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Subject: Economics

  • Opportunity for agri-reforms in Punjab

    Context

    It is no secret that Punjab, once the frontrunner of Indian agriculture, is struggling to retain its dynamism.

    Need to diversify

    • While Punjab ranked at the top of major Indian states in terms of per capita income during 1967-68 to 2002-03, it has slipped below the 13th position.
    • Punjab’s agricultural growth rate, at 5.7 per cent, was more than double the country’s average of 2.3 per cent during 1971-72 to 1985-86.
    • This has reversed between 2005 and 2019 with Punjab at 1.9 per cent and India at 3.7 per cent.
    • Agriculture least diversified state: With almost 85 per cent of the gross cropped area under wheat and rice, agriculture is least diversified in the state. 
    • Mandi transactions cost about 8.5 per cent of the MSP, the highest in the country, making Punjab wheat and rice less competitive.

    What explains low diversification in agriculture?

    • Policies: Guaranteed MSP for wheat and paddy, backed by assured procurement, free power and highly subsidised fertilisers, has disincentivised diversification.
    • Political economy: The political economy around wheat and rice is so intense that any effort to address its distortionary impact is met with fierce opposition by vested interest groups.

    How to recalibrate Punjab agriculture towards higher, sustainable growth?

    • Augment livestock and milk processing: While fruits and vegetables account for 7.4 per cent of the value of the output of agriculture and allied sectors, livestock accounts for 31.5 per cent and fisheries less than 1 per cent.
    • The state has the highest per capita availability of milk but it can process less than 20 per cent of it.
    •  Promoting mega parks for value addition in fruits and vegetables, milk, and other livestock products through medium and small enterprises will strengthen its competitiveness.
    • Strengthen market for seed potato: It is also a significant player in seed potato and with the right package of practices, traceability systems, and infrastructure, the market for Punjab seed potato can be strengthened.
    • Scaling up alternative marketing channel: Alternative marketing channels for fruits and vegetables such as direct marketing, contract farming, and exports have been in place but these models need to be scaled up with the right ecosystem.
    • Shift to demand-driven agriculture: Punjab needs to switch from supply-driven agriculture to demand-driven agriculture.
    • The demand for fisheries, poultry, dairy, and fruits and vegetables is increasing way faster than the demand for wheat and rice.
    • Rationalise mandi charges:  Rationalising mandi charges to not more than 3 per cent will attract private sector investments in building efficient value chains.
    • Rationalise subsidies: Time-bound incentives in the form of freight subsidies for exporters of high-value agri-produce, tax exemptions for the processing of perishable commodities for value chain players would be more rational than the overloaded subsidies of urea and free power.
    • Use technology and start-up revolution: Punjab should leverage the start-up revolution that is unfolding in India, and use technology to ensure optimal utilisation of resources, expand markets, and augment farmers’ income.
    • Geo-tagging of farms can address concerns related to long-term leasing of land that is critical for large-scale investments and enable vibrant agricultural land markets.
    • Innovations in supply chain management, be it automated grain silos or state-of-art herd management will not only optimise the use of resources but also bring in traceability of farms and animals, early monitoring and prevention of disease outbreaks, and contain value chain losses.

    How to manage financial resources?

    • Rationalise urea subsidy: It should rationalise its fertiliser subsidy regime by moving towards cash transfers on a per hectare basis and free up fertiliser prices.
    • Include urea in nutrient-based subsidy scheme: If that’s not possible, then urea should be included in the nutrient-based subsidy scheme.
    • Bring soluble fertiliser under subsidy: Bring soluble fertilisers under subsidy, which will enhance fertiliser use efficiency through fertigation.
    • This will also help reap environmental gains.
    • Rationalise food subsidy: Food subsidy can also be rationalised through direct cash transfers replacing PDS, as Punjab is a grain surplus state.

    Conclusion

    Both environmental and financial sustainability concerns related to business-as-usual farming in Punjab call for a rebooting strategy.

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  • India-China trade crossed $125 bn in 2021

    India’s trade with China in 2021 crossed $125 billion, with imports from China nearing a record $100 billion, underlining continued demand for a range of Chinese goods, particularly machinery.

    Note: India-China trade has always been an all-time contested issue. This newscard presents crucial stats which is essential to substantiate your answers in Mains as well as in Interviews.

    Highlights of the bilateral trade

    • Bilateral trade reached $125.6 billion in 2021, with India’s imports from China accounting for $97.5 billion.
    • Trade fell from $92.8 billion in 2019 to $87.6 billion in 2020 on account of the pandemic.
    • Trade has boomed in 2021 thanks to a recovery in demand as well as rising imports of new categories of goods such as medical supplies.
    • Also, note that these figures exclude bilateral trade between India and Hong Kong.

    Imports-Exports imbalance

    • Imports were higher by 30% from 2019 while India’s exports to China, amounting to $28.1 billion, were up by as much as 56% from two years earlier.
    • The trade deficit last year reached $69.4 billion, up by 22% from the pre-pandemic figure in 2019.
    • While a break-up of imports and exports wasn’t immediately available, India’s biggest exports to China in recent years were iron ore, cotton, and other raw material-based commodities.
    • India has imported large quantities of electrical and mechanical machinery, active pharmaceutical ingredients (APIs), auto components, and over the past two years, a range of medical supplies from oxygen concentrators to PPEs.

    A global comparison

    • The 43% year-on-year growth in bilateral trade with India was among the highest that China recorded with its major trading partners.
    • Trade figures with China’s top three trading partners showed growth of 28.1% with ASEAN (to $878.2 billion), 27.5% with the EU (to $828.1 billion), and 28.7% with the US, (to $755.6 billion).

    Back2Basics: India-China Bilateral Trade

    • China is India’s largest trading partner.
    • Major commodities exported from India to China were: cotton; gems, precious metals, coins; copper; ores, slag, ash; organic chemicals; salt, sulphur, stone, cement; machines, engines, pumps.
    • Major commodities imported from China into India were: electronic equipment; machines, engines, pumps; organic chemicals; fertilizers; iron and steel; plastics; iron or steel products; gems, precious metals, coins; ships, boats; medical, technical equipment.

     

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  • Taxing cryptocurrency transactions

    Context

    Notwithstanding the eventual introduction of the Cryptocurrency and Regulation of Official Digital Currency Bill in Parliament, cryptocurrencies continue to proliferate.

    Provisions in Income Tax Act 1961 to tax cryptocurrencies

    • Cryptocurrencies not mentioned in Income Tax Act, 1961: Although the Income Tax Act, 1961 (“IT Act”) does not specifically mention cryptocurrencies, it does cast a wide enough net to bring crypto transactions under its ambit.
    • Capital asset: Trading in cryptocurrency may be classified as transfer of a ‘capital asset’, taxable under the head ‘capital gains.
    • Business income: If such cryptocurrencies are held as stock-in trade and the taxpayer is trading in them frequently, the same will attract tax under the head ‘business income’.
    • Even if one argues that crypto transactions do not fall under the above heads, Section 56 of the IT Act shall come into play, making them taxable under the head ‘Other sources of income’.

    Challenges in taxing cryptocurrencies

    • The above provisions in themselves are not sufficient in order to put in place a simple yet effective taxation regime for cryptocurrencies.

    [1] Varied interpretations:

    • First, the absence of explicit tax provisions has led to uncertainty and varied interpretations being adopted in relation to mode of computation, applicable tax head and tax rates, loss and carry forward, etc.
    • For instance, the head of income under which trading of self generated cryptocurrency (currencies which are created by mining, acquired by air drop, etc.) is to be taxed is unclear.
    • Since there is no consistency in the rates provided by the crypto-exchanges, it is difficult to arrive at a fair market value.
    • Similarly, when a person receives cryptocurrency as payment for rendering goods or services, how should one arrive at the value of the said currency and how should such a transaction be taxed?

    [2] Identifying tax jurisdiction

    • It is often tricky to identify the tax jurisdiction for crypto transactions as taxpayers may have engaged in multiple transfers across various countries and the cryptocurrencies may have been stored in online wallets, on servers outside India.

    [3] The anonymity of taxpayer

    • The identities of taxpayers who transact with cryptocurrencies remain anonymous.
    • Exploiting this, tax evaders have been using crypto transactions to park their black money abroad and fund criminal activities, terrorism, etc.

    [4] Lack of third party information on crypto transaction

    • The lack of third party information on crypto transactions makes it difficult to scrutinise and identify instances of tax evasion.
    • One of the most efficient enforcement tools in the hands of Income Tax Department is CASS or ‘computer aided scrutiny selection’ of assessments, where returns of taxpayers are selected inter alia based on information gathered from third party intermediaries such as banks.
    • However, crypto-market intermediaries like the exchanges, wallet providers, network operators, miners, administrators are unregulated and collecting information from them is very difficult.

    [5]  Physical goods/services may change hand in return for cryptocurrencies

    • Even if the crypto-market intermediaries are regulated and follow Know Your Customer (KYC) norms, there remains a scenario, where physical cash or other goods/services may change hands in return for cryptocurrencies.
    • Such transactions are hard to trace and only voluntary disclosures from the parties involved or a search/survey operation may reveal the tax evaders.

    Steps need to be taken

    • Statutory provision: The income-tax laws pertaining to the crypto transactions need to be made clear by incorporating detailed statutory provisions.
    • Awareness generation: This should be followed by extensive awareness generation among the taxpayers regarding the same.
    • Separate mandatory disclosure: The practice of having separate mandatory disclosure requirements in tax returns (as is the case in the United States) should be placed on the taxpayers as well as all the intermediaries involved, so that crypto transactions do not go unreported.
    • Strengthen international legal framework: Additionally, the existing international legal framework for exchange of information should be strengthened to enable collecting and sharing of information on crypto-transactions.
    • This will go a long way in linking the digital profiles of cryptocurrency holders with their real identities.
    • Training tax officers: the Government must impart training to its officers in blockchain technology.
    • The United Nations Office on Drugs and Crime’s ‘Cybercrime and Anti-Money Laundering’ Section (UNODC CMLS) has developed a unique cryptocurrency training module, which can aid in equipping tax officers with requisite understanding of the underlying technologies.

    Consider the question “What are the provision in Income Tax Act 1961 to tax the cryptocurrencies? What are the challenges in taxing cryptocurrencies? “

    Conclusion

    It is certain that cryptocurrencies are here to stay. A streamlined tax regime will be essential in the formulation of a clear, constructive and adaptive regulatory environment for cryptocurrencies.

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  • MSP is necessary to make farming viable

    Context

    There has been debate on the issue of MSP with some arguing against it while some favouring it.

    The issues with MSP

    • The broad strands of argument against MSP are:
    • MSP hinders the price discovery: Providing MSP does not allow the market to discover the prices; if market cleared prices are less than MSP, then the only buyer would be the government; this would render the government bankrupt.
    • FPO as a mechanism to deal with markets: If markets have any distortions, the way to negotiate it is through Farmer Producer Organisations (FPOs) — as demonstrated by Amul.
    • Provide income support through DBT: A better way to address the possible income gap is to give an income support-based direct benefit transfer (DBT).

    Why MSP is necessary?

    1] Barriers in agri-markets

    • Through tariffs and other measures, we have built a national barrier on markets, where gates are opened on the basis of strategic intent.
    • If we were to open our borders for free movement of grains from elsewhere, we may even argue for unlocking agricultural land for more lucrative purposes without worrying about food self-sufficiency, buffer stocking and domestic food safety.
    • We may have to accept a national food safety for at least the essential foodgrains and pulses.

    2] Role of MSP as price signalling and why it needs to be given as legal guarantee

    • Disproportionate risk: If we were to look at farming, we realise that this exposes itself to disproportionate risks. 
    •  First, there is no stop-loss mechanism after sowing the seed, except for destroying the crop for the season.
    • This enterprise not only has the usual business risks but also has the enhanced risk of the force majeure elements that destroy the enterprise — a sudden hail storm, drought, unseasonal showers, a pest attack, a locust attack — there are too many things that the farmer cannot control.
    • Therefore, an MSP provides a powerful signal to the farmer to exercise the choice of sowing a particular crop because the farmer can back-calculate the expected margin.
    •  If MSP is a signal that helps the farmer to choose a crop, then it must remain a choice at the harvest time as well.
    • The significance of MSP is only when the markets do not clear the price.
    • In such a situation, the farmer gets a return less than the MSP and by this argument we are escorting the farm fraternity towards bankruptcy.
    • A legal guarantee is, therefore, needed.
    • The argument that the state will have to procure all the floating stock in the market and may become bankrupt is fallacious.
    • The intervention of the state in the markets usually covers information asymmetry, arbitrage and cools the markets when they get overheated.

    3] Why not opt for income support instead of MSP?

    •  Income support does not address the issue of viability of the farming operations.
    • There is no doubt that we need to make farming viable.
    •  It is important to address the prices of each crop as a strategic signalling mechanism: For crops that would be encouraged and those that would be discouraged.

    4] Issues with drawing parallels with AMUL

    •  While the Amul model recognised the inherent power of markets, it took about five decades to make the system competitive — the investments were made in breed improvement, free veterinary services, better cattle feed, capital subsidy for processing plants, and return-free capital as investments.
    • The nature of subsidies was smart and innovative.
    • Dairying was the last bit to be liberalised, and it enjoyed protection even when we opened up in 1991.

    Way forward

    • Modernise the markets: We need to modernise the markets and storage and processing facilities.
    • There is no point in conflating modernisation with liberalisation.
    • Investment: If we need to take Indian agriculture on the path of Amul, we need to start making those investments now.

    Consider the question “What are the objectives of providing MSP? How legal basis to MSP could help in making agriculture viable in India?”

    Conclusion

    Let us use the MSP framework smartly on diversified crops, on a decentralised basis while we develop the markets. A legal guarantee will only assure the farmers that they will not be bankrupted.

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  • A new form of socialism powered by cooperative economic enterprises is required

    Context

    Inequalities of wealth have increased around the world and India is becoming one of the world’s most unequal countries.

    Role of globalisation and privatisation in increasing economic distress

    • Economic despair is feeding the rise of authoritarianism, nationalism, and identity politics.
    • Role of Globalisation: Opening national borders to free trade became an ideology in economics in the last 30 years.
    • Taxes of incomes and wealth at the top were also reduced.
    • The ideological justification was that the animal spirits of ‘wealth creators’ must not be dampened.
    • With higher taxes until the 1970s, the U.S. and many countries in Europe had built up their public health and education infrastructure and strengthened social security systems.
    • The rich are now being taxed much less than they were.
    • The pie has grown larger but the richest few have been eating, and hoarding, most of it themselves.
    • Role of privatisation: ‘Privatisation’ of everything became another ideological imperative in economics by the turn of the century.
    • Selling off public enterprises raises resources for funds-starved governments.
    • Another justification is efficiency in delivery of services, setting aside ethical questions of equity.
    • When ‘public’ is converted to ‘private’, rich people can buy what they need.
    • The gaps between the haves and the have-nots become larger.

    How liberal economic policies are creating illiberal societies

    • Liberal economists, promoting free markets, free trade, and privatisation, are worried by nationalism and authoritarian governments.
    • They rail against “populist” policies of governments that subsidise the poor and adopt industrial strategies for self-reliance and jobs for their citizens.
    • Liberals must re-examine their ideas of economics, to understand their own culpability in creating authoritarian and identitarian politics.

    The failure of capitalism and communism

    • While communism had lifted living standards, and the health and education of masses of poorer people faster than capitalism could, communism’s solution to the “property” question — that there should be no private property — was a failure.
    • It deprived people of personal liberties.
    • Capitalism’s solution to the property problem — replacing all publicly owned enterprises with privately owned ones (and reducing taxes on wealth and high incomes) has not worked either.
    • It has denied many of their basic human needs of health, education and social security, and equal opportunities for their children.
    • The private property solution has also harmed the natural environment.

    Way forward

    • Climate change and political rumblings around the world are both warnings that capitalism needs reform.
    • Economic policies must be based on new ideas.
    • Thought leaders and policymakers in India must lead the world out of the rut of ideas in which it seems to be trapped.
    • Principles of human rights must not be overpowered by property rights.
    • A new form of “Gandhian” democratic socialism, powered by cooperative economic enterprises, is required in the 21st century, to create wealth at the bottom, not only at the top, and save humanity and the planet.

    Conclusion

    A new form of ‘Gandhian’ democratic socialism powered by cooperative economic enterprises is required.

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  • Millimeter Wave band in 5G auctions

    The Telecom Regulatory Authority of India (TRAI) has asked for views on band plan, block size, and conditions for auction of spectrum in 5G bands, which includes Millimetre (mm) Wave band of 24.25-28.5 GHz.

    Must read:

    Status of 5G Rollout in India

    What is 5G technology?

    • 5G or fifth generation is the latest upgrade in the long-term evolution (LTE) mobile broadband networks.
    • It’s a unified platform that is much more capable than previous mobile services with more capacity, lower latency, faster data delivery rate and better utilisation of spectrum.

    5G spectrum

    5G mainly works in 3 bands, namely low, mid and high-frequency spectrum — all of which have their own uses as well as limitations.

    (1) Low band spectrum

    • It has a great promise in terms of coverage and speed of internet and data exchange but the maximum speed is limited to 100 Mbps (Megabits per second).
    • So Telcos can use and install it for commercial cell phone users who may not have specific demands for very high speed internet, the low band spectrum may not be optimal for specialized needs of the industry.

    (2) Mid-band spectrum

    • It offers higher speeds compared to the low band, but has limitations in terms of coverage area and penetration of signals.
    • This band may be used by industries and specialized factory units for building captive networks that can be moulded into the needs of that particular industry.

    (3) High-band spectrum

    • It offers the highest speed of all the three bands, but has extremely limited coverage and signal penetration strength.
    • Internet speeds in the high-band spectrum of 5G has been tested to be as high as 20 Gbps (giga bits per second), while, in most cases, the maximum internet data speed in 4G has been recorded at 1 Gbps.

    What is Millimetre (mm) Wave Band?

    • Millimetre Wave band or mmWave is a particular segment of radio frequency spectrum that range between 24 GHz and 100 GHz.
    • This spectrum, as the name suggests, has a short wavelength, and is apt to deliver greater speeds and lower latencies.
    • This in turn makes data transfer efficient and seamless as the current available networks work optimally only on lower frequency bandwidths.

    Significance of this mm band

    • 5G services can be deployed using lower frequency bands.
    • They can cover greater distances and are proven to work efficiently even in urban environments, which are prone to interference.
    • But, when it comes to data speeds, these bands fail to hit peak potential needed for a true 5G experience.
    • So, mmWave is that quintessential piece in the 5G jigsaw puzzle for mobile service providers.

    Concerns with inclusion of mm-band

    • The mm bands have been preserved for satellite-based broadband services as per the decision taken by the International Telecommunication Union (ITU).
    • Providing excess spectrum could pose a downside risk of the bands going unsold, or even worse, underutilised by terrestrial players at the expense of satellite-based service providers.
    • Offering excessive spectrum will result in Indian citizens being denied the benefits of high-demand, advanced satellite broadband services.
    • In addition to this, it will result in a massive loss to the Indian economy of up to $184.6 billion by 2030, along with the loss of foreign direct investment (FDI) and employment generation benefits.

    How could this disrupt the satellite communication industry?

    • Internet has largely been provided to users via fibre-optic based broadband connectivity or mobile network.
    • Of late, another class of Internet vendors is showing up. These are satellite-based communication service providers.
    • For example, SpaceX’s Starlink and Bharti Airtel’s OneWeb are some of the players in this market.
    • This segment uses Low-Earth Orbit (LEO) satellites to provide broadband to both urban and rural users. Their service could also be used for weather predictions.
    • The mm band had been the subject of controversy due to out-of-band emissions into the passive satellite band used for weather satellites at 23.6-24 GHz.

    HeaWay ahead

    • The allocation of mmWave band is critical to the satellite communication industry, which needs a stronger regulatory support to ensure that 5G operations don’t interfere with their existing operations.
    • The industry body pointed to Europe’s “5G Roadmap”, which is built on the ITU’s decision to hold these bands for satellite-based broadband services.

     

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  • Dravidian Model of Development

    The Chief Minister of Tamil Nadu is pushing for a ‘Dravidian Model’ where economic development is inclusive.

    What is the Dravidian Model?

    • The goal is equal economic development that will be in tune with social justice.
    • It has taken root since the days of the Justice Party government [in pre-Independent India].
    • TN polity has divided the task into short-term and long-term, and travels with the objective of improving the economy by implementing them within the time frame.

    Note: The Government of India Act 1919 implemented the Montagu-Chelmsford reforms, instituting a Diarchy in Madras Presidency. The diarchial period extended from 1920 to 1937, encompassing five elections. Justice party was in power for 13 of 17 years.

    Unique features of this developmental approach

    (1) Financial planning

    • TN has constituted an Economic Advisory Council comprising internationally renowned economists since there is a need to evolve an economic development to suit the current situation.
    • It has emerged out higher as comparatively high levels of human development with economic dynamism.

    (2) Health and education

    • It sought and ensured opportunity-equalizing policies in the expanding modern sectors through affirmative action policies and investments in education and health.
    • Tamil Nadu has been a pioneer in broad-basing entry into school education through a slew of incentives, the noon meal scheme being the most well-known.

    (3) Social Harmony

    • It also succeeded in building a bloc of lower caste groups under a Dravidian-Tamil identity that subsumed and sought to transcend individual caste identities.
    • It has distinct political mobilization against caste-based inequalities in the state.
    • Mobilization built an ethos that questioned the privileges of caste elites and the naturalness of merit in a caste society.

     

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  • Reaping India’s demographic dividend

    Context

    Countries like Singapore, Taiwan and South Korea have already shown us how demographic dividend can be reaped to achieve incredible economic growth by adopting forward-looking policies and programmes.

    The window of demographic opportunity

    • With falling fertility (currently 2.0), rising median age (from 24 years in 2011, 29 years now and expected to be 36 years by 2036), a falling dependency ratio (expected to decrease from 65% to 54% in the coming decade taking 15-59 years as the working age population), India is in the middle of a demographic transition.
    • This provides a window of opportunity towards faster economic growth. India has already begun to get the dividend.
    • As fertility declines, the share of the young population falls and that of the older, dependent population rises.
    • If the fertility decline is rapid, the increase in the population of working ages is substantial yielding the ‘demographic dividend’.
    • The smaller share of children in the population enables higher investment per child.
    • Therefore, the future entrants in the labour force can have better productivity and thus boost income.
    • With the passage of time, the share of the older population rises and that of the working age population begins to fall and hence the dividend is available for a period of time, ‘the window of demographic opportunity’.

    Need for forward-looking policies

    • Without proper policies, the increase in the working-age population may lead to rising unemployment, fueling economic and social risks.
    • This calls for forward-looking policies incorporating population dynamics, education and skills, healthcare, gender sensitivity, and providing rights and choices to the younger generation.

    Lessons for India

    • Countries like Singapore, Taiwan and South Korea have already shown us how demographic dividend can be reaped.
    •  There are important lessons from these countries for India.
    • 1) NTA data: The first is to undertake an updated National Transfer Accounts (NTA) assessment.
    • Using NTA methodologies, we find that India’s per capita consumption pattern is way lower than that of other Asian countries.
    • A child in India consumes around 60% of the consumption by an adult aged between 20 and 64, while a child in China consumes about 85% of a prime-age adult’s consumption.
    • The NTA data for India needs to be updated to capture the progress made on such investments since 2011-12.
    • 2) Invest more in children and adolescents: India ranks poorly in Asia in terms of private and public human capital spending.
    • It needs to invest more in children and adolescents, particularly in nutrition and learning during early childhood.
    • 3) Make health investments: Health spending has not kept pace with India’s economic growth.
    • The public spending on health has remained flat at around 1% of GDP.
    • Evidence suggests that better health facilitates improved economic production.
    • Hence, it is important to draft policies to promote health during the demographic dividend.
    • 4) Make reproductive healthcare services accessible on a rights-based approach: We need to provide universal access to high-quality primary education and basic healthcare.
    • The unmet need for family planning in India at 9.4% as per the latest National Family Health Survey-5 (2019-21) is high as compared to 3.3% in China and 6.6% in South Korea, which needs to be bridged.
    •  5) Bridge gender differentials in education: The gender inequality of education is a concern.
    • In India, boys are more likely to be enrolled in secondary and tertiary school than girls. This needs to be reversed.
    • 6) Increase female workforce participation: As of 2019, 20.3% of women were working or looking for work, down from 34.1% in 2003-04.
    • New skills and opportunities for women and girls befitting their participation in a $3 trillion economy is urgently needed.
    • It is predicted that if all women engaged in domestic duties in India who are willing to work had a job, female labour force participation would increase by about 20%.
    • 7) Address the diversity between StatesWhile India is a young country, the status and pace of population ageing vary among States.
    • Southern States, which are advanced in demographic transition, already have a higher percentage of older people.
    • These differences in age structure reflect differences in economic development and health – and remind us of States’ very different starting points at the outset of the 2030 Sustainable Development Goals Agenda.
    • But this also offers boundless opportunities for States to work together, especially on demographic transition, with the north-central region as the reservoir of India’s workforce.
    • 8) Governance reform: A new federal approach to governance reforms for demographic dividend will need to be put in place for policy coordination between States on various emerging population issues such as migration, ageing, skiling, female workforce participation and urbanisation.

    Conclusion

    In India, the benefit to the GDP from demographic transition has been lower than its peers in Asia and is already tapering. Hence, there is an urgency to take appropriate policy measures.

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  • India improves position in Henley Passport Index, 2021

    India now ranks at 83rd position in the Henley Passport Index, climbing seven places from 90th rank last year.

    Henley Passport Index

    • The Henley & Partners publishes the ranking and the Index of the world’s passports according to the number of destinations their holders can access without a prior visa.
    • It was launched in 2005.
    • The ranking is based on data from the IATA (International Air Transport Association), a trade association of some 290 airlines, including all major carriers.
    • The index includes 199 different passports and 227 different travel destinations.
    • The data are updated in real time as and when visa policy changes come into effect.

    India’s performance this year

    • India is ranked at 83rd position and shares the rank with Sao Tome and Principe in Central Africa, behind Rwanda and Uganda.
    • It now has visa-free access to 60 destinations worldwide with Oman and Armenia being the latest additions.
    • It has added 35 more destinations since 2006.

    Global performance

    • Japan and Singapore has topped the list.
    • The US and the UK passports regained some of their previous strength after falling all the way to eighth place in 2020.
    • The passport of the Maldives is the most powerful in South Asia (58th) enabling visa-free entry to 88 countries.
    • In South Asia, Bangladesh (103rd) is ahead of Pakistan (108th) and Nepal (105th).
    • Afghanistan undoubtedly stands at the last rank.

     

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  • Extending GST compensation as a reform catalyst

    Context

    In 2020-21, the compensation payment episode plunged the Union-State relationship to a new low, creating humongous mistrust.

    Background of the compensation to the States

    • To allay the fears of States of possible revenue loss by implementing GST in the short term, the Union government promised to pay compensation for any loss of revenue in the evolutionary phase of five years.
    • This was estimated by taking the revenue from the merged taxes in 2015-16 as the base and applying the growth rate of 14% every year.
    •  To finance the compensation requirements, a GST compensation cess was levied on certain items such as tobacco products, automobiles.
    • Period of five years: The agreement to pay compensation for the loss of revenue was for a period of five years which will come to an end by June 2022.
    • Mistrust between Centre and the State: In 2020-21, due to the most severe lockdown following the novel coronavirus pandemic, the loss of revenue to States was estimated at ₹3 lakh-crore of which ₹65,000 crore was expected to accrue from the compensation cess.
    • Of the remaining ₹2.35 lakh-crore, the Union government decided to pay ₹1.1 lakh-crore by borrowing from the Reserve Bank of India.
    • The entire compensation payment episode plunged the Union-State relationship to a new low, creating humongous mistrust.

    GST reform is still in transition

    • Misuse of input tax credit: The technology platform could not be firmed up for a long time due to which the initially planned returns could not be filed.
    • This led to large-scale misuse of input tax credit using fake invoices.
    • Revenue uncertainty faced by the States: This is the only major source of revenue for the States.
    • Considering their increased spending commitments to protect the lives and livelihoods of people, they would like to mitigate revenue uncertainty to the extent they can.
    • They have no means to cushion this uncertainty for the Finance Commission which is supposed to take into account the States’ capacities and needs in its recommendations has already submitted its recommendations.
    • Changes needed: More importantly, the structure of GST needs significant changes and the cooperation of States is necessary to carry out the required reforms.

    Changes needed in GST structure

    • Reducing exemption items: Almost 50% of the consumption items included in the consumer price index are in the exemption list; broadening the base of the tax requires significant pruning of these items.
    • Bringing petroleum products, real estate etc under GST: Sooner or later, it is necessary to bring petroleum products, real estate, alcohol for human consumption and electricity into the GST fold.
    • Single rate: The present structure is far too complicated with four main rates (5%, 12%, 18% and 28%).
    • This is in addition to special rates on precious and semi-precious stones and metals and cess on ‘demerit’ and luxury items at rates varying from 15% to 96% of the tax rate applicable which have complicated the tax enormously.
    •  Multiple rates complicate the tax system, cause administrative and compliance problems, create inverted duty structure and lead to classification disputes.

    Way forward

    • Extending the compensation period: Reforming the structure to unify the rates is imperative and this cannot be done without the cooperation of States.
    • Thus, extending the compensation payment for the next five years is necessary not only because the transition to GST is still underway but also to provide comfort to States to partake in the reform.
    • Reforming the structure is important not only to enhance the buoyancy of the tax in the medium term but also to reduce administrative and compliance costs to improve ease of doing business and minimise distortions.
    • New rate of compensation: It has been pointed out by many including the Fifteenth Finance Commission that the compensation scheme of applying 14% growth on the base year revenue provided for the first five years was far too generous.
    • The issue can be revisited and the rate of growth of reference revenue for calculating compensation can be linked to the growth of GSDP in States.

    Conclusion

    The transition to GST is still in progress and an extension will provide comfort to States to help roll out crucial changes.

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