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Subject: Economics

  • MSP is not the way to increase farmers’ income

    Context

    The recently released data for 2018-19 Situation Assessment Survey (SAS) of agricultural households paints a bleak picture for doubling farmers’ income.

    Background

    • Prime Minister Narendra Modi set out an ambitious target to double farmers’ incomes by 2022-23.
    • The Ashok Dalwai Committee made it clear that the target of doubling farmers’ incomes was in real terms.
    •  Required rate: The committee clearly stated that a growth rate of 10.4 per cent per annum would be required to double farmers’ real income by 2022-23.
    • The goal was to be achieved over seven years with the base year of 2015-16.
    • According to an estimate of farmers’ income for 2015-16 by NABARD in 2016-17, the average monthly income of farmers for 2015-16 was Rs 8,931.
    • However, unless a similar survey is conducted in 2022-23, we won’t really know what happened to the target of doubling farmers’ real income.

    Determining the growth rate of farmers income

    • As per Situation Assessment Survey (SAS) of agricultural households for 2018-19, an average agricultural household earned a monthly income of Rs 10,218 in 2018-19 (July-June) in nominal terms.
    • We have a similar SAS for 2012-13, when the nominal income was Rs 6,426.
    • In nominal terms, the compound annual growth rate (CAGR) turns out to be 8 per cent between 2012-13 to 2018-19.
    • Choice of deflator: If one deflates nominal incomes by using CPI-AL (consumer price index for agricultural labour), which should be the logical choice, then the CAGR turns out to be just 3 per cent.
    • If one uses WPI (wholesale price index of all commodities), the CAGR in real incomes turns out to be 6.1 per cent.
    • This vast difference is just due to the choice of deflator.
    •  However, there is another SAS that the NSO conducted for 2002-03.
    • When one compares CAGR in farmers’ real income (deflated by CPI-AL) over 2002-03 to 2018-19, it turns out to be 3.4 per cent (and 5.3 per cent if deflated by WPI).
    • A better method would have been to look at average annual growth rates (AAGR), if yearly data was available.
    • The AAGR for agri-GDP is available and at an all-India level, between 2002-03 to 2018-19, it turns out to be 3.3 per cent.

    Policy message about farmers income from SASs

    • One, the share of income from rearing animals (this includes fish) has gone up dramatically from 4.3 per cent in 2002-03 to 15.7 per cent.
    • Two, the share of income from the cultivation of crops has decreased from 45.8 per cent to 37.7 per cent.
    • Three, the share of wages and salaries has gone up from 38.7 per cent to 40.3 per cent.
    • Four, the share of income coming from non-farm business has come down from 11.2 per cent to 6.4 per cent.

    Way forward

    • Survey results indicates that the scope for augmenting farmers’ incomes is going to be more and from rearing animals (including fisheries).
    • There is no minimum support price (MSP) for products of animal husbandry or fisheries and no procurement by the government.
    •  It is demand-driven, and much of its marketing takes place outside APMC mandis.
    • This is the trend that will get reinforced in the years to come as incomes rise and diets diversify.
    • Those who advocate raising the MSP of grains and government procurement, irrespective of increasing grain stocks to more than double the buffer stocking norms, are living in the past — and advocating a very expensive food system.
    • That will fail sooner or later.
    • Wisdom lies in investing more in animal husbandry (including fisheries) and fruits and vegetables, which are more nutritious.
    • The best way to invest is to incentivise the private sector to build efficient value chains based on a cluster approach.

    Consider the question “Why the role of MSP in increasing the farmers’ income has been repeatedly questioned? What are the alternatives to achieve the doubling of farmers’ income?”

    Conclusion

    Too much focus on increasing MSP to increase farmers’ income is not helping the cause. What we need is an investment in animal husbandry (including fisheries) and fruits and vegetables.

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  • What is a Cartel?

    Last week, the Competition Commission of India (CCI) has slapped a penalty on a cartel of beer companies for hiking the prices.

    What is a Cartel?

    • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
    • The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition.
    • The three common components of a cartel are:
    1. an agreement
    2. between competitors
    3. to restrict competition

    What is Cartelization?

    • Cartelization is when enterprises collude to fix prices, indulge in bid rigging, or share customers, etc.
    • But when prices are controlled by the government under a law, that is not cartelization.
    • The Competition Act contains strong provisions against cartels.
    • It also has the leniency provision to incentivise a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
    • This has proved a highly effective tool against cartels worldwide.
    • Cartels almost invariably involve secret conspiracies.

    How do they work?

    • According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
    1. price-fixing
    2. output restrictions
    3. market allocation and
    4. bid-rigging
    • In sum, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.

    How do cartels hurt?

    • While it may be difficult to accurately quantify the ill-effects of cartels, they not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
    • A successful cartel raises the price above the competitive level and reduces output.
    • Consumers choose either not to pay the higher price for some or all of the cartelised product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

    In other words, by artificially holding back the supply or raising prices in a coordinated manner, companies either force some consumers out of the market by making the commodity (say, beer) more scarce or by earning profits that free competition would not have allowed.

    Are there provisions in the Competition Act against monopolistic prices?

    • There are provisions in the Competition Act against abuse of dominance.
    • One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in purchase or sale of goods or services.
    • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as an abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
    • However, it should be understood that where pricing is a result of normal supply and demand, the Competition Commission may have no role.

    How might cartels be worse than monopolies?

    • It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large.
    • That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

    How to stop the spread of cartelisation?

    • Cartels are not easy to detect and identify.
    • As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one.
    • Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
    • However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelisation.
    • In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

    Try this PYQ:

    One of the implications of equality in society is the absence of:

    (a) Privileges

    (b) Restraints

    (c) Competition

    (d) Ideology

     

    [wpdiscuz-feedback id=”9yl0ox4504″ question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    Back2Basics: Competition Commission of India (CCI)

    • The CCI is the chief national competition regulator in India.
    • It is a statutory body within the Ministry of Corporate Affairs.
    • It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

     

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  • GI in news: Goa Cashew Feni

    The Goa government’s Feni Policy 2021 has paved the way to take the state’s ‘heritage drink’ forward.

    Sounds strange but an alcoholic beverage has been GI tagged!

    Goa Cashew Feni

    • Feni is a spirit produced in Goa, India.
    • The two most popular types of feni are cashew feni and toddy palm feni, depending on the original ingredient; however, many other varieties are sold.
    • Feni distilleries are usually family-run affairs, and the history of the drink goes back to at least 1585.
    • The feni consumed in South Goa is generally of higher alcohol content (43-45% abv) as compared to the feni produced in North Goa.
    • Commercially packaged feni is available at 42.8% abv.
    • Cashew feni was awarded Geographical Indication registration in 2009 as a speciality alcoholic beverage from Goa.
    • It has been described as a colourless, clear liquid that when matured in wooden barrels develops golden brown tint.

    Must read

    GI Tags in News

     

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  • Risks involved in Indian tech unicorns gaining at China’s expense

    Context

    Investment firms with a reputation for tracking and hunting unicorns — startups with billion-dollar-plus valuations are shifting their attention to India from China. While this cannot be good for China, the question remains over whether or not it is good for India either.

    China’s crackdown on tech industry

    • Beijing has decided to crack down on the tech industry, wiping out $1.5 trillion in market value.
    •  The crackdown began with the abrupt suspension of the much-anticipated initial public offering (IPO) of Ant Group last November.
    •  China’s regulators stopped the ride-hailing company, Didi Chuxing, from accepting new users, as soon as it went public on the New York Stock Exchange.
    • There have been sweeping industry-wide changes, from anti-monopoly legislation to new rules governing data collection and use.
    • All of this has investors spooked.

    How India can benefit from China’s crackdown on the tech industry?

    • Due to China’s crackdown, for the first time since 2013, the value of venture deals in India surpassed that of China.
    • Converging factors in India: If this keeps up, India will experience a veritable blessing of unicorns, thanks not only to the fact that the money fleeing China needs refuge, but to many converging forces within India itself.
    • India is the world’s second largest digital market.
    • The use of the United Payment Interface has made digital payments easier in a society that was — and still is — so tied to cash.
    • The pandemic lockdowns have driven an unusually large proportion of that digital population to spend an unusually large amount of time and spend money online.
    • This means that in a very short time, the need to serve this digital population has exploded.
    • The Chinese crackdown could not have come at a more opportune time.
    • Many startups are in a hurry to capitalise on the boom with many investors looking to capitalise them.

    Concern: the risk of tech-bubble

    • When investors rush in to seek refuge because they are fleeing risk elsewhere, even if the refuge looks promising, they can contribute to a self-reinforcing cycle that ends up destroying the refuge.
    • Eager to get a piece of the action, each investor may over-value a company, far exceeding what is justifiable based on market fundamentals.
    • The stampede builds and soon you have the makings of a tech bubble.

    Way forward for investors

    • Instead of reflexively chasing the next shiny startup in India, investors ought to ask a few questions.
    • Do the startups and the markets they serve have the capacity to scale up and do they justify sticking with them for a long period?
    • Has the Indian initial public offerings market really proven itself?
    • Are there enough large corporations that might buy these startups?
    • Can the under-investment in essentials, such as education, health and job market readiness, clog the talent pipeline?
    • Can the Indian government be trusted not to borrow a page from the government it would like to emulate — the Chinese state — and attempt a crackdown of its own?

    Consider the question “Indian tech start-ups are dealing with the gush of capital owing to the convergence of certain factors. Examine these factors and also the concerns with such influx of capital.”

    Conclusion

    India desperately needs patient capital, skilled talent and appropriate technology to solve the country’s numerous fundamental problems laid bare by the pandemic. The last thing India can afford is a bubble that bursts and for all three to take flight and seek refuge in yet another country because no one wants to pick up the pieces of a popped bubble.

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    Back2Basics: IPO

    • An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.
    • An IPO allows a company to raise capital from public investors.
    • The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors.
    • Meanwhile, it also allows public investors to participate in the offering.

  • Service Exports from India Scheme (SEIS)

    The Directorate General of Foreign Trade has imposed a cap on the total entitlement under the Services Exports from India Scheme (SEIS) at Rs 5 crore per exporter for shipments done in 2019-20 (FY20). The move is expected to benefit small businesses in the services sector.

    About SEIS

    • Service Exports from India Scheme (SEIS) aims to promote export of services from India by providing duty scrip credit for eligible exports.
    • Under the scheme, service providers, located in India, would be rewarded under the SEIS scheme, for all eligible export of services from India.
    • SEIS was earlier termed as Served from India Scheme (SFIS).

    Eligibility

    • Service Providers of notified services, located in India are eligible for the Service Exports from India Scheme.
    • To be eligible, a service provider (Company / LLP / Partnership Firm) should have a minimum net free foreign exchange earnings of USD 15000 in the preceding financial year to be eligible for duty credit scrips.
    • For proprietorships or individual service providers, minimum net foreign exchange earnings of USD10,000 in the preceding financial year is required to be eligible for the scheme.
    • Also, in order to claim reward under the SEIS scheme, the service provider shall have to have an active Import Export Code (IE Code) at the time of rendering such services for which rewards are claimed.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
    • It intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

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  • [pib] International Hydropower Association (IHA)

    NHPC’s 510 MW Teesta-V Power Station located in the Himalayan State of Sikkim has been conferred with the prestigious Blue Planet Prize by International Hydropower Association (IHA).

    Teesta-V Power Station

    • The power station has been built, owned and being operated by NHPC.
    • The award has been conferred for its sustainability assessment undertaken by Hydropower Sustainability Assessment Protocol (HSAP) of IHA.

    About IHA

    • IHA is a London based non-profit membership association operating in 120 countries.
    • The IHA membership includes leading hydropower owners and operators, developers, designers, suppliers and consultants.
    • The IHA Blue Planet Prize is awarded to hydropower projects that demonstrate excellence in sustainable development.
    • The Hydropower Sustainability Assessment Protocol (HSAP) is the leading international tool for measuring the sustainability of hydropower projects.
    • It offers a way to benchmark the performance of a hydropower project against a comprehensive range of environmental, social, technical and governance criteria.

    Back2Basics: Teesta River

    • Teesta River is a 414 km long river that rises in the Pauhunri Mountain of eastern Himalayas, flows through the Indian states of Sikkim and West Bengal through Bangladesh and enters the Bay of Bengal.
    • It drains an area of 12,540 sq km.
    • In India, it flows through North Sikkim, East Sikkim, Pakyong District, Kalimpong district, Darjeeling District, Jalpaiguri District, Cooch Behar districts and the cities of Rangpo, Jalpaiguri and Mekhliganj.
    • It joins River Brahmaputra at Fulchhari in Bangladesh. 315 km portion of the river lies in India and rest in Bangladesh.
    • Teesta is the largest river of Sikkim and the second largest river of West Bengal after Ganges.

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  • Inflation in India

    Context

    Inflation for the last four months has been worryingly high. This is happening at a time when demand has been down, unemployment has been high, many have lost incomes and poverty has aggravated.

    Issues with the recent inflation data

    • The shock of lockdowns not only made data collection difficult but the consumption basket for calculating CPI should have been changed.
    • Issue with the base: In April and May 2020, data on production and prices could not be collected due to the strict lockdown.
    • As such, the official inflation figures for these months in 2021 do not reflect the true picture.
    • For calculating inflation, a single number is arrived at by assigning weights to different commodities and services.
    • Issue due to different consumption baskets: For WPI, the weights in production are used; for CPI, the consumption basket is used.
    • The consumption basket is vastly different for the poor, the middle classes, and the rich.
    • Hence, the CPI is different for each of these classes and a composite index requires averaging the baskets.
    • So, in a sense, it represents none of the categories.
    • Changed consumption pattern: During lockdown and unlock in 2020, people largely consumed essentials.
    •  RBI data show that consumer confidence fell drastically from 105 in January 2020 to 55.5 by January 2021.
    • While the consumption pattern of the well-off sections may have changed little, the poor and middle classes, especially those who lost jobs and incomes, would have had to cut back on their consumption.
    • Thus, the weights in the CPI would have changed and inflation required recalculation, but this has not been done.
    • Under-representation of services: Inflation data under-represents services in the consumption basket.
    • In production, services are about 55% of the GDP but have no representation in WPI and about 40% in CPI.
    • Increased health and education cost not captured: Health costs and education costs shot up during the pandemic, but this is not captured in inflation figures.
    • Many services were not used. Eating out and travel, for instance, should have been factored out.

    Impact of the inflation

    • If the income does not increase in proportion to inflation, for the middle classes, both consumption of less essential items and savings get reduced.
    • But the poor, who hardly save, have to curtail essential consumption.
    • Decline in demand: In India, 94% work in the unorganised sector and mostly earn low incomes and have little savings.
    • By definition, they cannot bargain for higher incomes as prices rise, further, due to lockdowns, the wages of many declined, both in the unorganised and organised sectors.
    • Consequently, demand has declined not only for non-essentials but even for essentials.
    • Impact on employment generation: In a vicious cycle, this is slowing down economic recovery and employment generation.
    •  Further, this impacts the government’s revenues and tends to increase the budgetary deficit.
    • This puts pressure on the government to cut back budgetary expenditures, especially on the social sector.
    • That aggravates poverty and reduces demand further.

    Factors leading to inflation

    • Tax on fuels: Increase in tax on fuel push up the prices of all goods and services.
    • This is an indirect tax, it is regressive and impacts the poor disproportionately more.
    • It also makes the RBI’s task of controlling inflation difficult.
    • Supply bottlenecks: The lockdowns disrupted supplies and that added to shortages and price rise.
    • Prices of medicines and medical equipment rose dramatically.
    • Prices of items of day-to-day consumption also rose.
    • International factors: Most major economies have recovered and demand for inputs has increased while supplies have remained disrupted (like chips for automobiles).

    Consider the question “What are the issues with measurement of inflation data in India? How inflation in times of low demand and reduced incomes leads to a vicious cycle?”

    Conclusion

    The current official inflation rate does not correctly measure price rise since the lockdown administered a shock to the economy. The method of calculating it needed modification.

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  • Agri exports in India

    Context

    The Indian government has been encouraging agricultural exports to meet an ambitious target of $60bn by 2022.

    India’s agri-exports

    • The Ministry of Food Processing Industries shows that the contribution of agricultural and processed food products in India’s total exports is 11%.
    • Primary processed agricultural commodities form the majority share.
    • India’s export earnings will increase by focusing more on value-added processed food products rather than primary processed agricultural commodities (Siraj Hussain, 2021).
    • From 2015-16 to 2019-20, the value of agricultural and processed food increased significantly from $17.8bn to $20.65bn.
    • The Indian agricultural economy is shifting from primary to secondary agriculture where the focus is more on developing various processed foods.

    Changes in India’s agricultural export basket

    • Traditionally, Basmati rice is one of the top export commodities.
    • However, now there is an unusual spike in the export of non-basmati rice.
    • In 2020-21, India exported 13.09 million tonnes of non-basmati rice ($4.8bn), up from an average 6.9 million tonnes ($2.7bn) in the previous five years.
    • Indian buffalo meat is seeing a strong demand in international markets due to its lean character and near organic nature.
    • The export potential of buffalo meat is tremendous, especially in countries like Vietnam, Hong Kong and Indonesia.

    Challenges in Increasing agri-export

    • Lack of comparative advantage: The export of processed food products has not been growing fast enough because India lacks comparative advantage in many items.
    •  Domestic prices of processed food products are much higher compared to the world reference prices.
    • Non-tariff measures: The exporters of processed food confront difficulties and non-tariff measures imposed by other countries on Indian exports (Siraj Hussain, 2021).
    • Some of these include mandatory pre-shipment examination by the Export Inspection Agency being lengthy and costly.
    • Compulsory spice board certification being needed even for ready-to-eat products.
    • Lack of strategic planning of exports by most State governments.
    • Lack of a predictable and consistent agricultural policy discouraging investments by the private sector.
    • Prohibition of import of meat- and dairy based-products in most of the developed countries.
    • Withdrawal of the Generalised System of Preference by the U.S. for import of processed food from India.

    Consider the question “What are the challenges facing export of processed foods from India? Suggest the way forward.”

    Way forward

    • The main objective of the Agriculture Export Policy is to diversify and expand the export basket so that the export of higher value items, including perishables and processed food, be increased
    • Support to industry: The policy needs to nurture food processing companies, ensuring low cost of production and global food quality standards, and creating a supportive environment to promote export of processed food.
    • Focus on reputed brands: Reputed Indian brands should be encouraged to export processed foods globally as they can comply with the global standard of codex.
    • Indian companies should focus on cost competitiveness, global food quality standards, technology, and tap the global processed food export market.

    Conclusion

    India has competitive advantages in various agricultural commodities which can be passed onto processed foods. It has the potential to become a global leader in the food processing sector.

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  • Rooftop Solar Scheme

    India has added 521 megawatts (MW) of rooftop solar capacity in the second quarter (Q2) of the calendar year (CY) 2021, a 53% increase than earlier quarter showing good signs of popularity.

    What is Solar Rooftop?

    • A solar photovoltaic (PV) system mounted on a rooftop of a building is a mini-power requirement or feed into the grid.
    • The size of the installation varies significantly depending on the availability of space, amount of electricity consumed by the property and the ability or willingness of the owner to invest the capital required.

    Why rooftop?

    • Rooftop solar with a storage system is a benefit for both, end consumers as well as discoms (power distribution companies).
    • A one-kilowatt (kW) rooftop system can produce three to five units of electricity a day.
    • The combination increasingly becomes cost-effective for electricity generation compared to the traditional grid supply and diesel generators.
    • In 2021, solar and storage will be cheaper than grid supply for most commercial and industrial (C&I) customers.
    • The increase in penetration of rooftop solar in the distribution grid will have a significant impact on the stability of the grid.

    A viable alternative

    • Most housing societies in urban India rely on diesel generators for power backup. However, as power availability improves in the country, diesel generators will become redundant.
    • The operational cost of diesel generators is quite high— R16-18 per unit against Rs 5-6 a unit for solar rooftop systems. So rooftop solar power makes financial sense.Solar rooftop is also a perfect solution for commercial and institutional buildings that operate mostly during the day.
    • Their rooftops can be utilized to generate electricity, and they can, partially or completely, replace diesel generators. This would also help them reduce their electricity bills.

    Question of energy storage

    • In order to integrate rooftop solar and electric vehicles, the grid needs to be flexible and smart.
    • Energy storage systems will play a key role in providing this flexibility by acting as a load when there is a surplus generation, as well as generating sources when there is a supply shortage.
    • There are two major methods of integrating battery storage into the electric grid:
    1. Front-of-the-meter (FTM): It is implemented at the utility scale, wherein the battery system is connected to the transmission or distribution network that ensures grid reliability. This happens on a considerably large scale (~MWh scale).
    2. Behind-the-meter (BTM): The other method is implemented at the residential and commercial/industrial level, mainly to provide backup during a power failure or to store excess locally generated energy from solar rooftop photovoltaic (PV) systems.

    India’s storage capacity

    • About 34 GW / 136 GWh of battery storage is expected to be installed by 2030, according to the Central Electricity Authority of India.
    • This capacity would be used for RE integration, demand-side and peak load management services.

    Storage challenges

    • The solar segment offers a huge market opportunity for advanced battery technologies.
    • However, manufacturers have some ground to cover in addressing technical limitations of batteries, such as charging characteristics, thermal performance and requirement of boost current to charge deep cycle batteries.
    • Since solar companies may directly procure batteries from manufacturers and require after-sale services and technical support, battery companies should have wider a presence to address these expectations.

    Other key challenges

    • Rooftop solar source doesn’t match the rise in renewable energy in India.
    • While industrial and commercial consumers account for 70% of total installed capacity residential consumers remain a big untapped potential to give the boost
    • Solar rooftops also face several challenges such as little consumer awareness, lack of innovative government policies or attention, bureaucratic hassles, and limited support from discoms.

    Way forward

    • Supportive policies and innovative technological approaches are needed for the sector to achieve its potential.
    • Indian policymakers need to plan for rooftop solar plus storage, rather than rooftop solar alone with the grid as storage (net / gross metering).
    • The declining cost of storage solutions, along with that of rooftop solar solutions, is likely to change the future of the Indian power sector.
    • Several countries such as Australia, the United States, Germany, among others have already endorsed solar power with battery storage.
    • Energy storage, therefore, represents a huge economic opportunity for India.
    • The creation of a conducive battery manufacturing ecosystem on a fast track could cement India’s opportunity for radical economic and industrial transformation in a critical and fast-growing global market.

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  • SEBI introduces T+1 Settlement System

    The Capital markets regulator Securities and Exchange Board of India (SEBI) has introduced T+1 settlement cycle for completion of share transactions on optional basis in a move to enhance market liquidity.

    What is T+1 Settlement System?

    • T+1 means that settlements will have to be cleared within one day of the actual transactions taking place.
    • Currently, trades on the Indian stock exchanges are settled in two working days after the transaction is done (T+2).
    • In April 2002, stock exchanges had introduced a T+3 rolling settlement cycle. This was shortened to T+2 from April 1, 2003.

    What has Sebi allowed?

    • SEBI has allowed stock exchanges to start the T+1 system as an option in place of T+2.
    • If it opts for the T+1 settlement cycle for a scrip, the stock exchange will have to mandatorily continue with it for a minimum 6 months.
    • Thereafter, if it intends to switch back to T+2, it will do so by giving one month’s advance notice to the market.
    • Any subsequent switch (from T+1 to T+2 or vice versa) will be subject to a minimum period.
    • A stock exchange may choose to offer the T+1 settlement cycle on any of the scrips, after giving at least one month’s advance notice to all stakeholders, including the public at large.

    Why T+1 settlement?

    • Reduced settlement time: A shortened cycle not only reduces settlement time but also reduces and frees up the capital required to collateralize that risk.
    • Quick settlement: T+1 also reduces the number of outstanding unsettled trades at any instant, and thus decreases the unsettled exposure to Clearing Corporation by 50%.
    • Speedy recovery of assets: The narrower the settlement cycle, the narrower the time window for a counterparty insolvency/bankruptcy to impact the settlement of a trade.
    • Risk reduction: Systemic risk depends on the number of outstanding trades and concentration of risk at critical institutions such as clearing corporations, and becomes critical when the magnitude of outstanding transactions increases.

    How does T+2 work?

    • If an investor sells shares, settlement of the trade takes place in two working days (T+2).
    • The broker who handles the trade will get the money, but will credit the amount in the investor’s account only.
    • In effect, the investor will get the money only after three days.
    • In T+1, settlement of the trade takes place in one working day and the investor will get the money on the following day.
    • The move to T+1 will not require large operational or technical changes by market participants, nor will it cause fragmentation and risk to the core clearance and settlement ecosystem.

    Why are foreign investors opposing it?

    • Foreign investors operating from different geographies would face time zones, information flow process, and foreign exchange problems.
    • Foreign investors will also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
    • In 2020, SEBI had deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

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    Back2Basics: SEBI

    • The SEBI is the regulatory body for securities and commodity market in India under the jurisdiction of Ministry of Finance Government of India.
    • It was established on 12 April 1988 and given Statutory Powers on 30 January 1992 through the SEBI Act, 1992.

    Jurisdiction of SEBI

    • SEBI has to be responsive to the needs of three groups, which constitute the market:
    1. Issuers of securities
    2. Investors
    3. Market intermediaries

    SEBI has three powers rolled into one body: quasi-legislative, quasi-judicial and quasi-executive.

    • It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.
    • Though this makes it very powerful, there is an appeal process to create accountability.
    • There is a Securities Appellate Tribunal which is a three-member tribunal and is currently headed by Justice Tarun Agarwala, former Chief Justice of the Meghalaya High Court.
    • A second appeal lies directly to the Supreme Court.

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