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Subject: Economics

  • Ordinance Factory Board corporatization gets Cabinet approval

    Addressing a long-pending reform, the Union Cabinet has approved a plan to corporatize the Ordnance Factory Board (OFB).

    Ordnance Factory Board (OFB)

    • OFB consisting of the Indian Ordnance Factories is a government agency under the control of the department of defence production (DDP).
    • It is engaged in research, development, production, testing, marketing and logistics of a product range in the areas of air, land and sea systems.
    • OFB comprises 41 ordnance factories, nine training institutes, three regional marketing centres and four regional controllers of safety, which are spread all across the country.

    Why are OFBs significant?

    • OFB is the world’s largest government-operated production organization and the oldest organization in India.
    • It has a total workforce of about 80,000.
    • It is often called the “Fourth Arm of Defence” and the “Force Behind the Armed Forces” of India.
    • OFB is the 35th largest defence equipment manufacturer in the world, 2nd largest in Asia, and the largest in India.

    Why corporatization?

    • Once implemented, the OFB, the establishment of which was accepted by the British in 1775, will cease to exist.
    • It is a major decision in terms of national security and also make the country self-sufficient in defence manufacturing as repeatedly emphasized by PM.
    • This move would allow these companies autonomy and help improve accountability and efficiency.
    • This restructuring is aimed at transforming the ordnance factories into productive and profitable assets, deepening specialization in the product range, enhancing competitiveness, improving quality and achieving cost efficiency.

    Adhering to past recommendations

    • There have been several recommendations by high-level committees in the past for corporatising it to improve efficiency and accountability.

    What about employees?

    • All employees of the OFB (Group A, B and C) belonging to the production units would be transferred to the corporate entities on deemed deputation.
    • The pension liabilities of the retirees and existing employees would continue to be borne by the government.

    How would this be accomplished?

    • The 41 factories would be subsumed into seven corporate entities based on the type of manufacturing.
    • The ammunition and explosives group would be mainly engaged in producing ammunition of various calibre and explosives, with huge potential to grow exponentially.
    • Similarly, the vehicles group would mainly engage in producing defence mobility and combat vehicles such as tanks, trawls, infantry and mine protected vehicles.

  • [pib] Nutrient Based Subsidy (NBS) for Phosphatic & Potassic (P&K) Fertilizers

    The Union Cabinet has approved the proposal of the Department of Fertilizers for fixation of Nutrient Based Subsidy Rates for P&K Fertilizers for the year 2021-22.

    Key Points

    About Di-Ammonium Phosphate (DAP):

    • DAP is the second most commonly used fertiliser in India after urea.
    • Farmers normally apply this fertiliser just before or at the beginning of sowing, as it is high in phosphorus (P) that stimulates root development.
    • DAP (46% P, 18% Nitrogen) is the preferred source of Phosphorus for farmers. This is similar to urea, which is their preferred nitrogenous fertiliser containing 46% N.

    About Subsidy Scheme for Fertilisers:

      • Under the current scheme, the MRP of Urea is fixed but the subsidy can vary while MRP of DAP is decontrolled (i.e subsidy is fixed but the MRP can vary).
      • All Non-Urea based fertilisers are regulated under Nutrient Based Subsidy Scheme.

    About Nutrient-Based Subsidy (NBS) Regime:

      • Under the NBS regime – fertilizers are provided to the farmers at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
      • Also, the fertilizers which are fortified with secondary and micronutrients such as molybdenum (Mo) and zinc are given additional subsidy.
      • The subsidy on Phosphatic and Potassic (P&K) fertilizers is announced by the Government on an annual basis for each nutrient on a per kg basis – which are determined taking into account the international and domestic prices of P&K fertilizers, exchange rate, inventory level in the country etc.
      • NBS policy intends to increase the consumption of P&K fertilizers so that optimum balance (N:P:K= 4:2:1) of NPK fertilization is achieved.
        • This would improve soil health and as a result the yield from the crops would increase, resulting in enhanced income to the farmers.
        • Also, as the government expects rational use of fertilizers, this would also ease off the burden of fertilizer subsidy.
      • It is being implemented from April 2010 by the Department of Fertilizers, Ministry of Chemicals & Fertilizers.

    Issues Related to NBS:

    1.Imbalance in Price of Fertilisers:

    • Urea is left-out in the scheme and hence it remains under price control as NBS has been implemented only in other fertilizers.
    • There is an imbalance as the price of fertilizers (other than urea) — which were decontrolled have gone up from 2.5 to four times during the 2010-2020 decade.
    • However, since 2010, the price of urea has increased only by 11%. This has led to farmers using more urea than before, which has further worsened fertilizer imbalance.

    2.Costs on Economy and Environment :

    Fertilizer subsidy is the second-biggest subsidy after food subsidy, the NBS policy is not only damaging the fiscal health of the economy but also proving detrimental to the soil health of the country.

    3.Black Marketing :

    • Subsidised urea is getting diverted to bulk buyers/traders or even non-agricultural users such as plywood and animal feed makers.
    • It is being smuggled to neighbouring countries like Bangladesh and Nepal.

    Implications of Increasing the Subsidy on DAP :

    • As farmers will start sowing operations for Kharif Crops, it is highly important for them to get the fertilisers at subsidised rate so as to keep inflation at check.
    • Politically, too, to turn down the farmer protests, during the time of the Covid’s second wave, is the last thing the government would want.

  • Why India must bargain hard on G7 tax reforms

    The article deals with the issue of global minimum tax and how it matters to India in the changing digital landscape where data is the new oil.

    Two pillars of global taxation reforms endorsed

    • In the just-concluded G7 summit in the UK, the leaders endorsed the global taxation reforms premised on two pillars.
    • One, that the multinational companies with at least a 10 per cent profit margin pay tax in countries where they operate and that would be 20 per cent of any profit above the 10 per cent margin.
    • Two, a global minimum tax rate that envisages that multinational companies pay a tax of at least 15 per cent in each country they operate.

    How companies monetise data

    • The concept of tax on electronic transmission of data across borders was expressly prohibited under multiple WTO declarations.
    • However, in the changed digital landscape, multinational corporations are mining big data, which has economic value, but not paying their fair share of taxes.
    •  Many of these tech firms provide their product for free to users, and based on user engagements, create a detailed profile of the user that would be used to sell ad space to the clients.

    Efforts to find solution to tax avoidance

    • The Union government had rightly introduced an equalisation levy at 2 per cent, targeted at non-resident e-commerce operators with a turnover greater than Rs 2 crore in the Union budget of 2020.
    • India had an equalisation levy since 2016, initially at 6 per cent on specified services like online advertisement or provision of digital advertising space and was levied on non-resident firms, deducted by the payer.
    • In the case of the amended equalisation levy, the responsibility lay with the operator and was applicable to earnings that have been made by selling advertisements based on the data collected within the country.
    • The member-states of the OECD have been trying to find a solution to tax avoidance by multinational corporations under the Base Erosion and Profit Shifting Project since 2015.
    • OECD had built a model around two pillars on which the G7 position has been announced.

    Way forward for India

    • India has to stand its ground.
    • With the largest user base for Facebook, WhatsApp and YouTube, India will not be adequately compensated by the above two steps in global minimum tax.
    • The government must also pass the Personal Data Protection Bill 2019 quickly so that provisions for data localisation, requiring Indian data to be stored and processed in the country are in place.
    •  This could be the ideal way to force tech firms to correctly evaluate the revenue generated from our sovereign data and thus tax it.

    Consider the question “As the world moves towards the global taxation reforms, what are the factors India needs to consider? Also, mention the previous efforts made to find the solution to tax avoidance by the multinational companies.”

    Conclusion

    India must negotiate hard to come to an equitable position on the global tax and avoid as it harbours the largest user base of the social media companies.

  • Embracing cryptocurrency

    As India struggles to come up with an appropriate approach towards cryptocurrencies, the growing trend of the adoption of cryptocurrencies across the world offers a lesson.

    Rising global trend of embracing cryptocurrencies

    • El Salvador became the first country in the world to adopt bitcoin as legal tender.
    • The U.K. has classified cryptocurrency as property.
    • The U.K. has sought to regulate the functioning of crypto-businesses while still imposing some restrictions to protect the interests of investors.
    • On the other hand, while there is no exact legal classification of cryptocurrency in Singapore, there is now a legal framework for cryptocurrency trading.
    • In the U.S., the open approach taken by the authorities has resulted in the trade in cryptocurrency being both taxed and appropriately regulated.

    India’s approach

    • Between 2013 and 2018, the government’s response to the rise of virtual currencies was cautionary, alerting users to the potential risks posed by cryptocurrency transactions.
    • Instead of developing a regulatory framework to address these issues, the Reserve Bank of India (RBI), in April 2018, effectively imposed a ban on cryptocurrency trading.
    • This ban was overturned by the Supreme Court in 2020.
    • The court reasoned that there were alternative regulatory measures short of an outright ban through which the RBI could have achieved its objective of curbing the risks associated with cryptocurrency trading.
    • India’s next move lies in the draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021.
    • The draft Bill proposes to criminalise all private cryptocurrencies while also laying down the regulatory framework for an RBI-backed digital currency. 

    What should be India’s approach?

    • The global regulatory attitude towards cryptocurrencies offers valuable insights into the alternative ways to achieve balanced regulation.
    •  In India, the absence of an existing legal classification of cryptocurrency should not be the impetus to prohibit its use.
    • The government should use this as an opportunity to allow private individuals the freedom to harness a powerful new technology with appropriate regulatory standards.

    Consider the question “As India finds itself at a crossroads of prohibition and regulation in its tryst with cryptocurrencies, globally, the inclination towards permissive regulation recognises the freedom of choice given to people. In light of this, examine the advantages and concerns with the cryptocurrencies and suggest the approach India should adopt towards the cryptocurrencies.”

    Conclusion

    Regulations to avoid the pitfall and not the outright ban is the right way towards the cryptocurrencies.

  • Kerala’s Silver-Line Railway Project

    Last week, the Kerala cabinet gave the green light to begin acquiring land for SilverLine, its flagship semi high-speed railway project.

    What is the SilverLine project?

    • The SilverLine Project entails building a semi high-speed railway corridor through the state linking its southern end and state capital Thiruvananthapuram with its northern end of Kasaragod.
    • It is billed as one of the biggest infrastructure enterprises being pushed by the ruling Left government.
    • The line is proposed to be 529.45 km long, covering 11 districts through 11 stations.
    • When the project is realized, one can travel from Kasaragod to Thiruvananthapuram in less than four hours on trains traveling at 200 km/hr.
    • The current travel time on the existing Indian Railways network is 12 hours.
    • The project is executed by the Kerala Rail Development Corporation Limited (KRDCL), a joint venture between the Kerala government and the Union Ministry of Railways.

    What was the need for the project?

    • It has long been argued by urban policy experts that the existing railway infrastructure in the state cannot meet the demands of the future.
    • Most trains run with an average speed of 45 km/hr due to a lot of curves and bends on the existing stretch.
    • The government claims the SilverLine project is the need of the hour as it can take a significant load of traffic off the existing railway stretch and make travel easier and faster for commuters.
    • This will in turn reduce the congestion on roads and help reduce accidents and fatalities.

    Issues with the Project

    • The unofficial deadline for the project is 2025 but many would say it’s not a realistic target, given the laborious nature of land acquisition in a highly densely populated state like Kerala.
    • Acquiring land, especially from private players, in urban areas remains the key challenge for the project.
    • There’s also significant opposition to the project by environmentalists citing potential damage to the state’s ecosystem in the path of the proposed route.
    • They fear irreversible impact to the state’s rivers, paddy fields, and wetlands, triggering floods and landslides in the future.

  • FSSAI recognizes new precision Iodine Value Analyser

    The Council of Scientific and Industrial Research-Central Scientific Instruments Organization (CSIR-CSIO) has developed and transferred the technology of Precision Iodine Value Analyzer (PIVA).

    What is Precision Iodine Value Analyzer?

    • It is an instrument for the measurement of the degree of unsaturation (iodine value) in vegetable oils.
    • This indigenous food testing equipment was recognized by the Food Safety and Standards Authority of India (FSSAI) on World Food Safety Day on June 7, 2021.
    • It has applications in oil extraction units, quality control and assurance labs, food regulatory authorities, soaps and cosmetics, bakeries, meat industry, paint industry, biodiesel analysis, and charcoal industry.
    • It is also useful in determining adulteration in edible oils and fats.

    Measuring iodine value

    • Iodine value is conventionally determined using manual titration and a few analytical instruments based on automated titration.
    • However, these methods take a longer time to analyze, are costly, and use toxic chemicals.
    • Researchers at CSIR-CSIO developed a rapid analysis technique that takes just three minutes to carry out the same analysis.
    • Currently, PIVA has been calibrated and tested for coconut, sunflower, mustard, palm, rice bran, soybean, groundnut, olive oil, and ghee.
    • This new development is a part of the ongoing effort to strengthen the food testing capabilities by introducing quick and advanced food testing kits.

  • Mustard oil blending is now banned

    The Food Safety and Standards Authority of India had decided this on March 31. This would end the practice to add other edible oil (like palms, rice bran, etc) to mustard oil.

    Why such move?

    • This is good news for mustard farmers whose fortunes were adversely hit as up to a fifth of mustard oil volume could earlier be blends of other oils.
    • But why did India start the practice in the first place? And how has it affected consumer health?

    Answer this question from CSP 2018:

    Q.Consider the following statements:

    1. The quantity of imported edible oils is more than the domestic production of edible oils in the last five years.
    2. The Government does not impose any customs duty on all the imported edible oils as a special case.

    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

    Why did the blending begin?

    • The Union health ministry had allowed blending in edible vegetable oil in a notification in 1990.
    • In 1998, Delhi and other north Indian states witnessed the dropsy epidemic — a disease that caused swelling in the body due to the build-up of fluid in tissues.
    • At least 60 people died and 3,000 were hospitalized in the national capital.
    • Researchers believed the consumption of mustard oil caused the disease.

    Adulteration is hazardous

    • Upon investigation, it was found to be adulterated with Argemone Mexicana, a kind of weed that grows with yellow flowers.
    • The adulteration, however, was highly suspicious: While mustard is a rabi crop that is cultivated in the winters, Argemone Mexicana grows in April-May.
    • This meant that the possibility of mixing mustard seeds with that Argemone mexicana was rare.
    • The suspicious adulteration stoked fear among the masses.  It started a campaign against the consumption of oil.
    • Several studies have found mustard oil unsafe for consumption.

    The 1990 decision

    • Experts have claimed that the blending of mustard oil was not only dangerous to health but also adversely impacted mustard farming.
    • Some groups have also flagged the blending of refined oil.
    • Following the Union health ministry’s 1990 notification allowing for the blending of edible vegetable oil, the FSSAI rolled out regulations in the regard in 2006.
    • Producers and other companies involved in blending were regularised through the Agriculture Produce (Grading and Marking) Act (AGMARK).
    • It also made it mandatory to write the kind of oil used for blending over the packet.
    • The companies involved in blending strongly advocated for the cause, despite reports about its excess and unregulated use. The governments over the years have been tight-lipped about it.

    Has blending led to dependence over the import of oil?

    • In 1990-91, India was self-reliant in mustard oil production and produced 98 percent of the oil needed.
    • Blending mustard oil with other edible oils considered to bolster nutritional profile, taste, and quality.
    • Despite the harmful effects, the processing industry took advantage of blending.
    • Cheap palm oil would be blended up to 80 percent in mustard oil sometimes.
    • As a result, profits of mustard farmers dried up, which discouraged them from cultivating the crop.
    • This could be one of the reasons behind India’s increasing dependency on oil imports over the last two decades.

  • [pib] Sub-Mission on Agricultural Mechanization (SMAM)

    To empower the farmers through the Sub-Mission on Agricultural Mechanization (SMAM) scheme, the government has released funds for various activities of Farm Mechanization.

    Sub-Mission on Agricultural Mechanization (SMAM)

    • The Agri ministry has launched this mission in 2014-15 with the objectives of increasing the reach of farm mechanization to small and marginal farmers and to the regions & difficult areas where farm power availability is low.
    • Under this scheme, it has been proposed to established Village Level farm Machinery Bank (VLFMB), Custom Hiring Centres (CHC) and High Tech Hubs (HTH) in order to facilitate easy availability of farm implements and machinery for hire by farmers.

    Why need such a scheme?

    • Agricultural Mechanization plays a vital role in optimizing the use of land, water energy resources, manpower and other inputs like seeds, fertilizers, pesticides etc to maximize the productivity of the available cultivable area and make agriculture a more profitable and attractive profession for rural youth.
    • It is one of the key drivers for the sustainable development of the agriculture sector.
    • Sustainable Agriculture mechanization growth will require appropriate and precision agricultural machinery adequately supported by the latest technology.

  • Why companies are adopting sustainable business models?

    The article discusses the three undercurrents that are pushing companies to adopt more sustainable business models.

    Demand for sustainable business practices

    • Companies across the world are facing pressure to adopt sustainable business practices.
    • In a global first, a judicial court in the Netherlands has invoked the principles of human rights obligations of companies to rule that the Royal Dutch Shell will have to further accelerate its targeted reduction in greenhouse gas (GHG) emission.
    •  The shareholders of Chevron forced upon the management a resolution to set strict emission targets from the products that it sells.
    • The German cabinet approved a law that requires all coal-fired plants to close down much earlier than the target date set only eighteen months ago.
    • In India, the SEBI came out with a new set of Business Responsibility and Sustainability Reporting (BRSR).
    • BRSR will be mandatory for the top 1,000 companies from the next year.

    Three factors driving the change

    1) Investors’ pull

    • Workers saving for their pension do not want their investments to go to companies whose tailings-dam can burst and cause hundreds of death in Brazil.
    • Investors also realise the long-term business risk of companies if sustainability isn’t a focus.

    2) Governments’/regulators’ push

    • In 2021, the US announced that it will cut emissions by over 50% by 2030.
    • Japan has almost doubled its 2030 targets.
    • The UK has now announced a target to cut 40-45% by the same time, from the earlier goal of a 30%-cut.
    • China has announced that its emissions will peak by 2030, and by 2060, it would have net zero emissions.
    • India is expected by the global community to announce net-zero by 2050.
    • All of these have huge implications not only for hydrocarbon companies but across multiple sectors.
    • Banking regulators are asking banks to include climate in the risk assessment of the companies they lend to.
    • Insurance and pension regulators are raising similar questions in their sector.

    3) Measurement/reporting

    • When sustainability debates picked up, many organisations like CDP, CDSB, PRI, GRI, TCFD, IMP, IIRC, SASB, etc, sprang up to fulfill the need for sustainability reporting.
    • Often, these worked at cross purposes and in competition with each other, leading to ‘greenwashing’ and other malpractices and creating confusion in the minds of investors.
    • But, the realisation that the investors need a set of comparable and verifiable reporting formats has gathered momentum in the past one year.
    • The last excuse to avoid focus on sustainable business practices will also wither away.

    Consider the question “Financial capital is just one of the multiple capitals a successful company must possess. This brings sustainability into the focus. In light of this, discuss the factors that are forcing the companies to factor in the sustainability in their business models.”

    Conclusion

    The decades-old debate on environmental damage and sustainability is now reaching a decisive phase. Companies need to factor in the sustainability aspect in their profit calculus to remain relevant in changing world.

    Source:

    https://www.financialexpress.com/opinion/the-sustainability-heat-on-companies/2268494/

  • What Centre must do to meet the economic challenges

    The article takes an overview of the fiscal and monetary challenges posed by the second covid wave and suggest ensuring the availability of liquidity.

    GDP projections need to be re-examined

    •  According to NSO’s provisional estimates for 2020-21, the annual contraction in real GDP turned out to be 7.3 per cent.
    • The erstwhile GDP growth projections for 2021-22 are being re-examined to take into account the adverse impact of the second wave of the pandemic.
    • The RBI has revised down its 2021-22 real GDP growth forecast to 9.5 per cent.
    • Some other recent estimates (ICRA) indicate the feasibility of a 9 per cent growth.
    •  It is also important to consider nominal GDP growth for 2021-22 since that would be a critical determinant of fiscal prospects. 
    • In the light of supply-side and cost-push pressures, the RBI has projected CPI inflation at 5.1 per cent.
    • The nominal GDP growth may be projected at 13.4 per cent, that is, 1 percentage point lower than Centre’s budget assumption of 14.4 per cent.

    Fiscal aggregates

    • The Controller General of Accounts’ data indicate a gross tax revenues (GTR) of Rs 20.2 lakh crore and net tax revenue of Rs 14.2 lakh crore for 2020-21. 
    • The likely growth in GTR for 2021-22 may be derived by applying a buoyancy of 0.9.
    • This gives a tax revenue growth of 12 per cent, translating that to projected gross and net tax revenues for 2021-22 would mean Rs 22.7 lakh crore and Rs 15.8 lakh crore respectively. 
    • This implies some additional net tax revenues to the Centre amounting to Rs 0.35 lakh crore as compared to the budgeted magnitudes.
    • The main expected shortfall may still be in non-tax revenues and non-debt capital receipts.
    • According to the CGA numbers, their 2020-21 levels are respectively Rs 2.1 lakh crore and Rs 0.57 lakh crore.
    • Applying a growth rate of 15 per cent on these, a shortfall in 2021-22 to the tune of Rs 1.3 lakh crore may arise in non-tax revenues and non-debt capital receipts.

    So, how much would be the Fiscal Deficit?

    • The growth rates of non-tax revenues and and non-debt capital receipts average to a little lower than 15 per cent during the five years preceding 2020-21.
    • In any case, the large budgeted growth of 304 per cent in non-debt capital receipts for 2021-22 seems quite unlikely because of the challenges posed by the second wave.
    • Taking into account RBI’s recently announced dividend of Rs 0.99 lakh crore to the Centre, the main shortfall may be in non-debt capital receipts.
    • Together, the overall shortfall in total non-debt receipts may be limited to about Rs 0.9 lakh crore, or 0.4 per cent of estimated nominal GDP.
    • This indicates that a slippage, if any, in the budgeted fiscal deficit of 6.7 per cent of GDP, as revised in view of the recently released GDP data, could be a limited one.

    Way forward: Prioritise three heads

    • First, an increase in the provision for income support measures for the vulnerable rural and urban population.
    • Second, in light of the recent decision, the budgeted expenditure on vaccination of Rs 0.35 lakh crore ought to be augmented, at the very least, doubled.
    • Third, additional capital expenditure for select sectors, particularly healthcare, should also be provided for.
    • Together these additional expenditures would amount to Rs 1.7 lakh crore, about 0.8 per cent of the estimated nominal GDP.
    • Thus, we need to plan for a fiscal deficit of about 7.9 per cent of GDP.

    Borrowing programme would need RBIs support

    • The Centre has announced borrowings of Rs 1.6 lakh crore to meet the shortfall in the GST compensation cess.
    • Given the higher fiscal deficit, it would need to add to its borrowing programme another Rs 2.6 lakh crore, taking the total borrowing, including GST compensation, to about Rs 16.3 lakh crore, from Rs 12.05 lakh crore now.
    • Borrowing by states would be in addition to this.
    • The net result will be an unprecedented borrowing programme by the Centre which may require RBI’s support.
    • RBI is injecting liquidity into the system through various channels.
    • Banks have sufficient liquidity to subscribe to new debt.
    • This is indirect monetisation of debt.
    • This is not new, but the scale is much higher.
    • Direct monetisation is best avoided.
    • The success of the borrowing programme of the Centre depends on the support provided by the RBI.
    • The support need not be direct.
    • It can be indirect as is currently happening. RBI is injecting liquidity into the system in a big way.
    • Despite this, the money multiplier is low.
    • This may be attributed to two reasons: Low credit expansion and larger leakage in the form of currency.
    • The potential for money supply growth is large.
    • The discussion in the monetary policy statement on inflation is focused entirely on supply availability and bottlenecks in the distribution of commodities.
    • The output gap is certainly relevant.
    • But equally relevant in an analysis of inflation is liquidity in the system, and its impact on output and prices with lags.
    • The injection of liquidity has its limits.

    Conclusion

    With higher expenditure, financed through borrowings, the impact of liquidity expansion on inflation needs to be monitored.