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Subject: Economics

  • Kozhikode-Wayanad Tunnel Project

    Kerala CM has launched a tunnel road project that would connect Kozhikode with Wayanad.

    Try this PYQ:

    Q.From the ecological point of view, which one of the following assumes importance in being a good link between the Eastern Ghats and the Western Ghats?

    (a) Sathyamangalam Tiger Reserve

    (b) Nallamala Forest

    (c) Nagarhole National Park

    (d) Seshachalam Biosphere Reserve

    Kozhikode-Wayanad Tunnel Project

    • The 7-km tunnel, being described as the third-longest in the country, is part of an 8-km road cutting through sensitive forests and hills of the Western Ghats.
    • Its endpoints are at Maripuzha in Thiruvambady village panchayat (Kozhikode) and Kalladi in Meppadi panchayat (Wayanad).
    • The tunnel is an outcome of a decades-long campaign for an alternative road as the Thamarassery Ghat Road is congested and gets blocked by landslides during heavy monsoon.

    How will the road impact the ecology?

    • The Forest Department has identified the proposed route as a highly sensitive patch comprising evergreen and semi-evergreen forests, marshlands and shola tracts.
    • This region is part of an elephant corridor spread between Wayanad and Nilgiri Hills in Tamil Nadu.
    • Two major rivers, Chaliyar and Kabani that flows to Karnataka, originate from these hills in Wayanad.
    • Eruvazhanjipuzha, a tributary of Chaliyar and the lifeline of settlements in Malappuram and Kozhikode, begins in the other side of the hills.
    • The region, known for torrential rain during the monsoon, has witnessed several landslides, including in 2019 at Kavalappura near Nilambur and at Puthumala, Meppadi in Wayanad.

    Environmental clearance issues

    • Proponents of the project have been stressing that the tunnel will not destroy forest (trees).
    • The MoEFCC guidelines state that the Forest Act would apply not only to surface area but the entire underground area beneath the trees.
    • For tunnel projects, conditions relating to underground mining would be applicable.
    • As the proposed tunnel is 7 km long, it will require emergency exit points and air ventilation wells among other measures, which would impact the forest further.

  • Asset Reconstruction Companies

    The article argues for the greater role to Asset Reconstruction Companies by allowing them to invest in the equity [shares] of the distressed companies.

    Context

    • In a recently released paper “Indian Banks: A time to reform” Viral Acharya and Raghuram Rajan argued for a greater role for Asset Reconstruction Companies.
    • They argue that when there are fewer bids in a bankruptcy auction, the value on loans is better realised if read an asset reconstruction company takes over the borrower and places the firm under new management.

    Current limits on the role of ARC

    • The RBI limited the role of  ARC to participation in resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) only by partnering with an equity investor, which is the resolution applicant.
    • If the application succeeds, the equity investor would acquire the shares, while the ARC trust would acquire the debt.

    Background of the ARCs

    •  Some stakeholders are asking for extending the role of ARCs by allowing direct invest in the equity of distressed companies through IBC resolution just like private equity funds.
    • The RBI doesn’t appear to favour such an extended role for ARCs.
    • This is due to the uninspiring performance of the Asset Reconstruction Companies in the past.
    • At the time of the Asian Financial Crisis,  India’s non-performing assets stood at a whopping 14.4 per cent.
    •  It was in this context that the Narasimham Committee (1998) recommended setting up an ARC specifically for purchasing NPAs from banks and financial institutions.
    • Subsequently, the SARFAESI Act, 2002 created the legal framework for establishing multiple private ARCs.
    • This policy achieved only modest success.
    • The maximum average recovery by ARCs as a percentage of total bank claims stood at 21.5 per cent in 2010.
    • Since then, it has steadily declined and reached 2.3 per cent in 2018.
    • This low recovery could be the result of collateral disposal rather than genuine business turnarounds [i.e. operating the business and turning it profitable].

    Need for extending the role of ARCs

    • In 2002, India lacked an effective bankruptcy system.
    • There was no market for corporate control of distressed firms.
    • ARCs were originally designed for this peculiar institutional ecosystem.
    • They were required to hand over the distressed business back to the original promoter once they had generated enough value to repay the debt.
    • Consequently, ARCs had little incentive to turn around distressed businesses.
    • This situation completely changed in 2016 as the IBC seeks to maximise the value of distressed businesses through a market for corporate control.
    • ARCs should be able to fully participate in this market and attempt successful turnarounds by acquiring strategic control over distressed businesses.
    • In a solvent company, shareholders have stronger incentives than creditors to maximise enterprise value.
    • This is because an increase in enterprise value automatically increases the value of its equity.
    • In contrast, creditors do not benefit from increases in enterprise value beyond their individual claims.
    • If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turnaround.

    Way forward

    • The law should enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity.
    • Effectively, an ARC should act more like a private equity fund, as Acharya and Rajan suggested.
    • This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.

    Consider the question “What are Asset Reconstruction Companies? How allowing the ARCs to invest in equity of distressed companies under IBC help successful turnaround of the distressed business?”

    Conclusion

    •  If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.

    Back2Basics: Difference between debt and equity

    • Debt market and equity market are two broad categories of investment available in the general investment milieu.
    • Equity markets trade in shares or stocks of the company listed on the stock exchanges.
    • A stock in a company indicates a unit in the ownership of the company.
    • As shareholders, you become part owners of the company.
    • The largest shareholder, with 50% or more shares, becomes the owner of the company.
    • Equity markets are riskier than debt markets.
    • Debt is a form of borrowed capital.
    • The central or state governments raise money from the market by issuing government securities or bonds.
    • In effect, the government is borrowing money from you and will pay interest to you at regular intervals.
    • The principal amount is returned on maturity.
    • In the same way, a company raises money from the market by selling debt market securities such as corporate bonds.
    • The debt market is made up of bonds issued by government authorities and companies.

  • GST Council and its Functioning

    The Goods and Services Tax (GST) Council has failed to iron out differences between some States and the Centre over the plan to get States to borrow from the market to meet the shortfall in compensation cess collections this year.

    Try this question from CSP 2018:

    Q.Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    About GST Council

    • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
    • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
    • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
    • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

    How is the GST Council structured?

    • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
    • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
    1. The Union Finance Minister will be the Chairperson
    2. As a member, the Union Minister of State will be in charge of Revenue of Finance
    3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

    Terms of reference

    • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
    • They lay down GST laws, principles that govern the following:
    1. Place of Supply
    2. Threshold limits
    3. GST rates on goods and services
    4. Special rates for raising additional resources during a natural calamity or disaster
    5. Special GST rates for certain States

  • What is Sheltering of Taxes?

    This newscard is an excerpt from an original article published in TH.

    We can expect a statement based question comparing Tax Shelters and Tax Heavens.

    What is a Tax Shelter?

    • A tax shelter is a financial vehicle that an individual can use to help them lower their tax obligation and, thus, keep more of their money.
    • It is a legal way for individuals to “stash” their money and avoid getting it taxed.
    • A tax shelter is entirely different from a tax haven because the latter exists outside the country and its legality can, at times, be questionable.
    • A tax shelter, on the other hand, is entirely legal and keeps all monies within an individual’s home country.

  • Need for streamlining the Insolvency and Bankruptcy Code

    The article analyses the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution and on Indian economy.

    Measures that will improve investment

    1)  IBC: transforming insolvency resolution

    • IBC replaced inefficient bankruptcy law regime and has transformed insolvency resolution in India.
    • The IBC has focused on time-bound resolution, rather than liquidation.
    • IBC acts as an empowering tool to support companies falling within its ambit.
    • It has successfully instilled confidence in the corporate resolution methodology.
    • It has allowed credit to flow more freely to and within India while promoting investor and investee confidence.
    • The IBC is both flexible and dynamic, which makes it impactful, given how forward thinking the concept of an omnibus legislation of its nature actually is.
    • Through the Insolvency and Bankruptcy Board of India (IBBI), it has established an unprecedented organisation that both regulates and develops insolvency policy, and assesses market realities.

    Impact of IBC

    •  According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018.
    • Further, the recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019
    • The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.

    2) Decriminalisation of minor offences

    • Criminal penalties including imprisonment for minor offences act as major deterrents for investors.
    • The Government of India is also working toward decriminalisation of minor offences.
    • This will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent.

    3) Other legislative measures

    • Together with the IBC, following 3 reforms suggests major and multi-dimensional effort by the government.
    • 1) The rolling out of the commercial courts.
    • 2) Commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts.
    • 3) Removal of over 1,500 obsolete and archaic laws.

    Way forward

    • There could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process.
    • This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.

    Consider the question “Examine the impact of Insolvency and Bankruptcy Code (IBC) on the insolvency resolution procedure and suggest the further improvements in the IBC.”

    Conclusion

    The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence, and helped encourage entrepreneurship while also providing support to MSMEs. Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment destination.

    B2BASICS

  • ATAL: World’s Longest Highway Tunnel

    PM Modi has inaugurated the Atal Tunnel at Rohtang at an altitude of above 3,000 metres in Himachal Pradesh.

    Refer this link to read more about Himalayan passes and rivers

    https://www.civilsdaily.com/the-northern-and-northeastern-mountains-part-1/

    Atal Tunnel

    • The 9.02 km-long-tunnel, built by the Border Roads Organisation (BRO), is the world’s longest highway tunnel and connects Manali to Lahaul-Spiti valley.
    • It provides all-weather connectivity to the landlocked valley of Lahaul-Spiti, which remains cut-off for nearly six months in a year as the Rohtang Pass is usually snow-bound between November and April.
    • Before the tunnel construction, the Lahaul Valley used to remain closed for vehicular movement due to bad weather conditions.
    • It reduces the distance by 46 km between Manali and Leh and the travel time by about 4 to 5 hours. It is expected to boost tourism and winter sports in the region.
    • The tunnel, also significant from the military logistics viewpoint, will provide better connectivity to the armed forces in reaching Ladakh.

  • Finishing the unfinished task of reform in land and labour markets

    The article discusses the issues faced by the various sectors of the economy and how the reform measures introduced by the government could help these sectors.

    Exploitation of farmers and consumers

    • The Indian farmer has bee treated as captive sources of producing cheap food grain while living at subsistence levels.
    • There was no freedom to choose the point of sale for his produce, he could not decide the price of his product and had no say in selecting the buyer.
    • The end consumer was equally short-changed with frequent cycles of persistent high inflation.
    • The only beneficiaries of this perverse system were middlemen who thrived under political protection.

    How reforms will help farmers

    • The stifling nature of the Essential Commodities Act and the APMC Act have both been removed.
    • Contract farming is now nationally enabled, allowing private investment to come in.
    • Private investment will bring in technology, modern equipment, better seeds, know-how for in-between-season crops, improved yields, better logistics and freer access to national and international markets.
    • The Indian farm sector will now finally begin to see the benefits of economies of scale.

    Need for the reforms in various sectors

    • There were 44 different labour laws with more than 1,200 sections and clauses that demanded compliance if one even thought of becoming an entrepreneur.
    • Different inspectors and departments administered these laws and this stunted many entrepreneurs.
    • The Companies Act of 2013 completely paralysed risk-taking and quick decision-making among the private wealth creators.
    • There were a large number of organisations that called themselves “banks” but were completely outside the ambit of RBI regulation.
    •  The politicians who controlled these banks were the primary obstacles in introducing any reforms in these sectors.
    • Indian mainstream banks, contrary to international norms, had a peculiar practice of “grossing” their bilateral liabilities rather than “netting”.
    • As per estimates, this locked anywhere between Rs 50,000 to Rs 70,000 crore funds.

    Reforms made by the government

    • In place of the 44 central labour laws,  the Parliament has now put in place four labour codes that are much simpler — the Code on Wages, the Industrial Relations Code, the Social Security Code and the Occupational Safety, Health and Working Conditions Code.
    • The bilateral banking netting law has been passed and a large corpus of unproductive capital has been freed to be deployed in the market.
    • Cooperative banks will now be regulated by the RBI and its customers will have the same protections as those of other regular banks.
    • The problematic sections of the Companies Act 2013 have been done away with and the fear of criminal prosecution gone.

    Conclusion

    The reforms in various sectors of the economy are bound to help the faster recovery of the economy as well as help the farmers realising their full potential.

  • Code on Wages 2019

    The article discusses the issues in the Code on Wages (yet to be notified) 2019 and how it fails to achieve what it seeks to achieve.

    Code on Wages 2019

    • The Code on Wages, 2019 seeks to consolidate and simplify four pieces of legislation into a single code. These 4 legislations are-
    • 1) Payment of Wages Act, 1936.
    • 2) Minimum Wages Act, 1948.
    • 3) Payment of Bonus Act, 1965.
    • 4) Equal Remuneration Act, 1976.
    • Its object and reasons stated that even the Second National Commission on Labour- 2002 suggested consolidating all labour laws into four codes.

    Issues with the consolidation

    • While the previous four pieces of legislation had a total of 119 sections, the new Code has 69 sections.
    • Any consolidation will impact the length of the sections.
    • Further, all requirements for enforcing the Act, have been relegated to the Rules.
    • As a result, the delegated pieces of legislation (Rules) will be bigger than the Code; this is no way to condense prior pieces of legislation.
    • All the four repealed pieces of legislation were enacted historically at different points in time and to deal with different situations.
    • The combining of asymmetrical laws into a single code is not an easy task and will only create its own set of new problems.
    • The central government will have the power to fix a “floor wage”.
    • Once it is fixed, State governments cannot fix any minimum wage less than the “floor wage”.
    •  The concept should be for a binding minimum wage and not have dual wage rates — a binding floor wage and a non-binding minimum wage.
    • Neither the Code nor the Rules (presently, draft Rules) prescribe the qualifications and experience required for appointment of competent authority.
    • Anew provision (Section 52) has been introduced where an officer will be notified with power to impose a penalty in the place of a judicial magistrate.
    • An essential judicial function is now sought to be vested with the executive in contravention of Article 50 of the Constitution.

    Issue of MGNREGA wages

    • There were cases as to whether the Minimum Wages Act would have an over-riding effect over the provisions of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005.
    • Several High Courts have placed the Minimum Wages Act to override MGNREGA.
    • That has been set to rest by excluding MGNREGA from the purview of the Code on Wages.
    • That has been set to rest by excluding MGNREGA from the purview of the Code on Wages.

    Conclusion

    The Code on Wages (yet to be notified) has neither succeeded in consolidation of laws nor will it achieve the expansion of the coverage of workers in all industries in the unorganised sector.

  • Lessons to learn from Vodafone ruling

    Context

    •  An Investor-State Dispute Settlement (ISDS) tribunal has ruled that India’s imposition of tax liability amounting to â‚č22,000 crore on Vodafone is in breach of India-Netherlands bilateral investment treaty obligations.

    Background of the case

    • This case arose after the Indian Parliament in 2012 amended the Income Tax Act.
    • As per the amendment, income deemed to be accruing to non-residents, directly or indirectly, through the transfer of a capital asset situated in India is taxable retrospectively with effect from April 1, 1962.
    • This amendment was carried out to override the Supreme Court ruling in favour of Vodafone.
    • This amendment dented India’s reputation as a country governed by the rule of law, and shook the faith of foreign investors.

    Key lessons from Vodafone case

    • 1) All the three organs of the Indian state — Parliament, executive, and the judiciary — need to internalise India’s BIT and other international law obligations.
    • These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
    • 2) India should learn that being a country that values the rule of law is an important quality to win over the confidence of foreign investors and international goodwill.
    • 3) It is likely that the government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.
    •  It would mean that India does not honour its international law obligation.
    • 4) This ruling might have an impact on the two other ISDS claims that India is involved in with Cairn Energy and Vedanta on the imposition of taxes retrospectively.
    • 5) It is quite possible that India might use this award to further harden its antagonistic stand against ISDS and BITs.
    • India unilaterally terminated almost all its BITs after foreign investors started suing India for breaching BITs.
    • But the fact is that this case and several others are a result of bad state regulation.
    • 6) This decision shows the significance of the ISDS regime to hold states accountable under international law when in case of undue expansion of state power.
    • The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.

    Consider the question “What were the issues involved in the Vodafone tax case? What are the implication of Investor-State Dispute Settlement ruling for India?”

    Conclusion

    If government is serious about wooing foreign investment, India should immediately comply with the decision.

  • What are the ESG funds?

    ESG funds are witnessing a growing interest in the Indian mutual fund industry these days.

    Try this PYQ:

    Sustainable development is described as the development that meets the needs of the present without compromising the ability of future generations to meet their own needs. In this perspective, inherently the concept of sustainable development is intertwined with which of the following concepts?

    (a) Social justice and empowerment

    (b) Inclusive Growth

    (c) Globalization

    (d) Carrying capacity

    What are the ESG funds?

    • ESG means using Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
    • ESG investing is used synonymously with sustainable investing or socially responsible investing.
    • While selecting a stock for investment, the ESG fund shortlists companies that score high on the environment, social responsibility and corporate governance, and then looks into financial factors.
    • So, the scheme focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.
    • They imbibe the environment, social responsibility and corporate governance in their investing process.

    Why so much focus on ESG now?

    • Modern investors are re-evaluating traditional approaches and look at the impact their investment has on the planet.
    • As a result of this paradigm change, asset managers have started incorporating ESG factors into investment practices.
    • Companies with good ESG scores tick most of the checkboxes for investing, tend to mitigate environmental and social risks and tends to have stronger cash flows, lower borrowing costs and durable returns.