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Subject: Economics

  • What are Interest Rate Derivatives (IRDs)?

    The RBI has proposed allowing foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of â‚č5,000 crores.

    Every year, there is a question on a capital market instruments. Make note of all such separately. Also, 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? (CSP 2019)

    (a) Certificate of Deposit

    (b) Commercial Paper

    (c) Promissory Note

    (d) Participatory Note

    Interest Rate Derivatives (IRDs)

    • An IDR is a financial instrument with a value that is linked to the movements of an interest rate or rates.
    • These may include futures, options, or swaps contracts.
    • They are often used by institutional investors, banks, companies, and individuals to protect themselves against changes in market interest rates.
    • The proposed directions by RBI are aimed at encouraging higher non-resident participation, enhance the role of domestic market makers in the offshore market, improve transparency, and achieve better regulatory oversight, according to the central bank.

    Back2Basics: Foreign portfolio investment (FPI)

    • FPI involves holding financial assets from a country outside of the investor’s own.
    • FPI holdings can include stocks, ADRs, GDRs, bonds, mutual funds, and exchange-traded funds.
    • Along with foreign direct investment (FDI), FPI is one of the common ways for investors to participate in an overseas economy, especially retail investors.
    • Unlike FDI, FPI consists of passive ownership; investors have no control over ventures or direct ownership of property or a stake in a company.

    FPI vs FDI

    • With FPI—as with portfolio investment in general—an investor does not actively manage the investments or the companies that issue the investments.
    • They do not have direct control over the assets or the businesses.
    • In contrast, foreign direct investment (FDI) lets an investor purchase a direct business interest in a foreign country.

  • Urban unemployment in India

    The article discusses the issue of vulnerability of informal jobs in India and suggests the steps to address the problem.

    The urban unemployment in India crept up to 9.83% in August as against 9.15% in July, according to monthly unemployment data released Tuesday by the Center for Monitoring Indian Economy (CMIE). In other words, roughly one in every 10 person in urban areas cannot find work

  • Indian IT industry must seize the opportunity of Chinese tech exit

    The article analyses the significance of the Indian ban on Chinese apps. The ban also presents Indian IT companies with unique opportunity.

    Context

    • The current India-China border standoff has entered into cyberspace.

    How China took lead in IT

    • The Chinese government censored and banned several popular Western websites and applications years ago.
    • In the intervening years the Chinese Internet market exploded and has grown to over 900 million users.
    • The Chinese government insulated Chinese entrepreneurs from Big Tech in Silicon Valley.
    • Home-grown apps at first were faithful reproductions of Silicon Valley, but soon morphed into distinctly Chinese applications tailored solely to the home market.
    • According to the 2016 White House report, the Chinese have leapfrogged even the U.S. in AI research.
    • In this case, the intellectual property being produced actually belongs to China and is not a faithful duplicate of someone else’s product or technology.
    • This has far-reaching implications.

    Significance of India’s ban

    • India now has the lowest Internet data costs in the world.
    • In its attempt to dominate the rest of the world, the Chinese Internet industry desperately needs India’s 500-plus million netizens to continue to train AI algorithms they put together.
    • The ban on apps in India is not only a geopolitical move but also a strategic trade manoeuvre that can have a significant economic impact.
    • Ban on Chinese apps allows our home-grown IT talent to focus on the newly arrived Internet user.
    • However, India’s focus remains on exporting IT services while paying little attention to servicing our own nation’s tech market.
    • India spent the last two decades exporting technology services to developed countries in the West, the vacuum created as the Indian Internet grew has been filled by American Big Tech and by the Chinese.
    • After the removal of more than 118 Chinese apps, Indian techies have started trying to fill the holes.

    Way forward

    • The primary Indian IT objective must shift from servicing others to providing for ourselves.
    • Focus should not be simply to replace what the exiting firms have so far been providing.
    • Focus should be on providing services and products of high quality that will be used by everyday Indians across the country.
    • The aim of providing netizens with the same services across diverse markets is overarching — regional barriers created by language exist within our own nation.
    • The fundamental focus of the new digital products should be to provide for hyper-regional necessities and preferences.
    • Hyper-local and hyper-regional services with great accessibility that are also portable across our linguistic diversity, are likely to succeed in creating one of the strongest Internet markets in the world.

    Consider the question “What are factors responsible for the lack of innovation in the Indian IT industry? How the ban on Chinese apps provide the IT industry with the opportunity to fill the vacuum?”

    Conclusion

    Indian IT companies must seize the opportunity provided by the exit of Chinese IT companies and come up with products transcending regional barriers and allowing accessibility.

  • What is Foreign Contribution (Regulation) Act, and how does it control donations?

    The licences of 13 non-governmental organisations (NGOs) have been suspended under the Foreign Contribution (Regulation) Act (FCRA), 2010, this year.

    What is the FCRA?

    • The FCRA regulates foreign donations and ensures that such contributions do not adversely affect internal security.
    • First enacted in 1976, it was amended in 2010 when a slew of new measures was adopted to regulate foreign donations.
    • The FCRA is applicable to all associations, groups and NGOs which intend to receive foreign donations. It is mandatory for all such NGOs to register themselves under the FCRA.
    • The registration is initially valid for five years and it can be renewed subsequently if they comply with all norms.

    What happens once registered?

    • Registered associations can receive a foreign contribution for social, educational, religious, economic and cultural purposes.
    • Filing of annual returns, on the lines of Income Tax, is compulsory.
    • In 2015, the MHA notified new rules, which required NGOs to give an undertaking that the acceptance of foreign funds.
    • It ruled that it is not likely to prejudicially affect the sovereignty and integrity of India or impact friendly relations with any foreign state and does not disrupt communal harmony.
    • It also said all such NGOs would have to operate accounts in either nationalized or private banks which have core banking facilities to allow security agencies access on a real-time basis.

    Who cannot receive foreign donations?

    • Members of the legislature and political parties, government officials, judges and media persons are prohibited from receiving any foreign contribution.
    • However, in 2017 the MHA amended the 1976-repealed FCRA law paving the way for political parties to receive funds from the Indian subsidiary of a foreign company or a foreign company in which an Indian holds 50% or more shares.

    How else can receive foreign funding?

    • The other way to receive foreign contributions is by applying for prior permission.
    • It is granted for receipt of a specific amount from a specific donor for carrying out specific activities or projects.
    • But the association should be registered under statutes such as the Societies Registration Act, 1860, the Indian Trusts Act, 1882, or Section 25 of the Companies Act, 1956.
    • A letter of commitment from the foreign donor specifying the amount and purpose is also required.

    When is a registration suspended or cancelled?

    • The MHA on inspection of accounts and on receiving any adverse input against the functioning of an association can suspend the FCRA registration initially for 180 days.
    • Until a decision is taken, the association cannot receive any fresh donation and cannot utilise more than 25% of the amount available in the designated bank account without the permission of the MHA.
    • The MHA can cancel the registration of an organisation which will not be eligible for registration or grant of ‘prior permission’ for three years from the date of cancellation.

    Also read:

    Registration under Foreign Contribution Regulation Act (FCRA)

  • [pib] Ranking of States on Support to Startup Ecosystems, 2019

    The Results of the second edition of Ranking of States on Support to Startup Ecosystems were recently released by Minister of Commerce & Industry.

    About the Ranking

    • The Department for Promotion of Industry and Internal Trade (DPIIT) has conducted the second edition of the States Startup Ranking Exercise.
    • The key objective is to foster competitiveness and propel States and Union Territories to work proactively towards uplifting the startup ecosystem.
    • It has been implemented as a capacity development exercise to encourage mutual learning among all states and to provide support in policy formulation and implementation.

    7 focus areas

    1. Institutional Leaders
    2. Regulatory Change Champions
    3. Procurement Leaders
    4. Incubation Hubs
    5. Seeding Innovation Leaders
    6. Scaling Innovations Leaders
    7. Awareness and Outreach Champions

  • The way out on GST compensation

    The economic disruption due to pandemic has made the issue of GST compensation bone of contention between the Centre and the States. This article argues that it is the GST Council and not the Centre which is responsible to find ways to raise the revenue in such a situation.

    GST revenue loss and role of the Centre

    • Due to global pandemic, one significant area of loss of revenue to both the Centre and the states is GST.
    • The states have the comfort of assured 14 per cent growth through the compensation mechanism.
    • The Centre has no such guarantee.
    • The Compensation Act mandates compensating the states for revenue loss on GST implementation from the Compensation Fund.

    Role of GST Council

    • The course of action to be adopted in the event of the amount in the Fund falling short of requirements was discussed at length in the GST Council.
    • The late Arun Jaitley, then chairman, had, in the 8th meeting, assured that “in case Compensation Fund fell short of the compensation payable, the GST Council shall decide the mode of raising additional resources including borrowing from the market which could be repaid by collection of cess in the sixth year or further subsequent years”; the Council had agreed to this suggestion.
    • Quite clearly,  it is the Council and not the Government of India that shall decide the mode of raising additional resources in the event of a shortfall and this is reflected in Section 10(1) of the Compensation Act.

    Why it makes sense for the States to borrow

    • It is argued that borrowings by the Centre or by the states make no difference in the context of fiscal discipline.
    • The argument further adds that the Centre should borrow in view of its higher borrowing and debt-servicing capacity and its ability to borrow at lower rates.
    • Article 292 (1) mandates that the Centre can borrow on the security of the Consolidated Fund of India (CFI).
    • However, the idea of providing compensation to the states from the Consolidated Fund of India was not agreed to in the Council, it is difficult to agree with the suggestion that GoI borrows on the basis of the said CFI.
    • Large borrowings by the Centre would push up the bond yield rates, pushing up bond yield of the states setting off a spiral leading to hike in the interest rates for businesses and individuals.
    • The states’ borrowing would become costlier if the Centre were to borrow for this purpose.
    • The borrowing capacity of the states, too, is not very inferior.
    • The RBI study of state finances shows that the debt receipts of all the states as a percentage of GDP has hovered between 2.4 per cent and 3.6 per cent during the last four years.
    • The states have on the average borrowed just about 1.25 per cent of the GSDP thus far.
    • The states are consistently borrowing less than they can borrow (legally and financially).
    • The cost of state borrowings for this purpose can be considerably lowered if arranged through a special window.
    • The Centre has already breached the budgeted borrowing limits for the current year.
    • Thus it makes sense for the states to borrow.

    Borrowing options for the States

    • There are two ways in which the States can borrow.
    • 1) Borrowing the entire shortfall in the revenue.
    • 2) Borrowing only the shortfall attributable to GST implementation with the remaining shortfall to be made good from the Cess Fund post the transition period.
    • Certain conditionalities have been relaxed for option-1.
    • However, borrowing the entire shortfall, as envisaged in option-1, will hurt both the markets and the private sector, pushing up the interest rate.
    • The single window under option-1 being arranged by the Centre and the entire debt being serviced from future cess receipts will ensure that the cost remains close to the G-sec rate.
    • Moreover, there will be no variation in the interest rate as between the states.

    Conclusion

    The states should come forward and work with the Centre in the true spirit of cooperative federalism that the Council has come to be known for these past few years.

  • Registration under Foreign Contribution Regulation Act (FCRA)

    The Union Home Ministry has granted FCRA registration to the famous Gurdwara Harmandir Sahib, or the Golden Temple, in Amritsar, enabling it to receive foreign donations.

    Foreign Contribution Regulation Act

    • The Foreign Contribution (Regulation) Act, 2010 is an act to regulate the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies
    • It prohibits acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto
    • The central government has the power to prohibit any persons or organizations from accepting foreign contribution or hospitality if it is determined that such acceptance would likely “affect prejudicially”

    (i) the sovereignty and integrity of India,

    (ii) public interest,

    (iii) freedom or fairness of election to any legislature,

    (iv) friendly relations with any foreign State, or

    (v) harmony between religious, racial, social, linguistic or regional groups, castes or communities

    Premise for the FCRA

    • Government of India enacted the Foreign Contribution (Regulation) Act (FCRA) in the year 1976 with an objective of regulating the acceptance and utilization of foreign contribution.
    • Any association, non-government organisation (NGO) or registered society requires FCRA registration to receive foreign donations for specified purposes.
    • The act was majorly modified in 2010 with several amendments because many NGOs were found using illegal use of foreign funding.

  • What are SAROD-Ports?

    Union Ministry of Shipping has e-launched ‘SAROD-Ports’ (Society for Affordable Redressal of Disputes – Ports).

    Try this MCQ:

    Q.The term SAROD is sometimes seen in the news with context to governance is related to:

    (a) Disputes Redressal

    (b) Employment

    (c) Sustainable Development

    (d) None of the above

    SAROD Ports

    SAROD-Ports are established under the Societies Registration Act, 1860 with the following objectives:

    1. Affordable and timely resolution of disputes in a fair manner
    2. Enrichment of Dispute Resolution Mechanism with the panel of technical experts as arbitrators.
    • They consist of members from the Indian Ports Association (IPA) and Indian Private Ports and Terminals Association (IPTTA).
    • They will advise and assist in settlement of disputes through arbitrations in the maritime sector, including ports and shipping sector in Major Port Trusts, Non-major Ports, including private ports, jetties, terminals and harbours.
    • It will also cover disputes between granting authority and Licensee/Concessionaire /Contractor.

  • Redefining a farmer

    The article analyses the issues of multiple definitions of a farmer. The issues of ownership as a criterion for being a farmer and its impact on tenant farmers in discussed.

    Is land ownership right criterion

    • Traditionally, land ownership is a mandatory criterion for availing benefits under various agricultural schemes in India.
    • Laws governing land leasing operate at different levels across India.
    • The Model Agricultural Land Leasing Act, 2016 was introduced to formalise land leasing.
    • However, except a few States, a majority of State governments have not extended the scope of the Act to farmers.
    • According to the 2015-16 agricultural census, about 2.65 million operational holdings are either partially or wholly leased.

    How this impact tenants

    • The impact of agrarian distress is felt disproportionately by tenant farmers.
    • The tenant farmer incurs the costs and faces the risks, while the owner receives the rent, subsidies and other support.
    • The lessees do not benefit from loan waivers, moratorium and institutional credit, and are forced to be at the mercy of moneylenders.
    • The distress is reflected in the fact that tenant farmers account for a majority of farmer suicides reported in the NCRB data.

    Multiple definitions of farmers

    • There are multiple definitions for a ‘farmer’ in official data published by the Government of India.
    • The population census defines ‘cultivators’ as a person engaged in cultivation of land either ‘owned’ or held in kind or share.
    • The 59th round of the Situation Assessment Survey (SAS) of farmers also stresses on ‘possession of land’ either owned or leased or otherwise possessed for defining ‘farmers’.
    • Delinking of land as the defining criterion for a ‘farmer’ was done in the 70th round of SAS carried out by the NSSO.
    • The 70th Round of NSSO refined the definition of a farmer as one who earns a major part of the income from farming. 

    Conclusion

    Access to land as a policy instrument in bringing about equitable growth of rural economies needs no further emphasis. However, until the time ‘land to the tiller’ remains just wishful thinking, adopting a broader definition of a ‘farmer’ is a short-term solution to ensure inclusive and sustainable growth.

  • [pib] ARISE-ANIC Initiative

    Atal Innovation Mission (AIM), NITI Aayog, has launched Aatmanirbhar Bharat ARISE-Atal New India Challenges, to spur applied research and innovation in Indian MSMEs and startups.

    The name ARISE typically sounds some social sector or HRD related initiative. This is where one has to be cautious.

    ARISE ANIC Initiative

    • The program is a national initiative to promote research & innovation and increase the competitiveness of Indian startups and MSMEs.
    • Its objective is to proactively collaborate with esteemed Ministries and the associated industries to catalyse research, innovation and facilitate innovative solutions to sectoral problems.
    • It also aims to provide a steady stream of innovative products & solutions where the Central Government Ministries / Departments will become the potential first buyers.
    • It is in line with the PM’s mandate of “Make in India”, “Startup India”, and “Aatmanirbhar Bharat” to fast track the growth of the Indian MSME sector.

    Its implementation

    • The programme will be driven by ISRO, four ministries—Ministry of Defence; Ministry of Food Processing Industries; Ministry of Health and Family Welfare; and Ministry of Housing and Urban Affairs.
    • It will support deserving applied research-based innovations by providing funding support of up to Rs 50 lakh for speedy development of the proposed technology solution and/or product.