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Subject: Economics

  • Making up for shortfalls in GST collection

    The article deals with the issue of shortfall in the GST compensation cess and the challenge Central government faces to pay the promised compensation to the states.

    Background of the cess

    • GST subsumed several taxes, including those which were the preserve of the States.
    • Therefore it required an amendment to the Constitution of India.
    • The amendment affected the Seventh Schedule, so it required ratification by the legislatures of half the States.
    • Before the GST, States exporting goods to other States collected a tax.
    • But the GST is a destination-based tax, i.e., the State where the goods are sold receive the tax.
    • This implies that manufacturing States would lose out while consuming States would benefit.
    • So, in order to convince manufacturing States to agree to GST, a compensation formula was created.
    • Under which States were promised compensation for loss of revenue for a period up to five years.
    • The Act for compensation to states assumed that the GST revenue of each State would grow at 14% every year, from the amount collected in 2015-16.
    • This scheme is valid for five years, i.e., till June 2022.

    Compensation cess fund

    • A compensation cess fund was created from which States would be paid for any shortfall.
    • An additional cess would be imposed on certain items and this cess would be used to pay compensation.
    • The Act states that the cess collected and “such other amounts as may be recommended by the [GST] Council” would be credited to the fund.
    • In the first two years of this scheme, the cess collected exceeded the shortfall of States.
    • In the third year, 2019-20, the fund fell significantly short of the requirement.

    The problem and its source

    •  A key source of the problem is that the 2017 Act guaranteed a tax growth rate of 14%, which is unachievable this year.
    • The 14% target was too ambitious to start with.
    • Given the government’s inflation target at 4%, this implied a real GDP growth plus tax buoyancy of 9%.
    • But, the Central government is constitutionally bound to compensate States for loss of revenue for five years.

    Solution to the problem

    1) The Constitution could be amended to reduce the period of guarantee to three years thus ending June 2020.

    • But most States would be reluctant to agree to this proposal.
    • It could also be seen as going back on the promise made to States.

    2) The Central government could fund this shortfall from its own revenue.

    •  The Centre’s finances are stretched due to shortfall in its own tax collection combined with extra expenditure to manage the health and economic crisis.

    3) The Centre could borrow on behalf of the cess fund.

    • The tenure of the cess could be extended beyond five years until the cess collected is sufficient to pay off this debt and interest on it.

    4) the Centre could convince States that the 14% growth target was always unrealistic.

    • If the Centre can negotiate with States through the GST Council to reset the assured tax level, it could then bring in a Bill in Parliament to amend the 2017 Act.

    Consider the question “What were the reasons for making provisions under GST for paying the states compensation for tax revenue shortfall? What are the implications of the provision for the Central government?”

    Conclusion

    The Constitution makes it obligatory for the Centre to make up for shortfall by the States. The cess collected will not be sufficient for this purpose. The GST Council, which is a constitutional body with representation of the Centre and all the States, should find a practical solution.

    B2BASICS

    Source: https://www.thehindu.com/opinion/op-ed/making-up-for-shortfalls-in-gst-collection/article32319744.ece

  • Increasing dependence on indirect taxes and issues with it

    India, with a tax-GDP ratio of 10.9 per cent in 2019 needs an overhaul of its tax system. This article analyses India’s growing dependence on indirect taxes and its implications for the poor.

    Important changes in direct taxes

    • The wealth tax was abolished in 2016.
    • Wealth tax was replaced by a 2 per cent surcharge on super-rich individuals with taxable income of over Rs 10 crore.
    • But the government rolled back the increase in surcharge in 2019.
    • Corporate taxes were slashed from 30 per cent to 22 per cent to attract foreign investors and induce Indian companies to invest.
    •  Cuts in corporate tax that have resulted in a revenue loss of Rs 1.5 lakh crore have contributed to making the state poor.

    Increasing indirect taxes and cess

    • The share of indirect taxes has increased by up to 50 per cent of the gross tax revenue in FY2019 from 43 per cent in FY2011.
    • The combined share of customs and excise duties and value-added tax reached an all-time high of 10.5 per cent of GDP.
    • This high was following a three-year-long steady increase in customs or excise duty on commonly used goods, such as petroleum products, metals and sugar, automobiles and consumer durables.
    • This is also when the service tax was hiked steadily to 18 per cent under GST from 12.4 per cent in 2014.
    • Swachh Bharat cess and Krishi Kalyan cesses were imposed in addition to GST.
    • The permanent nature of these cesses has been widely opposed by the states and criticised by the CAG.
    • CAG has pointed out the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses.
    • All of this is troubling because indirect taxes often penalise the poor and the middle class more than the rich.

    Case for the wealth tax

    • High tax rates on the wealthy in Europe have played a key role in ensuring a strong social security net for the poor.
    • This successful example should encourage India to consider the rationale for a wealth tax.
    • Higher taxes on the super-rich could be used for cash transfers and a fiscal stimulus, that, in India, at 1 per cent of GDP each, have been negligible so far.
    • A wealth tax, a COVID-19 cess on the super-rich and a surcharge on the super-rich for their income from listed equity shares are critical for mitigating the current situation.

    Issues with such policy

    • Cuts in corporate taxes, increased indirect tax revenues, decreased capital expenditure and practically no change in revenue expenditure on health and education show that India’s taxation policy is more business-friendly than pro-poor.
    • This is happening at a time when a supply-side oriented approach to the economy is counter-cyclical.
    • Faced with increased expenditure amid pandemic Centre increased the duty on fuel by a record Rs 10 per litre on petrol when global crude prices have been falling.
    • This speaks of the government’s increased dependency on indirect tax-based revenues.

    Examine the implications of India’s growing dependence on indirect tax revenue? Suggest the measures to reduce such dependence.

    Conclusion

    COVID-19 may be a blessing in disguise if it allows India to reform its tax system in order to make it work towards inclusive growth and sustainable development rather than targeting only investment-led economic growth.

    bACK 2 BASICS
    GO THROUGH THE ARTICLE BELOW FOR MORE INFORMATION ON TAXATION:

    Taxation in India: Classification, Types, Direct tax, Indirect tax

  • What is Balance of Payments?

    India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports said the Commerce and Industry Ministry.

    Try this PYQ:

    Q.In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? (CSP 2019)

    1. The foreign currency earnings of India’s IT sector
    2. Increasing the government expenditure
    3. Remittances from Indians abroad

    Select the correct answer using the code given below.

    (a) 1 only

    (b) 1 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

    Balance of Payment

    • BOP is the oldest and the most important statistical statement for any country.
    • In a nutshell BOP of a country is “a systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year”.
    • Economic Transactions include all the foreign receipts and payments made by a country during a given financial year.
    • Foreign receipts include all the earnings and borrowings by a country from the other countries.

    Read the complete thread, here, at:

    India’s Balance of Payments: Current Account, Capital Account, Goods and Services Account

  • What is the Negative Imports List for Defence?

    The Defence Ministry announced a list of 101 items that it will stop importing.

    Try this question for mains:

    Q.Being one of the top importers of defence equipment India is well placed to enhance its domestic manufacturing capacity of defence equipment. Yet, India lacks it after repeated attempts to achieve it. Examine the reasons for this and suggest measures to overcome this anomaly.

    Negative Imports List

    • The negative list essentially means that the Armed Forces—Army, Navy and Air Force—will only procure all of these 101 items from domestic manufacturers.
    • The manufacturers could be private sector players or Defence Public Sector Undertakings (DPSUs).

    Why such a decision?

    • Reduce imports: As per the Stockholm International Peace Research Institute, which tracks defence exports and imports globally, India has been the second-largest importer between 2014 and 2019 with US$ 16.75 billion worth of imports.
    • Boost domestic industry: By denying the possibility of importing the items on the negative list, the domestic industry is given the opportunity to step up and manufacture them for the needs of the forces.
    • Boost exports: The government has been hoping that the defence manufacturing sector can play a leading role in boosting the economy, not just for the domestic market, but to become an exporter as well.

    Items included in the negative list

    The items mentioned in the negative imports list include:

    • water jet fast attack craft to survey vessels, pollution control vessels, light transport aircraft, GSAT-6 terminals, radars, unmanned aerial vehicles, to certain rifles, artillery guns, bulletproof jackets, missile destroyers, etc.

    Impact of the move

    • The items in the list are of proven technologies and do not involve any critical or cutting-edge technology for a next-generation weapon system or platform.
    • Little benefits for domestic players in short-run: Against each of these items are mentioned a year when import embargo would kick in, leading to apprehensions that demands will be placed with foreign vendors until then, leaving very little for domestic producers.
    • The biggest challenge for the government and the armed forces will be to keep this commitment to domestic producers in the event of an operational requirement.

  • The new consumer

    The focus of this article is on the behavioural changes in the consumer post Covid. It also suggest the ways to deal with these changes.

    Context

    • The consumer during and post-COVID is showing remarkable flexibility, bringing about a paradigm shift in her consumption pattern.

    Issue of generating demand

    • Some state governments are busy demanding the opening up of the economy.
    • However, the issue is that the economy does not merely need opening up, but it requires urgent generation of basic demand.
    • That is why consumer behaviour needs to be closely watched.
    • Since the lockdown, the priorities of consumers have seen a drastic shift.

    Factors to consider to increase demand

    • 1) The decrease in the purchasing power to buy products needs to be addressed.
    • The government must look at ways like a reduction in taxes which will help the common man.
    • 2) The current scenario has also made all of us go back to the basic needs.
    • Luxury products hold little value. But renting will increase.
    • 3) The emphasis will be on saving for a rainy day, whether in the case of banks or households
    • 4) Aviation, tourism and hospitality sectors have been hit and continue to remain so even after the restrictions are lifted.
    • 5)  e-commerce has shown exponential growth and will continue to do so.
    • 6) With “Vocal for Local” gaining momentum, there’s a huge increase in local apps, local kirana stores, local artisans and brands.
    • 7) Schools and colleges have taken a hit as e-learning and online courses are being preferred.
    • 8) The entertainment industry has been drastically hit. The media and entertainment industry needs to pay heed to this and curate content accordingly.
    • 9) With a lot of people laying emphasis on their health and immunity, there’s been a substantial rise in the consumption of organic, ayurvedic, and immunity-boosting products.
    • Apart from the obvious products, financial and medical insurance will play an important role.
    • 10) Real estate will suffer as no long-term, high investment purchases will be favoured, but renting will increase.

    Role of the government

    • 1) People need to be provided with their daily needs — basic essentials such as food, water, housing, and electricity.
    • The government is already taking care of that, but money also needs to be given.
    • 2) Jobs need to be provided through development of infrastructure projects.
    • 3) Farmers need to have insurance for their crops and the infrastructure to sell at the right price.
    • 4) Migrant workers with their livelihoods being disrupted are looking for support,and many are focusing on agriculture as a means of income.

    Way forward

    • The government should focus on generating demand for products, and create jobs by improving infrastructure.
    • The government must incentivise spending by offering tax benefits on the amount spent.
    • Government must forget about fiscal prudence this year.
    • Consumers in rural areas are buying more than before.Companies should focus on tapping the rural demand

    Consider the question “Demand has been the driver of India’s growth. But the pandemic has dampened it with devastating effect. Agaist this backdrop suggest the measures to be taken by the government to revive the demand.”

    Conclusion

    With focus on these emerging trends and changing behaviour of the consumers, the government must take steps to bring the economy fast on the tracks.

  • Agriculture Infrastructure Fund (AIF) Scheme

    PM has launched a new financing scheme under the ₹1 lakh crore AIF.

    Note the following things about AIF:

    1) It is a Central Sector Scheme

    2) Duration of the scheme

    3)Target beneficiaries

    Agriculture Infrastructure Fund (AIF)

    • It is a Central Sector Scheme meant for setting up storage and processing facilities, which will help farmers, get higher prices for their crops.
    • It will support farmers, PACS, FPOs, Agri-entrepreneurs, etc. in building community farming assets and post-harvest agriculture infrastructure.
    • These assets will enable farmers to get greater value for their produce as they will be able to store and sell at higher prices, reduce wastage and increase processing and value addition.

    What exactly is the AIF?

    • The AIF is a medium – long term debt financing facility for investment in viable projects for post-harvest management infrastructure and community farming assets through interest subvention and credit guarantee.
    • The duration of the scheme shall be from FY2020 to FY2029 (10 years).
    • Under the scheme, Rs. 1 Lakh Crore will be provided by banks and financial institutions as loans with interest subvention of 3% per annum.
    • It will provide credit guarantee coverage under Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for loans up to Rs. 2 Crore.

    Target beneficiaries

    The beneficiaries will include farmers:

    • PACS, Marketing Cooperative Societies, FPOs, SHGs, Joint Liability Groups (JLG), Multipurpose Cooperative Societies, Agri-entrepreneurs, Startups, and Central/State agency or Local Body sponsored Public-Private Partnership Projects

  • Restructuring to cushion impact on the economy

    “The article analyses the present scenario of the economy and impact of the steps taken by the central bank and the government.” 

    Context

    • Monetary policy committee (MPC) members, through a unanimous vote, decided to keep policy rates unchanged.
    • MPC also maintained an accommodative stance.
    • This was the result of inflation hovering around 6% i.e. above the MPCs target of 4%.

    Restructuring package after moratorium ends

    • Moratorium on loans ends 31 August, RBI said the way forward is a restructuring package for businesses and households.
    • Recent data released by large banks indicate that there has been a sizeable reduction in moratorium in June from 50% in April for all scheduled commercial banks (SCBs).
    • As economic activity normalizes further, the need for restructuring will be even lower.

    What do the trends indicate

    • Most indicators—manufacturing and services Purchasing Managers’ Index(PMI’s) electricity output, vehicle sales, exports, imports—point to economic momentum settling at 10-15% below covid levels in the near-term.
    • The RBI’s consumer confidence survey—gauge of consumer spending—was at its lowest in May, and the one-year outlook is not promising.
    • This implies that consumption demand, especially discretionary demand, will be far lower.
    • With muted consumption, capacity utilization, which had fallen to 68.2% last December, has fallen further in the last few months.
    • Thus, investment demand is not likely to see upward momentum in the near term, even with lower interest rates.

    How RBI’s intervention made the difference

    • An economic slowdown of such proportions leads to an increase in risk premium.
    • Rating upgrade to downgrade ratio of the corporate sector had fallen to 0.05 as in May from a high of 1.11 in December 2018.
    • Spread between 3-year AAA corporate bonds and sovereign bonds rose to 276 basis points on 26 March.
    • But the spread has since fallen to 50bps.
    • This was possible because of the abundant liquidity made available by RBI and credit enhancement provided by the government.

    Way forward

    • RBI and the government will have to work together to revive demand.
    • Centre has already expanded its gross borrowing to ₹12 trillion.
    • Even with net tax collections at 53% of last year’s levels, the Centre has increased its spending by 13% over 2019-20.
    • The government better understand that this is the time to apply Keynesian economics.
    • Global central banks have become large buyers of sovereign debt to support the larger roles being played the governments.
    • In India, too, the Centre and states will have to spend to crowd-in private sector spending.
    • RBI’s role will be important not only as the lender of last resort but also as a buyer of government securities.
    • It has carried out its function as a central bank well, and brought a semblance of stability to financial markets.
    • It will have to do the same in the sovereign bond market.
    • More importantly, it will have to remain vigilant of impending risks to growth and inflation, and be ready to act.

    Consider the question “To what extent the steps taken by the RBI and the government to stabilise the economy battered by the covid pandemic were helpful? 

     Conclusion

    As India’s central bank comes towards the end of its interest rate reduction cycle, it will have to navigate the economy through financial and macroeconomic stability. The government will also have to act in tandem with the central bank in steering the economy through this storm.

    Original

    articles:https://www.livemint.com/opinion/columns/opinion-restructuring-to-cushion-impact-on-the-economy-11596758908360.html

  • Importance of increasing the income of those at the bottom of income pyramid

    India’s growth has been fuelled by demand which has dampened owing to various factors. One untapped source of demand could be the group which lies at the bottom of income pyramid. This article suggests the ways to increase the income of this group.

    Structural demand problem

    • India’s structural demand problem predates the COVID-19 shock.
    • This problem has been compounded after lockdown as jobs have been lost and incomes have collapsed.
    • Boosting domestic demand is critical for an economic revival as external demand is likely to remain muted.
    • It is argued that India’s growth story has been driven by demand generated by those who are at the top of India’s socio-economic pyramid
    • But the demand from that section has now plateaued.

    So, where the demand is going to come from?

    •  Turn to those at the bottom of the pyramid.
    • Those at the bottom of pyramid have a high marginal propensity to consume.
    • But realising the untapped demand potential of this group requires enhancing their incomes and earnings.

    Division of India’s workforce

    • Periodic Labour Force Survey (2018-19) tells us that less than 10 per cent of the workforce is engaged in regular formal jobs.
    • Another 14 per cent are engaged in regular informal jobs with average monthly earnings (Rs 9,500), which is roughly equivalent to or slightly below a minimum wage.
    • The self-employed and casual workers account for 50 per cent and 24 per cent of the workforce respectively and report average earnings that are considerably below a decent minimum amount.
    • Casual workers, who are unlikely to receive work on every day of the month, are at the bottom of the employment structure.

    How to increase the earning of those at the bottom of employment structure

    • Devising strategies that enhance productivity growth in the informal economy could increase their income.
    • Raising the minimum wages of the worst-off workers.
    • At present, under the Minimum Wage Act,  India has a complex set of minimum wages which offer different wages by occupation type and skill levels.
    • The Code on Wages (2019) seeks to universalise minimum wages and extend them to the unorganised sector.

    Way forward

    • 1) Ensuring a decent minimum wage for those who are the bottom of the distribution — the casual labour, would be helpful in this context.
    • This will help set a higher wage floor for others engaged in low-paid work, including regular informal workers.
    • 2) It is also important that minimum wages are paid in public workfare programmes too, in particular MGNREGA works.
    • At present, MGNREGA wages are not covered under the Minimum Wages Act.
    • 3) The minimum wage can be linked to the consumption expenditure of the relatively better-off group of workers.

    Consider the question “India’s growth story is scripted by demand which has been tapering off. The new source of demand could be those at the bottom of income structure. Suggest the strategies to increase the income of this group which could then translate into demand.”

    Conclusion

    The Indian employment challenge today cannot be seen independently of the problem of inadequate income. The above intervention will not only enable income enhancement of those in low-paid work but also add fuel to demand and growth, this time from those at the bottom of the distribution.

  • Delhi government’s Electric Vehicle Policy

    Image source: TOI

    The Delhi government has notified the new Electric Vehicle Policy under which it aims to make a quarter of all new vehicle registrations battery-operated by 2024 and thereby help reducing air pollution.

    Try this PYQ:

    Q.In the context of proposals to the use of hydrogen-enriched CNG (H-CNG) as fuel for buses in public transport, consider the following statements:

    1. The main advantage of the use of H-CNG is the elimination of carbon monoxide emissions.
    2. H-CNG as fuel reduces carbon dioxide and hydrocarbon emissions.
    3. Hydrogen up to one-fifth by volume can be blended with CNG as fuel for buses.
    4. H-CNG makes the fuel less expensive than CNG.

    Which of the statements given above is/are correct? (CSP 2018)

    (a) 1 only

    (b) 2 and 3 only

    (c) 4 only

    (d) 1, 2, 3 and 4

    Some key highlights of the policy are:

    • A purchase incentive of Rs 5,000 per kilowatt/hour of battery capacity (advanced battery), a maximum incentive of Rs 30,000 per vehicle for two-wheelers.
    • A purchase incentive of Rs 30,000 per vehicle (advanced battery) for e-autos.
    • A purchase incentive of Rs 30,000 per vehicle for the purchase of one e-rickshaw and e-cart. Additionally, an interest subsidy of 5 per cent on loans on vehicles with advanced battery.
    • Conversion of 50 per cent of all new stage carriage buses (all public transport vehicles with 15 seats or more) by 2022.
    • A purchase incentive of Rs 10,000 per kilowatt/hour of battery capacity (advanced battery), and maximum incentive of Rs 150,000 per vehicle to the first 1,000 e-four wheelers.
    • Complete removal of road tax and registration fee for all battery electric vehicles.

    Significance of the policy

    • According to the VAHAN database of the Ministry of Road Transport and Highways, electric vehicles comprised only 3.2 per cent of the new vehicles registered in Delhi in 2019-20.
    • The proposed 25 per cent transformation of Delhi’s new-vehicle market could catalyse electric vehicle production and bring more product diversity.

  • [pib] First “Kisan Rail” flagged off

    Indian Railways introduced the first “Kisan Rail” from Devlali (Maharashtra) to Danapur (Bihar).

    Try this question for mains:

    Q.Discuss the role of agricultural marketing and logistics for doubling farmer’s income by 2022.

    Kisan Rail

    • From Maharashtra’s Devlali to Bihar’s Danapur, the train will cover the journey of 1,519 kilometres in over 31 hours.
    • It will take stops at Nasik Road, Manmad, Jalgaon, Bhusaval, Burhanpur, Khandwa, Itarsi, Jabalpur, Satna, Katni, Manikpur, Prayagraj Chheoki, Pt. Deendayal Upadhyay Nagar and Buxar.
    • This train will help in bringing perishable agricultural products like vegetables, fruits to the market in a short period of time.
    • The train with frozen containers is expected to build a seamless national cold supply chain for perishables, inclusive of fish, meat and milk.
    • It is a step towards realizing the goal of doubling farmers’ incomes by 2022.

    Other facts

    • Indian Railways have earlier run single commodity special trains like Banana Specials etc.
    • But this will be the first-ever multi-commodity trains and will carry fruits like Pomegranate, Banana, Grapes etc and vegetables like Capsicum, Cauliflower, Drumsticks, Cabbage, Onion, Chilies etc.