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Subject: Economics

  • River Ropeway over Brahmaputra

     India’s ‘longest’ river ropeway across the Brahmaputra River was unveiled in Guwahati.

    Navigate to this page for more readings on Brahmaputra River systems:

    Brahmaputra River System

    Brahmaputra Ropeway

    • The 1.82 km bi-cable jig-back ropeway connects the southern bank of the Brahmaputra and a hillock behind the Doul Govinda temple in North Guwahati on the other.
    • It passes over the mid-river Peacock Island that houses Umananda, a medieval Shiva temple.
    • It thus cuts travel time between the two banks to 8 minutes.
    • The current travel options between the two banks are by ferry (30 minutes or more, depending on current and season) or by road through a bridge that usually takes over an hour in the traffic.

  • The missing large in MSMEs

    MSMEs in India has huge untapped potential. This article suggest the ways to tap it and make the MSMEs major contributor to India’s growth.

    What is an issue with MSMEs

    • Despite MSME contributing 20% of the GDP and employing about 110 million workers,  we have failed to make bold policy-moves to make it more productive and competitive.
    •  MSMEs are not becoming ‘larger’ and more dynamic, with 99% of the estimated 60 million being micro-enterprises with limited aspirations.
    • At the core of this lack of competitiveness is a structural issue.

    Addressing the structural challenges

    Size

    • Consider  India’s largest textile cluster vs Bangladesh’s largest.
    • More than 70% of the units in Tirupur are micro-enterprises with less than 10 employees while only 20% of the units in Narayanganj in Bangladesh have less than 10 employees.
    • This factor makes the cluster in Bangladesh more competitive and helping Bangladesh’s exports grow faster than India’s.
    • Though  Bangladesh has other advantages also, but this structural difference is critical.

    Relation between size and productivity

    • Productivity data from manufacturing MSMEs in OECD show that the productivity of medium firms (50-250 people) could be as much as 80-100% higher than that of micro firms (<9 employees).
    • Growth in scale allows them to invest in people to improve skills, in better technology & processes, and in innovation.
    • The most-competitive of them grow from their small beginnings to become world-beaters.
    • This push to grow and improve capabilities and productivity is central to dynamism of any country’s industrial structure.
    • This dynamism of micro-enterprises has been one of the less-reported policy levers behind China’s rise as an industrial powerhouse.

    What stops MSMEs in India from growing?

    • Our policy-legacy of highly restrictive asset-based definition which has only recently been relaxed, coupled with a mindset, and, policies, to support the ‘small is beautiful’ narrative.
    • Overly complex regulatory regime doesn’t differentiate enterprises on their scale, other than the really tiny ones, in terms of compliance needs.
    • For example, if a unit has more than six employees, the trade union law becomes applicable, If a unit has more than 10 employees, the Factories Act is applicable.
    • Small enterprises thus face the same multitude of regulatory requirements as larger ones, and end up having compliance costs account for a higher percentage of revenue.
    • For the tiny/micro units, there is simply no incentive to grow and enter the formal economy.

    Policy intervention needed

    1) Getting MSMEs into formal credit system

    • To do this, we need to adopt an approaches that can help banks and NBFCs move away from asset-backed lending, towards some form of cash-flow-based lending.
    • Small retailers are outside the formal credit system, unable to invest, modernise and grow, given they lack fixed ‘assets’.
    • But, all of them are linked to, and sell, brands of well-known, large companies.
    • If banks and NBFCs work with these companies and use anonymised data on sales and credit-performance to develop credit-scores for lending to them?
    • Similar innovative ways could help cover other micro-unit segments.

    2) Simplified tax and regulatory regime

    • The second policy intervention needed is to de-average and implement a simplified tax and regulatory regime for MSMEs.
    • This would also reduce the cost of compliance.

    3) Development of digital platform

    • The third intervention, appropriate for digital era, is to develop a comprehensive ‘digital platform’ for the sector.
    • This will call for a mandatory, unique identifier for all.
    • The platform will have to be linked to different relevant databases.

    Consider the question “MSMEs in India continues to play an important role in India’s development yet it suffers from structural challenges which hinders it from fueling India’s growth. In light of this, examine the challenges MSMEs faces and suggest the policy interventions.” 

    Conclusion

    As India launches the Atmanirbhar Bharat Abhiyan to reignite growth of the economy for a post-COVID world, building such a globally-competitive MSME has to become one of the initiative’s core pillars. Only then can our industry improve and sustain its global competitiveness.

    Source-

    https://www.financialexpress.com/opinion/the-missing-large-in-msmes-a-globally-competitive-indian-mittelstand-is-the-need-of-the-hour/2063155/

  • How GST created single market

    The article analyses the instrumental role played by the GST in transforming nation into a single market dismantling the barriers across the states.

    Reduced tax burden on consumers

    • In the pre-GST era, the total of VAT, excise, CST and their cascading effect led to 31 per cent as tax payable, on an average, for a consumer.
    • In its first two years, as the collections improved, the GST Council kept reducing the tax burden on consumers.
    • Most items have been brought in the 18 per cent, 12 per cent or even 5 per cent category.
    •  Most items of daily common use are in the zero to 5 per cent slab.
    • An analysis by the Reserve Bank of India (RBI) observes that since the roll out of GST, the rate changes have brought down the GST incidence from 14 per cent to 11.6 per cent.
    • This explains the revenue loss stated above. The consumer pays less tax now under the GST.

    Flexibility and increased compliance

    • Taxation threshold for goods was increased to Rs 40 lakh.
    • The composition limit was increased from Rs 75 lakh to Rs 1.5 crore.
    • For manufacturers, composition tax rate was lowered from 2 per cent to 1 per cent.
    • The composition scheme was extended to services as well.
    • Special lower rates without Input Tax Credit (ITC) were prescribed for construction and restaurants.
    • As per an RBI calculation, the weighted GST rate at present is 11.6 per cent.
    • The revenue-neutral rate determined at the time of GST introduction by its own committee was 15.3 per cent.

    Widened tax base

    • Today, there are 1.2 crore GST assessees compared to 65 lakh at the time of introduction of the tax regime.
    • The average revenue collected per month for the nine months (July-March) in 2017-18 was Rs 89,700 crore in  2018-19 it rose by 10 per cent to Rs 97,100 crore.
    • In FY 2019-20, the revenue per month was Rs 1,02,000 crore.
    • This steady increase was despite the various concessions and rate reductions mentioned above.

     Simplification

    • GST is an IT-enabled platform.
    • Accounting and billing software is provided free to the small taxpayers.
    • Those with nil return to file can do so with an SMS.
    • Since the registration is completely online, the refund process is also fully automated.
    • The Centre is the only refund disbursal authority and no physical interface is required.

    Agriculture sector under GST

    • Concessions are extended to the agriculture sector under GST, agricultural inputs such as fertilisers, machinery have seen a considerable reduction in rates.
    • Other inputs such as cattle/poultry/aquatic feeds are kept at the nil rate.
    • Agricultural produce such as vegetables, fruits, flowers and foodgrains are exempt from GST.
    • Dairy products — milk, curd, lassi, buttermilk and minor forest produce such as lac, shellac and sisal leaves are also exempt.
    • Silk cocoon, raw silk, wool, jute fibre are nil rated.
    • In the pre-GST era, many of these were in the 5 per cent slab.
    • Service inputs to agriculture are similarly treated.
    • Before the introduction of GST, many such items were taxed at a standard rate of 15 per cent.

    MSME  under GST

    • Micro, small and medium enterprises (MSMEs) have consistently received sensitive treatment under the GST regime.
    • Items that have large employment creating activities, rough diamond/precious stone sorting and polishing for example, have seen a GST reduction from 3 per cent to 0.25 per cent.
    • Services rendered by MSMEs have also received such sensitive treatment.

    Concerns

    • Tax reduction in some cases has led to an inversion of duty structure.
    • Manufactured goods in lower slabs have suffered due to inversion in the duty structure.
    • With lockdowns and consequential deferrals in tax payments, compensation payments to the states is a concern that the Council has taken cognisance of.

    Consider the question “Elaborate on how the GST has been benefiting the various stakeholders and helped in transforming India into a single market?” 

    Conclusion

    The states have shown maturity and understanding. The spirit of collective responsibility and statesman-like thinking have kept mutual trust and confidence high. The much talked about cooperative federalism is actually in action in the GST Council.

  • Differential impact of COVID and the lockdown

    Though pandemic has been called as the great leveller, closer look at the impact of Covid on the marginalised section indicate otherwise. This article examines the impact of pandemic with respect to responsible factors.

    The marginalised at risk

    • Preliminary data and early indirect evidence from several parts of the world indicate that the incidence of the disease is not class-neutral.
    • Poorer and economically vulnerable populations are more likely to contract the virus as well as to die from it.
    • Economic consequences of the current pandemic are likely to be most concentrated among the low wage earners.
    • Disaggregated data on COVID-19 incidence and mortality are not available for India.
    • Thus, we cannot comment on whether certain caste groups are more vulnerable to the virus than others.

    Cast factor: Let’s look into CMIE survey

    • India’s lockdown was among the most stringent.
    • The first month of the severe lockdown, April 2020, witnessed a sharp rise in unemployment.
    • Let’s examine shifts in employment and unemployment rates using data from the Centre for Monitoring Indian Economy (CMIE)’s Consumer Pyramids Household Survey (CPHS) database.
    • That the proportion of employed upper castes dropped from 39% to 32% between December 2019 and April 2020, a fall of seven percentage points.
    • The corresponding fall for Scheduled Castes (SCs) was from 44% to 24%, i.e. a fall of 20 percentage points.
    • Other Backward Classes and Scheduled Tribes (STs) the fall was from 42% to 34%, 40% to 26% and 48% to 33%.
    • Thus, the fall in employment for SCs and STs was far greater in magnitude than that for upper castes.

    Education factor

    • The global evidence suggests that job losses associated with COVID-19 are much more concentrated among individuals with low levels of education.
    • Those with more than 12 years of education, were much less likely to be unemployed in April 2020 than those with less than 12 years of education.
    •  Data from the India Human Development Survey for 2011-12 (IHDS-II) show that 51% of SC households have adult women who have zero years of education, i.e. are illiterate, and 27% have an illiterate adult male member.
    •  Thus, in the face of current school closures, parents of SC children would be much less equipped to assist their children with any form of home learning.

    Access to technology and other factors

    • The proportion of households with access to the Internet is 20% and 10% for UC and SC households, respectively.
    •  Only 49% of SCs have bank savings, as compared to 62% of Upper Caste households.
    • Differential access to information technology, as well as disparities in the ability to invest in technology, will be critical in shaping access to online education.

    Consider the question “Examine the impact of Covid on the vulnerable section of society. Suggest the measures to mitigate the impact.”

    Conclusion

    Early impacts of the pandemic-induced lockdown indicate that the resultant economic distress is exacerbating pre-existing structures of disadvantage based on social identity, and investments in education and health.

  • In news: Srisailam Dam

    The major fire accident at the Srisailam hydroelectric power station has resulted in heavy loss of lives.

    Try this PYQ:

    What is common to the places known as Aliyar, Isapur and Kangsabati? (CSP 2019)

    (a) Recently discovered uranium deposits

    (b) Tropical rain forests

    (c) Underground cave systems

    (d) Water reservoirs

    About Srisailam Dam

    • The Srisailam Dam is constructed across the Krishna River in Kurnool district, AP near Srisailam temple town.
    • It is the 2nd largest capacity working hydroelectric station in the country.
    • The dam was constructed in a deep gorge in the Nallamala Hills in between Kurnool and Mahabubnagar districts, 300 m (980 ft) above sea level.
    • It has a reservoir of 616 square kilometres.

  • Three areas to work on to put India on the path to growth

    The article suggests the three areas on which country should work on to make it resilient in the future. These three areas include the labour laws for informal employment, conditions of our cities and the strength of our rural economy.

    Background

    • The Prime Minister, while addressing the Confederation of Indian Industry (CII) annual meeting urged to think big and partner with the government in putting India on the path to growth.
    • There is much that we can be achieved if government and industry work towards the same objective, and in a spirit of mutual trust.

    Let’s look into some areas

    1) Employment

    • Over 85 per cent of employment in India is in the informal sector.
    • The Centre for Monitoring the Indian Economy (CMIE) estimates that between mid-March and mid-April, 120 million people lost their jobs.
    • With this unemployment rise to an all-time high of 27 per cent.
    • There was reverse migration on an unprecedented scale — some 10 million people abandoned cities to return to their native villages.
    • As economic activity has restarted in cities, CMIE reports that unemployment is now down to around 9 per cent.

    3 Problems we must address

    1) Need for labour regulation

    • We have stringent labour laws to protect workers, but this covers only the 15 per cent formal sector employment.
    • The 85 per cent of our workforce who are informally employed have almost no protection, and employers have almost complete flexibility.
    • We need to address both the formal and informal labour spectrum to get the balance right between flexibility and protection for all labour.

    Way forward

    • Everyone must have a minimum level of protection, and every employer a minimum level of flexibility.
    • This calls for a new social contract to define a well-calibrated social security system.
    • This huge project demands good faith and strong leadership by industry, labour and government.

    2) Living conditions of our cities

    • We need a massive private home-building programme.
    • It probably needs much more liberal land-use regulations — our cities have among the least generous floor-space indices (FSI) in the world.
    • New York, Hong Kong, and Tokyo have an FSI five times Mumbai’s.
    • Again, this is a multi-year project, and it involves state and city governments partnering with private developers.
    • India is unique in having 70 per cent of our population still residing in rural areas.
    • We must encourage the migration of people to higher productivity occupations in our cities.
    • And we must ensure that clean, affordable and accessible housing is available for all in our cities.

    3) Strength of our rural economy

    • Reverse migration is also an opportunity to collaborate in spreading the geography of development.
    • We need a three-pronged approach:
    • 1) As Ashok Gulati has often argued, the easiest way to grow farmer incomes is by having them grow more value-added crops.
    • Exports of fruits and vegetables must be consistently encouraged.
    • The cultivation of palm plantations with potential for huge import substitution, we need corporate farming as the gestation period of seven years for the first crop is too much for the average farmer to handle.
    • The Atmanirbhar agricultural reforms, which permit contract farming, and open up agricultural markets, are major medium-term reforms. Implemented right, they can transform agricultural markets.
    • 2) We need to encourage agro-processing near the source.
    • Fostering entrepreneurship in rural and semi-urban areas would combine nicely with local processing.
    • 3) We need to invest even more massively in rural connectivity.
    • Today, we would add digital connectivity to road connectivity to level the playing field for all regardless of where they live.

    Consider the question “What are the vulnerabilities in our economic structure that were highlighted by the covid pandemic? Also suggest the measures to make our rural economy strong and resilient to such shocks.”

    Conclusion

    The task is huge, and only collaboration between all levels of government (Union, state, and city) and our dynamic private sector can hope to make substantial progress.

  • Online Pharmacy Regulation in India

    In the last week, India’s online pharmacy market saw two significant merger and acquisition deals. This has suddenly caused activity in a sector from which large investors have shied away due to lack of proper regulations.

    Try this easy question:

    Q. Discuss the prospects and benefits of online pharmacy in India. (150W)

    How is the pharmacy market in India currently shaped?

    • Unlike the US, where the top three pharmaceutical distributors have a 90 per cent share in the market, India’s is a fragmented market with over 8 lakh pharmacies.
    • This gives online pharmacies an opportunity to capture their space without opposing large traditional retailers.
    • Currently, companies in the Indian e-pharmacy space mainly operate three business models — marketplace, inventory-led hybrid (offline/online) and franchise-led hybrid (offline/online) — depending on the way the supply chain is structured.

    Rules governing the pharma sector

    • Work on regulations specifically for e-pharmacies has been in progress for several years now.
    • In the absence of clear regulations, online pharmacies currently operate as marketplaces and cater to patients as a platform for ordering medicines from sellers that adhere to the Drugs and Cosmetics Act and Rules of India.
    • Other regulations, like the Information Technology Act and the Narcotic Drugs and Psychotropic Substances Act, also apply.

    What do the draft e-pharmacy regulations propose?

    • Draft rules for e-pharmacies sought to define the online sale of medicines, what an e-prescription means and what type of licences online firms would need to get from regulators to operate.
    • The draft had proposed to allow e-pharmacies to get a central licence to operate from the country’s apex drug regulator, which could be used to allow it to operate across the country.
    • It also proposed to define e-pharmacies in a way that would allow them to distribute, sell and stock medicines.
    • The proposed regulations prevent them from selling habit-forming drugs like cough syrups specified in Schedule X of the Indian drug regulations.

    Current status

    • Regulations for online pharmacy players have been in the works since 2016 but are yet to come out.
    • The last attempt to clear these regulations saw the draft rules being pushed through two expert committees under the Central Drugs Standard Control Organisation–India’s apex drug regulatory body–in June 2019.

    Online pharma is growing in scale

    • While Covid-19 and the subsequent behavioural shift towards e-commerce may have catalyzed growth for online pharmacies, the sector was already poised to grow seven-fold by 2023 to $2.7 billion.
    • This was mainly on account of the challenges faced by physical pharmacies that gave their online counterparts a problem to solve.
    • Experts believe that e-pharmacies will be able to solve the problems that traditional pharmacies couldn’t.
    • But for this, they need to have a large-scale presence that calls for either huge investments or consolidation.

    Conclusion

    • The e-pharmacy sector holds immense potential to address the persisting issue of affordability and accessibility of medicines in India.
    • Steps should be taken to foster the e-pharmacy sector with sufficient safeguards and under regulatory control to protect the interest of the consumers.

  • A dicey dollar could yet revive Keynes’s Bancor currency plan

    The direct question in the exam from this article is not expected. Nevertheless, it is important to get a general understanding of the important role dollar plays in the world economy and the reasons for any viable alternative to it.

    Context

    • The dollar fell in July to a two-year low against the euro.
    • When the covid-19 pandemic went global in March, the dollar strengthened on the back of safe-haven flows into US Treasury bonds.

    What the depreciation of dollar indicate?

    • The dollar’s subsequent depreciation reflects the changing prospects of the US and European economies.
    • Some observers point instead to the agreement by European leaders to issue €750 billion ($884 billion) of European Union (EU) bonds.
    • With the spread of covid-19 investors expect the Fed to keep interest rates low for longer.
    • In the eurozone, the virus is under better control, and data from purchasing managers’ surveys are surprising on the upside.
    • This improving outlook doesn’t mean that the European Central Bank (ECB) will start raising its policy rate in the near future.
    • Interest rates determine the exchange rates as per the “interest parity” theory.

    Factors responsible for holding currency

    • 1) Normally, investors hold a currency when the issuer’s policies are sound and stable.
    • 2) Banks and firms hold a currency when it is useful for invoicing and settling trade with the issuing country.
    • But President Donald Trump’s administration has done more than any in living memory to disrupt US trade.
    • 3) Governments, for their part, hold and use the currencies of their alliance partners.

    Resilience of dollar

    • The most striking takeaway from recent experience is the dollar’s resilience.
    •  US policy has been risky and erratic.
    •  But President Donald Trump’s administration has done more than any in living memory to disrupt US trade.
    • Under Trump, the US today is no longer the reliable alliance partner it once was.
    • Despite all this, countries continue to hold the dollar.
    • The currency’s international role has not diminished significantly.
    • It has declined only along select dimensions—its share in central banks’ foreign-exchange reserves, for example—and even there, only marginally.

    No alternative

    • The euro is not an alternative to the dollar.
    • The stock of safe euro assets remains segmented along national lines.
    • Nor is the renminbi a viable alternative.
    • Given heightened tensions with China, no Western government will encourage its residents to depend on the People’s Bank of China for liquidity.

    Conclusion

    The only solution to this conundrum is more resources for the International Monetary Fund, so that it can supply countries in a crisis with the dollars that a future Fed fails to provide. This, of course, is the solution that John Maynard Keynes offered in 1944, albeit by another name-Bancor.

  • Job Losses during Lockdown

    The data by the Centre for Monitoring Indian Economy (CMIE) briefs us about the job losses due to lockdown restrictions imposed because of the COVID pandemic.

    We can utilize this data as examples for answer writing.

    CMIE data on job losses

    • Salaried jobs: They suffered the biggest hit during the lockdown, with a total loss estimated to be at 18.9 million during April-July.
    • Informal and non-salaried jobs: They have shown improvement during the same period increasing to 325.6 million in July from 317.6 million last year, an increase of 2.5 per cent.
    • Small traders, hawkers and daily wage labourers: They were the worst hit by the lockdown in April, comprising 91.2 million of the jobs lost from the total loss of 121.5 million in that month.
    • Farm employment: A sharp rise was seen in June to 130 million, with good rains and the consequent sowing absorbing a lot of the labour that was lost in non-farm sectors.

    About CMIE

    • CMIE, or Centre for Monitoring Indian Economy, is a leading business information company.
    • It was established in 1976, primarily as an independent think tank.
    • CMIE produces economic and business databases and develops specialised analytical tools to deliver these to its customers for decision making and for research.
    • It analyses the data to decipher trends in the economy.

  • Digital Quality of Life Index, 2020

    India ranks among the lowest in the world in terms of Internet quality, according to the Digital Quality of Life Report.

    Note the following aspects:

    1)Organisation publishing the report

    2)India’s rank and its comparison with neighbors

    3)Rankers at the top

    Digital Quality of Life Index

    • It is global research released by online privacy solutions provider SurfShark.
    • It releases a report on the quality of digital wellbeing in 85 countries (81% of the global population), in terms of e-infrastructure.

    India’s ranking: Hits and Misses

    • India occupies 79th place, ranking below countries including Guatemala and Sri Lanka.
    • India makes it into the top 10 in terms of Internet affordability. With a ranking of nine, it outperforms countries such as the U.K., the U.S. and China.
    • Additionally, when it comes to e-government, India occupies the 15th place globally, just below countries like New Zealand and Italy.
    • However, at position 78, India’s Internet quality is one of the lowest across 85 countries analysed in the research.

    Global rankings

    • The report found that seven of the 10 countries with the highest digital quality of life are in Europe, with Denmark leading among 85 countries.
    • Canada stands out as a country with the highest digital quality of life in the Americas, while Japan takes the leading position in Asia.
    • Among the countries in Africa, people in South Africa enjoy the highest quality of digital lives whereas New Zealand leads in Oceania, outperforming Australia in various digital areas.