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Subject: Economics

  • Mistake in allowing industrial houses to own banks

    The article analyses the risks involved in allowing the corporate houses to own and operate the banks.

    Context

    • An internal working group of the RBI has recently made a recommendation to permit industrial houses to own and control banks.

    Encourage bank but not owned by banks

    • According to the report, the main benefit is that industry-owned banks would increase the supply of credit, which is low and growing slowly.
    • Credit constraints are indeed a real problem, and creating more banks is certainly one way of addressing the issue.
    • But this is an argument for encouraging more banks but it is not an argument for creating banks specifically owned by industry.
    • The other powerful way to promote more good quality credit is to undertake serious reforms of the public sector banks.

    Problems in allowing industrial houses in banking

    • The problem with banks owned by corporate houses is that they tend to engage in connected lending.
    • This can lead to three main adverse outcomes:

    1) Over-financing of risky activities

    • Lending to firms that are part of the corporate group allows them to undertake risky activities that are not easily financeable through regular channels.
    • Precisely because these activities are risky, they often do not work out.
    • And when that happens, it is typically taxpayers who end up footing the bill.
    • In principle, connected lending can be contained by the regulatory authority.
    • However, experiences in other nations show that regulating connected lending is impossible convincing most advanced countries that regulating connected lending is impossible.
    • Indonesia tried to regulate the practice: It banned the practice.
    • The only solution is to ban corporate-owned banks.
    • Regulation and supervision need to be strengthened considerably to deal with the current problems in the banking system before they are burdened with new regulatory tasks.

    2) Lack of exit

    • The economic landscape is littered with failed firms, kept alive on life support, making it impossible for more efficient firms to grow and replace them.
    • While some progress was initially made under the Insolvency and Bankruptcy Code (IBC), this had stalled even before the pandemic, largely because existing promoters and owners mounted a stiff resistance.
    • If industrial houses get direct access to financial resources, their capacity to delay or prevent exit altogether will only increase.

    3) Increasing dominance

    • The Indian economy already suffers from over-concentration.
    • We not only have concentration within industries, but in some cases the dominance of a few industrial houses spans multiple sectors.
    • If large industrial houses get banking licences, they will become even more powerful, not just relative to other firms in one industry, but firms in another industry.

    Impact on regulator and government

    • The power acquired by getting banking licences will not just make them stronger than commercial rivals, but even relative to the regulators and government itself.
    • This will aggravate imbalances, leading to a vicious cycle of dominance breeding more dominance.

    Impact on quality of credit

    • Indian financial sector reforms have aimed at improving not just the quantity, but also the quality of credit.
    • The goal has been to ensure that credit flows to the most economically efficient users, since this is the key to securing rapid growth.
    • If India now starts granting banking licences to powerful, politically connected industrial houses we will effectively be abandoning that long-held objective.

    Impact on economy and democracy

    • Indian capitalism has suffered because of the murky two-way relationship between the state and industrial capital.
    • If the line between industrial and financial capital is erased, this stigma will only become worse.
    • Corporate houses that are already big will be enabled to become even bigger allowing them to dominate the economic and political landscape.
    • A rules-based, well-regulated market economy, as well as democracy itself — will be undermined, perhaps critically.

    Consider the question “What are the challenges and opportunities in allowing the industrial houses to own and operate the banks.”

    Conclusion

    The conclusion is clear. Mixing industry and finance will set us on a road full of dangers — for growth, public finances, and the future of the country itself.

  • [pib] SDG Investor Map for India

    Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

    UNDP and Invest India have launched the SDG Investor Map for India, laying out 18 Investment Opportunities Areas (IOAs) in six critical SDG (Sustainable Development Goals) enabling sectors.

    Try this PYQ:

    Q.The Partnership for Action on Green Economy (PAGE), a UN mechanism to assist countries transition towards greener and more inclusive economies, emerged at:

    (a) The Earth Summit on Sustainable Development 2002, Johannesburg

    (b) The United Nations Conference on Sustainable Development 2012, Rio de Janeiro

    (c) The United Nations Framework Convention on Climate Change 2015, Paris

    (d) The World Sustainable Development Summit 2016, New Delhi

    SDG Investor Map for India

    • SDG Finance Facility platform at UNDP in partnership with Invest India, the investment promotion arm of the Government of India has developed this Map.
    • The map will help public and private sector stake-holders direct capital towards IOAs, and White Spaces (Areas of Potential) that can contribute to the sustainable development needs of the country.
    • The map has identified 18 IOAs and 8 White Spaces across 6 Priority Sectors including Education, Healthcare, Agriculture and Allied Services, Financial Services, Renewable Energy and Alternatives, and Sustainable Environment.

    Utility of this map

    • Investing in the SDGs at this point is crucial to ‘Building Back Better’ and making the economy and our societies more resilient and sustainable.
    • With the COVID-19 pandemic, the financing gap for the SDGs in India has only widened further and decades of development progress is nearly on the verge of reversal.
    • Enhanced productivity, technology adoption and increased inclusion are all critical factors that this map uses to identify the most attractive sectors for investors.

    Back2Basics: What are SDGs?

    • The SDGs or Global Goals are a collection of 17 interlinked goals designed to be a “blueprint to achieve a better and more sustainable future for all”.
    • They were set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.
    • They are included in a UN Resolution called the 2030 Agenda or what is known as Agenda 2030.
    • Countries are expected to take ownership and establish a national framework for achieving these Goals.
    • Implementation and success will rely on countries’ own sustainable development policies, plans and programmes.

  • Steps needed to achieve Comparative advantage in Manufacturing

    The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

    Issue of policy binary

    • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
    • Import duties are being raised.
    • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
    • At the same time, there is considerable unease at the rolling back of trade liberalisation.
    • This binary is not very useful.

    Steps needed to gain competitive advantage

    1) Infrastructure

    • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
    • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
    • Competitive logistics are essential.
    • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
    • High-speed broadband real-time connectivity to the US market was provided through public investment.
    • This was done well before general telecom modernisation began.

    2) Closing the financing gap

    • Long-term financing for world-class infrastructure is still a gap.
    • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
    • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

    3)  Prevent real exchange rate appreciation

    • Before considering specific increases in import duties, real exchange appreciation should be undone.
    • This would have the effect of raising tariffs across the board.
    • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

    4) Change the regime for SEZ

    • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
    • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
    • This would create a level-playing field for production vis-à-vis competitive locations overseas.
    • Large zones would have to be developed by the state.
    • The private sector can be partners in the process, but achievement of scale is only possible by the state.
    • Production for the domestic as well as the global market would become easier.

    5) Encourage domestic value addition

    • Domestic value-addition can be incentivised by-
    • 1) Reducing duties to zero for all primary raw materials and inputs.
    • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
    • In short, have just the opposite of the inverted duty structure we have had for computers.
    • This would change investment and production decisions if other costs of production in India have been made competitive.

    6) Commitment of procurement of full production

    • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
    • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
    • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
    • If the bid size is large enough, the best global firms would come and invest.
    • If the bids are repeated, prices would come down and a competitive industry structure would be created.

    7) Encourage public investment

    • Public investment in firms should not be ruled out altogether.
    • In some cases, it may be the best way to create competitive capacity.
    • Maruti Suzuki is a good example in India.
    • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
    • This is a policy instrument that can be used to create competitive advantage.

    8) Creation of fund

    • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

    Conclusion

    The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.

    Source:-

    https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/

  • Solar Power Tariffs in India

    India’s solar power tariffs have hit a new record low of ₹2 per unit.

    Can you relate this?

    We have such a lower cost of solar energy. Then why do we rely on coal powered thermal power plants?

    Solar energy scenario in India

    • India has an ambitious target to increase its solar power base – by 2022, it wants to quadruple its current solar capacity to 100GW.
    • A number of industrial-scale solar energy plants have come up in the past few years.
    • The government-backed company Solar Energy Corp. of India (SECI) has been auctioning solar energy capacity to various private developers using a bidding process that favours the cheapest tariffs.

    Low tariff may seem lucrative

    • The record low solar tariffs are mainly due to the “reverse bidding” process, which selects the cheapest bidder.
    • India is now said to be considering a ceiling on solar tariffs – a cap of ₹2.5 ($o.035) and ₹2.68 ($0.038) per unit – for solar power companies that use both domestic and imported equipment.
    • India imports over 90 per cent of solar equipment including cells and modules from overseas, mainly from China and Malaysia.
    • The govt. now is in proves to impose a 25 per cent safeguard duty on solar equipment imports to protect domestic manufacturers, which could further put pressure on the razor margins of solar developers.

    Impacts of such low tariff

    • With the steep drop in prices, there are also concerns about the quality of the equipment being deployed, raising questions about future regulation and related costs.
    • The infrastructure of many solar plants in India didn’t meet many environmental stress factors and technical standards, according to a study.
    • India also has a target of increasing its rooftop solar capacity to 40,000 megawatts (MW) by 2022 similar to trends in many European countries.
    • But, here too, prohibitive costs of solar equipment have kept many residential property owners from switching to rooftop solar despite a government subsidy.

    Back2Basics: SECI

    • It is a company of the Ministry of New and Renewable Energy, Government of India, established to facilitate the implementation of the National Solar Mission (NSM).
    • It is the only Central Public Sector Undertaking dedicated to the solar energy sector.
    • The company’s mandate has been broadened to cover the entire renewable energy domain and the company will be renamed to Renewable Energy Corporation of India (RECI).
    • It is responsible for the implementation of a number of govt. schemes, major ones being the solar park scheme and grid-connected solar rooftop scheme etc.
    • It has a power-trading licence and is active in this domain through the trading of solar power from projects set up under the schemes being implemented by it.

    Reverse bidding Process

    In a reverse auction, the buyer puts up a request for a required good or service. Sellers then place bids for the amount they are willing to be paid for the good or service, and at the end of the auction the seller with the lowest amount wins.

  • NPCI caps UPI transactions on third-party apps at 30%

    The article deals with the recent NPCI decision to cap the number of transactions by third party application providers (TPAPs).

    Context

    • The National Payments Corp of India (NPCI), in its recent guidelines imposed a 30% volume-based cap on the share of transactions by TPAPs and payment service providers (PSPs), effective from January 2021.

     5 issues with the volume-based cap

    1) It undermines cashless economy

    • The growth and recognition of UPI would not have been possible had a cap been in place.
    • Typically, customers limit themselves to one or two TPAPs of their choice.
    • A transaction cap that forces users to use multiple apps may result in more transaction failures and dilute UPI’s popularity and impact.
    • Lack of accessibility and user-friendliness would push users away from UPI towards other payment methods, or even cash.

    2) It’s an anti-consumer decision

    • Open markets and user choice have been crucial factors in the exponential increase seen in UPI adoption and its transactions.
    • A volume-based cap would compel TPAPs to either limit the number of transactions on their platforms or stop enrolling new users, which in turn would restrict the customer’s use of UPI.
    • TPAPs will likely be forced to redact customer incentives like cashbacks, coupons and the like.
    • This could go against consumer interests by reducing choice.

    3) It will also make the Indian market less attractive for investors:

    • The cap would raise compliance and regulatory costs for players in the sector, which could deter new investors from entering.
    • It would also adversely affect the growth potential of existing UPI players.

    4) No regulatory impact assessment

    • The idea of a volume-based cap does not appear to have undergone an assessment of its impact on the sector.
    • As a general principle, before any such rule is imposed, an RIA (Regulatory Impact Assessment) needs to be undertaken.
    • Systemic risks are not restricted to UPI and are common in all financial systems; yet, a similar cap has not been suggested for, say, retail bank transactions.

    5) Impact on Atmanirbhar Bharat

    •  In order for Indian businesses to grow and compete at the global level, we need to integrate business processes with the global economy.
    • Indian start-ups, in particular, need tools and infrastructure that lets them gain an international edge.
    • Atmanirbhar Bharat envisions a self-reliant India that thrives on innovation, technology and entrepreneurship.
    • But this vision cannot be fulfilled if our policies restrain the growth of a cashless economy.

    Conclusion

    India’s UPI ecosystem is nascent, but has demonstrated significant growth and has had a positive impact on the economy by providing the backbone needed to move towards cashless commerce. Any policy decision by regulators at this point should aim at catalysing innovation in this space. Stifling it would serve India badly.

  • Allowing corporate houses in banking

    The article argues against the suggestion of allowing the corporate houses in the banking sector in India.

    Context

    • An Internal Working Group of the Reserve Bank of India (RBI) has recommended that corporate houses be given bank licences.

    Background of the idea

    • In February 2013, the RBI had issued guidelines that permitted corporate and industrial houses to apply for a banking licence.
    • No corporate was ultimately given a bank licence.
    • None of the applicants had met ‘fit and proper’ criteria.
    • In 2014, the RBI restored the long-standing prohibition on the entry of corporate houses into banking.
    • The RBI’s position on the subject has remained unchanged since 2014.

    Advantages

    • Corporate houses will bring capital and expertise to banking.
    • Moreover, not many jurisdictions worldwide bar corporate houses from banking.

    Risks involved

    • As the report notes, the main concerns are interconnected lending, concentration of economic power and exposure of the safety net provided to banks
    • Corporate houses can easily turn banks into a source of funds for their own businesses.
    • In addition, they can ensure that funds are directed to their cronies.
    • They can use banks to provide finance to customers and suppliers of their businesses.
    • Adding a bank to a corporate house thus means an increase in concentration of economic power.
    • Not least, banks owned by corporate houses will be exposed to the risks of the non-bank entities of the group.
    • If the non-bank entities get into trouble, sentiment about the bank owned by the corporate house is bound to be impacted.

    Suggestion by IWG and issues with them

    • The Internal Working Group (IWG) believes that before corporate houses are allowed to enter banking, the RBI must be equipped with a legal framework to deal with interconnected lending and a mechanism to effectively supervise conglomerates that venture into banking.
    • But there are following 4 issues with such suggestion-
    • 1) Tracing interconnected lending will be a challenge.
    • 2)The RBI can only react to interconnected lending ex-post, that is, after substantial exposure to the entities of the corporate house has happened.
    • It is unlikely to be able to prevent such exposure.
    • 3) Any action that the RBI may take in response could cause a flight of deposits from the bank concerned and precipitate its failure.
    • 4) Pitting the regulator against powerful corporate houses could end up damaging the regulator.

    Issues in allowing NBFC owning corporate house in banking

    • Under the present policy, NBFCs with a successful track record of 10 years are allowed to convert themselves into banks.
    • The Internal Working Group believes that NBFCs owned by corporate houses should be eligible for such conversion.
    • This promises to be an easier route for the entry of corporate houses into banking.
    • The Internal Working Group argues that corporate-owned NBFCs have been regulated for a while.
    • However, there is a world of difference between a corporate house owning an NBFC and one owning a bank.
    • Bank ownership provides access to a public safety net whereas NBFC ownership does not.
    • The reach and clout that bank ownership provides are vastly superior to that of an NBFC.
    • The objections that apply to a corporate house with no presence in bank-like activities are equally applicable to corporate houses that own NBFCs.

    Consider the question “What are the concerns and challenges in allowing the corporate houses in the banking sector in India?” 

    Conclusion

    India’s banking sector needs reform but corporate houses owning banks hardly qualifies as one. If the record of over-leveraging in the corporate world in recent years is anything to go by, the entry of corporate houses into banking is the road to perdition.

  • What are Negative-Yield Bonds?

    China recently sold negative-yield debt for the first time, and this saw high demand from investors across Europe.

    Try this PYQ:

    Q.Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    What are Negative-Yield Bonds?

    • These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond.
    • These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.

    Why do investors buy them?

    • Negative-yield bonds attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion.
    • At a time when the world is battling the Covid-19 pandemic and interest rates in developed markets across Europe are much lower.
    • Hence, investors are looking for relatively better-yielding debt instruments to safeguard their interests.

    Why is there a huge demand?

    • While Europe, the US and other parts of the world are facing a second wave of Covid-19 cases, China has demonstrated that it has controlled the spread of the pandemic and is therefore seen as a more stable region.
    • Many feel that European investors are also looking to increase their exposure in China, and hence there is a huge demand for these bonds.
    • The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly.
    • As against minus —0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between –0.5% and —0.75%.

  • Sustaining India’s Growth Momentum

    The article highlights the factors that explain that India’s economic recovery is broad-based and sustainable in nature.

    Revising India’s GDP forecast

    • With major banks, investor advisory groups, and credit rating agencies revising their GDP forecasts for the next financial year while lowering estimates of economic contraction for this fiscal, surely the bounce back is well on track.
    • Some of the earlier assessments were too pessimistic and assumed a gradual pace of economic normalisation.
    • Thus, a reassessment was given but nevertheless welcome.

    Many continue to challenge conventional belief regarding India’s economic recovery being broad-based and sustainable in nature. It is important that we look at underlying data and relate it with steps undertaken by the government with the sole objective of reviving India’s economy.

    1) Employment figures

    •  Economic activity will see a faster revival than employment figures as labour markets tend to lag.
    • This is because most firms face costs associated with hiring and firing and they prefer to adjust the working hours before adjusting employment numbers.
    • Trends labour market does indicate prospects of a cyclical recovery which will lead to jobs being added at a faster pace than what was originally estimated.
    • Critically, the new scheme subsiding part of the EPFO contribution for the unskilled workers will benefit enormously which will then have spill-over effects.

    2) Normalisation driven by rural economy

    • The bulk of the normalisation of economic activity was driven by the rural economy which eventually benefited the rest of the economy.
    • Rural growth has gained momentum and definitely augurs well for the Indian economy as it gets one of the engines firing.
    • The strong push by the government towards financing construction of assets has a significant impact.

    3) Avoiding excessive and inefficient use of public funds

    • The design of the aid by the government is similar in terms of its size to programmes announced by other emerging markets.
    • However, the choice of instruments is along the lines those deployed by developed countries.
    • The government has refrained from excessive and inefficient use of public funds by restricting expenditures to temporary fiscal commitments.
    • This is important as our 2008 response had a lot of permanent fiscal expenditures which led to a systematic deterioration of our macroeconomic fundamentals.
    • The government has taken undertaken a sizable fiscal expansion combining automatic stabilizers, cash transfers, bank guarantees, expansion of expenditure under various programs such as MGNREGA, Food Security Act and Urban Affordable Housing Measures.
    • The fiscal component under each of these policies can be easily reversed making it possible for India to revert to its fiscal consolidation path a lot sooner.

    4) Structural reforms as a part of its economic response package

    • These reforms are geared at unshackling the productivity potential in areas such as APMCs,  labour markets, other reforms that allow for greater private role within the economy in critical areas such as coal, space technology etc.
    • These moves and their productivity gains will help India improve its potential growth rate.
    • This means that India should be better equipped at sustaining a high-growth rate of above 7 per cent due to the productivity gains that will be an outcome of the proposed reforms.
    • This will further help a faster reduction in fiscal deficit as a percentage of GDP and our public debt to GDP figures.

    Conclusion

    Strong macroeconomic fundamentals are necessary for sustained economic growth and the government has focused on a response package which prioritises sustainability of growth rather than having a fast yet unsustainable economic recovery from the crisis.

  • Analysing India’s economic growth

    The article analyses India’s economic trajectory after independence and divides it into five phases. India’s progress is also compared with Pakistan’s as both countries have had much in common.

    What drives economic growth

    • Examining the experiences of different countries to analysing the growth may seem a promising approach.
    • However, generalising from specific experiences can be misleading since ground conditions vary hugely across countries.
    • There are two ways to avoid the pitfalls of generalising from specific cases.
    • 1) The first is to examine the same country over time to look for changes in outcomes at specific points in time.
    • 2) A second approach is to compare countries with shared history, culture and geography.
    • If there are stark differences in outcomes between them, then there may be some policy lessons to be drawn.

    The Indian subcontinent provides lessons from both approaches. The 73 years of post-Independence India has generated a lot of evidence across different political-economic regimes. This period has also provided us with the contrasting experiences of India and Pakistan, two countries that share history, geography and socio-cultural mores.

    5 phases of India’s economic progress in 73 years: first approach

    • 1) The first phase was the period 1950-65. This was the Nehruvian period of state-led industrialisation.
    • Starting in 1950 annual per person GDP growth averaged 2 per cent during this period.
    • This translated to aggregate annual GDP growth of around 4 per cent since the population was growing at close to 2 per cent.
    • 2) The second phase of post-Independence India was during 1965-84.
    • This period was an unmitigated economic disaster with negative per capita growth.
    • The phase was marked with increasing state control of the economy, nationalisation of industry, closing of the economy to trade and a systematic weakening of institutions.
    • 3) The third phase is 1984-91 when the government ushered in the first round of economic reforms by liberalising capital goods imports as well as starting industrial de-licensing.
    • These reforms were rewarded by a growth take-off. India’s annual per capita GDP growth averaged 3.1 per cent while aggregate GDP grew at 5.2 per cent during 1984-91.
    • 4) The period 1991-2004 is typically classified as the liberalisation phase.
    • The reform effort was reflected in the 4.9 per cent annual per capita GDP growth during 1991-2004.
    • 5) India embarked on a distinctive phase of faster growth post-2004 on the back of large investments in infrastructure.
    • Per person GDP growth in the period 2004-2015 averaged 7.7 per cent.
    • The corresponding aggregate GDP growth averaged 9 per cent.
    • This came at a cost, as a number of these infrastructure projects later caused problems in the banking sector on account of burgeoning NPAs, a problem that continues till today.

    Comparison with Pakistan

    • In 1950, Pakistan’s per person GDP was almost 50 per cent greater than India that year.
    • Due to political uncertainty, Pakistan stagnated throughout the 1950s while a politically stable India grew.
    • As a result, by 1960, India had almost caught up with Pakistan in per capita GDP terms.
    • Unfortunately, from 1964, India went into two decades of economic stagnation while Pakistan opened up to foreign capital.
    • By 1984, Pakistan’s per capita income was more than double that of India’s.
    • Pakistan’s slowdown began in the 1980s.
    • This period coincided with the reforms in India.
    • Nevertheless, it wasn’t till as recently as 2010 that India’s per capita GDP finally overtook Pakistan.

    4 takeaways

    •  First, openness to trade and private enterprise usually has positive effects on growth.
    • Second, rapacious and exploitative democratic systems do not necessarily promote growth. Pakistan in the 1950s, 1990 and post-2010 is a good example.
    • Third, the socio-economic environment surrounding religious fundamentalism may be inimical to growth.
    • Fourth, degradation of institutions that regulate, arbitrate and enforce laws can be costly.

    Conclusion

    India’s growth when analysed from both the perspective offers valuable lessons for India and these lessons must guide India’s future economic trajectory.

  • India’s no to RCEP could still be a no

    The article examines the significance of the RCEP and India’s concerns over its provision. 

    Significance of RCEP

    • Last week, 15 East Asian countries signed the Regional Comprehensive Economic Partnership (RCEP), the largest free trade agreement (FTA) ever.
    • In 2019, RCEP members accounted for about 30% of world output.
    • More importantly, about 44% of their total trade was intra-RCEP, which is a major incentive for the members of this agreement.
    • The deal could contribute to the strengthening of the regional value chains.

    Comparing RCEP with Trans-Pacific Partnership (TPP)

    • The TPP included several regulatory issues including labour and environmental standards and “anti-corruption”.
    • All of these issues could raise regulatory barriers and severely impede trade flows.
    • In contrast, RCEP includes traditional market access issues, following the template provided by the World Trade Organization (WTO).
    • RCEP also includes issues like electronic commerce, investment facilitation that are currently being discussed by WTO members to “reform the multilateral trading system”.

    Would RCEP be able to realise trade and investment liberalisation?

    • In case of trade in goods, RCEP members have taken big strides towards lowering their tariffs.
    • However, commitments made by RCEP members for services trade liberalisation do look shallow in terms of the coverage of the sectors.
    • Movement of natural persons, an area in which India had had considerable interest, is considerably restricted.
    • The areas of investment and electronic commerce, in both of which India had expressed its reservations on the template adopted during RCEP negotiations, the outcomes are varied.
    • The text on investment rules shows that it is a work-in-progress.
    • The rules on dispute settlement procedures are yet to be written in.

    Will India’s concerns get addressed in near future?

    • The answer seems to be unambiguously in the negative on two counts.
    • 1) Two of the concerns India had raised, namely,  the deep cuts in tariffs on imports from China, and provisions relating to the investment chapter, have become even more significant over the past several months.
    • 2) India’s Atmanirbhar Bharat Abhiyan is primarily focused on strengthening domestic value chains, while RCEP, like any other FTA is solely focused on promoting regional value chains.

    Consider the question “What were India’s concerns about RCEP that resulted in India not signing it? ” 

    Conclusion

    This suggests that the prospects of India joining the RCEP in the near future appears bleak.