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Subject: Economics

  • Government Securities Acquisition Programme (GSAP 2.0)

    In a bid to infuse more liquidity in the market, the Reserve Bank of India (RBI) has announced undertake Government Securities Acquisition Program (G-SAP) 2.0 during the second quarter of FY22 and conduct secondary market purchase operations of Rs 1.20 lakh crore.

    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

    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).

  • RBI supervision of Cooperative Banks

    Maharashtra government has approved a plan to set up a task force to prepare an action plan against a recent change in the law that has brought cooperative banks under the supervision of the Reserve Bank of India (RBI).

    What are Cooperative Banks?

    • Co-operative banks are financial entities established on a cooperative basis and belonging to their members.
    • This means that the customers of a cooperative bank are also its owners.
    • These banks provide a wide range of regular banking and financial services. However, there are some points where they differ from other banks.
    • They came into being with the aim to promote saving and investment habits among people, especially in rural parts of the country.

    Structure of co-operative banks in India

    • Broadly, cooperative banks in India are divided into two categories – urban and rural.
    • Rural cooperative credit institutions could either be short-term or long-term in nature.
    • Further, short-term cooperative credit institutions are further sub-divided into State Co-operative Banks, District Central Co-operative Banks, Primary Agricultural Credit Societies.
    • Meanwhile, the long-term institutions are either State Cooperative Agriculture and Rural Development Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
    • On the other hand, Urban Co-operative Banks (UBBs) are either scheduled or non-scheduled.

    Who oversees these banks?

    • In India, cooperative banks are registered under the States Cooperative Societies Act.
    • They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.
    • They were brought under the RBI’s watch in 1966, a move that brought the problem of dual regulation along with it.

    Now answer this PYQ in the comment box:

    Q.Consider the following statements:

    1. In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCB) delivers more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks.
    2. One of the most important functions of DCCBs is to provide funds to the Primary Agricultural Credit Societies.

    Which of the statements given above is / are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    How has The Banking Regulation Act been amended?

    • Cooperative banks have long been under dual regulation by the state Registrar of Societies and the RBI.
    • As a result, these banks have escaped scrutiny despite failures and frauds.
    • The changes to The Banking Regulation Act approved by Parliament in September 2020, brought cooperative banks under the direct supervision of the RBI.

    Changes brought

    • The amended law has given RBI the power to supersede the board of directors of cooperative banks after consultations with the concerned state government.
    • Earlier, it could issue such directions only to multi-state cooperative banks.
    • Also, urban cooperative banks will now be treated on a par with commercial banks.
    • And a cooperative bank can, with prior approval of the RBI, issue equity shares, preference shares, or special shares to its members or to any other person residing within its area of operation, by way of public issue or private placements.
    • It can also issue unsecured debentures or bonds with a maturity of not less than 10 years.
    • This essentially means non-members can become shareholders of the bank, and this will allow the RBI to merge failing banks quickly.

    What triggered the need for the changes in the law?

    • India has some 1,540 urban cooperative banks, with a depositor base of 8.6 crore and deposits of at least Rs 5 lakh crore.
    • Finance Minister told Lok Sabha last year that the financial status of at least 277 urban cooperative banks was weak, and around 105 cooperative banks were unable to meet the minimum regulatory capital requirement.
    • According to RBI’s latest financial stability report, the gross non-performing asset ratio of urban cooperative banks deteriorated from 9.89 percent in March 2020 to 10.36 percent in September 2020.
    • Not only do these banks have high levels of bad loans, they also have a small capital base — something that the changes in the law have tried to address by allowing these banks to issue shares with RBI’s approval.
    • Political interference in staff appointments is also a problem with these banks, which has added to inefficiencies.

  • Prices, profits and the pandemic: What RBI could do

    The article discusses the challenges in managing the inflationary pressure while ensuring the low interest rates and sufficient liquidity in the covid battered economy.

    Growing inflationary pressure

    • As the second wave eases, producers could pass on more cost increases to consumers, pushing up inflation.
    • Inflationary pressures are on the rise, globally and domestically.
    • Real rates in India have moved into the negative terrain and some measures of inflation expectations have begun to rise gently.
    •  WPI inflation was subdued last year during the first wave of the pandemic due to falling global commodity prices.
    • This year is different, as inflationary pressures have surfaced in the WPI.
    • And within WPI inflation, input prices are rising much faster than WPI output prices.
    • Producers do not seem to be passing on much of the rise in raw material costs to output prices, perhaps worried that already uncertain demand could weaken further.
    • After states roll back local lockdowns, the demand for goods and services will gradually picks up, producers may feel more confident about passing on raw material cost increases to output prices, pushing core inflation higher, particularly in the second half of FY22.

    RBI’s role: Dealing with impossible trinity?

    • Last year, RBI was faced with conflicting objectives on inflation, bond yields and the rupee, also known as the impossible trinity.
    • It bought dollars to prevent the rupee from strengthening too much and purchased government bonds to keep bond yields from spiralling out of control.
    • But this created excess rupee liquidity in the banking system, which over time can stoke inflation and other financial imbalances.
    • These conflicting objectives are also likely to linger this year, and RBI will have to juggle them carefully.
    • As the year progresses, space could open up for RBI to gradually shift the focus to inflation control.
    • With the current account moving into deficit, the balance of payments surplus is likely to fall, so RBI may not have to purchase as many dollars as last year.
    • The will result in decrease in domestic liquidity and ultimately an important part of the normalization of monetary policy and inflation control.
    • RBI would still need to buy government bonds to support the administration’s borrowing programme.
    •  However, a large carry-over of cash balances could act as a buffer—they totalled ₹2.5 trillion at the end of FY21, almost double the recent average.
    • This could help fund some of the unbudgeted rise in the fiscal deficit.

    Way forward on controlling inflation

    • If the need to buy dollars is lower than last year, RBI could gradually shift the focus to controlling inflation.
    • Starting in 4Q 2021, when the proportion of the population vaccinated will hopefully reach critical mass, RBI need to start reducing the level of surplus liquidity, raise the reverse repo rate, and change its monetary stance to neutral.
    • The aim should be to gradually push up short-end rates towards 4%, so that real rates don’t remain hugely negative for too long.
    • An increase in the benchmark repo rate— currently 4%— can wait, perhaps until there are surer signs that the private investment cycle is rising.

    Conclusion

    Dealing with the three elements of impossible trinity this time is not as difficult for the RBI as it was last year, it needs to shift focus to inflation control at the opportune moment.

    Back2Basics: Real interest rate

    • A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor.
    • The real interest rate of an investment is calculated as the difference between the nominal interest rate and the inflation rate.

    Real Interest Rate = Nominal Interest Rate – Inflation (Expected or Actual)

    The impossible trinity

    • A theory that states that, in the long-run, a central bank that hopes to conduct independent monetary policy must choose between maintaining a fixed foreign exchange rate and allowing the free movement of capital.
    • For instance, a central bank that chooses to increase the total money supply by adopting loose monetary policy cannot hope to maintain the foreign exchange value of its currency unless it resorts to restricting the sale of domestic currency in the currency market.
    • The idea is derived from the academic works of Canadian economist Robert Mundell and British economist Marcus Fleming.

  • Global minimum tax may help India but can cause international disagreements

    The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.

    The US proposal for global minimum tax

    • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
    • The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
    • The U.S. is now discussing a floor of 15% for the minimum tax rate.
    • The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.

    Similarity with Pillar Two Proposal

    • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
    • It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
    • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
    • India has been part of the Pillar Two discussions and has not objected in principle to the proposal.

    How Global Minimum Tax would benefit India?

    • The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
    • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
    • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
    • Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
    • Revenue from such operations is often retained offshore and not repatriated to India.
    • Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
    • Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.

    Challenges

    • Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
    • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
    • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.

    Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?” 

    Conclusion

    As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.

  • What explains the surge in FDI inflows?

    The article analyses the factors contributing to the claim of 10% rise in total Foreign Direct Investment in 2020-21 and its impact on economy.

    Making sense of increased FDI

    • Total foreign direct investment (FDI) inflow in 2020-21 is $81.7 billion, up 10% over the previous year, reported a recent Ministry of Commerce and Industry press release.
    •  The short press release highlighted industry and State-specific foreign investment figures without detailed statistical information.
    • The Reserve Bank of India (RBI) bulletin, which was released a week earlier, has the details.

    What explains increased gross inflows

    • The gross inflow consists of (i) direct investment to India and (ii) repatriation/disinvestment.
    • The disaggregation shows that direct investment to India has declined by 2.4%.
    • Hence, an increase of 47% in “repatriation/disinvestment” entirely accounts for the rise in the gross inflows.
    • In other words, there is a wide gap between gross FDI inflow and direct investment to India.
    • Similarly, measured on a net basis (that is, “direct investment to India” net of “FDI by India” or, outward FDI from India), direct investment to India has barely risen (0.8%) in 2020-21 over the last year.
    • What then accounts for the impressive headline number of 10% rise in gross inflow?
    • It is almost entirely on account of “Net Portfolio Investment”, shooting up from $1.4 billion in 2019-20 to $36.8 billion in the next year.
    • That is a whopping 2,526% rise.
    • Further, within the net portfolio investment, foreign institutional investment (FIIs) has boomed by an astounding 6,800% to $38 billion in 2020-21, from a mere half a billion dollars in the previous year.
    • This explains the surge in gross FDI inflows which is entirely on account of net foreign portfolio investment.

    How FDI is different from FII

    • FDI inflow, in theory, is supposed to bring in additional capital to augment potential output (taking managerial control/stake).
    • In contrast, foreign portfolio investment, as the name suggests, is short-term investment in domestic capital (equity and debt) markets to realise better financial returns.
    • But the conceptual distinctions have blurred in official reporting, showing an outsized role of FDI and its growth in India.

    How FPI distorted equity markets?

    • The deluge of FII inflow did little to augment the economy’s potential output.
    • It added a lot of froth to the stock prices.
    • When GDP has contracted by 7.3%  in 2020-21 on account of the pandemic and the economic lockdown, the BSE Sensex nearly doubled from about 26,000 points on March 23, 2020 to over 50,000 on March 31, 2021.
    • BSE’s price-earnings (P-E) multiple — defined as share price relative to earnings per share — is among the world’s highest, close behind S&P 500 in the U.S.

    FDI inflow’s contribution to domestic output

    • As Figure below shows, between 2013-14 and 2019-20, the ratio of net FDI to GDP has remained just over 1% (left-hand scale), with no discernible rising trend in it.
    • The proportion of net FDI to gross fixed capital formation (fixed investment) is range-bound between 4% and 6%.
    • These stagnant trends are evident when the economy’s fixed investment rate — gross fixed capital formation to GDP ratio — has plummeted from 31.3% in 2013-14 to 26.9% in 2019-20 (right-hand scale).
    • Thus, FDI inflow’s contribution to domestic output and investment remains modest.

    Conclusion

    The flood of FIIs has boosted stock prices and financial returns. These inflows did little to augment fixed investment and output growth.

  • Growth of farm sector during COVID-19 Pandemic

    2020-21 saw the Indian economy register its worst-ever contraction since Independence and also the first since 1979-80. There has been recording economic contraction, however, the farm sector actually grew by 3.6%.

    Growth in Farm Sector

    There are two main reasons why agriculture didn’t suffer the fate of the rest of the economy last year.

    (1) Better monsoon and yields

    • 2019 and 2020, by contrast, were above-normal monsoon years, with the country receiving an area-weighted rainfall.
    • It led to the filling of reservoirs and recharging of groundwater tables and aquifers, unlike after the deficient monsoons of 2014 and 2015 and the near-deficient one of 2018.
    • Not surprisingly, 2019-20 and 2020-21 produced back-to-back bumper harvests.

    (2) Ease during lockdowns

    • The second reason had to do with agriculture being exempted from the nationwide lockdown that followed the first wave of Covid-19.
    • Lockdown restrictions only spared PDS ration shops and other stores selling food, groceries, fruits & vegetables, milk, meat and fish, animal fodder, seeds and pesticides.
    • But within days, an addendum was issued, extending the lifting of curbs to fertilizer outlets, all field operations by farmers and farmworkers, intra- and inter-state movement of agricultural machinery, sale of produce in wholesale mandis and procurement.

    Inherent resilience of India’s farm sector

    • Simply put, farmers made sure they did not waste a good monsoon, finding ways to even mobilize harvesting and planting labor during peak lockdown.
    • The inherent resilience and adaptability of rural economic actors — meant that the farm sector was relatively insulated from lockdown-imposed supply-side

    What were the issues faced?

    • The problems agriculture encountered due to the lockdown had more to do with the demand
    • The closure of hotels, restaurants, roadside eateries, sweetmeat shops, hostels, and canteens — and no wedding receptions and other public functions — resulted in a collapse of out-of-home consumption.
    • This was demand destruction not from rising prices — “movement along the demand curve”.
    • Instead, it was from forced consumption reduction, translating into lower demand for farm produce even at the same price — “a leftward shift in the demand curve”.

    Various successes

    (1) Success of MSP procurement

    • MSP procurement was effective largely in crops and regions where the institutions undertaking such operations — be it the Food Corporation of India, NAFED, Cotton Corporation of India or even cooperative dairies.
    • These all were active and could stem price declines during the period of demand destruction.
    • Such intervention wasn’t possible in non-mainstream produce (vegetables, fruits, poultry, fish, flowers, spices, etc) and regions (maize in Bihar), where the corresponding institutional mechanisms were non-existent.
    • The demand situation improved, though, with the gradual lifting of lockdown restrictions and also the recovery in global agri-commodity prices.

    (2) MGNREGA

    • While agriculture grew amid an unprecedented economic contraction, 2020-21 was also notable for the record person-days of employment generated under MGNREGA.
    • This flagship employment scheme was yet another source of liquidity infusion and, again, a pre-existing program that the government could deploy to support rural incomes during a crisis.
    • Rural consumption, in turn, provided some cushion to the economy and preventing a bad situation from turning much worse.

    Prospects for this Year

    The one obvious difference between now and last year is Covid-19 cases. Covid’s impact on agriculture per se would depend on the spread, intensity, and duration of the infection.

    • Rural areas were mostly unaffected by the pandemic’s first wave.
    • Farm-related activities could, then, go on relatively unhindered, which government policy, whether to do with lockdown or public procurement, also facilitated.
    • That situation has changed with the second wave and rising share of rural districts in total cases, even without factoring in the higher probability of underreporting in these places.

    What next?

    • While fear of the virus may induce precautionary behavior and economic growth, it is unlikely to affect normal agricultural operations.
    • And if last years’ experience is any guide, the adaptability of farmers and myriad rural economic agents should not be underestimated.

    (1) The first factor to be considered is the monsoon. The good news this time is that there is no El Niño.

    • There are increasing chances of a La Niña — El Niño’s counterpart that is associated with above-normal rains and lower temperatures in India — for the autumn and winter months.
    • El Nino is the abnormal warming of the tropical central and eastern Pacific Ocean surface waters, resulting in increased evaporation and cloud-formation activity around South America and away from Asia.

    (2) Uncertainty is prices

    • Global prices — be it of wheat, maize, soybean, palm oil, sugar, skimmed milk powder or cotton — have scaled multi-year highs in the recent period, helping India’s agri-commodity exports.
    • But export demand alone cannot sustain prices, especially in a scenario where job and income losses, accelerated post the pandemic that has severely dented domestic purchasing power.
    • Diesel prices alone have gone up by over a third in the last year; so have that of most non-urea fertilizers.

    Way forward

    • The real challenge for Indian agriculture and farmers will be on the demand side.
    • That is specifically going to come from declining real incomes and particularly affecting demand for milk, pulses, egg, meat, fruits, vegetables and other protein/micronutrient-rich foods.
    • While rising rural wages and overall incomes is what propelled the demand for these foods in the past — in turn, contributing to dietary and cropping diversification — the ongoing slide presents a frightening proposition.

  • Explained: India’s GDP fall, in perspective

    India’s Gross Domestic Product (GDP) contracted by 7.3% in 2020-21.

    Tap to read more about:

    National Income Determination, GDP, GNP, NDP, NNP, Personal Income

    GDP contraction

    There are two ways to view this contraction:

    1. One is to look at this as an outlier — after all, India, like most other countries, is facing a once-in-a-century pandemic — and wish it away.
    2. The other way would be to look at this contraction in the context of what has been happening to the Indian economy since the regime change.

    Impact of the new regime

    Let’s look at the most important ones.

    (1) Gross Domestic Product

    • Contrary to perception advanced by the Union government, the GDP growth rate has been a point of growing weakness for the last 5 of these 7 years.
    • The GDP growth rate steadily fell from over 8% in FY17 to about 4% in FY20, just before Covid-19 hit the country.
    • The economy was already struggling with massive bad loans which were further deteriorated by demonetization and the GST regime.

    (2) GDP per capita

    • Often, it helps to look at GDP per capita, which is total GDP divided by the total population, to better understand how well-placed an average person is in an economy.
    • At a level of Rs 99,700, India’s GDP per capita is now what it used to be in 2016-17 — the year when the slide started.
    • As a result, India has been losing out to other countries. A case in point is how even Bangladesh has overtaken India in per-capita-GDP terms.

    (3) Unemployment rate

    • This is the metric on which India has possibly performed the worst.
    • First came the news that India’s unemployment rate, even according to the government’s own surveys, was at a 45-year high in 2017-18 — the year after demonetization and GST.
    • Then in 2019 came the news that between 2012 and 2018, the total number of employed people fell by 9 million — the first such instance of total employment declining in independent India’s history.
    • As against the norm of an unemployment rate of 2%-3%, India started routinely witnessing unemployment rates close to 6%-7% in the years leading up to Covid-19.
    • The pandemic, of course, made matters considerably worse.
    • What makes India’s unemployment even more worrisome is the fact that this is happening even when the labor force participation rate — which maps the proportion of people who even look for a job — has been falling.

    (4) Inflation rate

    • After staying close to the $110-a-barrel mark throughout 2011 to 2014, oil prices (India basket) fell rapidly to just $85 in 2015 and further to below (or around) $50 in 2017 and 2018.
    • On the one hand, the sudden and sharp fall in oil prices allowed the government to completely tame the high retail inflation in the country, while on the other, it allowed the government to collect additional taxes on fuel.
    • But since the last quarter of 2019, India has been facing persistently high retail inflation.
    • Even the demand destruction due to lockdowns induced by Covid-19 in 2020 could not extinguish the inflationary surge.

    (5) Fiscal deficit

    • The fiscal deficit is essentially a marker of the health of government finances and tracks the amount of money that a government has to borrow from the market to meet its expenses.
    • Typically, there are two downsides of excessive borrowing:
    1. One, government borrowings reduce the investible funds available for the private businesses to borrow (this is called “crowding out the private sector”); this also drives up the price (that is, the interest rate) for such loans.
    2. Two, additional borrowings increase the overall debt that the government has to repay. Higher debt levels imply a higher proportion of government taxes going to pay back past loans. For the same reason, higher levels of debt also imply a higher level of taxes.

    On paper, India’s fiscal deficit levels were just a tad more than the norms set, but, in reality, even before Covid-19, it was an open secret that the fiscal deficit was far more than what the government publicly stated.

    (6) Rupee vs dollar

    • The exchange rate of the domestic currency with the US dollar is a robust metric to capture the relative strength of the economy.
    • A US dollar was worth Rs 59 when the government took charge in 2014.
    • Seven years later, it is closer to Rs 73. The relative weakness of the rupee reflects the reduced purchasing power of the Indian currency.

    What’s the outlook on growth?

    • The biggest engine for growth in India is the expenditure by common people in their private capacity.
    • This “demand” for goods accounts for 55% of all GDP.
    • The private consumption expenditure has fallen to levels last seen in 2016-17.

  • Resource crunch in states after Covid second wave

    The article gives the overview of the impact of second Covid wave on the fiscal health of the States.

    Impact of first Covid wave on fiscal health of states

    • The analysis of the fiscal data for all states with the exception of Goa, Manipur, Meghalaya and Sikkim reveal a grim picture.
    • The aggregate revenue deficit for 24 state governments soared to Rs 4 trillion as per the revised estimates (RE) for 2020-21, up from a modest budgeted amount of Rs 353 billion.
    • And, despite a 16 per cent cut in capital spending, the fiscal deficit of these states deteriorated to Rs 8.7 trillion in 2020-21 (RE), up from the budgeted estimate of Rs 6.0 trillion.

    How states had projected ambitious decline in revenue deficit

    • The budgets for the ongoing fiscal year,  had projected an ambitious, decline in the aggregate revenue deficit to Rs 1.2 trillion, lower than the pre-Covid-19 level of Rs 1.3 trillion in 2019-20.
    • This has benefitted from the considerable expansion in their revenue receipts this year, forecasted at 24.7 per cent, compared to a moderate 12.4 per cent increase in their aggregate revenue expenditure.
    • This anticipated shrinking of the revenue deficit has allowed states to plan for a substantial expansion in their capital expenditure and net lending pegged at 34.1 per cent.
    • This anticipated shrinking also allowed the States to attempt a modest correction in their budgeted fiscal deficit, bringing it down to Rs 7.6 trillion in 2021-22 from Rs 8.7 trillion in 2020-21 (RE).

    Fiscal concerns over second Covid wave

    • The second wave of Covid-19 infections and its spread to rural areas has fanned fiscal concerns.
    •  The curtailed consumption of discretionary items and contact-intensive services will dampen the growth of states’ own tax revenues this year.
    • Moreover, lower mobility during the regional lockdowns will constrain tax revenues that states earn on fuels.
    • The data for the generation of GST e-way bills confirms that the staggered imposition of the localised lockdowns has had an adverse impact on economic activity since April.
    • This will result in a sequential slowdown in GST collections that will be reported in the subsequent two months.
    • Nevertheless, the GST collections is likely to nearly double to Rs 1.7 trillion in the first quarter of this year, up from Rs 0.9 trillion over the same period last year, boosted by the record-high collections in April,
    • That reflected healthy economic activity in March.

    The shortfall and way forward

    •  States’ own tax collections is estimated to trail their budget estimates as they were drawn up before the second wave.
    • For this year,  state GST collections would be at Rs 6.1 trillion, falling below their projected revenues of Rs 8.7 trillion.
    • This indicates a GST compensation requirement of Rs 2.65 trillion — only 38 per cent of which may be met through the expected GST compensation cess collections.
    • Following the meeting of the GST Council, the Finance Minister has indicated that a back-to-back loan of Rs 1.58 trillion will be provided to the states.
    • If the tranches of this loan start flowing to the states soon, it will alleviate their anticipated revenue crunch over the next two months.
    • Already, there has been a sharp rise in the size of the upcoming State Development Loan auction to Rs. 19,550 crore, relative to the modest average size of around Rs. 7,400 crore seen so far in the first eight auctions held in FY2022.

    Conclusion

    In any case, the capital spending budgeted by certain state governments this year appears to be optimistic. Moreover, localised restrictions imposed during the last two months are expected to have constrained activity.

  • Why are edible oils getting costlier?

    Edible oil prices have risen sharply in recent months.

    How much have edible oil prices rising?

    • The prices of six edible oils — groundnut oil, mustard oil, vanaspati, soya oil, sunflower oil, and palm oil — have risen between 20% and 56% at all-India levels in the last year.
    • The prices of soya oil and sunflower oil, too, have increased more than 50% since last year.
    • In fact, the monthly average retail prices of all six edible oils soared to an 11-year high in May 2021.
    • The sharp increase in cooking oil prices has come at a time when household incomes have been hit due to Covid-19.

    Trends of oil consumption in India

    • With rising incomes and changing food habits, consumption of edible oils has been rising over the years.
    • While mustard oil is consumed mostly in rural areas, the share of refined oils —sunflower oil and soyabean oil — is higher in urban areas.

    How much is produced domestically and how much is imported?

    • In 2019-20, domestic availability of edible oils from both primary sources (oilseeds like mustard, groundnut etc.) and secondary sources (such as coconut, oil palm, rice bran oil, cottonseed) was only 10.65 million tonnes against the total domestic demand of 24 million tonnes.
    • Thus, India depends on imports to meet its demand.
    • In 2019-20, the country imported about 13.35 million tonnes of edible oils or about 56% of the demand.
    • This mainly comprised palm (7 million tonnes), soyabean (3.5 millon tonnes) and sunflower (2.5 million tonnes).
    • The major sources of these imports are Argentina and Brazil for soyabeen oil; Indonesia and Malaysia palm oil; and Ukraine and Argentina again for sunflower oil.

    Answer this PYQ from CSP 2019:

    Q.Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

    Global prices rising

    • The increase in domestic prices is basically a reflection of international prices because India meets 56% of its domestic demand through imports.
    • In the international market, prices of edible oils have jumped sharply in recent months due to various factors.
    • Even the FAO price index (2014-2016=100) for vegetable oils, an indicator of the movement of edible oil prices in the international market, has soared to 162 in April this year, compared to 81 in April last year.

    But why are international prices rising?

    • One of the reasons is the thrust on making biofuel from vegetable oil. There is a shifting of edible oils from food basket to fuel basket.
    • There has been a thrust on making renewable fuel from soyabean oil in the US, Brazil and other countries.
    • Other factors include buying by China, labour issues in Malaysia, the impact of La Niña on palm and soya producing areas, and export duties on crude palm oil in Indonesia and Malaysia.

    What are the options before the government?

    • One of the short-term options for reducing edible oil prices is to lower import duties.
    • However, the edible oil industry is not in favor of reducing duties.
    • If import duties are reduced, international prices will go up, and neither will the government get revenue nor will the consumer benefit.
    • The government can rather subsidize edible oils and make them available to the poor under the Public Distribution System.

  • What is Global Minimum Corporate Tax?

    Global_Minimum_Corporate_Tax

    The US has anticipated support from the G7 industrial democracies for the Biden Administration’s proposed 15%-plus global minimum corporate tax.

    Multinational corporations rather monopolies don’t like to pay their fair share of taxes. They’ll do everything in their power to exploit loopholes and minimize their tax liability. Most companies simply open offices in destinations where tax rates are low or negligible. And at the end of it all, they’ll have done just enough to avoid paying billions of dollars in taxes.

    Global Minimum Corporate Tax

    • Major economies are aiming to discourage multinational companies from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
    • Increasingly, income from intangible sources such as drug patents, software, and royalties on intellectual property has migrated to these jurisdictions.
    • This has allowed companies to avoid paying higher taxes in their traditional home countries.
    • With a broadly agreed global minimum tax, the Biden administration hopes to reduce such tax base erosion without putting American firms at a financial disadvantage.

    How would such tax work?

    • The global minimum tax rate would apply to companies’ overseas profits.
    • Therefore, if countries agree on a global minimum, governments could still set whatever local corporate tax rate they want.
    • But if companies pay lower rates in a particular country, their home governments could “top-up” their taxes to the agreed minimum rate, eliminating the advantage of shifting profits to a tax haven.
    • The Biden administration has said it wants to deny exemptions for taxes paid to countries that don’t agree to a minimum rate.

    Back2Basics: Base Erosion and Profit Shifting (BEPS)

    • BEPS refers to corporate tax planning strategies used by multinationals to “shift” profits from higher-tax jurisdictions to lower-tax jurisdictions.
    • It thus “erodes” the “tax base” of the higher-tax jurisdictions.
    • Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven.
    • It is alleged that BEPS is associated mostly with American technology and life science multinationals.