless IT infrastructure.
    • We operate in an almost information vacuum especially with respect to IGST along with several glitches in the digital architecture.
    • GSTN is now in the doldrums.
    • Data monopoly: It neither makes effective use of the massive and invaluable data being generated nor shares them to enable others to make use of them.
    • Such practice in “data monopoly” was a fact of history in India’s statistical system and has to go sooner rather than later.
    • Australia, having several similarities with India, in terms of Centre and the subnational units, and destination-based, multi-stage tax with input credit provisions, has not been revenue-buoyant.
    • It is a matter for consideration whether widening exemptions and the replacing of income-tax by GST in the case of small and medium enterprises are advisable measures in the Indian context.

    Consider the question “What are the challenges facing the GST in India? What India can learn from the experience of other countries’ experience.”

    Conclusion

    Despite many years of efforts in evolving an Indianised GST system and over 50 months of adjustments with over a thousand notifications, with accompanying uncertainties in the first year and the novel coronavirus pandemic and the lockdown still in the saddle, GST continues to be an unfinished agenda. But how far and how long?

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  • [pib] Saryu Nahar National Project

     

    PM will inaugurate the Saryu Nahar National Project.

    Saryu Nahar National Project

    • The Project involves the interlinking of five rivers – Ghaghara, Saryu, Rapti, Banganga and Rohini to ensure optimum usage of water resources of the region.
    • It will benefit nine districts of Eastern Uttar Pradesh namely – Bahraich, Shravasti, Balrampur, Gonda, Siddharthnagar, Basti, Sant Kabir Nagar, Gorakhpur and Maharajganj.
    • The sub canals with a length of 6,600km have been linked to the 318km main canal.
    • The work on the project started in 1978 but due to lack of continuity, it got delayed and was not completed even after nearly four decades.

    Benefits offered

    • The project will provide assured water for irrigation of over 14 lakh hectares of land and benefit about 29 lakh farmers of over 6200 villages.
    • The farmers of the region, who were the worst sufferers of the inordinate delay in the project, will now immensely benefit from the upgraded irrigation potential.
    • They will now be able to grow crops on a larger scale and maximize the agri-potential of the region.

    Back2Basics: Sarayu River

    • The Sarayu is a river that originates at a ridge south of Nanda Kot mountain in Bageshwar district in Uttarakhand.
    • It flows through Kapkot, Bageshwar, and Seraghat towns before discharging into the Sharda River at Pancheshwar at the India—Nepal border.
    • Lower Ghaghara is also popularly known as Sarayu in India.
    • Especially while it flows through the city of Ayodhya, the birthplace of legendary Rama.

     

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  • What are Non-convertible Debentures?

    Several companies have announced public issues to raise funds through non-convertible debentures.

    What are Debentures?

    • Debentures are long-term financial instruments issued by a company for specified tenure with a promise to pay fixed interest to the investor.
    • They can be held by individuals, banking companies, primary dealers other corporate bodies registered or incorporated in India and unincorporated bodies.
    • Their types include:
    1. Convertible debentures (CDs): They are a type of debentures that can be converted into equity shares of the company.
    2. Non-convertible debentures (NCDs): They are defined as the type of debentures that cannot be converted into equity shares of the company.

    What are NCDs?

    • Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner.
    • The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
    • They are debt financial instruments that companies use to raise medium- to long-term capital.

    Benefits offered by NCDs

    • At a time when fixed deposit rates are in low single digits, these NCD offerings look lucrative.
    • NCDs offer interest rates between 8.25–9.7%.

    Risks posed

    • Although NCDs are generally considered safe fixed-income instruments, some recent defaults have made investors cautious.
    • NCDs can be either secured by the issuer company’s assets, or unsecured.
    • Certain issuers, with credit rating below investment grade, had in the past issued both a secured NCD and another unsecured one through the same offer document, with different credit ratings.
    • The risk is high in the case of unsecured NCDs, even though they offer high-interest rates.
    • Credit rating of the issuer is a key factor to consider before investing in any NCD.

     

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  • RBI must tackle surplus liquidity on way to policy normalisation

    Context

    Monetary Policy Committee (MPC) voted to maintain status quo on policy rates, with one member continuing to dissent on the “accommodative” stance of policy.

    What is accommodative stance of policy?

    Accommodative monetary policy is when central banks expand the money supply to boost the economy. Monetary policies that are considered accommodative include lowering the Federal funds rate. These measures are meant to make money less expensive to borrow and encourage more spending.

    Overview of RBI policy measures during Covid-related lockdown

    • Cut in policy rates and injection of liquidity: The RBI had moved proactively to cut the repo and reverse repo rate and inject unprecedented amounts of funds into banks and other intermediaries.
    • The short-term interest rate at reverse repo level: a combination of the lower reverse repo rate and the large liquidity injection had resulted in a drop in various short-term rates down to (and occasionally below) the reverse repo rate, making it the effective operating rate of monetary policy.
    • Gap between repo and reverse repo increased to 65 bps: In addition, both the repo and reverse repo rates had been cut to 4.0 and 3.35 per cent, respectively, with the gap – the “corridor” – between the rates widening from the usual 25 basis points to 65 bps.

    Central bank’s role in modern monetary policy

    • Determining basic overnight interest rate: A central bank’s main role in modern monetary policy operating procedures is to determine the basic overnight interest rate, deemed to be consistent with prevailing macroeconomic conditions and their economic policy objectives, in balancing the ecosystem for sustained growth together with moderate inflation.
    • This is achieved through buying and selling very short-term (predominantly overnight) funds (mainly) from banks to keep a specified operating rate (the weighted average call rate in our case) very close to the policy rate.

    Liquidity management: Key pillar of monetary policy normalisation

    • Liquidity management: Liquidity management in the extended banking and financial system (which includes non-banking intermediaries like NBFCs, mutual funds and others) will now be the key pillar of normalisation.
    • This process is the domain of RBI and not MPC.
    • These operations will be conducted within RBI’s liquidity management framework.
    •  There are two sources of liquidity additions:
    • (i) Exogenous: which are largely due to inflows of foreign currency funds and outflows of currency in circulation (cash) from the banking sector.
    • (ii) Voluntary or endogenous: which is the result of the creation of base money by RBI through buying and selling of bonds, thereby injecting or extracting rupee funds.

    How RBI is managing liquidity surplus?

    • Stopped GSAP and OMOs: Post the October review, RBI had stopped buying bonds under the Govt Securities Asset Purchase (GSAP) and done negligible Open Market Operations (OMOs), thereby stopping addition of voluntary liquidity injection into the system, our own version of “tapering”.
    • Union government balances with RBI, arising from cash flow mismatches between receipts and expenditures, has hybrid characteristics and also impacts liquidity.
    • Use of reverse repo window: RBI has used the reverse repo window to absorb almost all this liquidity surplus from banks.
    • Allowed repaying TLRTOs: It has again allowed banks the option to prepay the outstanding borrowings from the Targeted Long Term Repo Operations (TLTROs), thereby potentially extracting another Rs 70,000 crores.

    How RBI is managing interest rate in the policy normalisation process

    • Increased rates and closed the gap between repo and reverse repo: RBI – post the October review – has gradually guided short-term rates up with a sure hand from near the reverse repo rate to close to the repo rate.
    • It has shifted its liquidity absorption operations from the predominant use of fixed rate reverse repos (FRRR) into (largely) 14-day variable rate reverse repo (VRRR) auctions to guide a rise in interest rates.
    • Since early October, these rates had steadily moved up in a smooth and orderly fashion up to 3.75-3.9 per cent.
    • The VRRR rates moving up have also resulted in various short-term funding interest rates like 90-day Treasury Bills, Commercial Papers (CP) and banks’ Certificates of Deposits (CD) moving up from the reverse repo rate or below in September to 3.5 per cent and higher since December.
    • The OMO and GSAP operations have also helped in managing medium- and longer-term interest rates in the yield curve.

    Way forward

    • There is a likelihood of further additions to exogenous system liquidity.
    • Other instruments to absorb surpluses: There might consequently be a need for other instruments to absorb these surpluses apart from VRRR auctions.
    • Liquidity surplus of non-banking intermediaries: Managing liquidity surpluses of the non-banking intermediaries, especially mutual funds, will be another challenge since they do not have direct access to VRRR operations.

    Consider the question “Since the onset of the Covid-related lockdowns, RBI had moved proactively to cut the repo and reverse repo rate and inject unprecedented amounts of funds into banks and other intermediaries. In this context, what are the challenges in monetary policy normalisation as RBI plans to absorb the excess liquidity and increase the interest rates ?”

    Conclusion

    The shift to the tightening phase, with hikes in the repo rate, is likely towards the late months of FY23, with shifts “if warranted by changes in the economic outlook”.

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    Back2Basics: Monetary Policy Corridor

    • The Corridor in monetary policy of the RBI refers to the area between the reverse repo rate and the MSF rate.
    • Reverse repo rate will be the lowest of the policy rates whereas Marginal Standing Facility is something like an upper ceiling with a higher rate than the repo rate.
    • The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.

  • Cabinet nods for Ken-Betwa Interlinking Project

    The Union Cabinet has approved the funding and implementation of the Ken-Betwa river interlinking project at the 2020-21 price level.

    Ken-Betwa Interlinking Project

    • The Ken-Betwa Link Project is the first project under the National Perspective Plan for the interlinking of rivers.
    • Under this project, water from the Ken River will be transferred to the Betwa River. Both these rivers are tributaries of the river Yamuna.
    • The project is being managed by India’s National Water Development Agency (NWDA), under the Ministry of Jal Shakti.
    • Implementation of the project
    1. Phase-I: Daudhan dam complex and its appurtenances like Low Level Tunnel, High Level Tunnel, Ken-Betwa link canal and Power houses
    2. Phase-II: Lower Orr dam, Bina complex project and Kotha Barrage

    Utility of the Project

    • Irrigation: The project is slated to irrigate 10.62 lakh hectares annually, provide drinking water supply to 62 lakh people and generate 103 MW of hydropower and 27 MW of solar power.
    • Water supply: The project will be of immense benefit to the water-starved Bundelkhand region, spread across Madhya Pradesh and Uttar Pradesh.
    • Agricultural boost: The project is expected to boost socio-economic prosperity in the backward Bundelkhand region on account of increased agricultural activities and employment generation.
    • Addressing Rural Distress: It would also help in arresting distress migration from this region.

    Many hurdles

    • Submergence of critical wildlife habitat: The project will partly submerge the Panna Tiger Reserve in Madhya Pradesh and affect the habitat of vultures and jackals.
    • Clearance: After years of protests, it was finally cleared by the apex wildlife regulator, the National Board for Wildlife, in 2016.
    • Water sharing disputes: Then UP and MP could not agree on how water would be shared, particularly in the non-monsoonal months.

    Back2Basics: River Interlinking in India

    History

    • The idea of interlinking of rivers in the Indian subcontinent is atleast 150 years old.
    • During the British Raj in India, Sir Arthur Cotton, a British general and irrigation engineer, first suggested linking the Ganga and the Cauvery for navigational purposes.
    • K.L. Rao’s Proposal (1972), which had 2640 km long Ganga – Cauvery link as its main component involved large scale pumping over a head of 550 m.
    • The Central Water Commission, which examined the proposal, found it to be grossly under estimated and economically prohibitive.

    Capt. Dastur Proposal (1977)

    It envisaged the construction of two canals:

    1. 4200 km Himalayan Canal at the foot of Himalayan slopes running from the Ravi in the West to the Brahmaputra and beyond in the east
    2. 9300 km Garland Canal covering the central and southern parts

    Beginning of implementation

    • The Indian Rivers Inter-link aims to link India’s rivers by a network of reservoirs and canals and so reduce persistent floods in some parts and water shortages in other parts of India.
    • The idea to link rivers got a shot in the arm with the establishment of the National Water Development Agency in 1982 by then PM Indira Gandhi.
    • The Inter-link project was split into three parts:
    1. Northern Himalayan rivers inter-link component
    2. Southern Peninsular component
    3. Intrastate rivers linking component

    Objectives of inter-linking

    • Connect the Himalayan and peninsular rivers via a network of canals so that
    • Excess water from one channel can be diverted to another which has an inadequate flow
    • Flood moderation in the Ganga-Brahmaputra system
    • Hydropower generation through excess water

    Prospects of River inter-linking

    • Engineering challenges: This is one of the most daring feats of engineering attempted in the history of mankind.
    • Ecosystem challenges: It is a reimagining of the entire aquatic ecosystem of a country as large and diverse as India.

    Advantages offered by river inter-linking

    • Flood control and mitigation: Problems related to flood control, irrigation, limiting droughts and boosting farm output—can be sorted out by linking the country’s rivers.
    • Economic boost: Potential benefits to transport infrastructure through navigation, as well as to broadening income sources in rural areas through fish farming.

    Issues with such projects

    • Migration: It will lead to massive displacement of people
    • Topography change: Since the Ganga basin topography is flat, building dams would not substantially add to river flows.
    • Inundation: The transfer of such enormous amounts of water will inundate forests and land for reservoirs.
    • Seismic hazards: The weight of billions of liters of water can have seismic implications in the Himalayan region.
    • Financial expense: River inter-linking is an expensive business from building the link canals to the monitoring and maintenance infrastructure.
    • Political will: Implementation of the project not only needs a huge financial capital but also political support both is scarce commodities as of now.
    • Consensus building for land acquisition: Another important issue is building consensus among states and Land acquisition.
    • Ecological feasibility: Once the project is implemented it would lead to large-scale displacement of people and animals.

    Criticisms of such projects

    • Bad Science: Such projects are built on bad science and an outdated understanding of water systems and water management.
    • Human determinism: Such projects go in contravention with natural process thereby generating more scope for threat than any opportunity.

     

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  • World Inequality Report, 2022

    As per the ‘World Inequality Report 2022’, India is among the most unequal countries in the world, with rising poverty and an ‘affluent elite.’

    World Inequality Report

    • This report is published by Mr. Lucas Chancel, the co-director of the World Inequality Lab of the Paris School of Economics.
    • It was coordinated by famed French economist Thomas Piketty.

    Key highlights of the report

    (1) Income divide

    • The report highlights that the top 10% and top 1% in India hold 57% and 22% of the total national income respectively while the bottom 50% share has gone down to 13%.
    • The average national income of the Indian adult population is Rs 2,04,200.
    • The bottom 50% earns 20 times more than the top 10%.

     (2) Decline in public wealth

    • The report notes that the share of public wealth across countries has been on a decline for decades now.
    • Public assets typically include public buildings housing administrations, schools, universities, hospitals, and other public services.

    (3) Inequality during Colonial India

    • Going back in time, the report shows that the income inequality in India under the British colonial rule (1858-1947) was very high, with a top 10% income share around 50%.
    • After independence, due to socialist-inspired five-year plans, this share was reduced to 35-40%.
    • Owing to poor post-Independence economic conditions, India embarked upon deregulation and loosening controls in the form of liberalization policies.

    (4) Wealth inequality

    • The average household wealth in India is around Rs 9,83,010.
    • The bottom 50% of the nation can be seen to own almost nothing, with an average wealth of Rs 66,280 or 6% of the total pie.
    • The middle class is relatively poor with an average wealth of Rs 7,23,930 or 29.5% of the total.
    • The top 10% owns 65% of the total wealth, averaging Rs 63,54,070 and the top 1% owns 33%, averaging Rs 3,24,49,360.

    (5) Gender Inequality

    • Gender inequality in India is also considered on the higher end of the spectrum.
    • The share of female labor income share in India is equal to 18% which is significantly lower than the average in Asia (21%, excluding China) & is among the lowest in the world.
    • Although, the number is slightly higher than the average share in the Middle East (15%).
    • However, a significant increase has been observed since 1990 (+8 p.p.) but it has been insufficient to lift women’s labor income share to the regional average.

    (6) Poor States, wealthy population

    • Countries across the world have become richer over the past 40 years, but their governments have become significantly poorer.
    • The report shows that the share of wealth held by public actors is close to zero or negative in rich countries, meaning that the totality of wealth is in private hands.
    • Following the pandemic, governments borrowed the equivalent of 10-20% of GDP, essentially from the private sector.

    (7) Issue over data availability

    • The report goes on to say that over the past three years, the quality of inequality data released by the government has seriously deteriorated.
    • This has made it particularly difficult to assess recent inequality changes.

    Conclusions from the report

    (1) Wealth is mostly inherited and has a snowball effect

    • People accumulate wealth across generations through inheritance.
    • It has a snowball effect, wherein successive generations will gain more, but in their concentrated section.
    • More capital incentivizes banks to lend. This is why the rich section’s wealth grows faster.

    (2) Wealth management is necessary

    • Public wealth has been declining for two reasons:
    1. First, governments have been privatizing assets and natural resources at low costs.
    2. Second, governments contract debt to the private sector, making it richer.
    • Without assets, governments have low resources to invest and to mitigate climate change impacts, particularly in the energy sector.
    • Currently, governments have more debts than assets. This calls for strategic management of the economy.

     

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  • The brush with crypto offers some lessons for regulation

    Context

    The fact that crypto exchanges successfully managed to signal legitimacy for their services and offer these tokens to a mostly-uninformed public for over a year provides lessons on how the government and sectoral regulators may need to act before the game gets out of hand.

    Regulating the technology innovation

    • Technology innovation typically remains a step ahead of regulatory frameworks, which are designed with current practices in mind.
    • Problems occur when these innovations push the envelope beyond accepted codes of social and ethical behaviour.
    • Digital lending apps: The joint parliamentary committee (JPC) on a proposed data privacy law that recently released its controversial report has pointed to dubious “digital” lending apps proliferating on the Android platform.
    • Blockchain technology, of which cryptos are a part, is an innovation that can facilitate transactions across assorted functions.

    Issues with unregulated cryptocurrencies in India

    • Some estimates show that over 15 million Indians have invested in cryptos, many of whom live in Tier-II or Tier-III towns.
    • But crypto exchanges in India have pushed the boundaries of this invention.
    • Important disclaimer not communicated properly: They have been advertising aggressively across media platforms often announcing important disclaimers at warp speed.
    • These provisos were supposed to communicate that cryptos are neither currencies nor strictly “assets”, and that these trading platforms are not truly “exchanges”, that crypto values are not determined by the usual dynamics governing other income-yielding assets, and that investing in cryptos was an exceedingly risky proposition.
    •  In the meantime, with advertising overload stimulating viewer interest, many scam crypto issuers and exchanges have sprung up in attempts to separate the gullible from their savings.

    Regulation challenges and how government is tackling it

    • The government has now stepped in, seized with the political perils of speculative investments turning sour.
    •  Unfortunately, sectoral regulators, such as the Reserve Bank of India (RBI) and Securities Exchange Board of India (Sebi), were unable to step in and act earlier because they are governed by specific Acts which do not mention cryptos as a category that needs regulation.
    • Need for enabling clauses: This episode provides a valuable lesson on how these Acts should perhaps include some enabling clauses that allow financial sector regulators to intervene whenever any intermediary tries to sell a financial service or any new innovative financial service poses the risk of disrupting financial stability.
    • Two important documents have recently been released which discuss entry norms into formal banking, both further strengthening RBI’s hands.
    • Think-tank Niti Aayog’s paper on licensing digital banks recommends an evolutionary path for digital banks that’s RBI-regulated at all stages: first a restricted licence, then a regulatory sandbox offering some relaxations, and finally a “full-stack” digital banking licence.
    • Simultaneously, RBI has accepted some of the suggestions of its internal working group and modified a few to make entry norms stricter, but has maintained silence on the entry of private sector corporate houses into banking.
    • The JPC’s concerns over unregulated digital lending have also focused attention on an RBI-appointed committee’s report on digital lending, given that multiple fintech-based online lenders have mushroomed during the pandemic.

    Conclusion

    This highlights the need for principle-based regulations, rather than rule-based regulations, to allow for flexibility and adaptability in a fast-changing technology environment.

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