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Subject: Economics

  • [pib] Authorised Economic Operators

    Central Board of Indirect Taxes & Customs (CBIC) has inaugurated the online filing of Authorised Economic Operators (AEO) T2 and T3 applications.

    Who are Authorised Economic Operators?

    • The AEO concept is one of the main building blocks within the WCO SAFE Framework of Standards (SAFE).
    • The latter is part of the future international Customs model set out to support secure trade.
    • The growth of global trade and increasing security threats to the international movement of goods have forced customs administrations to shift their focus more and more to securing the international trade flow and away from the traditional task of collecting customs duties.
    • Recognizing these developments, the World Customs Organization, drafted the WCO Framework of Standards to Secure and Facilitate global trade (SAFE).
    • In the framework, several standards are included that can assist Customs administrations in meeting these new challenges.
    • Developing an Authorized Economic Operator programme is a core part of SAFE.

    AEOs in India

    • AEO is a voluntary programme.
    • It enables Indian Customs to enhance and streamline cargo security through close cooperation with the principal stakeholders of the international supply chain viz. importers, exporters, logistics providers, custodians or terminal operators, customs brokers and warehouse operators.

    Back2Basics: World Customs Organization (WCO)

    • WCO is an intergovernmental organization headquartered in Brussels, Belgium.
    • The WCO is noted for its work in areas covering international trade facilitation, customs enforcement activities, combating counterfeiting in support of Intellectual Property Rights (IPR), drugs enforcement, illegal weapons trading, integrity promotion, and delivering the sustainable capacity building to assist with customs reforms and modernization.
    • The WCO represents 179 Customs administrations that collectively process approximately 98% of world trade.
    • As the global centre of Customs expertise, the WCO has the tools and expertise to assist implementation of all legal, policy, procedural, technological, and human resource aspects related to trade facilitation.
    • The WCO maintains the international Harmonized System (HS) goods nomenclature and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.

  • Rajasthan’s rural power solution that other states can emulate

    Power regulatory body in Rajasthan recently ordered discoms to solarise unelectrified public schools. The move has several benefits and therefore can be emulated by the other states as well. 

    Expanded electricity access in rural areas and shortcomings in it

    • Estimates suggest that India has doubled the electrified rural households, from 55% in 2010 to 96% in 2020.
    • However, the measure of access to power supply has been the number of households that have been connected to the electricity grid.
    • This measure discounts large areas of essential and productive human activities such as public schools and primary health centres.
    • And despite greater electrification, power supply is often unreliable in rural areas.

    Solar energy: Solution to electrification in remote parts

    • To address the above problems, the Rajasthan Electricity Regulatory Commission (RERC) has ordered the State’s discoms to solarise unelectrified public schools.
    • The RERC has also suggested installation of batteries to ensure storage of power.
    • Apart from enabling education, this ruling would benefit several other crucial aspects of rural life.
    • The RERC order also directed discoms to seek corporate social responsibility (CSR) funds for the solarising drive and allows schools ownership of the power systems in a phased manner.
    • This removes the burden of infrastructure development expenses on discoms, while also ensuring clean energy for the schools.
    • The power that is generated could also be counted towards the discoms’ Renewable Purchase Obligations (RPO).
    • Large-scale projects are generally financed by companies that wish to profit from economies of scale.
    • They are less interested in investing in rural electricity as it is not as lucrative.
    • Large-grid based projects add to the supply of power in urban areas, and therefore, only marginally further greater energy access goals.

    The decentralised model of power generation

    • While Rajasthan has land mass with vast, sparsely populated tracts available to install solar parks, bulk infrastructure of this scale is susceptible to extreme weather events.
    • With climate change increasing the possibility of such events, a decentralised model of power generation would prove to be more climate resilient.
    • With battery storage, the susceptibility of grid infrastructure to extreme weather events could be mitigated.
    • This is called climate proofing.
    • As solar installations become inexpensive and with rapidly advancing battery storage technologies, decentralised solar power generation has become a reality.

    Conclusion

    The ruling by Rajasthan’s power regulator not only helps in increasing access to electricity, achieving targets of renewable energy but also suggests solutions that other States could emulate.

  • Why the dairy sector needs more private players

    One of India’s largest dairy cooperative societies has just raised its milk prices for consumers by Rs 2/litre and this has become national news.

    Sparking off a debate

    • Many in the media are debating how this will push up Consumer Price Index causing inflationary pressures, which may soon force the RBI to change its “accommodative stance” on monetary policy.

    Why such hues over Milk?

    Milk is an important case study for our overall agriculture sector.

    • First, milk is our biggest agri-commodity in terms of value, greater than paddy (rice), wheat, and sugarcane combined.
    • Second, India is the largest producer of milk in the world with an estimated production of about 208 million tonnes in 2020-21, way above its closest competitor, the US, whose milk production hovers around 100 million tonnes.
    • Third, our dairy sector is dominated by smallholders with an average herd size of 4-5 animals.
    • Fourth, and this is important, there is no minimum support price (MSP) for milk. It is more like a contract between the company and the farmers.

    How is the milk price determined?

    • The price of milk is largely determined by the overall forces of demand and supply.
    • Increasing costs of production enter through the supply side, but the demand side cannot be ignored.
    • As a result of all this, the overall growth in the dairy sector for the last 20 years has been between 4-5 per cent per annum, and lately, it has accelerated to even 6 per cent.

    Concerns of dairy farmers

    • For dairy farmers, this increase in milk prices is not commensurate to the increase in their feed and other costs, and they feel that their margins are getting squeezed.
    • They also feel that this price still does not count their logistics cost.

    Transformation since Op Flood

    • It is well known that “Operation Flood” (OF) that started in the 1970s transformed this sector.
    • The institutional innovation of a cooperative model, steered by Verghese Kurien, changed the structure of this sector.
    • However, even after five decades, cooperatives processed only 10 per cent of the overall milk production.
    • India needed the double-engine force of the organised private sector to process another 10 per cent.
    • The doors for the private sector were opened partially with the 1991 reforms, but fully in 2002-03 under the leadership of Vajpayee, when the dairy sector was completely de-licenced.

    Rise of dairypreneurs

    • Many start-ups “dairypreneurs” have come in promising a farm-to-home experience of milk.
    • There is one company that delivers fresh milk at the consumer’s doorstep and gives quality testing kits at home.
    • These have digitized cattle health, milk production, milk procurement, milk testing, and cold chain management.

    Effective breeding

    • Sexed semen technology helps in predetermining the sex of offspring by sorting X and Y chromosomes from the natural sperm mix.
    • This can solve the problem of unwanted bulls on Indian roads.
    • Although the current cost of sexed sorted semen is high, Maharashtra has taken a bold step in subsidizing it for artificial insemination.

    Way forward

    • The upshot of all this is that let prices be determined by market forces, with marginal support from the government or cooperatives in times of extreme.
    • The major focus should be on innovations to cut down costs, raise productivity, ensure food safety, and be globally competitive.
    • That will help both farmers and consumers alike.
    • The cooperatives did a great job during OF, and are still doing that, but the private sector entering this sector in a big way has opened the gates of creativity and competition.

  • Failure to comply with international judicial rulings hurts India’s image as an investment destination

    The article highlights the lack of immediate compliance by the Indian government in awards involving foreign investors.

    Why honouring award is important

    • An important factor that propels investors to invest in foreign lands is that the host state will honour contracts and enforce awards even when it loses.
    • But when the host state refuses to do so, it shakes investors’ confidence in the host state’s credibility towards the rule of law, and escalates the regulatory risk enormously.
    • To an extent, this has been India’s story over the last few years
    • Last year, India lost two high-profile bilateral investment treaty (BIT) disputes to two leading global corporations — Vodafone and Cairn Energy — on retrospective taxation.
    •  India has challenged both the awards at the courts of the seat of arbitration.
    • As India drags its feet on the issue of compliance, it harms India’s reputation in dealing with foreign investors.

    Antrix-Devas agreement cancellation dispute

    • The other set of high-profile BIT disputes involve the cancellation of an agreement between Antrix, a commercial arm of the Indian Space Research Organisation, and Devas Multimedia.
    • This annulment led to three legal disputes — a commercial arbitration between Antrix and Devas Multimedia at the International Chambers of Commerce (ICC), and two BIT arbitrations brought by the Mauritius investors and German investors.
    • India lost all three disputes. 
    • The ICC arbitration tribunal ordered Antrix to pay $1.2 billion to Devas after a U.S. court confirmed the award earlier this year.
    • After the ICC award, Indian agencies started investigating Devas accusing it of corruption and fraud.
    • Last month, the National Company Law Tribunal (NCLT) ordered the liquidation of Devas on the ground that the affairs of the company were being carried on fraudulently.
    • This has led to Devas issuing a notice of intention to initiate a new BIT arbitration against India, sowing the seeds for complex legal battles again.

    Implications for investment in India

    • A closer reading of these cases reveals that whenever India loses a case to a foreign investor, immediate compliance rarely happens.
    • Instead, efforts are made to delay the compliance as much as possible.
    • While these efforts may be legal, it sends out a deleterious message to foreign investors.
    • It shows a recalcitrant attitude towards adverse judicial rulings.
    • This may not help India in attracting global corporations to its shores to ‘make for the world’.

    Consider the question “What are the factors that are leading to more Indian business disputes being settled elsewhere? What are the implications of delay by the government in honouring the awards of the disputes?” 

    Conclusion

    As India aspire to be the global destination of FDI, it needs to burnish its image on the dispute resolution front by honouring the awards.

  • Four years of GST Regime

    The Prime Minister has lauded Goods and Services Taxes (GST) on its completion of 4 years and said it has been a milestone in the economic landscape of India.

    What is GST?

    • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
    • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
    • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
    • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

    Answer this PYQ in the comment box:

    Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

    (a) Contingency Fund of India

    (b) Public Account

    (c) Consolidated Fund of India

    (d) Deposits and Advances Fund

    What are the components of GST?

    There are three taxes applicable under this system:

    1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

    Advantages Of GST

    • GST has mainly removed the cascading effect on the sale of goods and services.
    • Removal of the cascading effect has impacted the cost of goods.
    • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
    • Also, GST is mainly technologically driven.
    • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

    Issues with GST

    • High operational cost
    • GST has given rise to complexity for many business owners across the nation.
    • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
    • Petrol is not under GST, which goes against the ideals of the unification of commodities.

  • Middle income trap

    The article suggests focusing on improving productivity and thereby the manufacturing sector to avoid the middle-income trap.

    What is the middle-income trap and why it matters for India

    • This trap was first conceived by World Bank economists.
    • They found that of the 101 developing economies that could be classified as ‘middle income’ in 1960, only 13 managed to become rich nations by 2008. 
    • There is little consensus on why some countries succeed in making the transition to high-income status.
    • But a distinctive attribute of those that succeed in the transition to high income is productivity improvement.
    • India could use its demographic dividend to avoid this predicament and achieve the critical velocity needed to move into the high-income bracket.

    How can India avoid the middle-income trap

    1) Improve productivity

    • Re-allocation of labour from low-productivity agriculture to high-productivity sectors, such as manufacturing, has been a primary channel through which today’s advanced economies raised their living standards.
    • In India, growth in labour productivity has consistently declined over the past decade.
    • The annual growth rate of output per worker has dipped from 7.9% in 2010 to 3.5% in 2019, as per International Labour Organization estimates.
    • This was also a period of low growth in India’s manufacturing sector.
    • In 2020-21, it accounted for only 14.5% of India’s gross value added, down from 17.4% in 2011-12.
    • An essential first step in improving productivity would be strengthening this sector.

    2) Strengthen manufacturing sector

    • Industrial labour relations is among the most critical elements to revitalize India’s manufacturing sector especially in the context of labour productivity.
    • These labour laws created incentives for firms to remain small and uncompetitive, thereby affecting productivity.
    • The new code, once implemented, would increase the threshold relating to layoffs and retrenchment in industrial establishments to 300 workers.
    • Other countries, such as China, Vietnam and Bangladesh, with whom India competes for foreign investment and export markets do not require the approval of administrative or judicial bodies for dismissals.
    • Therefore, in spite of recent reforms, India’s labour laws stay rigid in comparison with those of its competitor countries.

    3) Technology intensive manufacturing

    • Engendering innovation in higher value-added, tech-intensive activities is important for economies before they reach that juncture.
    • If exports are taken as a proxy for the manufacturing capabilities and competitiveness of an economy, the present status of tech-intensive manufacturing in India leaves a lot to be desired.
    • As per World Bank data, high-tech exports accounted for only 10.3% of India’s manufacturing exports in 2019.
    • Rival countries had a much higher share of the same: 31% in China, 13% in Brazil, 40% in Vietnam and 24% in Thailand.
    • Low R&D spending in India, ranging from a mere 0.64% to 0.86% of gross domestic product over the past two decades, has held the country back.

    Steps to improve tech-intensive manufacturing

    • The government has introduced a production-linked incentive scheme to ensure a greater share of local value addition.
    • While this would attract foreign investments in tech-intensive manufacturing, there is also a need for greater incentives for R&D investments by firms in India.
    • A first step in this direction could be reinstating the tax exemption on R&D under Section 35 (2AB), even for companies opting for the lower corporate tax rate of 22%.

    Conclusion

    We need appropriate interventions to improve productivity—both economy-wide and within the sector. And we must do it now.

  • Investors should not be tempted to ignore macroeconomic factors

    Despite gloom in the economy, financial markets are scaling new highs. The situations calls for diligence on the part of individual investors. The deals with this issue.

    What influences investors’ decision

    • Investors may not necessarily be always sensible or even capable of perceiving the larger picture.
    • Nobel laureate Daniel Kahneman argues that humans usually use the ‘first system’ of ‘fast thinking’ to hurriedly act and perceive their environment.
    • Consequently, they are susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ and ‘availability heuristic’.
    • These phenomena, thus, play their part in pervading optimistic market conditions.
    • As a result, investors often end up ignoring or overlooking uncertainties and risks involved in their decision.
    • At the same time, investors’ decision choices could be significantly influenced by ‘nudging’.
    • It is a deliberate tactics and method of behaviour modification by which it is the ‘choice architect’ that decides who does what and who does so, as argued by the Nobel laureate, Richard H. Thaler.
    • The present surge in the Indian stock market is indeed nudging individual investors to trade more.

    What makes individual investors vulnerable

    • National Stock Exchange data indicate following trends:
    • The share of the non-institutional individual investors in equity trading volume has risen to one half of the total turnover. in 2021.
    • It was around a third in 2016.
    • In contrast, the share of Foreign Institutional Investors (FIIs) in the total trading volume has shrunk to just about a tenth, it used to be one fifth in 2016.
    • Trading in the stock market, the sudden rise, the intraday moves, etc., are, thus, attributable largely to individual traders now. 
    • However, despite their large trading volumes, individual investors have actually contracted their holding of the market capitalisation.
    • The FIIs currently own around half of the free float of all Indian companies.
    • Apparently, the retail investors have constantly sold their stake to end up holding less than 20% shares now.
    • Trading, thus, seems to be the mainstay of retail investors and this is what makes them more vulnerable to the vagaries of the market.

    Market is ignoring macroeconomic factors

    • Centre for Monitoring Indian Economy Pvt. Ltd. data of the listed companies reveal a rise in their profit, due to rationalisation and cost-cutting.
    • Investors might be tempted to ignore macroeconomic factors and invest in such stock believing that it is the profit that impels the stock prices.
    •  In reality, however, share price is expected to ascend if a company declares to cut its wage bill.
    • This probably explains why stock markets around the world have been on the rise amidst the novel coronavirus pandemic; demand may have declined but profits have been least impacted.
    • At the larger economic level, however, real wages have plunged.
    • Clearly, the market has not entirely decoupled itself from the economic indicators.
    • Established wisdom suggests that corporates cannot sustain contraction in the economy for long.
    • Sustained decline in demand caused by waning disposable household income would catch them soon.
    • Robert J. Shiller attributes this phenomenon of creating a possible bubble to irrational exuberance.
    • When bubbles burst, they cause a kind of financial earthquake, in turn destabilising public trust in the integrity of the financial system.
    • Critically, as the past portrays, individual investors, with all their vulnerabilities, suffer the most devastating consequences.
    • Retail investors are as well susceptible to overreaction when negative news hits the market.

    Consider the question “What are the factors driving the financial markets up despite the weak macroeconomic foundations? What are the risks involved in such situation for the individual investors?”

    Conlcusion

    History of financial markets is replete with bubbles and bursts. Most affected in such burst are the individual investors. Informed decisions based on information and risks involved should form the basis of investment by individual investors.

  • What is the Purchasing Managers’ Index (PMI)?

    India’s manufacturing industry has slid back to a decline in June, as per the IHS Markit Manufacturing Purchasing Managers’ Index (PMI).

    Purchasing Managers’ Index

    • PMI is an indicator of business activity — both in the manufacturing and services sectors.
    • It is a survey-based measure that asks the respondents about changes in their perception of some key business variables from the month before.
    • It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.
    • The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

    How is the PMI derived?

    • The PMI is derived from a series of qualitative questions.
    • Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were stronger than the month before and are asked to rate them.

    How does one read the PMI?

    • A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction.
    • Higher the difference from this mid-point greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month data.
    • If the figure is higher than the previous month’s then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.

    What are its implications for the economy?

    • The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available.
    • It is, therefore, considered a good leading indicator of economic activity.
    • Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later.
    • Central banks of many countries also use the index to help make decisions on interest rates.

  • Can India avoid a telecom duopoly?

    The Indian telecom sector faces the prospect of duopoly due to the impending exit of Vodafone-Idea. This has several implications.

    India’s telecom sector: From monopoly to hyper-competition

    • India’s telecom market has seen monopoly as well as hyper-competition.
    • Twenty-five years ago, the government alone could provide services.
    • Ten years later, there were nearly a dozen competing operators. Most service areas now have four players.
    • However, the possible exit of the financially-stressed Vodafone Idea would leave only two dominant players-Airtel and Jio in the telecom sector.
    • A looming duopoly, or the exit of a global telecommunications major, are both worrying.
    • They deserve a careful and creative response.

    Why it matters

    • Competition has delivered relatively low prices, advanced technologies, and an acceptable quality of services.
    • There is a long way to go in expanding access as well as network capacity.
    • For example, India is ranked second globally—after China—in the number of people connected to the internet.
    • However, it is also first in the number of people unconnected.
    • Over 50% of Indians are not connected to the internet, despite giant strides in network reach and capacity. India tops aggregate mobile data usage.
    • However, its per capita or device data usage is low.
    • It has an impressive 4G mobile network, however, its fixed network—wireline or optical fibre—is sparse and often poor.
    • 5G deployment has yet to start and will be expensive.
    • Filling the gaps in infrastructure and access will require large investments and competition.
    • The exit of the Vodafone-Idea will hurt both objectives.
    • The closure of Vodafone Idea is an arguably greater concern than the fading role of BSNL and MTNL.
    • The government companies are yet to deploy 4G and have become progressively less competitive.
    • Vodafone Idea, on the other hand, still accounts for about a quarter of subscriptions and revenues and can boast of a quality network.

    Way out

    1) Strategic partnership with BSNL-MTNL

    • A possible way out could be to combine the resources of the MTNL and BSNL and Vodafone Idea through a strategic partnership.
    • Creative government action can save Vodafone Idea as well as improve the competitiveness of BSNL and MTNL.
    • It could help secure government dues, investments, and jobs.

    2) Develop resale market

    • Global experience suggests that well-entrenched incumbents have massive advantages.
    • New players are daunted by the large investments.
    • However, regulators and policymakers have other options to expand choice for telecom consumers.
    • Their counterparts in mature regulatory regimes—e.g., in the European Union—have helped develop extensive markets for resale. 
    • Recognising the limited influence of smaller players, regulators mandate that the incumbent offer wholesale prices to resellers who then expand choice for end-users.
    • A key barrier to resale is India’s licence fee regime which requires licence-holders to share a proportion of their revenues with the government.

    Conclusion

    It would be tragic if India’s telecom-access market was to be reduced to only two competing operators, as we have a long way to go. The government needs to consider the implications of the situation arising due to the exit of one of the major players in the sector.

    Source:

    https://www.financialexpress.com/opinion/failing-to-connect-can-india-avoid-a-telecom-duopoly/2281486/

  • [pib] NATRAX: Asia’s longest and world’s fifth longest High-Speed Track

    Minister of Heavy Industries and Public Enterprises has inaugurated the 11.3 km NATRAX- the High-Speed Track (HST) in Indore which is the longest such track in Asia.

    NATRAX

    • NATRAX, developed in an area of 1000 acres of land is a one-stop solution for all sorts of high-speed performance tests for the widest categories of vehicles from 2 wheelers to heavy tractor-trailers.
    • It has multiple test capabilities like measurements of maximum speed, acceleration, constant speed fuel consumption.
    • It can conduct emission tests through real road driving simulation, high-speed handling and stability evaluation during manoeuvred such as lane change, high-speed durability testing, etc.
    • Also, it is a Centre of excellence for Vehicle Dynamics.

    Features of the HST

    • The vehicle can achieve a max speed of 375 Kmph on curves with steering control and it has less banking on ovals making it also one of the safest test tracks globally.
    • It is the one-stop solution for all sorts of high-speed performance tests, being one of the largest in the world.
    • It can cater to the widest category of vehicles; say from two-wheelers to the heaviest tractor trailers

    Its significance

    • HST is used for measuring the maximum speed capability of high-end cars like BMW, Mercedes, Audi, Ferrari, Lamborghini, Tesla and so forth which cannot be measured on any of the Indian test tracks.
    • Being centrally located in Madhya Pradesh, it is accessible to most of the major OEMs.
    • Foreign OEMs will be looking at NATRAX HST for the development of prototype cars for Indian conditions.
    • At present, foreign OEMs go to their respective high-speed track abroad for high-speed test requirements.