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Subject: Economics

  • What are Swiss Banks?

    A whistleblower has leaked information on more than $100 billion held in 30,000 accounts of Zurich-headquartered Credit Suisse, one of the world’s most infamous banks which hold black money.

    What is the news?

    • The investigation refocused attention on Swiss banks and their famous, century-old culture of secrecy.
    • This swiss tradition is under pressure as countries around the world try to get their super-rich to pay legitimate taxes on their wealth.

    Swiss Banks: Defined by Secrecy

    • Since at least the beginning of the 18th century, Geneva had become a favoured destination of French royalty and other European elites seeking discreet havens to stash their wealth.
    • In 1713, Swiss government authorities announced laws prohibiting bankers from giving out information about their customers.
    • Thus began a powerful culture of silence and secrecy that went on to become the defining feature of Swiss banking.
    • In 1934, Switzerland passed the Federal Act on Banks and Savings Banks, commonly known as the Banking Law of 1934 or the Swiss Banking Act.

    What’s behind this upmost secrecy?

    • Article 47 made it a crime to reveal details or information of customers to almost anyone — including the government — without their consent and in the absence of a criminal complaint.
    • Violators can get five years in prison; Article 47 lies at the heart of some of the most stringent banking secrecy laws anywhere.

    Why are they favourite destination to park black money?

    • As wealth became easily mobile across international borders, the safety and stability of Swiss banks, located in a peaceful country presented an irresistible attraction for the super-rich.
    • Switzerland itself is a politically neutral country.
    • Swiss bank accounts are attractive to depositors because they combine low levels of risk with very high levels of privacy.
    • The Swiss economy is extremely stable, and the banks are run at very high levels of professionalism.
    • Almost any adult in the world can open an account in a Swiss bank. Opening an account is not difficult, and requires not much more than basic KYC, including a proof of identity such as a passport.

    Question of ‘black money’

    • “Black money” allegedly stashed away by Indians in Swiss banks is a political issue in India, and parties and political functionaries have often made promises to “bring it back”.
    • Swiss authorities have maintained that they cooperate with the Indian government to fight tax evasion and fraud.

    Indian motives and moves

    • The two countries have had a system of automatic exchange of information in tax matters since 2018.
    • Under this, detailed financial information on all Indian residents with accounts in Swiss financial institutions was provided for the first time to Indian authorities in September 2019.

     

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  • Who are the Angadias?

    An FIR has been registered against some Mumbai Police officials last week for allegedly threatening Angadias and extorting money from them in south Mumbai.

    Who are Angadias?

    • The Angadia system is a century-old parallel banking system in the country where traders send cash generally from one state to another through a person called Angadia that stands for courier.
    • It is by and large used in the jewellery business with Mumbai – Surat being the most popular route as they are two ends of the diamond trade.
    • The cash involved is huge and it is the responsibility of the Angadia to transfer cash from one state to another for which they charge a nominal fee.
    • Generally, it is the Gujarati, Marwari and Malbari community that are involved in the business.

    How does the system work?

    • The Angadia system works completely on trust as large sums, at times in crores, are involved.
    • Generally, traders have the same Angadias for decades together.
    • If a trader from Zaveri Bazaar in south Mumbai wants to pay a diamond trader in Surat, he will send an Angadias who usually delivers the money within 24 hours.
    • They also have fixed trains that leave from Mumbai at night and reach Gujarat by early morning.
    • Usually, to verify authenticity, the trader will, for example, will give a Rs 10 note to the Angadia and provide the number of the note to the recipient.
    • It is only after the recipient confirms the note number that the Angadia will hand over the money to the person.
    • After making the payment, the Angadias return to Mumbai the same day.

    Is the system legal?

    • While the Angadia system per se is legal, there hangs a cloud over the activity as it is suspected that a lot of times it is used to transfer unaccounted money.
    • Since the business deals in cash and there is no account maintained for the same, there have been suspicions that it is also used for transfer of black money like the hawala.

     

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  • Issues with corporate governance in the context of NSE scam

    Context

    Over the past 10 days, the revelations about the functioning of the National Stock Exchange (NSE) during the tenure of Chitra Ramkrishna as Managing Director and Chief Executive Officer (CEO) have raised questions about the governance.

    Managerial misconduct at NSE

    •  There was managerial misconduct at NSE.
    • An effective board of directors: That is why we need checks on management such as an effective board of directors.
    • After the board was informed about the irregularities in Mr. Subramanian’s appointment, it discussed the matter but chose to keep the discussions out of the minutes on grounds of confidentiality and the sensitivity of the matter.
    • Second, despite being aware of Ms. Ramkrishna’s transgressions, it allowed her to resign and on generous terms instead of taking action against her.
    • Third, the Public Interest Directors (PIDs) failed to keep SEBI informed about the goings-on at the NSE.

    Issues with corporate governance

    • In the corporate world, much is forgiven on grounds of performance.
    • When a performing CEO chooses to unduly favour a particular individual or individuals, boards see that as a forgivable infirmity.
    • As for dysfunctional or ineffective boards, these remain the norm despite numerous regulations, seminars and papers over the past four decades.
    • In case of the the NSE, the problem is structural.
    • Selection and absence of penalty: It has to do partly with the way board members are selected and partly with the absence of penalties where directors do not live up to their mandate.
    • Board members are selected by top management (or, in India, by the promoter who is also top management).
    • Board members have every incentive to nod their heads to whatever the management wants to be done.

    Way forward

    • 1] Diversity in the selection of board members: As long as the top management selects all board members or can influence their selection, there is little hope of any active challenge to management.
    • The top management must be allowed to choose not more than 50% of the independent directors.
    • The rest must be chosen by various other stakeholders — financial institutions, banks, small shareholders, employees, etc.
    • 2] Accountability of board members: A second thing that needs to happen is holding board members accountable for lapses.
    • Regulators act against directors where there is financial malfeasance.
    •  This must change. Regulators must penalise errant directors through a whole range of instruments — strictures, financial penalties, removal from boards and a permanent ban from board membership.
    • 3] Accountability of regulator: Regulators themselves must be held to account.
    • In the NSE affair, questions have been asked of SEBI.
    •  For instance, why did SEBI not seek the help of the cyber police to ascertain the identity of the yogi?
    • SEBI needs to explain itself.

    Conclusion

    Convulsions of outrage after particular episodes will not take us very far. We need significant institutional reform if corporate governance is not to remain an illusion.

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  • How uniform power cost and electricity duty can achieve higher growth

    Context

    Electricity prices vary not just among end users, but also between states, where a complex patchwork of different taxes and subsidy regimes can leave consumers in some states paying five times more for their electricity than their counterparts in neighbouring states.

    Deprivations faced by Low Income States in India

    • The low-income States (LIS) are deprived on many fronts.
    • They have low accessibility to credit, low investments, low power availability and accessibility, and high energy costs.
    • The high-income States (HIS), on the other hand, have a big share in industry and commerce because they are not deprived on the same fronts.
    • The six HIS (Maharashtra, Tamil Nadu, Gujarat, Karnataka, Andhra Pradesh and Telangana) together account for 56.4% of factories and 54.3% of the net value added to the country, while their share in population is only 32.3%.
    • Among other reasons, this is because they have higher credit and financial accessibility (55% of total institutional credit and 56% of total industrial credit went to these five HIS) at the credit-deposit ratio.
    • On the other hand, the six LIS (Bihar, Jharkhand, U.P., M.P., Odisha, and Rajasthan) access only 15% of total institutional credit and barely 5% of total industrial credit, while their share in population is 43%.
    • The maximum benefit of the Atmanirbhar package (₹20 lakh crore) also went to the HIS as they have a higher share in industry.

    Role of power supply in disparity among states

    • Among other reasons, the availability of adequate quality power at the cheapest rate attracts investments, either private or public, in a particular location.
    • Due to a complex patchwork of different taxes and subsidy regimes, electricity prices vary not just among end users, but also between states.
    • This can leave consumers in some states paying five times more for their electricity than their counterparts in neighbouring states.

    Solutions

    •  Energy India Outlook 2021 provides two solutions.

    1] Eliminate price discrimination by synchronising all regional grids

    • The power-producing States have the advantage of power,  being available at lower prices.
    • This problem can be addressed by synchronising all the regional grids.
    •  This will help the transfer of energy (without compromising quality).
    • The idea is of ‘One Nation, One Grid, One Frequency’.
    • Further, this will pave the way for establishing a vibrant electricity market and facilitate the trading of power across regions through the adoption of the ‘one tariff’ policy.
    • The Central Electricity Regulatory Commission is in the process of implementing a framework of the Market-Based Economic Dispatch and moving towards ‘One Nation, One Grid, One Frequency, One Price’.

    2] Include electricity duty in GST

    • Apart from uniform cost, the power sector also needs uniformity in electricity duty charged by different States.
    • In general, the association between income and electricity consumption is direct.
    • Thus, only 32% of the population used 50% of power.
    • Contrary to this, six backward States got only 25% of the power though their share of the population is 43%.
    • Therefore, it is clear that the substantial proportion of the power cost incurred in HIS is also borne by the LIS which buy those industrial products, as the input cost of power has already been included in the product’s price.
    •  Further, this situation justifies the fact that the final costs of power consumption are also borne by other States.
    • Thus, the electricity duty should be redistributed among the States under the ambit of GST equally shared by the CGST and SGST.

    Conclusion

    In order to attain higher economic growth, the States should raise the issue of uniform energy tariff and inclusion of electricity duty under the ambit of GST.

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  • Kerala plans to replace Mullaperiyar Dam

    Kerala plans to build a new dam to replace the 126-year-old Mullaperiyar dam in the Idukki district.

    Mullaperiyar Dam

    • It is a masonry gravity dam on the Periyar River in Kerala.
    • It is located on the Cardamom Hills of the Western Ghats in Thekkady, Idukki District.
    • It was constructed between 1887 and 1895 by John Pennycuick and also reached in an agreement to divert water eastwards to the Madras Presidency area.
    • It has a height of 53.6 m (176 ft) from the foundation, and a length of 365.7 m (1,200 ft).

    Operational issue

    • The dam is located in Kerala but is operated and maintained by Tamil Nadu.
    • The catchment area of the Mullaperiyar Dam itself lies entirely in Kerala and thus not an inter-State river.
    • In November 2014, the water level hit 142 feet for first time in 35 years.
    • The reservoir again hit the maximum limit of 142 feet in August 2018, following incessant rains in the state of Kerala.
    • Indeed, the tendency to store water to almost the full level of reservoirs is becoming a norm among water managers across States.

    The dispute: Control and safety of the dam

    • Supreme court judgment came in February 2006, has allowed Tamil Nadu to raise the level of the dam to 152 ft (46 m) after strengthening it.
    • Responding to it, the Mullaperiyar dam was declared an ‘endangered’ scheduled dam by the Kerala Government under the disputed Kerala Irrigation and Water Conservation (Amendment) Act, 2006.
    • For Tamil Nadu, the Mullaperiyar dam and the diverted Periyar waters act as a lifeline for Theni, Madurai, Sivaganga, Dindigul and Ramnad districts.
    • Tamil Nadu has insisted on exercising the unfettered colonial rights to control the dam and its waters, based on the 1886 lease agreement.

    Rule of Curve issue

    • A rule curve or rule level specifies the storage or empty space to be maintained in a reservoir during different times of the year.
    • It decides the fluctuating storage levels in a reservoir.
    • The gate opening schedule of a dam is based on the rule curve. It is part of the “core safety” mechanism in a dam.
    • The TN government often blames Kerala for delaying the finalization of the rule curve.

     

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  • What are Participatory and Non-Participatory Funds?

    The amendment to Section 24 of the LIC Act, brought prior to commencing the IPO, segregated the previously single ‘Life Fund’ into the participatory and non-participatory fund.

    What are Participatory and Non-Participatory Funds?

    • Under a participatory policy, a policyholder can get a share of the profits of the company.
    • This is received as a bonus. Examples of such products offered by LIC include  Jeevan Labh and  Bachat Plus.
    • No such sharing of profits happens under non-participatory products, which under the LIC fold includes policies such as  Saral Pensionand  Nivesh Plus.
    • As all insurance companies do, LIC also reinvests premium monies that policyholders pay.
    • The profits or surplus that comes about, as a result, was till September last year held in one single fund. This was the Life Fund.
    • The surplus was divided in the 95:5 ratio between policyholders (in the form of bonuses) and shareholders (in the form of dividends).

    What has the Amendment changed?

    • But the amendment to Section 24 of the LIC Act has necessitated the segregation of the Life Fund into participatory and non-participatory funds, depending on the nature of the policies they support.
    • The amendment stipulates terms on how surplus is to be shared with respect to participatory and non-participatory funds.
    • As for non-participating funds, surplus from the non-participating business would be transferred to shareholders.
    • Surplus from participatory business, however, would be shared between policyholders and shareholders.

    How does this change impact the shareholder?

    • The change, especially the one that has enabled 100% of the surplus in non-participatory funds to flow to the shareholder, has led to a massive jump in the Indian Embedded Value, or IEV.
    • IEV is a measure of future cash flows in life insurance companies and the key financial gauge for insurers.
    • The embedded value will help establish the market valuation of LIC and determine how much money the government raises in the flotation.
    • That will be crucial for the government to help meet its divestment targets and keep its fiscal deficit in check.

    Why is it a risk, then?

    • LIC has stated in the document that a significant portion of its business premiums come from participating and single premium products.
    • It added, should the participating products generate lower than expected returns for policyholders, it could lead to increased surrenders.
    • This could also potentially bother their financial condition, operations, and cash flows.

     

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  • India, UAE to sign Comprehensive Economic Partnership Agreement (CEPA)

    India and the United Arab Emirates will sign the first-ever bilateral Free Trade Agreement between the two countries.

    What is CEPA?

    • The partnership agreement or cooperation agreement is more comprehensive than an FTA.
    • CECA/CEPA also looks into the regulatory aspect of trade and encompasses an agreement covering the regulatory issues.
    • CECA has the widest coverage. CEPA covers negotiation on the trade in services and investment and other areas of economic partnership.
    • It may even consider negotiation in areas such as trade facilitation and customs cooperation, competition, and IPR.
    • India has signed CEPAs with South Korea and Japan.

    What is a Free Trade Agreement (FTA)?

    • An FTA is a pact between two or more nations to reduce barriers to imports and exports among them.
    • Under a free trade policy, goods and services can be bought and sold across international borders with little or no government tariffs, quotas, subsidies, or prohibitions to inhibit their exchange.
    • The concept of free trade is the opposite of trade protectionism or economic isolationism.

    Key benefits offered by FTA

    • Reduction or elimination of tariffs on qualified: For example, a country that normally charges a tariff of 12% of the value of the incoming product will rationalize or eliminate that tariff.
    • Intellectual Property Protection: Protection and enforcement of intellectual property rights in the FTA partner country is upheld.
    • Product Standards: FTA enhances the ability for domestic exporters to participate in the development of product standards in the FTA partner country.
    • Fair treatment for investors: FTA provides treatment as favorably as the FTA partner country gives equal treatment for investments from the partner country.
    • Elimination of monopolies: With FTAs, global monopolies are eliminated due to increased competition.

     

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  • After the Budget’s ‘crypto signal’, India awaits reform

    Context

    In the Union Budget speech, Finance Minister Nirmala Sitharaman announced a 30% flat tax rate levied on any gains made from the transfer of virtual assets including cryptocurrencies and Non-Fungible Tokens (NFTs).

    What is cryptocurrency?

    • Cryptocurrency (crypto) consists of a digital denomination designed to work as a medium of exchange through a distributed computer network (a blockchain) that is not reliant on any central authority such as a government or a bank for its upholding and maintenance.
    • Legal status: The announcement of the tax by the Finance Minister now leads to the assumption that crypto is legal in India.
    • Foreseeable are changes that would, down the road, legitimize and formally legalize the activities of crypto start-ups and enable them to access the necessary support system which might not have been available previously.

    What are the implications of taxing cryptocurrencies in India?

    • While critics are right in observing that the 30% flat tax rate is a harsh rate, this is a premium and price well-worth paying in exchange for what is effectively a ruling-out of prospects for a total ban on crypto by the central government.
    • Scope for innovation: The high tax rate would inevitably hamper the willingness of investors to convert cryptocurrencies into national fiat, this may, in turn, open up more doors for technologically savvy and innovation-minded investors.
    •  The extremely high tax rate and the fact that the losses cannot be offset would invariably propel investors to turn to alternative means of storing and undertaking transactions in cryptocurrencies, without foregoing the significant losses involved as they “switch” back into the rupee.
    • An inadvertent upside of this, then, is the prospective conversion and reallocation of crypto-funds from one form to another.
    • Such transformations would involve DeFi (Decentralised Finance) activities such as staking, lending, and providing liquidity, among others.

    Scope for DeFi in India

    • DeFi (or “decentralized finance”) is “an umbrella term for financial services on public blockchains.
    • With DeFi, one can do most of the things that banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets, and more — but it is faster and does not require paperwork or a third party. 
    • DeFi is global, peer-to-peer (meaning directly between two people, and not routed through a centralised system), pseudonymous, and open to all.
    •  The processes highlighted above would drive innovation in the field of Indian DeFi.

    Concerns

    • Low participation due to high rate: The community of small and medium-sized enterprises (SMEs) and lower-end high net-worth individuals are going to find it most difficult to access the ecosystem given the substantial barriers posed by the tax rates.
    • Lack of clarity: Additionally, when it comes to India’s crypto policy at large, there is a fundamental lack of clarity in aspects other than taxation.
    • There appears to be a push to treat crypto as purely an asset class than a currency.
    • The consolation offered by the Government in the form of the Reserve Bank of India’s CBDC, or Central Bank Digital Currency, will definitely help in pushing for the adoption of digital currencies, but, equally, defeats the fundamental purpose of cryptocurrency, which is decentralization.

    Suggestion

    • Reduce the tax rate:  There is a need to reduce tax rates in the future, though this must be weighed against considerations concerning government revenue and the need to curb speculative bubbles surfacing in relation to the currency.
    • Incorporation of insights: The second reform constitutes the incorporation of insights from seasoned partners from international communities, the key should rest with engaging these individuals for their insights and advice on the best practices associated with cryptocurrency policymaking.

    Consider the question “What is DeFi (decentralised finance)? What are the implications levying high tax on the cryptocurrencies?”

    Conclusion

    Systemic reforms are by no means easy, but they are critical as an amplifier of the successes that India has already accrued in the field and as an accelerator of India’s advancement in the sphere of crypto finance and blockchain social policymaking.

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  • Renewable Purchase Obligations (RPO).

    Telangana CM in harsh words has criticized the Prime Minister over Renewable Purchase Obligations (RPO).

    Why such a gesture by Telangana CM?

    • Telangana has been particularly vocal about the “increasing burden” forced upon states by the Centre on account of the clean energy cess imposed on coal and the RPOs (Renewable Purchase Obligation).

    What are RPOs?

    • Renewable Energy Certificates (REC) is a policy instrument to catalyze the development of renewable energy.
    • It is a market-based mechanism that will help the states meet their regulatory requirements (such as RPOs) by overcoming the geographical constraints on existing renewable potential in different states.
    • Under RPO, power distribution companies purchase a certain percentage of their requirements from renewable energy sources.

    REC Mechanism

    • REC mechanism is a market-based instrument to promote renewable energy and facilitate compliance of renewable purchase obligations (RPO).
    • It is aimed at addressing the mismatch between availability of RE resources in state and the requirement of the obligated entities to meet the RPO.
    • 1 REC is treated as equivalent to 1 MWh.

    How many types of RECs are there?

    There are two categories of RECs, viz., solar RECs and non-solar RECs.

    1. Solar RECs are issued to eligible entities for the generation of electricity based on solar as a renewable energy source.
    2. Non-solar RECs are issued to eligible entities for the generation of electricity based on renewable energy sources other than solar.

    Issues highlighted by Telangana

    • Mandatory purchase: The CM has raised the issue of mandatory purchase of renewables reducing the Plant Load Factor (PLF) for existing thermal power projects.
    • Only solar RPO: The CM questioned the mandate to procure a certain percentage of power from solar energy noting that Telangana had hydropower projects producing over 2,500 MW of power from rivers.
    • Not all states have ample renewables: States have thus far not been able to meet RPO targets, with over a dozen states and UTs achieving less than 60% of RPOs.
    • Penalty for non-compliance: There is a (small) penalty for not meeting RPO obligations. The Centre has proposed to increase penalties on states for non-compliance with RPOs in the draft electricity amendment bill.

    Clarification from the centre

    • States were free to hold their own bids and buy green energy from any developer instead of procuring power based on bids by the SECI.
    • They can choose to have their own bids.

     

     

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  • The myth of the trickle-down

    Context

    There is fear that the way the money will be used by the Centre will disempower the states further, just when they must do most of the heavy lifting on public welfare.

    Wealth creation and trickle-down

    • Failure of trickle-down: Evidence from around the world is that the economic policy paradigm, of first increasing the overall size of the pie by reducing taxes at the top and then “redistributing” the wealth, has not delivered benefits to people.
    • Gandhiji had declared that he was not against wealth creators. He lauded wealth creation.
    • However, it must not be at the cost of workers and welfare.
    • Wealth creators must be trustees of the wealth they create, not its exclusive owners.

    The demand-side problem of the Indian economy

    • The Indian economy is suffering from a chronic “demand-side” problem that is becoming worse with misguided economic policies.
    • Young people who have been getting educated in larger numbers than before, even learning vocational skills, cannot find jobs.
    •  If people don’t earn, demand will not increase, and investments in businesses will not be attractive.
    • Moreover, frustrated youth are tinderboxes for social unrest.

    Financial globalization and its impact on India

    • Around the world, there is a reaction to the financial globalization of the last 30 years.
    • In his book, Davos Man, Peter Goodman explains how the wealthiest people have influenced economic policies in democratic countries from the 1990s to make themselves wealthier.
    • Thomas Piketty has documented how wealth inequalities have increased alarmingly.
    • Wealth has accumulated at the top, with regressive tax policies along with deregulation.
    • Government expenditure on social reforms has been crimped.

    Way forward

    • The global economy must move on from hyper-financial, deregulated capitalism, which has given easy money too much freedom.
    • They must move out from their ideological ruts.
    • Invest in human capital: Until the economy grows there will be no resources to invest in human development — whereas China invested in human development before its economic take-off.
    • Protection to industrial sector: That an unprepared industrial sector will thrive in global free trade — whereas the UK and US (and Japan and China too), grew their industrial sectors behind walls of protection, and then demanded that the rest open their markets to the might of their enterprises.
    • Inclusive growth: Political divisions by religion and caste are tearing India’s social fabric again. The Indian economy must grow inclusively to repair it.

    Conclusion

    Indian policymakers must urgently discover India’s own, contextually appropriate model of development and shed defunct economic theories.

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