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Subject: Economics

  • Places in news: Cattle Island on Hirakud Reservoir

    The Odisha Forest and Environment Department is all set to begin ‘Island Odyssey’ and ‘Hirakud Cruise’ ecotourism packages for tourists to islands inside the reservoir.

    Cattle Island

    • ‘Cattle island’, one of three islands in the Hirakud reservoir, has been selected as a sight-seeing destination.
    • When large numbers of people were displaced from their villages when the Hirakud dam was constructed on the Mahanadi river in 1950s, villagers could not take their cattle with them.
    • They left their cattle behind in deserted villages.
    • As the area started to submerge following the dam’s construction, the cattle moved up to Bhujapahad, an elevated place in the Telia Panchayat under Lakhanpur block of Jharsuguda district.
    • Subsequently named ‘Cattle island’, it’s surrounded by a vast sheet of water.

    Other islands

    • Then there is an “island of bats”, also within the reservoir, just 1 km away from the Debrigarh ecotourism project.
    • It is the habitat of hundreds of bats.
    • Tourists also get a magnificent view of the sunset from the reservoir. ‘Sunset island’ is one of the three stops on the unique boat ride.

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  • Emergency award

    Context

    The judgment delivered by the Supreme Court in the legal tussle between Amazon and the Future Group has laid the foundation for recognition and enforcement of emergency awards under the Indian arbitration law.

    What is an emergency award?

    • It is an award rendered by an emergency arbitrator, appointed prior to the formal constitution of an arbitral tribunal by an arbitral institution.
    • It is a recent mechanism introduced by arbitral institutions to encourage parties to seek urgent interim relief from an arbitral institution rather than from a court.
    • Many leading arbitral institutions such as SIAC, ICC, and LCIA have provisions for the appointment of an emergency arbitrator.
    • As far as India is concerned, the 246th Law Commission Report had recommended an amendment in the Arbitration and Conciliation Act, 1996 (‘Indian Arbitration Act’) to grant statutory recognition to an emergency award.
    • Some of the indigenous arbitral institutions though, such as the Delhi International Arbitration Centre, have made provisions for emergency arbitration.

    What is the tussle between Amazon and Future Group about?

    • In August 2020, Biyani Group and the Reliance Industries Group decided to amalgamate Future Retail Ltd. (FRL) with Reliance Industries and complete disposal of its retail assets in favor of the Group.
    • However, prior to the said transaction, Amazon had invested an amount of Rs 1,431 crores in Future Coupons Pvt. Ltd. (FCPL) based on rights granted to FCPL with regard to FRL.
    • So, Amazon initiated arbitration against the Biyani Group, including FRL, under Singapore International Arbitration Centre (SIAC) Rules.
    • Amazon made an application seeking urgent interim reliefs under SIAC rules and the appointment of an emergency arbitrator.
    • The emergency arbitrator appointed, made an award in favor of Amazon in October 2020, restricting the Biyani Group from proceeding ahead with the disputed transaction.
    • However, the Biyani Group proceeded with the disputed transaction, construing the emergency award as a nullity.

    Issue of enforcement of the emergency award in India

    • Amazon filed an application before the Delhi High Court for enforcement of the award.
    • The court had the task of answering two novel legal questions —
    • 1) Whether the emergency award is an interim order under section 17(1) of the Indian Arbitration Act,
    • 2) Whether it can be enforced under section 17(2).
    • The Delhi High Court gave judgment in March 2021 against the Biyani Group.
    • The case eventually reached the Supreme Court.
    • Party autonomy: The Supreme Court judgment emphasized party autonomy in arbitration, which includes the right of the parties to choose institutional rules as the governing rules of arbitration.
    • Once chosen, the parties are bound by such rules.
    • The Supreme Court also held that the Indian Arbitration Act does not prohibit the parties from agreeing to a provision providing for an emergency arbitrator.
    • The Supreme Court also held that the term “during the arbitral proceedings” is wide enough to encompass emergency arbitration proceedings.
    • The Court ultimately held the emergency award to be an interim order under section 17(1) of the Indian Arbitration Act and enforceable under section 17(2).

    Significance of the judgment for arbitration in India

    • This judgment has contributed to the development of Indian arbitration law.
    • In the broader scheme of things, it is a victory for Indian arbitration and a sigh of relief for arbitral institutions.

    Conclusion

    The judgment is a reaffirmation of the fact that India is gradually stepping towards being an “arbitration-friendly” jurisdiction.

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  • Getting the perfect haircut from the IBC

    Understanding the role of IBC 2016

    • For reasons sometimes a company may experience stress, that is, is unable to repay the debt in time — implying that it has assets less than claims against it.
    • So, when a company has inadequate assets, the claim of an individual creditor may be consistent with its assets while claims of all creditors put together may not.
    • In such a situation, creditors may rush to recover their claims before others do, triggering a run on the company’s assets.
    • The IBC provides for reorganisation that prevents a value-reducing run on the company.
    • It aims to rescue the company if its business is viable or close it if its business is unviable, through a market process.
    • Restructuring: The claims of creditors are restructured, which may be paid to them immediately or over time.
    •  In case of closure, the assets of the company are sold, and proceeds are distributed to creditors immediately as per the priority rule.
    • Reorganisation by financial creditor: The IBC entrusts the responsibility of reorganisation to financial creditors as they have the capability and the willingness to restructure their claims.

    Why so much variation in haircut?

    • Where the company does not have adequate assets, realisation for financial creditors, through a rescue, may fall short of their claims known as haircut.
    • The IBC process yields a zero haircut (100% recovery of claimed amount) in one case and 100 per cent haircut (i.e. 0% recovery) in another.
    • Factors: It depends on several factors, including the nature of business, business cycles, market sentiments, and marketing effort.
    • It critically depends on at what stage of stress, the company enters the IBC process.
    • If the company has been sick for years, and its assets have depleted significantly, the IBC process may yield a huge haircut or even liquidation.
    • A haircut is typically the total claims minus the amount of realisation/amount of the claims.
    • But this formulation may not tell the complete story.
    • The realisation often does not include the amount that would be realised from equity holding post-resolution, and through the reversal of avoidance transactions and the insolvency resolution of guarantors — personal and corporate.
    • It also does not include realisations made in other accounts.
    • The amount of claim often includes NPA, which may be completely written off, and the interest on such NPA.
    • These understate the numerator and overstate the denominator, projecting a higher haircut.

    Significance of IBC

    • A haircut should be seen in relation to the assets available and not in relation to the claims of creditors.
    • The market offers a value in relation to what a company brings on the table, not what it owes to creditors.
    • Value maximisation: So, the IBC maximises the value of existing assets, not of assets that probably existed earlier.
    • Market determined value: The IBC enables and facilitates market forces to resolve stress as a going concern.
    • Resolution applicants, who have many options for investment, including in stressed companies, compete to offer the best value.
    • If the best value offered by the market is not acceptable to creditors, the company is liquidated.
    • Maximum realisation: In addition to rescuing the company, the IBC realises, of the available options for creditors, the highest in percentage terms.

    Conclusion

    It is a tool in the hands of stakeholders to be used at the right time, in the right case, in the right manner.

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    Back2Basics: Avoidable Transactions in IBC 2016

    • The UNCITRAL Legislative Guide on Law of Insolvency defines avoidance proceedings as “provisions of the insolvency law that permit transactions for the transfer of assets or the undertaking of obligations prior to insolvency proceedings to be cancelled or otherwise rendered ineffective and any assets transferred, or their value, to be recovered in the collective interest of creditors.”
    • It is very important for the Resolution Professional (RP) or the liquidator to identify such transaction and file applications to avoid it so that creditors can collect their claims.
    • The Insolvency and Bankruptcy Code, 2016 (IBC) contains four types of avoidable transactions- preferential, undervalued, defrauding creditors and extortionate transactions.
    • Usually, the avoidable transactions should be made within the prescribed relevant time or look back period.
    • Look back period is the relevant time up to which an RP or a liquidator can go back to scrutinize an expected avoidable transaction.

  • Government Securities Acquisition Programme (GSAP 2.0)

    The Reserve Bank of India (RBI) has announced that it will conduct an open market purchase of government securities of ₹25,000 crore under the G-sec Acquisition Programme (G-SAP 2.0).

    Answer this PYQ in the comment box:

    Q.Consider the following statements:

    1. The Reserve Bank of India manages and services the Government of India Securities but not any State Government Securities.
    2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
    3. Treasury bills offer are issued at a discount from the par value.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 Only

    (c) 2 and 3 only

    (d) 1, 2 and 3

     

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    What are Government Securities?

    • These are debt instruments issued by the government to borrow money.
    • The two key categories are:
    1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
    2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

    Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

    Why G-Secs?

    • Like bank fixed deposits, g-secs are not tax-free.
    • They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
    • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
    • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

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  • [pib] International Bullion Exchange

    The International Financial Services Centres Authority (IFSCA) has inaugurated the pilot run/soft launch of the International Bullion Exchange scheduled to go live on October 1, 2021.

    What is Bullion?

    • Bullion is gold and silver that is officially recognized as being at least 99.5% and 99.9% pure and is in the form of bars or ingots.
    • Bullion is often kept as a reserve asset by governments and central banks.
    • To create bullion, gold first must be discovered by mining companies and removed from the earth in the form of gold ore, a combination of gold and mineralized rock.
    • The gold is then extracted from the ore with the use of chemicals or extreme heat.
    • The resulting pure bullion is also called “parted bullion.” Bullion that contains more than one type of metal, is called “unparted bullion.”

    The Bullion Market

    • Bullion can sometimes be considered legal tender, most often held in reserves by central banks or used by institutional investors to hedge against inflationary effects on their portfolios.
    • Approximately 20% of mined gold is held by central banks worldwide.
    • This gold is held as bullions in reserves, which the bank uses to settle the international debt or stimulate the economy through gold lending.
    • The central bank lends gold from their bullion reserves to bullion banks at a rate of approximately 1% to help raise money.
    • Bullion banks are involved in one activity or another in the precious metals markets.
    • Some of these activities include clearing, risk management, hedging, trading, vaulting, and acting as intermediaries between lenders and borrowers.

    What is International Bullion Exchange?

    • This shall be the “Gateway for Bullion Imports into India”, wherein all the bullion imports for domestic consumption shall be channelized through the exchange.
    • The exchange ecosystem is expected to bring all the market participants to a common transparent platform for bullion trading.
    • It would provide efficient price discovery, assurance in the quality of gold, enable greater integration with other segments of financial markets and help establish India’s position as a dominant trading hub in the World.

    Answer this PYQ:

    What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with India households into the economy
    2. To promote FDI in the gold and jewellery sector
    3. To reduce India’s dependence on gold imports

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

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  • Sub-Mission on Fodder and Feed

    Context

    The government recently announced a Sub-Mission on Fodder and Feed.

    Why availability of good and affordable quality feed and fodder matters

    • A study by the Indian Grassland and Fodder Research Institute has observed that for every 100 kg of feed required, India is short of 23.4 kg of dry fodder, 11.24 kg of green fodder, and 28.9 kg of concentrate feed.
    • Low milk productivity: The lack of good quality feed and fodder impacts the productivity levels of cattle.
    • This is one of the chief reasons why Indian livestock’s milk productivity is 20%-60% lower than the global average.
    • High input cost: If we break down the input costs, we find that feed constitutes 60%-70% of milk production costs.
    • When the National Livestock Mission was launched in 2014, it focused on supporting farmers in producing fodder from non-forest wasteland/grassland, and cultivation of coarse grains.
    • However, this model could not sustain fodder availability due to a lack of backward and forward linkages in the value chain.

    Why Sub-Mission on Fodder and Feed is significant

    • As about 200 million Indians are involved in dairy and livestock farming, the scheme is important from the perspective of poverty alleviation.
    • The Sub-Mission on Fodder and Feed intends to create a network of entrepreneurs who will make silage (the hub) and sell them directly to the farmers (the spoke).
    • Bringing down the input cost: The large-scale production of silage will bring down the input cost for farmers since silage is much cheaper than concentrate feed.
    • Objective: The revised scheme has been designed with the objectives of increasing productivity, reducing input costs, and doing away with middlemen (who usually take a huge cut).
    • Since India has a livestock population of 535.78 million, effective implementation of this scheme will play a major role in increasing the return on investment for our farmers.

    About the Sub-Mission on Fodder and Feed

    • The scheme will provide 50% capital subsidy up to ₹50 lakh towards project cost to the beneficiary for infrastructure development and for procuring machinery for value addition in feed such as hay/silage/total mixed ration.
    • Private entrepreneurs, self-help groups, farmer producer organizations, dairy cooperative societies, and Section 8 companies (NGOs) can avail themselves of the benefits under this scheme.
    • The scheme can be used for covering the cost of infrastructure/machinery such as bailing units, harvester, chaff cutter, sheds, etc.

    Challenges and solution

    • Seasonal availability: A major challenge in the feed sector emanates from the fact that good-quality green fodder is only available for about three months during the year.
    • Fermenting green fodder: Ideal solution would be to ferment green fodder and convert it into silage.
    • Hence, under the fodder entrepreneurship program, farmers will receive subsidies and incentives to create a consistent supply chain of feed throughout the year.

    Conclusion

    The mission will help marginal farmers reduce their input costs and help them in increasing the return on capital employed.

  • What are Oil Bonds?

    The Centre has argued that it cannot reduce taxes on petrol and diesel as it has to bear the burden of payments in lieu of oil bonds issued by the previous UPA government to subsidize fuel prices.

    What are Oil Bonds?

    • Oil bonds are special securities issued by the government to oil marketing companies in lieu of cash subsidy.
    • These bonds are typical of a long-term tenure like 15-20 years and oil companies are paid interest.
    • Before the complete deregulation of petrol and diesel prices, oil marketing companies were faced with a huge financial burden as the selling price of petrol and diesel in India was lower than the international market price.
    • This ‘under-recovery is typically compensated through fuel subsidies allocated in the Union budget.
    • However, between 2005 and 2010, the UPA government issued oil bonds to the companies amounting to Rs 1.4 lakh crore to compensate them for these losses.

    Why do governments issue such bonds?

    • Compensation to companies through issuance of such bonds is typically used when the government is trying to delay the fiscal burden of such a payout to future years.
    • Governments resort to such instruments when they are in danger of breaching the fiscal deficit target due to unforeseen circumstances that lead to a collapse in revenues or a surge in expenditure.
    • These types of bonds are considered to be ‘below the line’ expenditure in the Union budget and do not have a bearing on that year’s fiscal deficit, but they do increase the government’s overall debt.
    • However, interest payments and repayment of these bonds become a part of the fiscal deficit calculations in future years.

    Backgrounder: Deregulation of fuel prices

    • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of aviation turbine fuel in 2002, petrol in 2010, and diesel in 2014.
    • Prior to that, the government would intervene in fixing the price at which retailers were to sell diesel or petrol.
    • This led to under-recoveries for oil marketing companies, which the government had to compensate for.
    • The prices were deregulated to make them market-linked, unburden the government from subsidizing prices, and allow consumers to benefit from lower rates when global crude oil prices tumble.
    • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices based on calculations of their own cost and profits.
    • However, the key beneficiary in this policy reform of price decontrol is the government.

    Impact: Loss of consumers

    • While oil price deregulation was meant to be linked to global crude prices, Indian consumers have not benefited from a fall in global prices.
    • The central, as well as state governments, impose fresh taxes and levies to raise extra revenues.
    • This forces the consumer to either pay what she’s already paying, or even more.

    Why are the Oil Bonds in news?

    • As prices of petrol and diesel climb steeply, the Centre has been under pressure to cut the high taxes on fuel.
    • Taxes account for 58 per cent of the retail selling price of petrol and 52 per cent of the retail selling price of diesel.
    • However, the government has so far been reluctant to cut taxes as excise duties on petrol and diesel are a major source of revenue, especially at a time the pandemic has adversely impacted other taxes such as corporate tax.
    • The government is estimated to have collected more than Rs 3 lakh crore from tax on petrol and diesel in the 2020-21 fiscal year.

    The blame game

    • The present government has blamed the UPA regime for its inability to cut taxes.
    • It pointed out that the bonds issued by the Manmohan Singh government have weakened the financial position of the oil marketing companies and added to the government’s fiscal burden now.
    • It is an argument that has been often repeated since 2018.

    What budget documents show

    • Budget documents show that such bonds will be up for redemption over the next few years — beginning with two to be redeemed in the current fiscal year — till 2026.
    • The government has to repay a principal amount of Rs 10,000 crore this year, according to these documents.
    • The government has paid around Rs 10,000 crore annually as interest over the last decade.
    • The government is likely to pay a similar amount of interest for the current fiscal as well.

    Is the issuance of such special securities restricted to the UPA era?

    • Besides oil bonds, the UPA era also saw the issuance of fertilizer bonds from 2007 to compensate fertilizer companies for their losses due to the difference in the cost price and selling price.
    • However, the issuance of such special securities is not limited to the UPA regime.
    • Over the years, the Modi government has issued bank recapitalization bonds to specific public sector banks (PSBs) as it looked to meet the large capital requirements of these PSBs without allocating money from the budget.

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  • Why banks want inspection reports by RBI to be kept confidential?

    The contentious issue of whether banks should disclose inspection reports by the Reserve Bank of India (RBI) is back in the news once again after a division bench of the Supreme Court referred writ petitions filed by banks to another bench for reconsideration.

    What is RBI’s inspection on banks?

    • The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks.
    • These powers are exercised through on-site inspection and off-site surveillance.
    • RBI carries out dedicated and integrated supervision overall of credit institutions, i.e., banks, development financial institutions, and non-banking financial companies.
    • The Board for Financial Supervision (BFS) carries out this function.
    • Banks currently disclose the list of wilful defaulters and names of defaulters against whom they have filed suits for loan recovery.

    Note: CAMELS is an international rating system used by regulatory banking authorities to rate financial institutions, according to the six factors represented by its acronym. The CAMELS acronym stands for “Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity.”

    Why in news now?

    • In 2015, the Supreme Court had come down on the RBI for trying to keep the inspection reports and defaulters list confidential.
    • This was aimed for the public disclosure of such reports of the RBI, much against the wishes of the banking sector.
    • The SC had said the RBI has no legal duty to maximize the benefit of any public sector or private sector bank, and thus there is no relationship of ‘trust’ between them.
    • It added that the RBI was duty-bound to uphold the public interest by revealing these details under RTI.

    What is the issue?

    • The RBI was allowed to make such reports public following the Supreme Court order.
    • The SC had wanted full disclosure of the inspection report.
    • However, the court agreed that only some portions on bad loans and borrowers would be made public.
    • Banks have been refusing to disclose inspection reports and defaulters’ lists.

    Issues with report publication

    • Bank defamation: As banks are involved in dealing in money, they fear any adverse remarks — especially from the regulator RBI — will affect their performance and keep customers away.
    • Trust of the account holder: Banks are driven by the “trust and faith” of their clients that should not be made public.
    • The invalidity of RTI: On the other hand, private banks insisted that the RTI Act does not apply to private banks.
    • Right to Privacy: Banks also argued that privacy is a fundamental right, and therefore should not be violated by making clients’ information public.

    Why are banks against disclosing inspection reports?

    • Many feel that the RBI’s inspection reports on various banks, with details on alleged malpractices and mismanagement, can open up a can of worms.
    • As these reports have details about how the banks were manipulated by rogue borrowers and officials, banks want to keep them under wraps.
    • Obviously, banks don’t want inspection reports and defaulters’ lists to be made public as it affects their image.
    • Customers may also keep out of banks with poor track records.

    Try this PYQ now:

    Q.In the context of the Indian economy non-financial debt includes which of the following?

    1. Housing loans owed by households
    2. Amounts outstanding on credit cards
    3. Treasury bills

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 1 and 2 only

    (c) 3 only

    (d) 1, 2 and 3

     

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  • RBI unveils Financial Inclusion Index

    The Reserve Bank of India (RBI) has announced the formation of a composite Financial Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country.

    Financial Inclusion Index

    • The FI-Index will be published in July every year.
    • The index captures information on various aspects of financial inclusion in a single value ranging between 0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
    • It has been conceptualized as a comprehensive index incorporating details of banking, investments, insurance, postal as well as the pension sector in consultation with the government and respective sectoral regulators.
    • It has been constructed without any ‘base year’ and as such it reflects cumulative efforts of all stakeholders over the years towards financial inclusion.

    Parameters of the index

    • The FI-Index comprises three broad parameters viz.,
    1. Access (35%),
    2. Usage (45%), and
    3. Quality (20%)
    • These parameters are the identification of the customer, reaching the last mile, and providing relevant, affordable and safe products.
    • The index is responsive to ease of access, availability and usage of services, and quality of services for all 97 indicators.

    This year’s highlight

    • The annual FI-Index for the period ended March 2021 stood at 53.9 compared with 43.4 for the period ended March 2017.

  • What is RoDTEP Scheme?

    The Centre has notified the rates and norms for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme asserting that it would put ‘direct cash in the pockets of exporters’ soon.

    RoDTEP Scheme

    • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has been kicked in from January 2021, replacing the earlier Merchandise and Services Export Incentive Schemes (MEIS and SEIS) that were in violation of WTO norms.
    • The new RoDTEP Scheme is a fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Answer this PYQ:

    Q.With reference to the international trade of India at present, which of the following statements is/are correct?

    1. India’s merchandise exports are less than its merchandise imports.
    2.  India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.
    3.  India’s exports of services ye more than its imports of services.
    4.  India suffers from an overall trade/current account deficit.

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 2 and 4 only

    (c) 3 only

    (d) 1, 3 and 4 only

     

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    Why need such a scheme?

    • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
    • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

    Coverage of the scheme

    • It covers about 75% of traded items and 65% of India’s exports.
    • To enable zero-rating of exports by ensuring domestic taxes are not exported, all taxes, including those levied by States and even Gram Panchayats, will be refunded under the scheme.
    • Steel, pharma, and chemicals have not been included under the scheme because their exports have done well without incentives.

    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.