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Subject: Economics

  • Can India invoke state sovereignty in Cairn Energy case?

    Context

    Last year, an arbitration tribunal indicted India for breaching its obligations by imposing taxes retrospectively on Cairn. As a result, Cairn Energy has been attempting to seize Indian assets in several jurisdictions to recover $1.7 billion due from India.

    How asset seizure order affects India?

    • This episode projects India as an unfriendly country for investors at a time when it wishes to project itself as a prime destination for foreign investment.
    • This episode puts India in the league of countries like Pakistan, Congo, Venezuela, Russia and Argentina, who have been part of attachment proceedings overseas due to their failure to comply with international arbitral awards.
    • Fighting cases will consume an enormous amount of time, money, and resources, in addition to attracting bad press internationally.

    Understanding the doctrine of state immunity

    • State immunity is a well-recognised doctrine in international law.
    • It safeguards a state and its property against the jurisdiction of another country’s domestic courts.
    • Despite the universal acceptance of this doctrine, there is no international legal instrument in force administering its implementation.
    • Attempts are underway to create binding international law on the application of the rules of state immunity such as the United Nations Convention on Jurisdictional Immunities of States and Their Property (UNSCI).
    • However, this convention is yet to be ratified by 30 countries — the minimum number required to bring it in force, as per Article 30(1) of UNSCI.
    • India has signed the convention, but not ratified it.
    • The doctrine of state immunity has progressed from absolute immunity to restrictive immunity in which immunity is only for the sovereign functions of the state.

    Can India invoke state immunity?

    • Most prominent jurisdictions follow the concept of restrictive immunity.
    • State immunity can be invoked to resist the seizure of sovereign assets, but not commercial properties. 
    • In the context of the execution of the investment treaty arbitration awards, properties serving commercial functions are available for seizure.
    • In the case of India, the most popular commercial property that foreign investors would target for attachment are the global assets of India’s public sector undertakings such as Air India.

    Way forward

    • If India wishes to continue the case, it needs to carefully study the laws on state immunity in different jurisdictions where attachment proceedings are likely to come up.
    • A better option would be to admit that amending the tax law retrospectively was a mistake and comply with the international ruling.

    Conclusion

    At the time when India seeks to project itself as an attractive investment destination, such cases could be a setback. India needs to avoid such disputes in the future.

  • [pib] Kisan Sarathi Platform

    In order to facilitate farmers to get ‘right information at right time’ in their desired language, a digital platform namely ‘Kisan Sarathi’ was launched by the Ministry of Agriculture and Farmers Welfare.

    Kisan Sarathi

    • This digital platform empowers farmers with the technological interventions to reach farmers in remote areas.
    • Through this platform, the farmers can interact and avail personalized advisories on agriculture and allied areas directly from the respective scientists of Krishi Vigyan Kendra (KVKs).
    • Using this platform, farmers can get information about crop and crop production, among other things that will help them in improving the quantity of their produce.
    • Farmers will be able to get information about good crop practices, the right amount of products and many other basic things.

  • Growth matters but income levels matter more

    Context

    But the quest for sustained higher growth has been elusive for India for the last five years. The pandemic seems to make it more elusive.

    The magnitude of contraction in the economy

    • There is nothing encouraging in the provisional estimates of annual national income (2020-21), released by the National Statistical Office.
    • The agriculture sector continued its impressive growth performance, reiterating that it still remains as the vital sector of the economy, especially at times of crisis.
    • The manufacturing sector continued its subdued growth performance, failing to emerge as the growth driver.
    •  The contraction in trade (-18.2%), construction (-8.6%), mining (-8.5%) and manufacturing (-7.2%) is a matter of concern as these sectors account for the bulk of low-skilled jobs.
    • Gross Domestic Product (GDP) at Constant (2011-12) Prices in Q4 of 2020-21 is showing a growth of 1.6%.
    • The magnitude of contraction in the economy and the policy responses towards it raises an important issue of growth prospects for the next year.

    Contextualising the current growth rates in terms of following three macroeconomic data would provide us a better perspective on growth recovery.

    1) Rising unemployment

    • The unemployment data released by the Centre for Monitoring Indian Economy (CMIE) says, that in May 2021, India’s labour participation rate at 40 per cent was the same as it was in April 2021.
    • But, the unemployment rate shot up to 11.9 per cent from 8 per cent in April.
    • A stable labour participation rate combined with a higher unemployment rate implies a loss of jobs and a fall in the employment rate.
    • The employment rate fell to 35.3 per cent in May 2021 from 36.8 per cent in April 2021.
    • According to CMIE, over 15 million jobs were lost in May 2021.
    • May 2021 was therefore a particularly stressful month on the jobs front.

    Takeaway

    • Employment and aggregate demand in an economy are related via the channel of disposable incomes of workers.
    • Aggregate demand and output growth have a positive correlation.
    • Hence, the prospects of growth revival in the next year look bleak at the moment and from employment perspective.

    2) Low business confidence

    • It is the second important data point that needs to examined.
    • Business confidence index (BCI), from the survey by the industry body FICCI, plummeted to 51.5 from 74.2 in the previous round.
    • The survey also highlights the weak demand conditions in the economy.
    • Compounding this is the uncertainty arising out of the imposition of localised curbs due to the second wave of infections and a muddled vaccine policy in the country.

    3) Low PMI

    • Manufacturing Purchasing Managers’ Index (PMI) has slipped to a 10-month low indicating that the manufacturing sector is showing signs of strain with growth projections being revised lower.
    • Both BCI and PMI slipping down indicates that the overall optimism towards 2021-22 is low, which could impact investments and cause further job losses.

    Why focusing on supply-side will not work

    • Since last year, the policy responses have been to rely on credit easing, focusing more on supply side measures.
    • This policy stance is unlikely to prop up growth for three reasons.
    • First, the bulk of the policy measures, including the most recent, are supply side measures and not on the demand side.
    • Second, large parts of all the stimulus packages announced till now would work only in the medium term.
    • Third, the use of credit backstops as the main plank of policy has limits compared to any direct measure on the demand side as this could result in poor growth performance if private investments do not pick up.
    • Further, the credit easing approach would take a longer time to multiply incomes as lending involves a lender’s discretion and borrower’s obligation.

    Way forward

    • Growth recovery depends on demand recovery.
    • The combined increase in exports of April and May 2021 is over 12% indicating that global demand rebound is much faster than the domestic demand. 
    • What needs to be addressed immediately is the crisis of low domestic demand.
    • A tight-fisted fiscal policy approach comes at a time when conventional fiscal stimulus packages might not be enough as supply side issues arising out of episodic lockdowns need to be addressed simultaneously.
    • Focusing on short-term magnified growth rates resting on low bases might be erroneous, as income levels matter more than growth rates at this juncture.

    Conclusion

    India needs a sharp revival of demand for which higher per capita incomes are necessary.

  • SEBI needs to adopt dual approval system for independent directors

    Context

    While the regulators have taken giant strides to enhance board independence in India, one significant conundrum persists about appoint and removal process of the independent directors.

    How appointment and removal process affects the independence of independent directors?

    • Independent directors are appointed just like other directors through shareholder voting by a simple majority.
    • This confers a significant power in the hands of significant shareholders to handpick the independents.
    • In case of family-owned companies, it is not uncommon to appoint “friendly” independent directors.
    • As for public sector undertakings, there is a demonstrable affiliation between independent directors and the ruling political parties.

    Dual Approval System: Way forward

    • The above trends suggest that unless independent directors owe their allegiance to the shareholder body as a whole, independence is likely to remain largely in form and not function.
    • In its consultation paper, SEBI proposed a “dual approval” system.
    • Under this system, the appointment of an independent director required the satisfaction of two conditions:
    • First, the approval by a majority of all shareholders.
    • Second, the approval of a “majority of the minority”, namely the approval of shareholders other than the promoters.
    • SEBI recommended the same “dual approval” system for the removal of independent directors as well.
    • SEBI drew inspiration from Israel and the premium-listed segment of the United Kingdom, which confers greater power to minority shareholders in installing or dethroning independent directors.
    • SEBI has not yet made any mention of implementing the dual approval system.

    Issues with Dual Approval System

    • The first issue is that it militates against the majority rule principle that is intrinsic in a corporate democracy.
    • While understandable, that is hardly an immutable rule as corporate law does make exceptions in cases involving oppression of minority shareholders.
    • The second concern is that placing too much power in the hands of minority shareholders would be counterproductive, as it could result in a tyranny of the minority.
    • However, the dual approval system instead represents the best of both worlds. It does not negate the promoter’s involvement in the process of appointing or removing independent directors.
    •  Only consensus candidates would end up becoming independent directors.
    • The third issue is one of shareholder apathy: Will minority shareholders be motivated to exercise an informed and meaningful choice?
    • Minority shareholders tend to be passive when they are unable to influence the outcome of shareholding voting.
    • However, where they do have a significant say, like in the “majority of the minority” process, they are likely to be more active in exercising their franchise.

    Consider the question “How far has the provision of appointing independent directors to safeguard the interest of minority shareholders succeeded in its objectives? Suggest the changes to improve the challenges faced by the independent directors.”

    Conclusion

    In all, the appointment and removal system continues to undermine the independence and efficacy of corporate boards. The SEBI needs to implement the dual approval system at the earliest.

  • Bhutan becomes first neighbor to use BHIM UPI

    Bhutan becomes the first country, in India’s immediate neighbourhood, to use the BHIM app for mobile-based payments and “to adopt UPI standards for its QR deployment”.

    Bharat Interface for Money (BHIM)

    • BHIM is an Indian mobile payment App developed by the National Payments Corporation of India (NPCI), based on the Unified Payments Interface (UPI).
    • Named after B. R. Ambedkar and launched on 30 December 2016 it is intended to facilitate e-payments directly through banks and encourage cashless transactions.
    • The application supports all Indian banks which use UPI, which is built over the Immediate Payment Service (IMPS) infrastructure and allows the user to instantly transfer money between bank accounts of any two parties.
    • It can be used on all mobile devices.

    Note: Bhutan has become the first country to adopt India’s Unified Payment Interface (UPI) standards for its quick response (QR) code. It is also the second country after Singapore to have BHIM-UPI acceptance at merchant locations, NPCI International Payments Ltd (NIPL).

    What is UPI?

    • Unified Payments Interface (UPI) is an instant real-time payment system developed by NPCI facilitating inter-bank transactions.
    • The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.

    Answer this PYQ in the comment box:

    Q. With reference to digital payments, consider the following statements:

    1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
    2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.

    Which of the statements given above is/ are correct? (CSP 2018)

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

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  • High forex reserves are no guarantee of monetary policy independence

    Context

    The ascending stock of forex reserves has led to the view this will enable the sole devotion of monetary policy to domestic objectives.

    Assessing the significance of forex reserves

    Let’s look into the experinec of China and India in this regard.

    1) Learning from China’s experience

    • In 2016, China had a strong external position—current account surplus and more than $3tn forex reserves.
    • However, investors’ expectations on renminbi (RMB) value began to shift due to rising concerns about its growth outlook, domestic rate cuts and eventual depreciation, and imminent tightening of US monetary policy, resulting in net capital outflows of $725 billio (bn) over the year.
    • This put sustained pressure upon the RMB.
    • Eventually, China resorted to capital control measures, which slowed the outflow and supported the RMB in the first half of 2017.

    2) India’s own historical record

    • India’s own historical record shows that, high or low, forex reserves didn’t prevent investors from reappraising positions.
    • India experienced this in case of oil prices (2018) or taper fears (2013).
    • The CAD was moderate, at 1.1% and 1.4% of GDP in two quarters to December 2017.
    • But as oil prices climbed, current account projections were rapidly revised to 2.5-3% of GDP in less than a quarter seeing the jump in the import bill, lagging exports and continuous outflow of portfolio capital.
    •  Reserves totalled $424 bn then (end-March 2018); foreign currency assets were $399 billion.
    • Against a mere $9 bn capital outflow, the peak-to-trough decline in reserves was $19 bn in April-June 2018, with 5% depreciation of the rupee.
    • The sharper, $21 bn fall in mid-April to July 20, 2018 equalled the reserves decline in April-August 2013 taper episode when the rupee depreciated three times more or 15%!
    • Forex reserves were much lower in 2013 ($255 bn range) and it had taken only a quarter for the current account gap to widen from 4.0% of GDP in April-June 2012 to 5.4% and a record 6.7% in subsequent two quarters to December 2012!

    Key takeaways

    • History shows that no level of reserves is a foolproof guarantee for macroeconomic stability or interest rate immunity.
    • The important lesson these episodes hold is that repressive attempts do not always convince markets or prevent shifts in expectations and often compel large, abrupt adjustment.
    • Investors reassess positions, including global factors, whatever the reserves’ stock.
    • The crucial role of reserves is psychological, i.e. market confidence and liquidity insurance that is immediate and unconditional that allows central banks to buy time, whether for a gradual adjustment, soft landing, or as the case may be.

    Distortion in bond market and RBI’s role in it

    • RBI has been systematically suppressing bond yields, particularly the 10-year benchmark, the reference rate for banks.
    • So effective was the repression that the bond market became irrelevant as yields altogether stopped responding to inflation or fiscal developments.
    • The 207-basis-point jump in retail inflation in a month in May, which exceeded expectations, caused not even a flicker in the yield premium for example.
    • This did not prevent responses elsewhere though – the overnight indexed swap (OIS), which signals future interest rate movements, increased 20-30 basis points at different tenures with fresh inflation risks.
    • Clearly, the market reading was inconsistent with RBI’s, whose rigid adherence to a particular level (6% in the case of the old, 10-year bond) was disregarded outright.
    • The monetary policy cue was not being accepted, failing to soothe ruffled feathers about inflation.

    Risk involved in RBI’s policy

    • If the global financial cycle were to suddenly turn, risk-aversion set in, or oil prices shoot up to risky levels, investors will undoubtedly look at actual differentials, not the one set in stone by RBI.
    • There will be exchange rate pressures, which RBI can no doubt manage with liberal reserves.
    • But the duration and degree of adjustment is not in RBI’s control, identically to the bond market one, where it has infinite capacity to keep local yields where it wants.
    • There’s a limit to how much foreign currency it can sell—the $609bn reserve holding is finite.
    • Currency depreciation can, therefore, worsen a bad situation as higher inflation pressurises domestic interest rates to rise.
    • RBI’s issuance of the new 10-year benchmark bond at 6.10%, which came as a surprise against its previous inflexibility, indicates RBI has internalised the above risks.
    • The disparate movements were undermining RBI,  whose commitment to continue the accommodative monetary policy as long as necessary to revive and sustain growth has been reassuring.

    Conlcusion

    When the economy is open, financially integrated and subject to cross-country dynamics, it is more prudent to let market forces play out a bit than persist with a stance that could turn unsustainable despite the high reserves.

    Back2Basics: What is Current Account Deficit (CAD) ?

    • The current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
    • The current account includes net income, such as interest and dividends, and transfers, such as foreign aid, although these components make up only a small percentage of the total current account.
    • The current account represents a country’s foreign transactions and, like the capital account, is a component of a country’s balance of payments (BOP).

     

  • Retail Direct Scheme for G-Secs

    The RBI has announced a scheme under which retail investors will be allowed to open retail direct gilt accounts (RDG) directly with the central bank.

    Retail Direct Scheme

    • The scheme is a one-stop solution to facilitate investment in government securities (G-secs) by individual investors.
    • Under RDG schemes, accounts can be opened through a dedicated online portal, which will provide registered users access to primary issuance of government securities and to NDS-OM.

    What is a gilt account?

    • A “Gilt Account” means an account opened and maintained for holding Government securities, by an entity or a person including ‘a person resident outside India’ with a “Custodian” permitted by the RBI.

    About 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).

    Retail investors and G-Secs

    • Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
    • To encourage direct investment, the government and RBI have taken several steps in recent years.
    • Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts.
    • Stock exchanges act as aggregators and facilitators of retail bids.

  • New Ministry of Cooperation should enable people to leverage community networks

    Context

    India now has a Ministry of Cooperation that aims to strengthen the country’s cooperative movement. This is an opportune moment to look at the movement’s history, examine the potential of cooperatives and analyse the challenges they face.

    Development of Farmer Producer Companies in India

    • India’s significant tryst with dairy cooperatives began in the 1950s with the success of what we know today as Amul.
    • The nation took note of this initiative and the National Dairy Development Board was set up in 1965.
    • However, the expansion wasn’t working the way it had been envisaged.
    • The need for a new model was felt soon as cooperatives outside Anand were not holding regular and proper elections.
    • Their accounts were not audited.
    • As a result, a committee was set up in the Company Affairs Ministry to allow farmers to set up companies.
    • The Farmer Producer Companies (FPCs) would run on the principle of “one share one vote” and the essence of cooperatives would not be diluted.
    • The Parliamentary Committee looked into the Bill to give legal backing to FPCs, with this, the Companies Act (Second Amendment), 2002 became law.

    Funding the FPCs

    • The existing funding vehicles were designed to cater to cooperatives, not FPCs
    •  Around 2010, the Boston Consulting Group (BCG) had been commissioned to develop a plan for restructuring NABARD.
    • As a result, the restructured NABARD had a special window for FPCs.

    Community-based cooperatives

    •  The Cheliya community set up a chain of Hearty Mart “cooperative” supermarkets in villages in Gujrat using the franchise model.
    •  Just as the network of Charotar Patels that Kurien relied on in the case of Amul —Cheliya community have played a key role in the spread of the model.
    • The idea of leveraging the community network was tried in some parts of the country in the context of re-imagining economic infrastructure.
    • To deal with the electricity board failures, a distribution company was run on a community basis.
    • This model has, in fact, worked in places like Kanpur, even Kerala.

    Social cooperatives

    • The concept of social cooperatives builds on the idea of communities creating infrastructure by using local material and family labour.
    • These can be the village tank, paving the village road — with or without MGNREGA — finishing the last-mile construction of a canal network or even keeping watch on the contractor.
    • The pandemic seems to have increased the significance of community effort.
    • Reducing vaccine hesitancy, providing food to those waiting outside hospitals and, most importantly, looking after orphaned children are imperatives crying out for the cooperative model.

    Way forward for new Ministry of Cooperatives

    •  Keeping in mind social needs while using resources is a large part of the solution to our current predicament.
    • The pandemic will not follow the laws of corporate finance, cooperation has a lot to speak for itself, the new ministry should take this message.
    • The new work-from-home model will create several problems as well as offer opportunities.
    • The new ministry is a recognition of the needs of our times.
    • But it should not be just about pumping in money. 

    Conclusion

    This is the time to design models that help those who help themselves. We will wait expectantly to see how the new ministry works.

  • Cabinet extends Agri Infra Fund loans to APMCs

    The Centre has decided to allow state-run market yards to access financing facilities through its Agricultural Infrastructure Fund to calm the fears of protesting farmers that such market yards are being weakened.

    Agriculture Infrastructure Fund (AIF) Schemes

    • It is a Central Sector Scheme meant for setting up storage and processing facilities, which will help farmers, get higher prices for their crops.
    • The Union Cabinet approved this scheme in July 2020 for a period of 10 years.
    • It will support farmers, PACS, FPOs, Agri-entrepreneurs, etc. in building community farming assets and post-harvest agriculture infrastructure.
    • These assets will enable farmers to get greater value for their produce as they will be able to store and sell at higher prices, reduce wastage and increase processing and value addition.

        Note the following things about AIF:

        1) It is a Central Sector Scheme

        2) Duration of the scheme

        3)Target beneficiaries

    What exactly is the AIF?

    • The AIF is a medium – long term debt financing facility for investment in viable projects for post-harvest management infrastructure and community farming assets through interest subvention and credit guarantee.
    • Under the scheme, Rs. 1 Lakh Crore will be provided by banks and financial institutions as loans with an interest subvention of 3% per annum.
    • It will provide credit guarantee coverage under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for loans up to Rs. 2 Crore.

    Target beneficiaries

    The beneficiaries will include farmers:

    • PACS, Marketing Cooperative Societies, FPOs, SHGs, Joint Liability Groups (JLG), Multipurpose Cooperative Societies, Agri-entrepreneurs, Startups, and Central/State agency or Local Body sponsored Public-Private Partnership Projects

    What are the new changes?

    • The Union Cabinet decided to extend the AIF to State agencies and Agricultural Produce Marketing Committees (APMCs), as well as federations of cooperative organizations, Farmers Producers Organizations and self-help groups.
    • They will now be eligible for interest subvention for loans up to â‚č2 crores, with APMCs allowed to access separate loans for different kinds of infrastructure projects to build cold storage, silos, sorting, grading and assaying units in their market yards.
    • The scheme has also been extended to 2032-33.

    Why such a move?

    • The modifications in the Scheme will help to achieve a multiplier effect in generating investments while ensuring that the benefits reach small and marginal farmers.
    • The APMC markets are set up to provide market linkages and create an ecosystem of post-harvest public infrastructure open to all farmers.
    • This is also proof that APMC will not end as the farmers’ concern since the three farm laws.

  • [pib] Export of GI certified Bhalia Wheat

    In a major boost to wheat exports, the first shipment of Geographical Indication (GI) certified Bhalia variety of wheat was exported today to Kenya and Sri Lanka from Gujarat.

    Bhalia Wheat

    • The GI certified wheat has high protein content and is sweet in taste.
    • The crop is grown mostly across Bhal region of Gujarat which includes Ahmadabad, Anand, Kheda, Bhavanagar, Surendranagar, Bharuch districts.
    • The unique characteristic of the wheat variety is that grown in the rainfed condition without irrigation and cultivated in around two lakh hectares of agricultural land in Gujarat.
    • The Bhalia variety of wheat received GI certification in July, 2011.
    • The registered proprietor of GI certification is Anand Agricultural University, Gujarat.

    Answer this PYQ in the comment box:

    Q.Which of the following has/have been accorded ‘Geographical Indication’ status?

    1. Banaras Brocades and Sarees
    2. Rajasthani Daal-Bati-Churma
    3. Tirupathi Laddu

    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

    Back2Basics: Geographical Indication (GI)

    • The World Intellectual Property Organization defines a GI as “a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin”.
    • GIs are typically used for agricultural products, foodstuffs, handicrafts, industrial products, wines and spirit drinks.
    • Internationally, GIs are covered as an element of intellectual property rights under the Paris Convention for the Protection of Industrial Property.
    • They have also covered under the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.