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Subject: Economics

  • Denmark’s artificial energy island project

    The Danish government has approved a plan to build an artificial island in the North Sea as part of its effort to switch to green energy.

    The Energy Island concept provides an innovative solution for countries like India grappled with the scarcity of land required for RE projects!

    What is Energy Island?

    • An energy island is based on a platform that serves as a hub for electricity generation from surrounding offshore wind farms.
    • The idea is to connect and distribute power between Denmark and neighbouring countries.

    What is the Danish project?

    • Denmark has already entered into agreements with the Netherlands, Germany and Belgium to begin the joint analysis of connections in the energy island.
    • The project is being called the largest construction project to be undertaken in Denmark’s history with an estimated cost of DKK 210 billion.
    • In June 2020, the Danish Parliament decided to initiate the construction of two energy islands, which will export power to mainland Denmark and neighbouring countries.
    • One of these islands will be located in the North Sea and the second island, called the island of Bornholm, will be located in the Baltic Sea.
    • The artificial island will be located about 80 km into the North Sea and the majority of it will be owned by the Danish government.

  • What are Government Securities (G-Secs)?

    The RBI has said that it would allow retail investors and other small investors direct access to its government securities trading platform.

    What are G-Secs?

    • 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).

    Who can invest in Corporate Bonds and Government Securities?

    • Pension Funds: Pension funds can also invest in both corporate bonds and government securities to ensure long-term stability and growth in their investment portfolio. .
    • Retail Investors: Retail investors, including individual investors, can invest in both corporate bonds and government securities.
    • Insurance Companies: Insurance companies can invest in both corporate bonds and government securities as part of their investment portfolio. The search results indicate that insurance companies often invest in a mix of low-risk and high-yield assets, with government securities providing lower risk and corporate bonds offering higher returns.

    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.

    Try this PYQ:

    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

    Why the current proposal?

    • The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
    • So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.
    • In other words, there is no easy way for them to exit their investments.
    • Thus, currently, direct g-secs trading is not popular among retail investors.

    What will the current proposal do?

    • The details are not out yet. However, the RBI’s intention is to make the whole process of g-sec trading smoother for small investors.
    • By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.

    Why such a move?

    • The RBI is the debt manager for the government.
    • In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
    • When the government demands so much money, the price of money (i.e., the interest rate) will move up.
    • It is in the government’s and RBI’s interest to bring this down.
    • That can only happen by broadening the base of investors and making it easier for them to buy g-secs.

  • [pib] Hathkargha Samvardhan Sahayata (HSS) Yojana

    The Ministry of Textiles introduced the technology up-gradation scheme called Hathkargha Samvardhan Sahayata (HSS) Yojana.

    Much recently, in the budget, the Mega Investment Textiles Parks (MITRA) Scheme was launched.

    HSS Yojana

    • This scheme is introduced as an up-gradation scheme under National Handloom Development Programme (NHDP) and Comprehensive Handloom Cluster Development Scheme (CHCDS) in 2015-16.
    • It aims to provide upgraded looms/accessories to handloom weavers to improve the quality of the fabric and enhance productivity.
    • Under the scheme, the Union Govt bears 90% of the cost of looms/accessories.
    • It is designed for all the weavers, including SC/ST/OBC and women.
    • The performance of this scheme will be evaluated by independent third-party agencies.

  • [pib] Startup India Seed Fund Scheme

    Startup India Seed Fund Scheme (SISFS) has been approved for the period of next four years starting from 2021-22.

    Seed Fund Scheme

    • The scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization.
    • 945 Crore corpus will be divided over the next 4 years for providing seed funding to eligible startups through eligible incubators across India.
    • The scheme is expected to support about 3600 startups.

    Q.Discuss various inherent non-policy challenges to Start-ups in India.(150W)

    What is Seed Funding?

    • Seed funding or seed-stage funding is a very early investment which aims at helping a business grow and generating its own capital.
    • Also referred to as seed money or seed capital, investors often get an equity stake in exchange for the capital invested.
    • The investors can themselves be the founders and use their savings as seed money for their new company — also known as bootstrapping.

    Why Seed Funding matters?

    • It is a fact that starting a new business and lifting it up off the ground is a huge ask for most entrepreneurs and it only gets tougher with capital constraints.
    • Seed funding helps get things started before the business earns any revenue.
    • It is an effective solution for startups and growing businesses as it provides the much-needed early monetary support.
    • It can cover everything from infrastructure costs, marketing and development costs as well as the cost of initial hiring. Investment is the fuel of any business and seed funding is the first drop of this fuel.
    • As seed money becomes much-needed cash reserve or working capital, not having it is one of the main reasons for failure.

    Various options for Seed Funding

    • Crowdfunding
    • Corporate seed funds
    • Incubators Accelerators
    • Angel investors
    • Personal Savings
    • VC Funding
    • Angel Funds or Angel Networks

  • The reason that India cannot afford to go on a debt binge

    The article discusses the challenges associated with the Budget with a high fiscal deficit.

    Change in government’s stance

    • India’s economy has suffered more than most from the covid pandemic and so have its people.
    • Its economic contraction has put pressure on its government, like so many others, to respond.
    • Until this week, government’s response had been relatively restrained.
    • The government implied that any welfare-promoting and growth-enhancing measures had to stand on a solid macro-economic foundation.
    • The federal budget for the next financial year, 2021-22, with the fiscal deficit for the current fiscal at 9.5% of gross domestic product (GDP) has changed that optimistic narrative.
    • The government has effectively abandoned its long-term commitment to bring the deficit down to close to 3% of GDP, pitching instead for a gentle descent to 4.5%—six years from now.

    Implications of high fiscal deficit

    • Once the covid pandemic retreats, India might end up with a debt-to-GDP ratio of about 90%, compared to the low 70s at present.
    • It would be saddled with a permanently elevated fiscal deficit and a financial system bogged down by high levels of bad debt.
    • Consumer price inflation has topped the Reserve Bank of India’s target zone of 2%-6% since the covid lockdown began last year.
    • Unlike the US or China, countries in India’s position—which have neither a reserve currency nor strong growth momentum—cannot grow rapidly while exploding their debt.
    • They can’t afford to ignore rating agencies because of their supposed bias, or cock a snook at bond markets and just run the currency presses instead.
    • They need to grow in order to reduce their debt. That’s a very different dynamic.
    • India isn’t so attractive that it can expect vast sums of investment to arrive even if its macro-economic numbers look bad and its sovereign rating is junk.
    • We don’t have a history of deflation, we aren’t hitting the zero lower bound.
    • It’s quite the opposite; we have an economy prone to sustained high inflation.
    • India is not in a position in which it could build really productive assets using sustained deficit.
    • This is still a developing economy, which especially in bad times should tread carefully rather than throw caution to the winds.

    Rationale behind high spending

    • The government is hoping that increased spending will help India grow out of this predicament.
    • The only way India can pull itself out of this jam is if private investment pours into the country, financing projects that push up the country’s potential growth rate.
    • Yet the government, already monopolizing domestic financial savings, seems to want to go to war with global markets as well.

    Consider the question “Fiscal deficit figures for FY21 marks the end of India’s departure from the path of fiscal consolidation. Discuss the challenges posed by such high fiscal deficit to the Indian economy.

    Conclusion

    India’s greatest strength had been his commitment to fiscal responsibility. The path of fiscal adventurism could end up leaving India’s macroeconomy vulnerable.

  • [pib] Ropeways and Alternate Mobility Solutions to be under MoRTH

    The Ministry of Road Transport and Highways will, from now on, also look after the development of Ropeways and Alternate Mobility Solutions (AMS).

    Q.With growing mobility and diverse terrain across the country, it is imperative that all solutions be enabled and implemented. In this light, discuss various changes adopted by the Transport Ministry in this regard.

    Ropeways

    • A ropeway is a form of naval lifting device used to transport light stores and equipment across rivers or ravines.
    • It comprises a jackstay, slung between two sheers one at either end, from which is suspended a block and tackle, that is free to travel along the rope and hauled back and forth by inhauls.
    • An amendment to the Government of India (Allocation of Business) Rules, 1961 has been notified, to enable this step.

    Impacts of the move

    • The move is expected to give a boost to the sector, by setting up a regulatory regime and facilitating research and new technology to come into this sector.
    • This means that the Ministry will have responsibility for the development of ropeway and alternative mobility solutions technology, as well as construction, research, and policy in this area.
    • Formulation of the institutional, financial, and regulatory framework for the technology will also fall under the ambit of this move.

    Expected benefits

    • Last-mile connectivity for remote locations
    • Reducing congestion on mainstream roads
    • Chance to develop world-class ropeway infrastructure
    • Setting up of an organised  and dedicated rope-way and alternative mobility solutions industry
    • New technology, like CPT – Cable Propelled Transit coming to the sector
    • Setting safety norms for unregulated ropeways
    • Allowing freight and goods at remote stations
    • Regulating tariffs structure for the technology

  • Government set for fiscal push, RBI needs to do more

    The article analyses the key features of the Union Budget, including the increase in overall expenditure and jump in capital expenditure in FY22.

    Explaining the Rs 4.1 lakh crore jump in expenditure in FY21

    • The budget has moved clearly from off-balance-sheet funding [borrowing by FCI and arrears of fertiliser subsidy] to headline-deficit funding.
    • That possibly explains the surge in fiscal deficit in the current fiscal at 9.5 per cent of GDP.
    • However, by excluding such off-balance-sheet funding, the headline-fiscal deficit declines to 8.6 per cent of GDP. 
    • A closer look at the food subsidy, juxtaposed with outstanding FCI liabilities shows that Rs 1.2 lakh crore (0.6 per cent of the GDP) is a pure accounting shift, while the rest Rs 1.9 lakh crore is new spending this fiscal.
    • Hence, the incremental spending in FY21 comes to around Rs 2.9 lakh crore (net of Rs 1.2 lakh crore/ 1.5 per cent of the GDP).
    • Interestingly, the government has also spent an additional Rs 62,638 crore on fertiliser subsidy, the entire amount of which has been front-loaded.

    Focus on capital expenditure in FY22

    • Increase in the expenditure in FY22 is noticeable as the pie has decisively shifted towards capital expenditure.
    • The budgeted raise in FY22 is 4.6 times larger than the trend increase in the last two decades. 
    • The proposed capital expenditure amounts to 3.4 per cent of the GDP if we also include allocation for capital expenditure for autonomous bodies.
    • Assuming an Incremental Capital Output Ratio (ICOR) of 4.5, one can expect a GDP growth contribution of 0.8 per cent on account of the capital expenditure.
    • The other number in the budget that deserves admiration is the significant decline in extra budgetary resources of the government and PSUs. All this augurs well even for rating agencies if we go by purely fiscal transparency as a rule.

    Steps to clean up NPAs in the banking sector

    • The most notable development in the financial system is announcement of setting up an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC).
    • The approach is to set up an AMC, which in partnership with an ARC, takes over large stressed assets ( approximately Rs 3.5 lakh crore) spread across multiple banks that have a clear potential for turnaround.
    • An operational turnaround of the asset creates value for the overall system.
    • The AMC/AIF-led approach could enable a move towards true price discovery, consolidating debt into one single entity ensuring faster decision-making, freeing up blocked capital/funds and an operational turnaround of assets.
    • A better price discovery could be ensured by having an independent investment committee comprising of senior management professionals.

    Increase in FDI limit in insurance sector

    • The Union budget also has a proposal to increase the FDI limit in insurance companies to 74 per cent from the present 49 per cent, with Indian management control.
    • It is expected that fresh capital will bring a new wave in technical know-how, innovation, and new products to the advantage of consumers, pushing up insurance penetration in the country.
    • However, we must ensure that foreign investors become interested in the Indian insurance sector as the current FDI used limit is at 33.8 per cent in private insurers.

    Role of RBI

    • With the government set for a fiscal push, the baton has passed to the RBI.
    • Overall, monetary and fiscal policies need ideal co-ordination for macroeconomic management.
    • If the central bank pursues its monetary objectives by not accommodating debt financing in its strategy, the macroeconomic outcome may be worse for both the fiscal and monetary authorities, as well as for the economy.
    • Fortunately, the RBI and government have worked in perfect harmony during the pandemic.
    • As it continues, we can have a stable interest rate regime which will be rewarding for all, particularly the government.

    Conclusion

    The Union Budget for FY22 is a budget to consolidate (C), spend (S) and revive (R) and shows that the government is set for fiscal push. Now, the baton has passed to the RBI.

    Back2Basics: What Is the Incremental Capital Output Ratio (ICOR)?

    • The incremental capital output ratio (ICOR) is a frequently used tool that explains the relationship between the level of investment made in the economy and the consequent increase in the gross domestic product (GDP).
    • ICOR indicates the additional unit of capital or investment needed to produce an additional unit of output.

  • Cryptocurrency and Regulation of Official Digital Currency Bill, 2021

    With the likely scenario of India’s government banning private cryptocurrencies, the Reserve Bank of India (RBI) is planning to introduce an official digital currency for the country.

    What is the news?

    • An earlier government bill on cryptocurrency in 2019 reportedly sought to ban cryptocurrency and criminalise its possession in India. However, it was not introduced in Parliament.
    • The detailed text of the bill has not been released in the public domain so far.
    • The bill also says that there will be a regulation to help RBI create its own CBDC (central bank digital currency).

    What are Cryptocurrencies?

    • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
    • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
    • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
    • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

    Hues over the Bill

    • The past year has seen a surge in the number of cryptocurrency investors in India and in trading volumes.
    • Cryptocurrency exchanges such as CoinDCX and Coinswitch Kuber have also raised early-stage funding for their operations.
    • The bill may spark an end to the nascent cryptocurrency industry in the country.

    What were the provisions of 2019 Bill?

    Definition of cryptocurrencies:

    • The 2019 Bill defined cryptocurrency as any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in business activity, or acts as a store of value or a unit of account.

    Ban:

    • The 2019 Bill bans the use of cryptocurrency as legal tender or currency.
    • It also prohibits mining, buying, holding, selling, dealing in, issuance, disposal or use of cryptocurrency.
    • Mining is an activity aimed at creating a cryptocurrency and/or validating cryptocurrency transactions between a buyer and a seller.

    In particular, the use of cryptocurrency was prohibited for:

    1. use as a medium of exchange, store of value or unit of account,
    2. use as a payment system,
    3. providing services such as registering, trading, selling or clearing of cryptocurrency to individuals,
    4. trading it with other currencies,
    5. issuing financial products related to it,
    6. using it as a basis of credit,
    7. issuing it as a means of raising funds, and
    8. issuing it as a means for investment.

    Why the govt wants to ban cryptocurrencies?

    Sovereign guarantee

    • Cryptocurrencies pose risks to consumers.  They do not have any sovereign guarantee and hence are not legal tender.

    Market volatility

    • Their speculative nature also makes them highly volatile.  For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.

    Risk in security

    • A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).

    Malware threats

    • In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.

    Money laundering

    • Cryptocurrencies are more vulnerable to criminal activity and money laundering.  They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.

    Regulatory bypass

    • A central bank cannot regulate the supply of cryptocurrencies in the economy.  This could pose a risk to the financial stability of the country if their use becomes widespread.

    Power consumption

    • Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

  • Economy needs much more than what Budget 2021 offers

    The article highlights the areas of economy for which the allocation in the Budget has either been kept unchanged or reduced, signaling the missed opportunity to revive the economy.

    Including the off-budget items

    • An important feature of the Budget is the transparency on including the off-budget items.
    • The step will result in cleaning up of the balance-sheet of the Food Corporation of India (FCI).
    • The FCI was saddled with a debt of Rs 3.75 lakh crore by the end of December 2020, a significant part of which is now paid by the government.
    • So is the case of the fertiliser subsidy for which the pending Rs 65,000 crore was cleared.

    What was the increase in expenditure due to pandemic

    • The total expenditure of the government in 2020-21 hardly increased compared to the pre-pandemic budget estimates (BE).
    • The total increase in revised estimates (RE) for 2020-21 is only Rs 33,000 crore, around 1 per cent more than what was budgeted.
    • The government did raise the expenditure on food subsidy, direct benefit transfer to Jan Dhan accounts (Rs 33,000 crore) and the increase in the Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) (Rs 50,000 crore) and so on.
    • But it did so not by generating resources and expanding the fiscal deficit but by cutting down essential expenditure such as agriculture (Rs 18,000 crore), education (Rs 14,000 crore) and social welfare (Rs 14,000 crore).

    No increase in health budget

    • The Budget announced increase in the health budget to Rs 2.23 lakh crore.
    • This number was achieved by adding one-time expenditures on the vaccine, Finance Commission grants and inclusion of expenditure on drinking water, sanitation and nutrition.
    • However, the budget of the health ministry for 2021-21 is lower at Rs 74,602 crore compared to the revised estimates of Rs 82,445 crore for the current year.

    No increase in agriculture budget

    • Like in many other essential ministries, the agriculture ministry also witnessed a cut with estimates of 2021-22 lower by Rs 11,000 crore than last year.
    • Real investment in agriculture has been lower than 2013-14 for every year of this government.

    Lack of attention on employment generation in rural area

    • The lifeline provided by expenditure in rural areas on infrastructure creation and employment generation has either seen a decline in budgeted expenditure or remained stagnant.
    • The budget for the ministry of rural development is lower by Rs 66,000 crore compared to the RE of last year.
    • The MGNREGA budget of Rs 73,000 crore is barely enough to cover the increase in wages by 11 per cent announced in March.
    • It is only 1.8 per cent higher than the actual expenditure of 2019-20, but 52 per cent lower than the RE of last year.
    • Similarly, for the Pradhan Mantri Gram Sadak Yojna (PMGSY), the budget for 2021-22 has been cut by Rs 4,500 crore, not even enough to cover inflation between the two years.

    Consider the question “The Budget 2021-22 has been hailed for bringing in more transparency to the budgeting exerciese? Examine the context for this, how it will benefit the country?”

    Conclusion

    Estimates for next year point to missed opportunities to use fiscal measures to revive the ailing economy. Unlike the pandemic, where the arrival of vaccines has given hope, the ailing economy needs much more than this budget.

  • The Budget bids goodbye to fiscal orthodoxy

    A whopping fiscal deficit at 9.5% of GDP for FY21 highlights departure of India’s fiscal policy from the path of fiscal consolidation. The article highlights the issues related to such departure.

    Important departure

    • With its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 Budget for 2021-22 seems to signal “spend like there is no tomorrow”.
    • For well over a decade-and-a-half, we have tried attaining deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
    • In this Budget, target of FRBM Act has not been adhered to.
    • The Budget thus marks an important departure from one of the key tenets of the Washington Consensus that was based on macroeconomic stability.
    • In previous years, Medium Term Fiscal Policy cum Fiscal Strategy Statement would give the indicators for the past two years as well as the projections for the next two years.
    • In this year’s Budget, the yearly projections are missing.
    • The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

    The theoretical basis for departure

    • The Economic Survey laid the groundwork for a departure from rigid adherence to fiscal consolidation. 
    • It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate (IRGD), then the intertemporal budget constraint facing the government no longer binds.”
    • The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
    • The Survey argues that in India, the growth rate is higher than the interest rate most of the time. 
    • The Survey says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher.

    Key concerns

    • An important factor for adhering to the fiscal constraint in the past was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP.
    • That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
    • Another concern is that a large fiscal deficit can fuel a rise in inflation.
    • A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
    • A large-scale privatisation almost always involves substantial FDI.
    • In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies.

    Consider the question “The Budget 2021-22 is characterised by its departure from the path of fiscal consolidation. Examine the theoretical basis for such departure. What are the key concerns?”

    Conclusion

    If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.

    Back2Basics: Interest Rate Growth Differential

      • A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate.
      • When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs.
      • In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.