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Subject: Economics

  • E-commerce rules 2020

    The article analyses the various restrictions under The Consumer Protection (E-Commerce) Rules, 2020 to regulate all commercial transactions and issues with such restrictions.

    Context

    • The recent rules relating to e-commerce, issued by the ministry of consumer affairs, food and public distribution, under the Consumer Protection Act, 2019 needs some changes.

    What the recent rules specify

    • The Consumer Protection (E-Commerce) Rules, 2020, notified on July 23, regulate all commercial transactions sold over a digital or electronic network.
    • The e-com rules currently recognise two e-commerce business models, namely, marketplace model and inventory-based model.
    • The rules have separate specified provisions for marketplace- and inventory-based entities.
    • The e-com rules require that all information on the return, refund, exchange, warranty and guarantee, delivery and shipment of the goods or services being sold, including their country of origin, be provided on the platform.
    • Such details enable consumers to make an informed decision.

    What the new rules seek to achieve

    • The country of origin requirement is significant as India and several other countries are currently re-negotiating their free trade agreements.
    • E-com rules prohibit unfair trade practices by entities and sellers on marketplaces and manipulation of price.
    • The entities are prohibited from manipulating the price of the goods or services to gain unreasonable profit by imposing unjustified price or charges on consumers.

    Issues with the rules

    • It remains unclear as to what would constitute price manipulation.
    • It also remain unclear how the e-commerce entities and sellers are expected to navigate these roadblocks without falling foul of such provisions.
    • Both the marketplace entity and sellers are now required to set up a grievance redressal mechanism, small businesses may not be in a position to comply.
    • The rules also prohibit an e-commerce entity from levying a charge for cancellation post confirmation.
    • While the provisions may be intended as safeguards that ensure a level-playing field, some of these conditions are impractical.
    • Applying identical rules does not convey a business-friendly approach.

    Investment restrictions

    • The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 currently recognise the marketplace and inventory model.
    • It permit 100% FDI under the automatic route to marketplace entities as also to those engaged in single-brand retail.
    • Foreign investments, up to 51%, are permitted in multi-brand retail with prior government approval.
    • As per the non-debt rules, entities engaged in single-brand retail are permitted to undertake retail trading through e-commerce.
    • However, single-brand retail trading through e-commerce has to open a brick-and-mortar store within two years from the date it commences online retail.
    • Retail trading, in any form, by means of e-commerce, is not permissible for entities engaged in inventory-based multi-brand retail trading and having foreign investment.

    Consider the question “What are the objectives sought to be achieved through The Consumer Protection (E-Commerce) Rules, 2020 to regulate commercial transactions? What are the issues with the rules?”

    Conclusion

    The commercial sector is anxious for India to consider relaxing some of these requirements, or extending the time period for compliance, given that brick-and-mortar operations may not be possible in the foreseeable future.

    Source-

    https://www.financialexpress.com/opinion/e-commerce-rules-a-one-size-fits-all-approach-some-need-to-be-relaxed/2071953/

    Back2Basics: Invenetory model and marketplace model

    • Marketplace model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
    • The main feature of the market place model is that the e-commerce firm like flipkart, snapdeal, amazon etc. will be providing a platform for customers to interact with a selected number of sellers.
    • Inventory model of ecommerce means an ecommerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
    • The main feature of inventory model is that the customer buys the product from the ecommerce firm.

  • Aiming for wider consumer base and directing public spending accordingly

    The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

    Prescription for long term growth: Broadening the consumer base

    • India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
    • The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
    •  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
    • With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
    • This broadening of the consumer base should happen through empowering the low and middle-income consumers.

    Why can’t the government just spend to revive growth

    • 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
    • 2) With revenues declined, funding of additional expenditure is through higher borrowings.
    • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
    • India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

    Way forward

    • India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
    • To achieve this we will need well-paid employment for the bottom and middle segments.
    • The “safe” group of India’s workforce is extremely small.
    • The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
    • Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
    • These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
    • The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
    • 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
    • The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
    • To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
    • Policies should not become too inward-looking such that export promotion becomes difficult.

    Directing public spending and policies appropriately

    • Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
    • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
    • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
    • The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

    Conclusion

    To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

  • AGR dues issue in Telecom Sector

    The Supreme Court has held that telecom firms will get 10 years to clear their adjusted gross revenue or AGR dues and that the National Company Law Tribunal (NCLT) should decide whether or not spectrum can be sold under the Insolvency and Bankruptcy Code.

    Try this PYQ:

    Q. In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below:

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

    Supreme Court rule on AGR dues

    • In its judgment, the SC gave all telcos a 10-year timeline to complete the payments of AGR dues, instead of the old 20-year schedule suggested by the DoT.
    • It also directed telcos to pay 10 per cent of the total AGR dues by March 31, 2020, following which they can make payments in annual instalments between 2021 and 2031.
    • The non-payment of dues in any year would lead to the accrual of interest and invite contempt of court proceedings against such companies.
    • A crucial issue of whether the spectrum could be sold under IBC will now be decided by the National Company Law Tribunal.

    What is AGR?

    • Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
    • It is divided into spectrum usage charges and licensing fees, pegged between 3-5 per cent and 8 per cent respectively.

    What is the issue about?

    • All the telecom companies that operate in India pay a part of their revenues as licence fee and spectrum charges to the Department of Telecommunications (DoT) for using the spectrum owned by the government.
    • In its definition of AGR, the DoT had said that telcos must cover all the revenue earned by them, including from non-telecom sources such as deposit interests and sale of assets.
    • The telecom companies were opposed to this and had challenged this definition of AGR in several forums, including the Supreme Court.
    • On October 24, 2019, the SC had upheld the DoT’s definition of AGR.
    • Though the telcos sought a review of the judgment, it was dismissed by the top court which had then insisted that telcos clear all the dues by January 23, 2020.

  • GST reforms and compensation issue

    The GST compensation issue raises the need for reform in the system. The article discusses this issue and suggests reform.

    Background

    • Three years ago, the Centre and the States of the Union of India struck a grand bargain resulting in GST.
    • The States gave up their right to collect sales tax and sundry taxes, and the Centre gave up excise and services tax. 

    Issue of compensation

    • Consent of the states was secured by a promise of reimbursing any shortfall in tax revenues for a period of five years.
    • This reimbursement was to be funded by a special cess called the GST compensation cess. 
    • The promised reimbursement was to fill the gap for an assured 14% year on year tax growth for five years.

    Why is the Centre denying GST compensation

    • As the economy battles a pandemic and recession, the tax collection has dropped significantly.
    • At the same time, expenditure needs are sharply higher at the State level.
    • Using an equivalent of the Force Majeure clause in commercial contracts, the Centre is abdicating its responsibility of making up for the shortfall in 14% growth in GST revenues to the states.

    Why Central government is wrong in denying the compensation

    •  1) The States do not have recourse to multiple options that the Centre has.[like sovereign bond or a loan against public sector unit shares from the Reserve Bank of India]
    • 2) The Centre can get loans at lower rates of borrowing from the markets as compared to the States.
    • 3) In terms of aggregate public sector borrowing, it does not matter for the debt markets, nor the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
    • 4) Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilisation, which is the Centre’s domain.
    • 5) Using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
    • It will weaken the foundation of cooperative federalism.

    Reforms needed

    • GST is a destination-based consumption tax, which must include all goods and services with very few exceptions.
    • That widening of the tax base itself will allow us to go back to the original recommendation of a standard rate of 12%, to be fixed for at least a five-year period.
    • Some extra elbow room for the States’ revenue autonomy could be allowed by States non VATable surcharges on a small list of “sin” goods.
    • In the long term there are many changes in consumption patterns, production configurations and locations, which cannot be anticipated and hence a static concept of Revenue Neutral Rate cannot be reference.
    • The commitment to a low and stable rate is a must.
    • We must recognise the increasing importance of the third tier of government. 
    • After 28 years of the 73rd and 74th Amendments, the local governments do not have the promised transfer of funds, functions and functionaries.
    • Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies.
    • Fresh approach also calls for an overhaul of the interstate GST and the administration of the e-way bill.

    Consider the question “Discuss the issue related to GST compensation to the States by the Central government. Suggest the measures changes in the GST regime to deal with flaws.”

    Conclusion

    GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.

  • Despite the messaging, it is still advantage China

    The article examines whether India has been proving a favourable alternative to China or not.

    Is India becoming alternate supply source and investment destination?

    • Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
    • Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
    • Those that do leave may not choose India as a relocation destination.
    • Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
    • They also see other Asian countries as more competitive.

    India’s strengths

    • Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
    • Strong IPR: There is no threat of stealing of intellectual property rights.
    • No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
    • Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
    • Domestic market:India’s well-off domestic market also attracts foreign investors.

    Why China is a favoured destination

    • China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
    • China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

    Way forward

    1) Focus on the States

    • India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
    • Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
    • India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

    2) Focus on the policy framework

    • India should take two great steps-
    • 1) Reduce the number of investments needing approval by the Centre.
    • 2)To increase intra-Ministry coordination on foreign direct investment policies.
    • The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
    • This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

    Conclusion

    A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

  • Implications of World Bank halting ‘Doing Business’ report for India

    India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

    Background

    • Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
    • It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

    Why India should be concerned

    • Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
    • India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
    • Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
    • The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
    • Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
    • During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
    • The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

    Does ease of doing business have predictive power?

    • While India’s rank drastically improved, it has meant nothing on the ground.
    • The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
    • Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
    • India’s import dependence on China has shot up.
    • In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
    • China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

    Other flaws in the Index

    • The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
    • The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
    • The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
    • The World Bank conducts a global enterprise survey collecting information from companies.
    • There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

    Lack of theoretical basis: Major flaw

    • There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
    • Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
    • Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
    • To meet the ease of doing business targets, safety standards of factories are compromised.
    • For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
    •  However, no factory has complied with self-certification or submitted the third party certification.

    Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

    Conclusion

    It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.

  • In news: Channapatna Toys

    The COVID-19 pandemic has dealt a crippling blow to the Channapatna Toys industry.

    Must read:

    GI Tags in news for 2020 Prelims

    All time GI tags in news

    Channapatna Toys

    • Channapatna toys are a particular form of wooden toys (and dolls) that are manufactured in the town of Channapatna in the Ramanagara district of Karnataka.
    • This traditional craft is protected as a geographical indication (GI) under the World Trade Organization, administered by the state govt.
    • As a result of the popularity of these toys, Channapatna is known as Gombegala Ooru (toy-town) of Karnataka.
    • Traditionally, the work involved lacquering the wood of the Wrightia tinctoria tree, colloquially called Aale mara (ivory-wood).
    • Their manufacture goes back at least 200 years according to most accounts and it has been traced to the era of Hyder Ali and Tipu Sultan in the 18th century.
    • The toys are laced with vegetable dyes and colours devoid of chemicals and hence they are safe for children.

    Back2Basics: Geographical Indications in India

    • A Geographical Indication is used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Such a name conveys an assurance of quality and distinctiveness which is essentially attributable to its origin in that defined geographical locality.
    • This tag is valid for a period of 10 years following which it can be renewed.
    • Recently the Union Minister of Commerce and Industry has launched the logo and tagline for the Geographical Indications (GI) of India.
    • The first product to get a GI tag in India was the Darjeeling tea in 2004.
    • The Geographical Indications of Goods (Registration and Protection) Act, 1999 (GI Act) is a sui generis Act for the protection of GI in India.
    • India, as a member of the WTO enacted the Act to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights
    • GI protection is granted through the TRIPS Agreement.

  • Issue of GST compensation to states

    The article analyses the issue of GST compensation to states under GST regime for five years and how this has turned to be contentious issues after the economic disruption caused by Covid-19.

    The basis for compensation

    • Under Goods and Services Tax (GST) regime the Centre would make good the loss in the first five years if States faced revenue deficits after the GST’s introduction.
    • States sacrificed their constitutionally granted powers of taxation in the national interest.

    GST compensation cess

    • To pay the compensation to states, GST compensation cess was introduced.
    • When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus.
    •  Now, the economy has slowed down dramatically and the resources raised are insufficient.
    • The Centre is raising questions about whether it is legally accountable to pay compensation.
    • The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.

    Way forward

    • As stated by the Secretary of the GST Council in the tenth meeting, the central government could raise resources by other means for compensation and this could then be recouped by continuing the cess beyond five years.
    • Monetary measures are the monopoly of the central government.
    • Even borrowing is more efficient and less expensive if it is undertaken by the Central government.
    • As equal representatives of the citizens State governments expected the Centre to demonstrate empathy and provide them relief through the Consolidated Fund of India.

    Conclusion

    Central government should consider the legal provision in the GST regime and act in the spirit of cooperative federalism.

  • What is Compensation of GST?

    With Centre-State friction over pending compensation payments under the Goods and Services Tax (GST) taking a new turn in the 41st GST Council to meet, the strain on the finances of states is likely to continue in the near term.

    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

    What is GST?

    • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

    Compensation under GST regime

    • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
    • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
    • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
    • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

    Alternatives to prevent losses

    • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
    • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

    Distributing GST compensation

    • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
    • The compensation fund so collected is released to the states every 2 months.
    • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

    Significance of GST compensation

    • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
    • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
    • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

    Back2Basics:

    Goods and Services Tax

  • GIS-enabled Land Bank System

    A prototype of the National GIS-enabled Land Bank System was e-launched by Commerce and Industry Ministry for six States based on which land can be identified for setting up industries.

    Try to answer this question in short:

    Q.Discuss the benefits of digitizing land records in India.

    Land Bank System

    • The system has been developed by the Integration of Industrial Information System (IIS) with state GIS (Geographic Information System).
    • IIS portal is a GIS-enabled database of industrial clusters/areas across the states.
    • On the system, more than 3,300 industrial parks across 31 states/UTs covering about 4,75,000 hectares of land have also been mapped out on the system.
    • The information available on the system will include drainage, forest; raw material heat maps (horticulture, agricultural, mineral layers); multilayer of connectivity.
    • IIS has adopted a committed approach towards industrial upgrading, resource optimization, and sustainability.

    Various stakeholders

    • The initiative has been supported by the National e-Governance Division (NeGD), National Centre of Geo-Informatics (NCoG), Invest India, Bhaskaracharya Institute for Space Applications and Geo-Informatics (BISAG), and Ministry of Electronics and Informational Technology.