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Subject: Economics

  • Google for India Digitization Fund (GIDF)

    Technology giant Google will invest $10 billion (₹75,000 crores) in India as part of the ‘Google for India Digitization Fund (GIDF)’.

    Practice question for mains:

    Q.Discuss the role of foreign investment in the digital transformation of India.

    About GIDF

    • The GIDF focuses on digitizing the economy and building India-first products and services.
    • The plan is in line with big-tech’s bullish outlook on India. Earlier this year, Amazon said it would invest an additional $1 billion in India.
    • This was followed by a marquee investment announcement of $5.7 billion by Facebook in the country’s largest telecom company Reliance Jio.
    • Last month, Microsoft’s venture fund M12 said it would open an office in India to pursue investment opportunities focusing on B2B software startups.

    Focus areas

    The investment will focus on four areas important to digitization including:

    • Enabling affordable access and information for every Indian in their own language,
    • Building products and services that are deeply relevant to India’s unique needs,
    • Empowering businesses in their digital transformation journey and
    • Leveraging technology and AI for social good, in areas like health, education, and agriculture.

  • How friendly government policies can boost Indian steel industry

    The steel industry forms the backbone of the economy. This article highlights the difficulties of the industry magnified the pandemic. Ans suggest ways to revive demand.

    BAT could help

    • Introduction of a Border Adjustment Tax, known as BAT could help India’s steel industry.
    • Many countries use BAT to protect local steel manufacturers.
    • With economic pain unleashed by the pandemic and threat posed by Chinese state-subsidised steel imports, India hardly affords not to BAT.
    • BAT would create a level playing field.

    Why Indian steel industry is non-competitive

    • Indian steel manufacturers bear multiple local taxes – electricity and cross-subsidy duties, clean energy cess and royalties on ore and there are more.
    • These taxes make up 12% of the price of steel.
    • In rival markets, these levies either do not exist or are comparatively lower.
    • So Indian steel is non-competitive even before it leaves our plants.

    Impact of Covid

    • Impact of Covid on India’s biggest steel mills, which make up 65% of the country’s annual output of about 110 MT, was calamitous.
    • During the pandemic, the mills’ massive blast furnaces continued to burn.
    • Closure and reopening of furnaces can take up to 12 weeks; the process is complex, and maintenance costs are high.
    • So, the furnaces were burning during the lockdown.
    • India’s mills have continued to bear high fixed costs: firing furnaces but without making much steel.
    • Because of this, smaller mills, which account for about a third of national output, lack the strengths to survive a trough, and many have capitulated.

    Significance of Steel Industry

    • Steel is front and centre in India’s recovery.
    • The industry rests on mutual support – investment is made by entrepreneurs, the government offers supportive policies.
    • Government will lend weight to India’s competitive and comparative advantages, especially in manufacturing, in a post covid-19 economic order.
    • Indian steel’s guiding light is a steel ministry vision of 300MT of capacity by 2030, currently at about 138 MT.
    • The pandemic will put pressure on this target.

    Short term hurdles faced by Steel industry

    • Government capital expenditure is diverted to public health.
    • Real estate builders have an interest in large scale construction.
    • Car manufacturing will not see upturn until the second half of the year.
    • The pandemic has also hurt demand for capital utilisation, weighing heavily on capex.

    How the demand can be improved

    • Steel needs more infrastructure projects. Also, the fillip would be for the government to pay on time. Expedite the work.
    • An initiative to consign old cars to the scrap heap would significantly lift demand for steel to build replacement cars.
    • Improving the logistics chain would help transport finished goods and materials more quickly and less expensively.
    • Make steel the material of choice in the construction of flyovers, roads bridges and crash barriers, improving their safety, durability and, as a result, their life-cycle cost.
    • Indian mills possess world-class infrastructure and capacities and have integrated backwards by acquiring mining rights, partly to mitigate costs. As mentioned, one is high taxes on input materials such as energy.

    Consider the question “Examine the issues Indian steel industry faces. Suggest the ways to make it more competitive.”

    Conclusion

    A revived economy means a revived steel industry. The government should provide the wider and deeper support to the government to bring this vital sector back on the track and make help achieve global competitiveness.

  • Do we need Fiscal Council

    Why there is a need for Fiscal Council?

    • With a complex polity and manifold development challenges, India need institutional mechanisms for prudent fiscal practices.
    • An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.
    • International experience suggests that a fiscal council improves the quality of debate on public finance, and that, in turn, helps build public opinion favourable to fiscal discipline.
    • In a globalised world of enormous capital flows, market volatility across the world and especially in emerging markets, in response to monetary policy changes in major economies, and geopolitical tensions that ebb and flow, causing currencies and commodity prices to swing, countries like India need macroeconomic management as an active function round the year.
    • Also, it is supposed to report to the parliament regarding the practicability of government forecasts in the budget. This will make executive more responsible in budget preparation.
    • For the last eight years the projections of the government has fallen short by a consistent 10 percent, leading to fund cuts in the middle of the year. Thus, an independent Fiscal council would evaluate budget proposals and forecasts using objective criteria.
    • This would also boost confidence in global credit rating agencies about government’s fiscal commitment.

  • [pib] Rewa Solar Project

    The PM has inaugurated the 750 MW Solar Project set up at Rewa, Madhya Pradesh.

    Try this question from CSP 2017:

    Q. The term ‘Domestic Content Requirement’ is sometimes seen in the news with reference to-

    (a) Developing solar power production in our country

    (b) Granting licences to foreign T.V. channels in our country

    (c) Exporting our food products to other countries

    (d) Permitting foreign educational institutions to set up their campuses in our country

    Rewa Solar Project

    • This project comprises of three solar generating units of 250 MW each located on a 500-hectare plot of land situated inside a Solar Park (total area 1500 hectare).
    • The Solar Park was developed by the Rewa Ultra Mega Solar Limited (RUMSL), a Joint Venture Company of Madhya Pradesh Urja Vikas Nigam Limited (MPUVN), and Solar Energy Corporation of India (SECI), a PSU.
    • The Project was the first solar project in the country to break the grid parity barrier.
    • This project will reduce carbon emission equivalent to approx. 15 lakh ton of CO2 per year.

    Tariff management

    • Compared to prevailing solar project tariffs of approx. Rs. 4.50/unit in early 2017, the Rewa project achieved historic results.
    • It has a first-year tariff of Rs. 2.97/unit with a tariff escalation of Rs. 0.05/unit over 15 years and a levelized rate of Rs. 3.30/unit over the term of 25 years.

    Significance of the project

    • The project is also the first renewable energy project to supply to an institutional customer outside the State.
    • The Delhi Metro will get 24% of energy from the project with the remaining 76% being supplied to the State DISCOMs of Madhya Pradesh.
    • The Project also exemplifies India’s commitment to attaining the target of 175 GW of installed renewable energy capacity by the year 2022; including 100 GW of solar installed capacity.

  • Digitising the state

    This article examines the issues with governments account problems and their implications. It also suggests the ways to deal with the problems with data management in India.It is is line with the suggestions made by the CAG in this regard.

    Problem with government account keeping

    • The Union budget grew from Rs 197 crore in 1947 to Rs 30 lakh crore last year.
    • Total government expenditure may be higher than Rs 70 lakh crore. (states+union)
    • But the form and manner of keeping accounts have more or less remained unchanged since Independence.
    • Manual transactions and manual payments often lead to manually entered data at different stages in different databases on different systems.
    • This makes data unreliable, violates the principle of “single source of truth”.
    • This also sabotages transparency and good governance.

    Issues with computerisation by government

    • Government “computerisation” has often mechanised manual processes rather than “re-engineered processes”.
    • This has created siloed IT systems.
    • It has created various separate databases that lack modern data sharing protocols for organic linking like APIs (Application Programming Interfaces).
    • It leaves fiscal data being incomparable as basic as salary expenditure across states.
    • It creates the problem of obscurity in which large expenditures are booked under omnibus head called other.
    • Non-traceable actual expenditure against temporary advances drawn or funds drawn on contingent bills.
    • It creates the problem of misclassification so that grants in aid is classified as capital expenditure and bookings under suspense heads.

    3 Steps to deal with the issues

    1)  100% end-to-end data capture

    • All receipts and expenditure transactions including demands, assessment, and invoices should be received, processed, and paid electronically.

    2)  Data governance for standards

    •  Data standards are rules for describing and recording data elements with precise meanings that enable integration, sharing, and interoperability.
    • Prescribing data elements for all transactions will ensure standardisation.
    • This standardisation will clarify ambiguity, minimise redundant data, and create protocols for integration across different databases across entities receiving government funds.
    • It will also integrate entities collecting revenues on behalf of the government, and those discharging core functions on behalf of the government.
    • Government-wide data standards coupled with real-time data captured end-to-end will enable the use of cognitive intelligence tools like analytics, artificial intelligence, machine learning.
    • These tools, will support the establishment of budget baselines, detecting anomalies, data-driven project/activity costing, performance comparisons across departments and agencies, and benchmarking.

    3) Technology architecture

    • The element of technology architecture must ensure that all IT government systems should conform to a prescribed open architecture framework.
    • This framework should ensure robust security and maintaining privacy.

    How will these 3 steps help

    • It will help in recognising off-budget transactions, the last Union budget took steps towards this fiscal transparency and consolidation.
    • These steps will ensure business continuity: electronic records cannot be lost or misplaced like files or paper records.
    • It will also provide an incontrovertible audit trail.
    • It will enable Parliament and legislatures to draw “assurance” that each rupee due to the government has been collected, and each rupee has been spent for the purpose it was allocated.

    Consider the question “Government expenditure has increased manifold since 1947 but the form and manner of keeping data have remained more or less the same. In light of this examine the issues with payments, accounting and transactions data system of the government. Suggest the measures to improve it.”

    Conclusion

    A citizen-centric view of a single source of truth encompassing every rupee of public money would make the 299 remarkable people who wrote India’s Constitution proud of this 21st-century citizen empowerment innovation.

    Original Op-ed

    https://indianexpress.com/article/opinion/columns/digitising-the-state-6496692/

  • Need for a Bad Bank

    The idea of setting up a bad bank often comes up for debate, especially when stress in the banking sector is projected to rise in the near term.

    Practice question for mains:

    Q. What is a Bad Bank? Discuss how it can rescue the covid induced bad loans in India.

    COVID induced NPAs

    • Several economists and agencies project a recession in the Indian economy this year, due to the adverse effects of Covid-19 on economic activity.
    • This will hit the banking and financial sector in particular, as a slump in earnings of companies and individuals could lead to a jump in NPAs, reversing the early trends.
    • Various analysts suggest that in a couple of years, the proportion of stressed assets in the banking system could jump to as high as 18 per cent from around 11 per cent at present.
    • To tackle this upcoming challenge, the banking industry has proposed the setting up of a government-backed bad bank.

    What is the Bad Bank?

    • A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution.
    • The entity holding significant NPAs will sell these holdings to the bad bank at market price.
    • By transferring such assets to the bad bank, the original institution may clear its balance sheet—although it will still be forced to take write-downs.
    • A bad bank structure may also assume the risky assets of a group of financial institutions, instead of a single bank.

    What is the recent proposal of a bad bank?

    • The banking sector, led by the Indian Banks Association (IBA), had in May submitted a proposal for setting up a bad bank to the finance ministry and the RBI.
    • The IBA proposed for having equity contribution from the government and the banks.
    • This was based on an idea proposed by a panel on faster resolution of stressed assets in public sector banks headed by former PNB Chairman Sunil Mehta.
    • This panel had proposed an asset management company (AMC), ‘Sashakt India Asset Management’, for resolving large bad loans two years ago.
    • There were talks about creating a bad bank in 2018 too, but it never took shape.

    What kind of NPA spike is expected during this outbreak?

    • The impact of Covid-19 and the associated policy response is likely to result in an additional Rs 1,67,000 crore of debt from the top 500 debt-heavy private sector borrowers turning delinquent between FY21 and FY22.
    • Given that 11.57 per cent of the outstanding debt is already stressed, the proportion of stressed debt is likely to increase to 18.21 per cent of the outstanding quantum.

    What is the government’s view over Bad Banks?

    • While the finance ministry has not formally submitted its view on the proposal, senior officials have indicated that it is not keen to infuse equity capital into a bad bank.
    • The government’s view is that bad loan resolution should happen in a market-led way, as there are many asset reconstruction companies already operating in the private space.
    • The government has significantly capitalized state-owned banks in recent years and pursued consolidation in the PSU banking space.
    • In the last three financial years, the government has infused equity of Rs 2.65 lakh crore into state-owned banks.
    • These steps, along with insolvency resolution under the IBC, are seen as adequate to tackle the challenge of bad loans.

    What is the RBI view?

    • The RBI has so far never come out favourably about the creation of a bad bank with other commercial banks as main promoters.
    • Former RBI Governor Raghuram Rajan had opposed the idea of setting up a bad bank with a majority stake by banks, arguing it would solve nothing.
    • Rajan argued that a government-funded bad bank would just shift loans “from one government pocket (the public sector banks) to another (the bad bank) and did not see how it would improve matters”.
    • Indeed, if the bad bank were in the public sector, the reluctance to act would merely be shifted to the bad bank.
    • Alternatively, if the bad bank were to be in the private sector, the reluctance of public sector banks to sell loans to the bad bank at a significant haircut would still prevail.

    Alternatives to a bad bank

    • Many experts argue that the enactment of IBC has reduced the need for having a bad bank, as a transparent and open process is available for all lenders to attempt insolvency resolution.
    • The view is that an IBC-led resolution, or sale of bad loans to ARCs already existing, is a better approach to tackle the NPA problem rather than a government-funded bad bank.

    Former RBI Deputy Governor Viral Acharya has proposed two models:

    1) Private Asset Management Company

    • The first model is a Private Asset Management Company (PAMC) which would be suitable for sectors where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness.

    2) Setting up National Asset Management Company (NAMC)

    • The second model is a NAMC for sectors where the problem is not just of excess capacity, but possibly also of economically unviable assets in the short- to medium-term, such as in the power sector.
    • The NAMC would raise debt for its financing needs, keep a minority equity stake for the government, and bring in asset managers such as ARCs and private equity to manage and turn around the assets.

  • What is Equalization Levy?

    The government is not considering extending the deadline for payment of Equalization Levy by non-resident e-commerce players, even though a majority of them are yet to deposit the first instalment of the tax.

    Try this MCQ:

    Q.The Equalization Levy sometimes seen in news is related to:

    a) E-commerce

    b) Air Travel

    c) Imports Substitution

    d) None of these

    What is Equalization Levy?

    • Equalization Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India.
    • It is aimed at taxing business to business transactions.

    The following services are currently covered under the EL:

    1. Online advertisement;
    2. Any provision for digital advertising space or facilities/ service for the purpose of online advertisement;

    Applicability

    Equalization Levy is a direct tax, which is withheld at the time of payment by the service recipient. The two conditions to be met to be liable to the levy:

    • The payment should be made to a non-resident service provider;
    • The annual payment made to one service provider exceeds Rs. 1,00,000 in one financial year.

    Why it was introduced in India?

    • Over the last decade, IT has gone through an exponential expansion phase in India and globally.
    • This has led to an increase in the supply and procurement of digital services.
    • Consequently, this has given rise to various new business models, where there is a heavy reliance on digital and telecommunication networks.
    • As a result, the new business models have come with a set of new tax challenges in terms of nexus, characterization and valuation of data and user contribution.
    • To bring in clarity in this regard, the government introduced in the Budget 2016, the equalization levy.

  • [pib] Central Sector Scheme: Agriculture Infrastructure Fund

    The Union Cabinet has given its approval to a new pan India Central Sector Scheme-Agriculture Infrastructure Fund (CSS-AIF).

    Try this question from CSP 2018:

    Q.Increase in absolute and per capita real GNP does not connote a higher level of economic development, if:

    (a) Industrial output fails to keep pace with agriculture output.

    (b) Agriculture output fails to keep pace with industrial output.

    (c) Poverty and unemployment increase.

    (d) Imports grow faster than exports.

    Agriculture Infrastructure Fund

    • AIF aims to provide 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 financial support.
    • Under the scheme, Rs. One Lakh Crore will be provided by banks and financial institutions as loans.
    • The beneficiaries will include Primary Agricultural Credit Societies (PACS), Marketing Cooperative Societies, Farmer Producers Organizations (FPOs), SHGs, Farmers etc among others.
    • The moratorium for repayment under this financing facility may vary subject to a minimum of 6 months and maximum of 2 years.

    Management of AIF

    • Agri Infra fund will be managed and monitored through an online Management Information System (MIS) platform.
    • The National, State and District level Monitoring Committees will be set up to ensure real-time monitoring and effective feedback.
    • The duration of the Scheme shall be from FY2020 to FY2029 (10 years).

    Benefits of the scheme

    • The Project by way of facilitating formal credit to farm and farm processing-based activities is expected to create numerous job opportunities in rural areas.
    • It will enable all the qualified entities to apply for a loan under the fund.

  • Agreement for Emergency Response Programme for MSME

    The World Bank and the Government of India signed the $750 million agreement for the MSME Emergency Response Programme to support increased flow of finance into the hands of micro, small, and medium enterprises (MSMEs), severely impacted by the COVID-19 crisis.

    How will the agreement protect the MSME sector

    1. Unlocking liquidity

    • The Government is focused on ensuring that the abundant financial sector liquidity available flow to NBFCs and that banks.
    • Banks and NBFCs have turned extremely risk-averse.
    • This project will support the Government in providing targeted guarantees to incentivize NBFCs.
    • Project will also support banks to continue lending to viable MSMEs to help sustain them through the crisis.
    • It will be achieved by de-risking lending from banks and Non-Banking Financial Companies (NBFCs) to MSMEs.
    • This derisking will be done through a range of instruments, including credit guarantees.

    2. Strengthening NBFCs and SFBs

    • Improving the funding capacity of the NBFCs and Small Finance Bank (SFBs), will help them respond to the urgent and varied needs of the MSMEs.
    • This will include supporting government’s refinance facility for NBFCs.
    • In parallel, the IFC is also providing direct support to SFBs through loans and equity.

    3. Enabling financial innovation

    • Only about 8 percent of MSMEs are served by formal credit channels.
    • The program will incentivize and mainstream the use of fintech and digital financial services in MSME lending and payments.
    • Digital platforms will play an important role by enabling lenders, suppliers, and buyers to reach firms faster and at a lower cost.
    • The digital platform will be helpful especially to small enterprises who currently may not have access to the formal channels.

  • How to counter China

    There is no doubt that an economically prosperous India will be well placed to deal with China effectively. So, to achieve this prosperity India urgently needs to embark upon the path of reforms. 

    How much China has moved ahead

    • In 1987, both countries’ nominal GDPs were almost equal.
    • China’s economic opening-up has left India behind, contributing to a military imbalance.
    • China’s economy was nearly five times larger than India’s in 2019.
    • Not coincidentally, from rough parity in 1989, China’s military spending last year more than tripled India’s.
    • Heightened vigilance along the LAC demands summoning scarce resources.
    • If India cannot close the economic gap and build military muscle, Beijing may feel emboldened to probe the subcontinent’s land and maritime periphery.

    Reforms: Key to progress

    • In 1991, India enacted changes allowing markets to set commodity prices.
    • But it did not similarly liberalise land, labour and capital.
    • Now, the government has delivered mixed messages about a revitalised reform agenda.
    • Some States have temporarily lifted labour restrictions.
    • Some others intend to make land acquisition easier.

    But a call for self-sufficiency could do harm

    • India emphasis on self-reliance could inhibit growth and constrain investment in a more vigorous foreign and defence policy.
    • Greater self-sufficiency is desired.
    • Home-grown manufacturing of critical medicinal ingredients or digital safeguards on citizens’ personal data would reduce vulnerabilities.
    • Imposing restriction to help the local defence industry would hamper acquisitions helping balance China.

    Competition from other countries

    • China is facing intense scrutiny for its role in the pandemic, geopolitical competition, trade wars, and economic coercion.
    • Businesses are revisiting whether or not to diversify suddenly exposed international value chains.
    • India’s competitors [like Bangladesh, Vietnam] are trying to attract the businesses shifting out form China.
    • These countries are highlighting their regulatory predictability, stable tax policies, and fewer trade obstacles.
    • While India remains outside the Regional Comprehensive Economic Partnership, competitors are wooing companies seeking lower trade barriers.
    • Asian countries are pushing ahead: Vietnam just inked a trade deal with the European Union that threatens to eat into India’s exports.

    Way forward

    • India needs increased exports and investments to provide more well-paying jobs, technology.
    • Before committing to long-term, multi-billion investments, companies often want to test India’s market through international sales.
    • Liberalisation remains the tried-and-true path to competitiveness.
    • If India can unite its people and rapidly strengthen capabilities, it will likely discover that it can deal with China effectively.

    Consider the question “Do you agree with the view that slowdown in the reforms in land, labour and capital after the reforms of 1991 restricted Indias economic progress? Give reasons in support of your argument.

    Conclusion

    The choices that India makes to recapture consistent, high growth will determine its future. Bold reforms offer the best option to manage Beijing and achieve greater independence on the world stage.