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Subject: Economics

  • Taking the lid off illicit financial flows

    Context

    The Pandora Papers, published on October 3, once again expose the illegal activities of the rich and the mighty across the world.

    About the Pandora Papers investigation

    • It is “the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”.
    • The International Consortium of Investigative Journalists (ICIJ) has researched and analysed the approximately 12 million documents in order to unravel the functioning of the global financial architecture.
    • The Pandora Papers, unlike the previous cases, are not from any one tax haven; they are leaked records from 14 offshore services firms. The data pertains to an estimated 29,000 beneficiaries.
    • The 2.94 terabytes of data have exposed the financial secrets of over 330 politicians and public officials, from more than 90 countries and territories.
    • These include 35 current and former country leaders.

    Role of financial centres and banks

    • A large extent of the illicit financial flows have a link to New York City and London, the biggest financial centres in the world that allow financial institutions such as big banks to operate with ease.
    • The big financial entities operating from these cities have been prosecuted for committing illegalities.
    • In 2012, an investigation into the London Interbank Offered Rate or LIBOR — crucial in calculating interest rates — led to the fining of leading banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland for manipulation.
    • These banks also operate a large number of subsidiaries in tax havens to help illicit financial flows.

    Modus operandi

    • Tax havens enable the rich to hide the true ownership of assets by using: trusts, shell companies and the process of ‘layering’.
    • Financial firms offer their services to work this out for the rich.
    • They provide ready-made shell companies with directors, create trusts and ‘layer’ the movement of funds.
    • The process of layering involves moving funds from one shell-company in one tax haven to another in another tax haven and liquidating the previous company.
    • This way, money is moved through several tax havens to the ultimate destination.
    • Since the trail is erased at each step, it becomes difficult for authorities to track the flow of funds.
    • It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned.

    Why funds are moved to the tax havens?

    • Even citizens of countries with low tax rates use tax havens.
    • Over the three decades, tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital.
    • This has led to the ‘race to the bottom’, resulting in a shortage of resources with governments to provide public goods, etc., in turn adversely impacting the poor.
    • Lowering tax liability: It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned.
    • Moving funds out of reach of creditors: Revelations suggest that funds are moved out of national jurisdiction to spirit them away from the reach of creditors and not just governments.
    • Many fraudsters are in jail but have not paid their creditors even though they have funds abroad.

    Challenges in checking the illicit financial flows

    • The very powerful who need to be onboard to curb illicit financial flows (as the Organisation for Economic Co-operation and Development, or the OECD is trying) are the beneficiaries of the system and would not want a foolproof system to be put in place to check it.
    • Strictly speaking, not all the activity being exposed by the Pandora Papers may be illegal due to tax evasion or the hiding of proceeds of crime.
    • The authorities will have to prove if the law of the land has been violated.
    • Operators outside the purview of tax authorities: Many Indians have become non-resident Indians or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities.
    • That is why prosecution has been difficult in the earlier cases of data leakage from tax havens.
    • The Supreme Court of India-monitored Special Investigation Team (SIT) set up in 2014 has not been able to make a dent.
    • Role of organised sector: The Government’s focus on the unorganised sector as the source of black income generation is also misplaced since data indicate that it is the organised sector that has been the real culprit and also spirits out a part of its black incomes.

    Way forward

    • Global minimum tax: Recent development has been the agreement among almost 140 countries to levy a 15% minimum tax rate on corporates.
    • Though it is a long shot, this may dent the international financial architecture.
    • Ending banking secrecy: Other steps needed to tackle the curse of illicit financial flows are ending banking secrecy and a Tobin tax on transactions; neither of which the OECD countries are likely to agree to.

    Consider the question “How illicits financial flows affect the economies of the nations? What are the challenges in curbing it?” 

    Conclusion

    To curb the illicit financial flows, the global community needs to reach a consensus on several issues and tackle the challege collectively.

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  • How Sensible is it Use Food Grains to Produce Ethanol?

    India is planning to use surplus rice, besides sugarcane, to meet its biofuel target of blending 20% ethanol with petrol.

    Could this impede India’s crop diversification goals or worsen nutritional indicators? Let us see!

    Govt’s plan to promote ethanol

    • India is estimated to achieve about 8.5% blending with petrol by this year, which it plans to increase to a mandatory 20% blending by 2025.

    Sources for ethanol

    The plan is to divert its excess sugar production to produce ethanol, 3.5 million tonnes in 2021-22 and 6 million tonnes the next year, in addition to grains like rice, corn, and barley.

    • Using surplus rice: The government’s food department revealed its plans to divert 17 million tonnes of surplus rice from its food stocks of 90 million tonnes to produce ethanol.
    • Sugarcane: This is in addition to the 2 million tonnes of sugar which is already being diverted to produce ethanol.

    How would this benefit the country?

    • Cost saving: A successful biofuels programme can save India $4 billion or about ₹30,000 crore every year by lowering import of petroleum products.
    • Emission cut: Ethanol is also less polluting and offers equivalent efficiency at a lower cost than petrol.
    • Biofuel’s policy boost: Rising production of grains and sugarcane and feasibility of making vehicles compliant to ethanol-blended fuel makes its biofuels policy a strategic requirement.
    • Early rollout: Towards this, govt has put in place interest subsidies for distilleries to expand capacity while auto firms have agreed to make compatible vehicles.

    What are the unintended effects of the policy?

    • Unsustainability of cash-crops: Increasing reliance on biofuels can push farmers to grow more water-intensive crops like sugarcane and rice.
    • Huge water requirement: Currently use 70% of the available irrigation water, negating some positive impact on the environment of using more ethanol.
    • Food and nutrition security: The move could impact India’s hunger situation by limiting the coverage of the food security schemes.
    • Food inflation: Diversion of mass consumption grains can also push food prices up.

    How will it impact crop diversification?

    • Monotonous crops: Although the biofuels policy stresses on using less water-consuming crops, farmers prefer to grow more sugarcane and rice due to price support schemes.
    • Water stress: Growing more of them can lead to an adverse impact in water-stressed areas in states.

    What about food security?

    • It is unethical to use edible grains to produce ethanol in a country where hunger is rampant.
    • India is already a poor performer in Global Hunger Index.
    • Although about 80 crore people are now receiving subsidized food grains, calculations show that over 10 crore eligible households are still excluded.

     

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  • Customs Duty Waiver on Edible Oil Imports

    The Union Commerce Minister has announced that the government has decided to waive customs duty on import of crude sunflower, palm and soyabean oil, a move aimed at controlling their prices.

    Edible Oil Imports and India

    • Given the heavy dependency on imports, the Indian edible oil market is influenced by the international markets.
    • Of the 20-21 million tonnes of edible oil that India consumes annually, around 4-15 mt is imported.
    • India is second only to China (34-35 mt) in terms of consumption of edible oil.
    • Crude and food-grade refined oil is imported in large vessels, mainly from Malaysia, Brazil, Argentina, Indonesia etc.
    • Home-grown oilseeds such as soyabean, groundnut, mustard, cottonseed etc find their way to domestic solvent and expellers plants, where both the oil and the protein-rich component is extracted.

    Do you know?

    Palm oil (45%) is the largest consumed oil, mainly used by the food industry for frying namkeen, mithai, etc, followed by soyabean oil (20%) and mustard oil (10%), with the rest accounted for by sunflower oil, cottonseed oil, groundnut oil etc.

    Prices and politics

    • Prices of edible oil have been rising across the country since few months.
    • Most edible oils are trading between Rs 130-Rs 190/litre.
    • Also, the festive season will see increased buying of edible oils.

    Impact of the move

    • Consumers might not see a drastic reduction immediately in prices of edible oil.
    • The reduction in duty is expected to affect the earnings of oilseed growers across the country.

    Long-term implications

    • Over the last few years, the government has taken a series of steps to remove India’s import dependency on pulses, and tried to do the same for oilseeds through national missions.
    • However, frequent market interventions that ultimately bring down prices would backfire on the government and veer farmers away from growing oilseeds.
    • We need continuity in prices to help farmers stick to oilseeds or pulses.

    Back2Basic: Customs Duty

    • Customs duty refers to the tax imposed on goods when they are transported across international borders.
    • In simple terms, it is the tax that is levied on import and export of goods.
    • Custom duty in India is defined under the Customs Act, 1962, and all matters related to it fall under the Central Board of Excise & Customs (CBEC).
    • The government uses this duty to raise its revenues, safeguard domestic industries, and regulate movement of goods.
    • The rate of Customs duty varies depending on where the goods were made and what they were made of.

    Types of custom duty

    1. Basic Customs Duty (BCD): It is the duty imposed on the value of the goods at a specific rate at a specified rate of ad-valorem basis.
    2. Countervailing Duty (CVD): It is imposed by the Central Government when a country is paying the subsidy to the exporters who are exporting goods to India.
    3. Additional Customs Duty or Special CVD: It is imposed to bring imports on an equal track with the goods produced or manufactured in India.
    4. Protective Duty: To protect interests of Indian industry
    5. Safeguard Duty: It is imposed to safeguard the interest of our local domestic industries. It is calculated on the basis of loss suffered by our local industries.
    6. Anti-dumping Duty: Manufacturers from abroad may export goods at very low prices compared to prices in the domestic market. In order to avoid such dumping, ADD is levied.

     

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  • What is a Small Finance Bank?

    The Reserve Bank of India has issued a small finance bank (SFB) license to a consortium of fintech companies BharatPe and Centrum Financial Services Ltd.

    What is a SFB?

    • Small finance banks (SFBs) are a type of niche banks in India.
    • They can be promoted either by individuals, corporate, trusts or societies.
    • They are governed by the provisions of Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and other relevant statutes.
    • They are established as public limited companies in the private sector under the Companies Act, 2013.
    • Banks with a SFB license can provide basic banking service of acceptance of deposits and lending.

    Objectives of setting-up an SFB

    • To provide financial inclusion to sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganized sector entities

    Key features of SFBs

    • Existing non-banking financial companies (NBFC), microfinance institutions (MFI) and local area banks (LAB) can apply to become small finance banks.
    • The banks will not be restricted to any region.
    • 75% of its net credits should be in priority sector lending and 50% of the loans in its portfolio must in ₹25 lakh.
    • The firms must have a capital of at least ₹200 crore.
    • The promoters should have 10 years’ experience in banking and finance.
    • Foreign shareholding will be allowed in these banks as per the rules for FDI in private banks in India.

    Back2Basics: Small Payments Bank Vs. Payment Bank

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  • Kallakurichi Wood Carvings and Karuppur Kalamkari Paintings get GI tag

    In Tamil Nadu, the Karuppur kalamkari paintings and the Kallakurichi wood carvings recently received the geographical indication (GI) tags.

    [A] Kallakurichi Wood Carvings

    • The Kallakurichi wood carvings are a unique form of wood carving practiced in Tamil Nadu.
    • It involves the application of ornamentation and designs, derived from traditional styles by the craftsmen.
    • They are mainly practiced in Kallakurichi, Chinnaselam and Thirukkovilur taluks of Kallakurichi district.

    [B] Karuppur Kalamkari Paintings

    • Kalamkari paintings are done on pure cotton cloth, predominantly used in temples for umbrella covers, cylindrical hangings, chariot covers and asmanagiri (false ceiling cloth pieces).
    • Documentary evidence shows that kalamkari paintings evolved under the patronage of Nayaka rulers in the early 17th century.

    Back2Basics: Geographical Indication

    • A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Nodal Agency: Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry
    • India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 w.e.f. September 2003.
    • GIs have been defined under Article 22 (1) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
    • GI is granted for a term of 10 years in India. As of today, more than 300 GI tags has been allocated so far in India (*Wikipedia).
    • The tag stands valid for 10 years.

     

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  • [pib] Automated fuelling technology- UFill

    The Bharat Petroleum Corporation Limited (BPCL) has launched an automated fuelling technology -UFill- to ensure that its customers have a better experience at outlets.

    What is UFill?

    • UFill functionality, which has been described as swift, secure and smart, has been launched in 65 cities and will soon be launched across the country.
    • It does not need any app download, and is payment app agnostic.
    • Customer can use any payment app already downloaded on his/her phone.
    • It offers real time QR and voucher code through SMS and is accepted at all BPCL Fuel Stations where the functionality is enabled.

    Key features

    • UFill aims to improve customer’s turn-around time (TAT) at fuel outlet and increase transactional transparency, thereby providing enhanced retail like experience.
    • The technology provides the customer with control of fuelling as well as touch less pre-payment solution.
    • There is no need to check zero before fuelling or final reading, the dispensing unit will automatically dispense the exact quantity of fuel.

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  • Is India’s current investor rush too much of a good thing?

    Human traits driving financial markets

    • To imitate and to conform — do what others around us are doing — are common and very powerful human tendencies.
    •  In financial markets, “herd behaviour” is a warning sign: When markets are doing well, people invest for no other reason than their neighbours having become wealthier (and vice versa).
    • There is another human trait that affects markets — success increases risk appetite.
    • If someone’s financial investments work, they are very likely to invest more, and ignore safety measures.

    Factors driving the private equity investments

    • Better physical infrastructure (rural roads, electrification, phone penetration, data access).
    • Several layers of innovation (universal bank account access, surging digital payments on the “India Stack”).
    • 45 lakh software developers (largest in the world).
    • Maturing industries (for example, as research budgets of Indian pharmaceutical manufacturers have grown 10 times in the last 15 years.
    • The ecosystem can take on more challenging projects now, versus just generic filings a decade back).
    • Strong medium-term economic growth prospects create fertile ground for private equity investments.
    • Investors with patient capital (knowing that the businesses will not make money for several years) are now betting on and financing a faster transition to electric vehicles than was earlier anticipated.
    • In financial services, innovative methods of lending, insurance underwriting and wealth management are being experimented with, which are likely to only expand the market meaningfully.
    • An army of Software-as-a-Service (SaaS) firms have been funded in the hope of revolutionising the development and distribution of software.
    • There are also new-age distribution and logistics companies, education technology firms, and branded consumer goods suppliers, in addition to “normal” e-commerce, gaming and food-delivery startups.

    Risks involved in a rapid infusion of capital

    • Allocation inefficiency: Theoretically, an economy India’s size is capable of absorbing the $52 billion of PE funding seen over the last 12 months, but in practice, such a rapid surge creates allocation inefficiency. 
    •  As investors rush to deploy ever-larger sums of money, they appear to be running out of companies to invest in that can productively deploy this capital.
    • The result is companies’ valuations rising manifold within months and small firms getting more capital inflows than they can deploy, often resulting in wasteful business plans.
    • When investors rush to deploy funds, the risk of fraud rises — inadequate disclosures and weak due diligence are compounded by incentives to misrepresent financial data.
    • The discovery of any such frauds would likely freeze funding for the industry for a few quarters.

    Why now?

    • India has never lacked entrepreneurs, but lacked risk capital given the low per capita wealth.
    • As savers like pension and insurance funds in the developed world responded to record-low interest rates by allocating more to PE as an asset class, private funding markets have grown rapidly in the last 15 years globally.
    • In India, PE funding has exceeded public-market fund-raising every year in the past decade.
    • While earlier, only a few business groups could muster sizeable amounts of risk capital to establish new businesses and disrupt old ones, entrepreneurs can now lay hands on hundreds of millions of dollars if the idea makes sense.

    Conclusion

    For now, this flow of funds is a welcome booster for the economy as it recovers from the scars of the pandemic-driven lockdowns. While valuations can be volatile in the near term, we are in the early stages of this reshaping of India’s corporate landscape.

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  • India retains 3rd position in RE Investment Attractiveness Index

    India has retained the third rank in the Renewable Energy Country Attractiveness Index released by consultancy firm EY.

    RE Country Attractiveness Index (RECAI)

    • The RECAI ranks the world’s top 40 markets on the attractiveness of their renewable energy investment and deployment opportunities.
    • The rankings reflect assessments of market attractiveness and global market trends.

    India’s performance

    • India remained at the third position since three consecutive years.
    • India’s thriving renewable energy market conditions, inclusive policy decisions, investment and technology improvements focusing on self-reliant supply chains have pushed the transition.
    • RECAI highlights that corporate power purchase agreements (PPAs) are emerging as a key driver of clean energy growth.
    • A new PPA Index – introduced in this edition of RECAI – focuses on the attractiveness of renewable power procurement and ranks the growth potential of a nation’s corporate PPA market.
    • India is ranked sixth among the top 30 PPA markets.

    Global scenario

    • The US, mainland China and India continue to retain the top three rankings and Indonesia is a new entrant to the RECAI.
    • The top-performing markets have held their ground in this latest issue – with no movement into or out of the top eight.
    • France (fourth position, up by one) and the UK (fifth position, down by one), while Germany (sixth position, up by one) has edged back ahead of Australia (seventh position, down by one).

     

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  • Agri-food systems need a transformative change

    Context

    There is an urgent need for reorientation of the long-term direction of agri-food systems to not only enhance farm incomes but also ensure better access to safe and nutritious foods.

    Challenge of malnutrition in India

    • The findings from the first round of the Fifth National Family Health Survey suggest that nutrition-related indicators have worsened in most States.
    • In addition, findings from the Comprehensive National Nutrition Survey (2016-18) have highlighted the role of micro-nutrient malnutrition.
    • Pathways for nutritional security consist of improving dietary diversity, kitchen gardens, reducing post-harvest losses, making safety net programmes more nutrition-sensitive, women’s empowerment, enforcement of standards and regulations, improving Water, Sanitation and Hygiene, nutrition education, and effective use of digital technology.

    Agri-food system: Significance and challenges it faces

    • The agri-food systems are the most important part of the Indian economy.
    • India produces sufficient food, feed and fibre to sustain about 18% of the world’s population (as of 2020). Agriculture contributes about 16.5% to India’s GDP and employs 42.3% of the workforce (2019-20).
    • A sustainable agri-food system is one in which a variety of sufficient, nutritious and safe foods are made available at an affordable price to everyone, and nobody goes hungry or suffers from any form of malnutrition.
    • However, the country’s agri-food systems are facing new and unprecedented challenges, especially related to economic and ecological sustainability, nutrition and the adoption of new agricultural technologies.
    • The edifice of India’s biosecurity remains vulnerable to disasters and extreme events.

    Way forward: Reorienting agri-food systems

    • There is an urgent need for reorientation of the long-term direction of agri-food systems to not only enhance farm incomes but also ensure better access to safe and nutritious foods.
    • Additionally, the agri-food systems need to be reoriented to minimise cost on the environment and the climate.
    • This need is recognised by the theme of World Food Day 2021: ‘Our actions are our future. Better production, better nutrition, a better environment and a better life’.
    • FAO’s support for the transformation of agri-food systems is rooted in agro-ecology.
    • The more diverse an agricultural system, the greater its ability to adapt to shocks.
    • Different combinations of integrated crop-livestock-forestry-fishery systems can help farmers produce a variety of products in the same area, at the same time or in rotation.
    • In January this year, FAO in collaboration with NITI Aayog and the Ministry of Agriculture convened a National Dialogue to evolve a framework for the transition to a more sustainable agri-food systems by 2030 and identify pathways for enhancing farmers’ income and achieving nutritional security.

    Consider the question “What are the challenges facing agri-food systems in India? Suggest the pathways to transform the agri-food system to enhance farm income and ensure food and nutrition security.”

    Conclusion

    Food systems can help combat environmental degradation or climate change. Sustainable agri-food systems can deliver food security and nutrition for all, without compromising the economic, social and environmental bases.

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  • Issues with Free power

    Context

    With elections around the corner in many States, political parties are competing with one another in promising free power.

    Problems with free power

    • Supported by state subsidy, electricity tariff to agriculture is low in most States – often less than ₹1/unit – and is free in some States such as Punjab, Tamil Nadu and Karnataka.
    • There is inefficient use of electricity and water, neglect of service quality by the distribution companies leading to frequent outages and motor burn outs, and high subsidy burden on the State governments.
    • Inflated consumption estimates: Since nearly three-fourth of the agriculture connections in the country are unmetered, consumption estimates are often inflated by distribution companies to increase subsidy demand and project low distribution losses.
    • Any metering effort faces resistance as it is perceived as the first step towards levying charges.
    • Opting-out schemes are being made but do not seem to have uptake.
    • Difficulty in implementing DBT: Free power provision along with issues of metering make implementation of Direct Benefit Transfer difficult.
    • All this leaves farmers, distribution companies and State governments frustrated.
    • Subsidy burden on Governments: Due to free power in Delhi, the total state subsidy amounts to 11% of the total expenses.
    • In Tamil Nadu, where free power is available to households, half of the total subsidy is earmarked for this.
    • If there is further increase in number and consumption limits of free power, the subsidy burden on State governments will substantially increase.
    • Low adoption of solar power: Roof-top solar and energy efficiency are good environment-friendly options for homes but providing free power to well-off households will discourage them from taking these up.

    Way forward

    • Free or low-tariff power is at best a short-term relief, which should be provided to those who desperately need it.
    • Give fixed rebate: A fixed rebate of up to ₹200/month for residential consumers can be provided in the electricity bill.
    • As the rebate is delinked from consumption, distribution companies won’t have an incentive to inflate consumption.
    • Rebate for adopting energy-efficient appliances: There can be additional rebates for adopting energy-efficient appliances like refrigerators, combined with State-level bulk procurement programmes to reduce the cost.
    • Addressing mutual mistrust: The atmosphere of mutual mistrust between small consumers and distribution companies has to change.
    • There should be quick resolution of arrears and one-time offers for settlements.

    Conclusion

    There is a need to question the wisdom of broad-brush promises such as free power, which cannot be sustained in the long run.

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