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Subject: Economics

  • India should go all out in its Westward trade push

    After walking away from the RCEP, India needs to find alternative trading partners that can offer the potential for trade expansion. The article suggests a Westward trade push as an alternative.

    Forging trade deals with the Western countries

    • Our rejection of RCEP, which covers much of the eastern hemisphere, had exposed us to the risk of losing out on cross-border commercial relations in a highly dynamic part of the world.
    • To compensate for the opportunity cost of that decision, it was imperative to strike other alliances.
    •  As a part of this, India adopted a roadmap for the rest of this decade to elevate ties with the UK and also moving to revive free-trade talks with the EU.
    • An India-UK plan unveiled recently will raise our bilateral relationship to a ‘comprehensive strategic partnership in such areas as economic affairs, defence and health.
    • The two countries signed a £1-billion trade investment pact that is expected to generate jobs in both.
    • Separately, India and the EU are reportedly working out how to resume stalled negotiations for a trade deal.

    Issues India may face

    • The signing of pacts would involve mutual tariff reductions and the lowering of other barriers, both of which have proven thorny so far.
    • In general, while the West wants us to lower import duties, our negotiators have been citing India’s sovereign right to protect domestic businesses under World Trade Organization rules.
    • Globally, even before covid knocked the wind out of the sails of cargo ships, commerce across borders had been doing badly under the extended effects of a financial crisis that shook things up in 2008-09.
    • But world trade remains a reliable path to global prosperity and must therefore regain its gusto.
    • For us, deal-making would mean opening up markets to imports in lieu of easier access to foreign ones.

    Way forward

    • Concessions that cause very few job losses in India can easily be made. A broad cost-benefit analysis will have to guide our approach to talks, on complex issues like US visa rules which affect our software exports.
    • Since it is governments that thrash out deals, geopolitical convergences are often sought too.
    • We seem to be in a favourable position on this, given the West’s need to keep China’s rise in check.
    • The UK’s Rolls-Royce has just inked a memorandum with Hindustan Aeronautics Ltd for warship engines, a sign of our strategic ties.
    • Technology could come our way from the US, too.
    • If we can leverage an ability to play a role in Asia’s balance of power to our economic benefit, we should.

    Conclusion

    Mutually assured flexibility on tariff concessions would help India and its Western partners score economic gains and also counterbalance China’s growing dominance of world trade.

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    B2B

    [pib] India-UK Virtual Summit

  • Digital Service tax

    • Starting April 2022, overseas entities that don’t have a physical presence in India but derive significant financial benefit from Indian customers will come under the Indian tax net.
    • While the main legal provision was introduced in 2018, the revenue department notified the thresholds for the purposes of significant economic presence (SEP) on May 3.
    • The concept was introduced via Finance Act, 2018, to enlarge the scope of income of non-residents that accrues or arises in India, by establishing a “business connection” of the foreign entities.
    • The idea is to tax profits of those online and offline businesses that don’t have a physical presence in India but derive significant economic value from the country.
    • Only those entities will get impacted by the SEP provisions who come from non-treaty jurisdictions.
    • That’s because the treaties specify non-resident entities will come under the tax net only if they have a permanent establishment in India.
    • India currently has a Double Taxation Avoidance Agreement with 97 countries.

    Thresholds

    • Transaction Threshold: Any non-resident whose revenue exceeds Rs 2 crore for transactions in respect of goods, services or property with any person in India. This will include transactions on the download of data or software.
    • User Threshold: Any entity that systematically and continuously does business with more than 3 lakh users in India.

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    BACK2BASICS

    Revision of this topic further:

    What are Digital Services Taxes?

  • [pib] First supply of UCO-based Biodiesel flagged off

    Eco-system for collection and conversion of UCO into Biodiesel

    • Minister of Petroleum & Natural Gas flagged off the first supply of UCO (Used Cooking Oil) based Biodiesel blended Diesel under the EOI Scheme.
    • To create an eco-system for collection and conversion of UCO, Expressions of Interest had been initiated for “Procurement of Bio-diesel produced from Used Cooking Oil” on the occasion of World Biofuel Day on 10th August 2019.
    • Under this initiative, Oil Marketing Companies (OMC) offer periodically incremental price guarantees for five years and extend off-take guarantees for ten years to prospective entrepreneurs.

    Advantages

    • This is a landmark in India’s pursuance of Biofuels and will have a positive impact on the environment.
    • This initiative will garner substantial economic benefits for the nation by shoring up indigenous Biodiesel supply, reducing import dependence, and generating rural employment.

  • RBI to strengthen risk-based supervision (RBS) of banks, NBFCs

    About RBS model

    • The RBI uses the Risk-Based Supervision (RBS) model, including both qualitative and quantitative elements, to supervise banks, urban cooperatives banks, non-banking financial companies and all India financial institutions.

    Decision to review the model

    • The Reserve Bank has decided to review and strengthen the Risk-Based Supervision (RBS) of the banking sector with a view to enable financial sector players to address the emerging challenges.
    • The review process will help make the extant RBS model more robust and capable of addressing emerging challenges, while removing inconsistencies if any.
    •  Annual financial inspection of UCBs and NBFCs is largely based on CAMELS model (Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, and Systems & Control).
    • It is intended to review the existing supervisory rating models under CAMELS approach for improved risk capture in a forward-looking manner and for harmonising the supervisory approach across all Supervised Entities.

    Source:

    https://www.financialexpress.com/industry/banking-finance/rbi-to-strengthen-risk-based-supervision-of-banks-nbfcs/2244259/

  • Don’t worry about the deficit

    The devastation caused by the second wave calls for the government to shed its worry over the fiscal deficit. The article deals with this issue.

    Role of fiscal policy to support economy through second wave

    • As India battles to contain the surge in COVID-19 cases, several states have already imposed severe restrictions at the local level.
    • The services sector has been hit the most as a consequence of these lockdowns and it would be difficult for India to deliver on this optimistic growth projection.
    • Against this background, the role fiscal policy can play to support the economy needs consideration.
    • The monetary policy is already accommodative and may not have enough room to further boost the economy.
    • With headline as well as core inflation inching up in recent months, the RBI may not be in a position to further cut the policy rate.
    •  As per the latest Union Budget, the fiscal deficit is estimated to moderate from 9.5 per cent of GDP in FY21 to 6.8 per cent of GDP in FY22.
    • This expected decline in fiscal deficit is not on account of lower fiscal spending but because of expectations of sharper revenue growth.
    • The revenue receipts are estimated to grow by 15 per cent and fiscal spending by 1 per cent this financial year.
    • With the debt to GDP ratio already more than 90 per cent, additional fiscal expansion will not be an easy choice for the government.

    Government need to create fiscal space

    • Extraordinary times call for extraordinary measures and the government will have to find ways to create fiscal space.
    • This has become especially important as the economy is yet to shrug off the impact of the previous lockdown.
    • Under these difficult circumstances, immediate measures must aim at providing the requisite social safety net to the poor and the vulnerable.
    • The central government has already announced it will distribute an additional five kg of grain to the 800 million beneficiaries of the National Food Security Act, which is welcome.
    • However, given the unprecedented uncertainty brought about by this COVID wave, the ration support under the PDS should be raised further.
    • The government should also consider transferring cash to the bank accounts of the poor, just as it did last time.
    • This becomes important as MGNREGA  may not provide the safety cushion that it is indeed to as long as lockdown measures remain in place.
    • The best stimulus perhaps would be to provide free vaccinations to the population as the benefits of faster and wider vaccine coverage more than outweighs its monetary cost.
    •  Immunisation is a public good. As we get over this crisis, the government must increase its outlay on physical and human health infrastructure.

    How to finance additional cost?

    •  Part of this additional cost may be financed by reducing non-essential government expenditures and use it for COVID-related expenditure.
    • The government may need to resort to additional borrowings from the market than budgeted earlier.
    • The RBI may allow inflation above the upper bound of 6 per cent only in the short run.
    • The plausible rise in interest rates may also be crucial to prevent capital outflows, given the global “economic outlook” when the US economy adopts an easy monetary policy combined with a huge fiscal stimulus.

    Conclusion

    The government should not be deterred by a worsening fiscal deficit in the short run as the additional growth that it generates may make debt consolidation easier when things normalise.

  • Clean energy innovation slowing, report warns

    Major findings of the report

    • It is a joint report titled “Patents and the energy transition” released by the European Patent Office and the International Energy Agency.
    • The average annual growth rate of patents for low carbon emissions technologies has fallen to 3.3 percent since 2017, the rate was 12.5 percent in the period 2000-2013.
    • The report found that around 35 percent of the cumulative CO2 emissions reductions needed to shift to a sustainable path to reach net-zero emissions by 2070 are still currently at the prototype or demonstration phase.
    • The report found that energy efficiency and fuel-switching technologies remained at the top of patent activities, accounting for about 60 percent of the total.

    Shifting trend withing renewable

    • Patent activity in renewable energy technologies such as wind and solar has been in decline for nearly a decade however, and represented just 17 percent of the total in 2019, report found.
    • The key driver of patent growth since 2017 has been innovation in cross-cutting technologies such as batteries, hydrogen and smart grids, along with carbon-capture, utilisation and storage.

    Source:

    https://energy.economictimes.indiatimes.com/news/renewable/clean-energy-innovation-slowing-report-warns/82270391

  • How IPR served as barrier to the right to access healthcare

    Request for waiver

    •  Last year, India and South Africa requested WTO for a temporary suspension of rules under the 1995 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
    • A waiver was sought to the extent that the protections offered by TRIPS impinged on the containment and treatment of COVID-19. 
    • The request for a waiver has, since, found support from more than 100 nations.
    • But a small group of states — the U.S., the European Union, the U.K. and Canada among them — continues to block the move.
    • These countries have already secured the majority of available vaccines.
    • But for the rest of the world mass immunisation is a distant dream.

    Grounds on which patent laws are justified

    • Patent laws are usually justified on three distinct grounds:
    • On the idea that people have something of a natural and moral right to claim control over their inventions.
    • On the utilitarian premise that exclusive licenses promote invention and therefore benefit society as a whole.
    • On the belief that individuals must be allowed to benefit from the fruits of their labour and merit.
    • These justifications have long been a matter of contest, especially in the application of claims of monopoly over pharmaceutical drugs and technologies.

    Patent laws in India

    • In 1959, a committee chaired by Justice N. Rajagopala Ayyangar objected to monopolies on pharmaceutical drugs through colonial-era patent law.
    • The committee found that foreign corporations used patents to suppress competition from Indian entities, and thus, medicines were priced at exorbitant rates.
    • The committee suggested, and Parliament put this into law through the Patents Act, 1970, that monopolies over pharmaceutical drugs be altogether removed, with protections offered only over claims to processes.
    • This change in rule allowed generic manufacturers in India to grow. 

    How TRIPS goes against the interest of developing countries

    • WTO has into its constitution a binding set of rules governing intellectual property.
    • Countries that fail to subscribe to the common laws prescribed by the WTO would be barred from entry into the global trading circuit.
    • It was believed that a threat of sanctions, to be enforced through a dispute resolution mechanism, would dissuade states from reneging on their promises.
    • With the advent in 1995 of the TRIPS agreement, this belief proved true.
    • The faults in this new world order became apparent when drugs that reduced AIDS deaths in developed nations were placed out of reach for the rest of the world.
    • It was only when Indian companies began to manufacture generic versions of these medicines as TRIPS hadn’t yet kicked in against India, that the prices came down.

     Argument in support of the patent regime

    • Two common arguments are made in response to objections against the prevailing patent regime.
    • One, that unless corporations are rewarded for their inventions, they would be unable to recoup amounts invested by them in research and development.
    • Two, without the right to monopolise production there will be no incentive to innovate.

    Issues with the argument in support of patent regime

    • Big pharma has never been forthright about the quantum of monies funnelled by it into research and development.
    • Moderna vaccine in the U.S. emanated out of basic research conducted by the National Institutes of Health, a federal government agency, and other publicly funded universities and organisations. 
    • Similarly, public money accounted for more than 97% of the funding towards the development of the Oxford/AstraZeneca vaccine.
    •  Therefore, the claim that the removal of patents would somehow invade on a company’s ability to recoup costs is simply untrue.
    • The second objection — the idea that patents are the only means available to promote innovation — has become something of a dogma.
    • The economist Joseph Stiglitz is one of many who has proposed a prize fund for medical research in place of patents.

    Consider the question “What are the issues with the patent regime under the TRIPS in the field of medicine?”

    Conclusion

    We cannot continue to persist with rules granting monopolies which place the right to access basic healthcare in a position of constant peril. In its present form, the TRIPS regime represents nothing but a new form of “feudal calculus”.

  • Growth of ARCs not in line with NPA trends

    Key takeaways from the RBI report

    • The RBI report states that notwithstanding the rise in the number of Asset Reconstruction Companys (ARCs), the growth in their assets under management (AUM) has been largely trendless except for a major spurt in FY14.
    • The growth of the ARC industry has not been consistent over time and not always been synchronous with the trends in non-performing assets (NPAs) of banks and non-banking financial companies (NBFCs).
    • During 2019-20, asset sales by banks to ARCs declined, which could probably be due to banks opting for other resolution channels such as IBC and SARFAESI.
    • The acquisition cost of ARCs as a proportion to the book value of assets declined, suggesting lower realisable value of the assets.

    Overview of ARCs in India

    • The ARC industry began with the establishment of the Asset Reconstruction Company India Ltd (ARCIL) in 2003.
    • Of the total AUM, about 62 per cent and 76 per cent was held by the top-three and top-five ARCs in March 2020, respectively.
    • After remaining subdued in the initial years of their inception, a jump was seen in the number of ARCs in 2008, and then in 2016.
    • Although the number of ARCs has risen over time, their business has remained highly concentrated.

    Role of the government

    • Indian ARCs have been private sector entities registered with the Reserve Bank.
    • Public sector AMCs in other countries have often enjoyed easy access to government funding or government-backed.
    • By contrast, capital constraints have often been highlighted as an area of concern for ARCs in India.

    Scope for new ARC supported by the government

    • The ARC proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the Centre.
    • The RBI report supported the government’s proposal for a new ARC, saying that “such an entity will strengthen the asset resolution mechanism further.”
    • Introduction of a new asset reconstruction company for addressing the NPAs of public sector banks may also shape the operations of the existing ARCs, it added. 
    • The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large accounts.

  • SEBI tightens rules for provisional debt rating

    New framework for debt instrument

    • The new framework requires that a rating will be considered provisional in cases where certain compliances that are crucial to the assignment of credit rating are yet to be complied with at the time of rating.
    • Under the new framework, all provisional ratings (‘long term’ or ‘short term’) for debt instruments need to be prefixed as ‘provisional’ before the rating symbol.
    • In no case shall a rating, including provisional rating, be assigned by a credit rating agency for an issuer or client evaluating strategic decisions such as funding mix for a project, acquisition, debt restructuring, scenario-analysis in loan refinancing,” SEBI said.
    • On validity period, SEBI said provisional rating will be converted into a final rating within 90 days from the date of issuance of the instrument.

  • RBI issues guidelines for tenure of bank CEOs, MDs

    What the guidelines say

    • The Reserve Bank of India recently issued certain instructions on the governance for banks.
    • As per the instructions from the central bank, the post of Managing Director (MD) and Chief Economic Officer (CEO) MD or Whole Time Director (WTD) cannot be held by the same incumbent for more than 15 years.
    • The individual will be eligible for re-appointment as MD&CEO or WTD in the same bank after a minimum gap of three years, subject to meeting other conditions.
    • The upper age limit for MD & CEO and WTDs in private banks would continue to be 70 years.
    • MD&CEO or WTD who is also a promoter/ major shareholder, cannot hold these posts for more than 12 years except in extraordinary circumstances.
    • Banks are permitted to comply with these instructions latest by October 01, 2021.

    Applicability

    • These guidelines are applicable for banks, including private banks, Small Finance Banks (SFBs), Wholly Owned Subsidiaries of Foreign Banks.
    • However, it added that this circular is not applicable to foreign banks operating as branches in India.