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Subject: Economics

  • Aatamnirbhar in Agriculture

    India has been the net exporter of agricultural commodities since 1991, however, there is scope for increasing its net export. This article suggests the strategy to achieve this.

    Foreign exchange reserve: then and now in terms of grains

    • In the mid-1960s the country had about $400 million.
    • If India had spent all its foreign currency reserves just on wheat imports, it could have imported about seven million tonnes (mt) of wheat.
    • Today, India has foreign exchange reserves of more than $500 billion.
    • Even if the country has to buy 20 mt of wheat at a landed cost of $250/tonne, it will spend just $5 billion it is just one per cent of its foreign exchange reserves.
    • In that sense, the biggest reform in the last three decades that has led to “aatma nirbharta” in food is the correction of the exchange rate.
    • Another factor is coupling and the gradual integration of India with the world economy.
    • This has helped India increase its foreign exchange reserves from $1.1 billion in 1991 to more than $500 billion today.

    India: Net exporter of agricultural products

    • India has been the net exporter of agricultural products ever since the economic reforms began in 1991.
    • The golden year of agri-trade was 2013-14 when net agricultural trade surplus was $24.7 billion.
    • In 2019-20, agri-exports were just $36 billion, and the net agri-trade surplus at $11.2 billion.
    • With this dull performance doubling agri-exports by 2022 looks almost impossible.

    Let’s look at what India exports

    • Marine products with $6.7 billion exports top the list.
    • The second is rice at $6.4 billion of which basmati is at $4.6 billion and common rice at $2.0 billion.
    • Next is spices at $3.6 billion.
    • Other items are buffalo meat at $3.2 billion, sugar at $2.0 billion, tea and coffee at $1.5 billion, fresh fruits and vegetables at $1.4 billion, and cotton at $1 billion.

    Strategy to increase export

    • If one chalks out a strategy we would need to keep in mind the principle of “comparative advantage”.
    • That means exporting more where we have a competitive edge, and importing where we lack competitiveness.
    • Together power and fertiliser subsidies account for about 10-15 per cent of the value of rice and sugar produced on a per hectare basis.
    • So, we should offer similar incentives for exports of high-value agri-produce like fruits and vegetables, spices, tea and coffee, or even cotton, as we do for rice and sugar?

    Decreasing the edible oil imports

    • On the agri-imports front, the biggest item is edible oils — worth about $10 billion i.e. more than 15 MT.
    • India needs to decrease imports through augmenting productivity and increasing the recovery ratio of oil from oilseeds and in case of palm oil, from fresh fruit bunches.
    • The maximum potential of increasing production lies in oil palm.
    • This is the only plant that can give about four tonnes of oil on a per hectare basis.
    • India has about 2 million hectares that are suitable for oil palm cultivation — this can yield 8 mt of palm oil.
    • But it needs a long term vision and strategy.

    Issue of subsidy to rice and sugar

    • Rice and sugar cultivation are subsidised through free power and highly subsidised fertilisers, especially urea.
    • It is leading to the virtual export of water because of their high water requirements.
    • One kg of rice requires 3,500-5,000 litres of water for irrigation, and one kg of sugar consumes about 2,000 litres of water.
    • This leads to increased pressure on scarce water and highly inefficient use of fertilisers.
    • It may be worth noting that almost 75 per cent of the nitrogen in urea is not absorbed by plants.
    • It either evaporates into the environment or leaches into groundwater making it unfit for drinking.

    Consider the question “While India has been the net exporter of agricultural products ever since the economic reforms of 1991, it is far from realising its potential to become the leading agri-produce exporter. In light of this, suggest the strategy that India should follow to increase India’s net agri-exports.”

    Conclusion

    The government must focus on augmenting export and decrease import dependence in agricultural products which will further its goal of aatmanirbharta and doubling the farmers’ income.

  • Why have Indian Railways opened doors for private players?

    Indian Railways has launched the process of opening up train operations to private entities on 109 origin-destination (OD) pairs of routes using 151 modern trains.

    Practice question for mains:
    Q. Indian Railways has been the lifeline of India’s growth story since Independence. Discuss various opportunities and challenges ahead of its privatization.

    Why such a move?

    • From a passenger perspective, there is a need for more train services, particularly between big cities.
    • The Railway Board says five crore intending passengers could not be accommodated during 2019-20 for want of capacity, and there was 13.3% travel demand in excess of supply during summer and festival seasons.

    Moving the paralyzed system

    • The Railway Board has moved ahead with a long-pending plan, setting a tentative schedule for private train operations, expected to begin in 2023 and in 12 clusters.
    • At present, scheduled passenger train services remain paralyzed during the COVID-19 pandemic, and various railways have been running only specials such as those for workers.

    What is the background of the decision?

    • The present bid is only for a fraction of the total train operations — 5% of the 2,800 Mail and Express services operated by Indian Railways.
    • The overall objective, however, is to introduce a new train travel experience for passengers who are used to travelling by aircraft and air-conditioned buses.
    • Without an expansion, and with the growth of road travel, the share of the Railways would steadily decline in the coming years.

    Bibek Debroy Committee Recommendations

    • Several committees have gone into the expansion and the modernization of Indian Railways.
    • In 2015, the expert panel chaired by Bibek Debroy constituted by the Ministry of Railways a year earlier, recommended that the way forward for the railways was “liberalisation and not privatization”.
    • It asked for entry of new operators “to encourage growth and improve services.”
    • It also made it clear that a regulatory mechanism was a prerequisite to promote healthy competition and protect the interests of all stakeholders.

    Why is the move significant for Indian Railways?

    • For the Railways, one of the largest organisations in the country, operating not just trains for passengers and freight, but also social institutions such as hospitals and schools represents a radical change.
    • It was estimated that a one rupee push in the railway sector would have a forward linkage effect of increasing output in other sectors by ₹2.50.
    • Train services operated by Indian Railways cover several classes of passengers, meeting the social service obligation to connect remote locations, and adopting the philosophy of cross-subsidy.
    • In more recent years, it has focused on revenue generation through dynamic demand-based pricing.

    Private players will be game-changers

    • Private operators are not expected to shoulder the burden of universal service norms, and will focus on revenue.
    • Even the first IRCTC-run trains have a higher cost of travel between Lucknow and Delhi than a Shatabdi train on the same route that almost matches it for speed.
    • So private operators would have to raise the level of their offering even higher, to justify higher fares, and attract a segment of the population that is ready to pay for this difference.
    • The government would have to explain that it has monetized its expensive fixed assets such as track, signalling and stations adequately for the taxpayer, who has paid for them.

    Challenges ahead

    • Several critical issues remain unaddressed. For one, there will be questions over the financial viability of some routes.
    • Railways also tend to cross-subsidise passenger fares through freight revenue.
    • This translates to below-cost pricing, which will make it difficult for private players to compete.
    • On the other hand, higher fares needed to cover costs might bring them in direct competition with airlines, pricing them out of the market.

  • What is Winter Diesel?

    India’s armed forces may soon be using winter diesel for operations in high altitude areas such as Ladakh, where winter temperatures plummet to extremely low as -30° Celsius.

    This year BS-VI compliant fuel was in news. Try differentiating the Winter Diesel with the BS-VI fuel.

    What is Winter Diesel?

    • Winter diesel is a specialised fuel that was introduced by Indian Oil Corp. Ltd. last year specifically for high altitude regions and low-temperature regions such as Ladakh, where ordinary diesel can become unusable.
    • The flow characteristics of regular diesel change at such low temperatures and using it may be detrimental to vehicles.
    • Winter diesel which contains additives to maintain lower viscosity can be used in temperatures as low as -30°C and that besides a low pour point, it had higher cetane rating — an indicator is the combustion speed of diesel and compression needed for ignition.
    • It has lower sulphur content, which would lead to lower deposits in engines and better performance.

    Back2Basics: BS-VI fuel

    • Sulphur content in fuel is a major cause for concern. Sulphur dioxide released by fuel burning is a major pollutant that affects health as well.
    • BS-VI fuel’s sulphur content is much lower than BS-IV fuel.
      It is reduced to 10 mg/kg max in BS-VI from 50 mg/kg under BS-IV.

    This reduction makes it possible to equip vehicles with better catalytic converters that capture pollutants. However, BS-VI fuel is expected to be costlier that BS-IV fuel.

    With inputs from:
    https://www.civilsdaily.com/news/pib-winter-grade-diesel/

  • Differentiating FDI and trade

    Differentiating between trade and investment is necessary for reaping the benefits that come with foreign investment in firms. However, the concerns over the source of funds are not unfounded. So, some caution is warranted in dealing with FDI.

    Let’s look into the debate

    • Government is asking its citizens to aim for self-reliance.
    • So, should India continue to allow investment inflows from China? This is the debate.
    • China has invested $4 billion in Indian startups in the past 5 years.
    • This amount would be higher if funds located in tax havens with Chinese ownership are also accounted for.

    Some of the questions raised in the debate

    •  Is trade of products like buttons, crockery same as long-term foreign investments in high-risk new age technology-driven products?
    • Is it economically prudent for a country to fulfil all its capital requirements or compromise on innovation due to lack of thereof?

     Trade vs FDI

    • Trade just helps the country fulfil its requirements of those goods and services (G&S) that may not available in the country.
    • Investments provide the capital to build infrastructure that can plug the G&S deficit, even, sell it to other markets.
    • Trade just provides entry of G&S.
    • FDI inflow is a route for transferring capabilities, technology, building linkages, business capabilities etc.
    • FDI helps generate employment, public assets, tax revenues and develop markets, none of this is contributed by the trade of merchandise.
    • Foreign investment does have an adverse impact on domestic markets in the short-run by crowding out domestic competition or investment.
    • In fact, attracting FDI in employment-intensive sectors can create positive economic and social spillovers.
    • Possibilities to increase exports often arise from companies with significant levels of FDI.
    • Foreign investor exposes itself to regulatory, economic and geo-political risks of the country.

    Foreign investment in Indian firms: Two aspects to consider

    • While discussing the funding composition of the likes of Paytm, OYO hotel chain or Ola, two aspects need to be considered.
    • 1) These companies are Indian companies operating under the law of land, creating economic opportunities for the youth and contributing to the welfare of the Indian community.
    • 2) Success of these ventures is not solely due to the investment, but because of the novelty of the product offering.
    • Investments in start-ups involve high risk; the list of failed start-ups with Chinese investment is bound to be much longer.
    • In the absence of technology giants in India, we may also end up draining the brain to countries with a stronger financial ecosystem for fresh ideas.

    Apprehension over FDI in India

    • Apprehensions related to investments from any country per se, are not unwarranted in India.
    • This is mainly because history suggests foreign investment can potentially lead to economic colonisation.
    • However, times have changed and so has the world order.
    • Steady inflow of investments can exist without impacting the economic or political stability of the country.
    • To do so we should practice some of the following recommendations.

    How to address the concern over FDI

    • Investment funds can be set up outside the home country of the investor or be routed through companies located at tax havens.
    • It is not always possible to map the investor to the country.

    How to solve this problem

    • To solve this identify sectors based on sensitivity, the investment required, technology, employment and social impact.
    • Tighten regulations related to data storage and access by companies through data localisation in these sensitive sectors.
    • Modify the offset policy in defence to ensure a certain portion of the profits is invested in the SMEs.
    • To further India’s interests in nascent sectors such as machine learning, HealthTech, maximum period for an investor to be invested in a greenfield should be limited to 10 years.
    • All firms receiving foreign investment should have a plan to contribute to India’s exports within the product lifecycle and minimum employment generation.
    • Ease listing norms for firms so that funds through public and private placement can be raised by wholly Indian owned companies.
    •  BSE SME & Start-ups Platform has helped 322 companies raise Rs. 3,320.48 crores from the market. Start-ups should be encouraged to make use of the platform wherever possible.
    • Domestic procurement of raw material and intermediate goods has to be non-negotiable as far as possible.

    Consider the question “What are the challenges and opportunities associated with foreign investment and suggest the ways to address the challenges.”

    Conclusion

    From being treated as a ‘dumping bazaar’ to now attracting investors, India does not need to shy away from investments; it certainly needs to be wary of pure trade which limits India’s potential and drive to produce indigenously.

    Back2Basics: Offset policy

    • The offset policy, introduced in 2005, mandates foreign suppliers to spend at least 30% of the contract value in India.
    • It was first revised in 2006 and then again in 2011 and in 2016. Another round of tweaking is currently underway.

     

  • Decoupling pharmaceutical industry from China should be strategic

    Abrupt ban on import from China would harm the India pharmaceutical industry and disrupt the supply of several essential medicines. Any attempt at reducing the dependence on China for APIs should be strategies, argues the author.

    Dependence of Indian pharma industry on China

    •  India is the third-largest producer of finished drugs in the world.
    • However, India relies significantly on China for supplies of active pharmaceutical ingredients APIs.
    • An estimated 70 per cent of API requirements of India’s pharmaceutical industry are sourced from China.
    • For some drugs, such as paracetamol and ibuprofen, this dependence is almost 100 per cent.
    • This import reliance has been fuelled by environmental controls in India and competition with China, which has higher volumes of production and lower costs.

    Implications of banning import from China

    • Restricting or banning the import of APIs would cause significant disruption to the Indian pharmaceutical industry
    • The pharmaceutical industry had $40 billion in revenues in 2018-19, according to Pharmexcil.
    • Such a prospect is especially of concern to potential patients.
    •  Indian pharmaceutical industry annually exports $20 billion worth of medicine.
    • An ad hoc or reactive decoupling could disrupt the production of a wide range of medicines in India and globally.
    • Such disruption could affect the availability of Dexamethasone and painkillers, such as paracetamol and ibuprofen, as well as antibiotics, such as penicillin.
    • The impacts would be especially high in low and middle-income countries.
    • In many African countries, in fact, India supplies almost 50 per cent of the medicines in value terms.

    Lessons from the past: Policy initiative matters

    • Market share of foreign-owned multinationals in India was 80-90 per cent in 1970 in the pharmaceutical industry.
    • It fell to 50 per cent by the early 1980s, and down to 23 per cent today.
    • The prices of medicines in India fell from being amongst the highest in the world to amongst the lowest.
    • But this did not happen through sudden decoupling from foreign multinationals or a complete boycott or ban on imports.
    •  The 1970 Indian Patent Act removed product patent protection in pharmaceuticals.
    • So, the 1970 Patent Act is widely lauded for facilitating the growth of India’s industry.
    • India also benefited from the 1973 Foreign Exchange Regulation Act (FERA) and the subsequent New Drug Policy (1978).
    • Thus, a series of policy initiatives succeeded in tilting the balance in favour of Indian-owned firms.

    But does it mean we have to depend on China forever?

    • No, but reducing dependence on China will not be easy to achieve.
    • In India, any decoupling from China must be strategic, with significant policy support.
    • It will take time for a paced indigenisation.

    Government moves to reduce dependence for API

    • In March, the government announced Rs 3,000 crore to develop three bulk drug parks.
    • The government also announced Rs 6,940 crore to manufacturers of 53 bulk drugs over the next eight years.
    • Planning ahead towards greater domestic production of APIs, as well as reduced dependence on China, is an understandable and sensible policy objective.
    • Despite a decline in recent decades, India has a stronger starting point than most countries given the continued presence of some API production capabilities.
    • Indian firms have capacities, for instance, to produce COVID-19 treatments, including Remdesivir.

    Consider the question “What are the APIs? Why India depends on other countries for it and what are implications of it? Suggest ways to reduce this dependence.”

    Conclusion

    In the short run, boycotts or bans would be counter-productive for the Indian industry, while also affecting access to much-needed medicines to India’s citizens and beyond. In the long run, however, reducing dependence on China would be strategically prudent.

    Back2Basics: What are APIs?

    • Active pharmaceutical ingredient (API), is the term used to refer to the biologically active component of a drug product (e.g. tablet, capsule).
    • Drug products are usually composed of several components.
    • The API is the primary ingredient.
    • Other ingredients are commonly known as “excipients” and these substances are always required to be biologically safe, often making up a variable fraction of the drug product.
    • The procedure for optimizing and compositing this mixture of components used in the drug is known as “formulation.”

  • What did it take for the Indian Railways to achieve 100% punctuality?

    The Indian Railways has announced that it achieved 100 per cent punctuality of its passenger trains on July 1, a never-before feat.

    Try this question:

    Q.Discuss various issues crippling the punctuality of the Indian Railways.

    A big achievement for Railways

    • Usually, the Indian Railways run over 13,000 passenger trains and over 8,000 freight trains every day.
    • It is important to remember the context – very few trains are running now, and the punctuality of the Railways can hardly be compared with its own performance on this count in pre-COVID times.
    • The 100 per cent punctuality has been achieved when the network is running just 230 passenger trains – along with about 3,000 loaded freight trains and 2,200 empty ones.
    • This is no mean achievement – it is indeed not an easy task given all the constraints that the Railways usually face while running a train on its designated path and time slot.

    Why do trains get delayed in India?

    • There are a number of reasons, which is also why the achievement of the Railways is significant.
    • There are unforeseen situations such as a failure of assets like the signalling system and overhead power equipment.
    • Several types of breakdowns can occur, related to rolling stock, tracks, etc., that make a train lose time along the way.
    • Then there are external unforeseen problems like run-over cattle and humans, agitations on the tracks, and the like.

    And what have the Railways been doing right?

    • The maintenance of tracks was carried out in a quick time during the COVID period in various critical sections, so the average speed increased, and stretches of slowing down were minimized.
    • Better and modern signalling is also making an impact.
    • Another reason is better planning and operations analysis.

    How do the delays impact the overall system?

    • In normal times, these failures take away a lot of scheduled time when the train is detained even for a short time because making up the lost time during the remainder of the journey is a tricky business.
    • It’s not as though a train can just run faster to make up for a lost time. In a network chock-a-block with trains, a train hardly ever has such leeway built into its pre-set path.
    • Any train that gets delayed inordinately due to whatever reason during the journey theoretically eats into the “path” – or time slot allotted on the track – of another train.
    • It then becomes a matter of which train to prioritise. Conventionally, Rajdhanis and premium trains get priority of path over ordinary mail/express trains.
    • Freight trains, whose runs are not exactly time-sensitive, are usually held up to make way for passenger trains.

    But why do the Railways have to juggle operations in this way?

    • It’s a constantly dynamic scenario in which railway operations professionals take calls all the time.
    • At the heart of the problem are network capacity constraints. It basically means that there are more trains than the network can handle in a given time bracket.
    • Around 60 per cent of all train traffic is on the Golden Quadrilateral, even though it represents just about 15 per cent of the total network.
    • There are projects to enhance capacity by building additional lines and modernizing signalling systems, etc.

    Minimizing the delays

    • The Railways are working on what is called a “zero-based timetable”.
    • In this concept, which is to be introduced soon, every train that enters the network is justified based on needs and costs.
    • It is expected to make train operations more seamless.

  • Safety net of income post Covid

    Providing a minimum basic income post-Covid will require some novel approach. This article proposes an approach with the mix of direct cash transfer and changes in the employment guarantee scheme.

    Non-universal targeted programs

    •  It is true that a universal schemes are easy to implement.
    • Non-universal targeted programmes face the problem of identification.
    • Narrowly-targeted programmes will run into complex problems of identification.
    • And the problem of identification gives rise to exclusion and inclusion errors.

    How to solve identification problem

    • There are three proposals which meet the objective of providing a minimum basic income.
    • 1) Give cash transfers to all women above the age of 20 years.
    • 2) Expand the number of days provided under MGNREGA.
    • 3) Have a national employment guarantee scheme in urban areas.
    • In all the three proposals, there is no problem of identification.
    • A combination of cash transfers and an expanded employment guarantee scheme can provide a minimum basic income.

    1) Cash transfer to all women

    • One way of doing it will be to give it to all women say above the age of 20.
    • This is an easily identifiable criterion because the Aadhaar cards carry the age of the person.
    • The female population above the age of 20 is around 42.89 crore.
    • Making available a minimum of Rs 4,000 annually as a cash transfer to all of them will cost Rs 1.72 lakh crore.
    • Which is 0.84 per cent of GDP.
    • The cost of the scheme to the government will be less if the well-off women choose not to take the cash transfer.

    2) Expanding MGNREGA

    • The Act guarantees 100 days of employment.
    • At present, MGNREGA is availed of only for 50 days of employment.
    • One way to help the poor and informal workers is to strengthen it.
    • The government needs to increase the number of days under the scheme from 100 to 150 in rural areas.

    3) Employment guarantee scheme for urban areas

    •  Introducing Employment Guarantee Act in urban areas would help also provide income.
    • Providing employment for 150 days instead of 100 days will also prove beneficial.

    Some facts and figures

    • In 2019-20, the government spent Rs 67,873 crore for providing 48 days of employment to 5.48 crore of rural households.
    • Out of this, the wage expenditure was Rs 48,762 crore.
    • The government has increased the per day wage rate from Rs 182.1 in 2019-20 to Rs 202.5 in 2020-21.
    • So, the estimated expenditure for 150 days of employment to 5.48 crore households in rural areas and 2.66 crore households in urban areas — together they account for 33 per cent of total households in the country.
    •  The additional expenditure needed for the new proposal proposal is Rs 1.9 to 2.5 lakh crore.
    • This additional expenditure is around 1 to 1.22 per cent of GDP.
    •  The total cost of the three proposals would be Rs 4.9 lakh crore or 2.4 per cent of GDP.

    But the total cost could be lower

    •  As the Employment Guarantee Programme is a demand-based programme, the number of days availed could be lower.
    •  This is happening even now.
    • Second, on cash transfers, some women, particularly from richer classes, may voluntarily drop out of the scheme.
    • Alternatively, we can provide that everyone receiving cash transfer must declare that her total monthly income is less than Rs 6,000 per month.

    Where the additional money will come from

    • Removing all exemptions in our tax system would give enough money.
    • Tax experts advocate removing exemptions so that the basic tax rate can be reduced.
    • Perhaps, out of the Rs 4.2 lakh crore which is needed, Rs 1 lakh crore can come out of phasing out of some of the expenditures.
    • While another Rs 3 lakh crore must come out of raising additional revenue.
    • Some of the non-merit subsidies, another item of expenditure, can be eliminated.

    Consider the question “What are the issues non-universal schemes faces? Suggest the ways to do with the issue of identification which such schemes face.”

    Conclusion

    In the post-COVID-19 situation, we need to institute schemes to provide a minimum income for the poor and vulnerable groups and trying the mixed approach of cash transfer to women and modification of Employment Guarantee Acts could do that.

  • Reforming Digital policy

    Pandemic has been ravaging the economies across the globe but digital services have escaped the onslaught and are thriving. For India, this could be an opportunity. This article highlights the importance of the sector and how some proposed measures could have an adverse impact on the sector.

    Emerging trends in economies

    • Economic growth has dropped, and the competition for foreign investment is intensifying.
    • There are national campaigns to shift supply chains and the urgent necessity to reverse recessionary trends.
    • The United Nations Conference on Trade and Development just released its latest World Investment Report.
    • The report projected that FDI to developing Asian economies could drop by as much as 45%.

    Why digital services would beat this trend

    • Digital services have become critical to every 21st century economy.
    • Digital services are filling gaps when national or global emergencies interrupt more traditional modes of commerce.
    • It enables access to and delivery of a wide array of products across multiple sectors.

    How it matters for India

    • India offers undeniable potential for innovative homegrown start-ups.
    • India has a huge and increasingly digitised population.
    • Indian government policies will be key determinants in how quickly and at what level the economy attracts new investment.
    • Fostering innovation, and expanding its exporting prowess will also matter.

    Three pending measure

    • Three pending reform measures under consideration are-
    • 1) Personal Data Protection Bill (PDPB).
    • 2) The e-commerce policy.
    • 3) The Information Technology Act Amendments.

    Issues with these measures

    • These regulatory reforms seem to emphasise a focus on protecting the domestic market for domestic companies.
    • It also prioritises government access to data.
    • It may be difficult to reconcile these approaches with India’s strong interest in i) promoting data privacy ii) protecting its democratic institutions iii) encouraging FDI and India’s position as a global leader in information technology.

    India-US trade relationship issue

    • The India-U.S. trade relationship is uncertain.
    • The bilateral relationship is an important factor for greater trade and investment in digital services.
    • India and the U.S. are yet to conclude negotiation on a bilateral trade agreement that could address some digital services issues.
    • The U.S. just initiated a “Section 301” review.
    • The review seeks whether digital services taxes in 10 countries constitute “unfair” trade measures, including India’s equalisation levy.

    Consider the question “Digital services have become critical to every 21st-century economy and more so for Indian economy. In light, highlight the salience of digital services for the Indian economy and what are the issues that could affect the growth trajectory of the sector in India?”

    Conclusion

    Post-COVID-19 international cooperation and approaches to good governance in the digital sphere will be top-priority initiatives. The steps India takes now could well establish itself as a true global leader.

  • How much forex reserve is too much

    India’s foreign exchange reserves touched an unprecedented level. Being reserves, the reserves also represent the lost opportunity. This article examines the reasons for and utility of maintaining huge reserves.

    Reasons for surge in the forex reserves

    • The recent forex reserves surge was a result of two things:
    • 1) Foreign institutional investors reinvested in the Indian market in May-June after they exited their positions in panic in March.
    • 2) A global fall in fuel prices has reduced India’s oil import bill, allowing it to save up forex reserves.

    But why does India keeps huge forex reserves- 3 possibilities

    • Sufficiency of forex reserves is sometimes measured on how many months’ worth of imports a country can afford.
    • While six months is considered sufficient.
    • The RBI in December 2019 said it had enough to sustain for 10 months, the forex reserves were then $0.4 trillion.
    • Today, the cover is 12 months!
    • This is despite having a sufficient credit line from the IMF, should there be a credit shock.
    • So, there are 3 possibilities for why government maintains such huge reserves.
    • 1) Excess forex reserves are likely the government’s contingency fund, in case the economy suddenly topples.
    • The pandemic has increased the government’s insecurity.
    • 2) Another possibility is that the government is accumulating these reserves as “Plan-B” savings should its strategic disinvestment plans fail.
    • 3) Forex reserves are also likely a way for India now to maintain its global rating.
    • The fundamental use of India’s foreign exchange should be to ensure the Rupee (INR) stability.

    Stability of Rupee

    •  Despite steadily rising reserves, INR fluctuated between 77 and 75 against the US dollar in the last two months.
    • INR has become one of Asia’s worst currencies.
    • The RBI may allow it to devalue further to support its balance sheet,
    • Devaluation would enable it to transfer a big chunk of its realised profits as dividend to the starving government.

    Lost opportunity

    • It is understandable for oil-rich countries to maintain high forex reserves.
    • A single oil trade hiccup can derail their economy.
    • Economists have theorised that holding high forex reserves is unnecessary.
    • In fact, not using them to finance mega infrastructure projects are lost opportunities.
    • And yet the Indian government has held these reserves in liquid, possibly for its feared D-day.

    Perils of using forex reserves as emergency funds

    •  Over-reliance on these floating funds to stimulate the economy might be poorly informed.
    • The potential of these funds to switch direction [i.e. they could exit as fast] should not be underestimated.
    • In March alone, foreign institutional investments in India fell by Rs 65,000 crore.
    • India’s foreign exchange reserves registered this impact.
    • Reversing the dip, investments went up in May and now in June with some big corporate deals.
    • If the government intends to use forex reserves as an emergency fund, it should ensure that they do not shrink just when they are most needed.

    Consider the question “India’s foreign exchange reserves touched new height recently. This also giver rise to the argument of lost opportunity. In light of this discuss the utility of maintaining foreign exchange reserves and issue of optimum level of foreign exchange reserves.”

    Conclusion

    Maintaining high foreign exchange reserves definitely entails cost. The cost-benefit analysis and the lost opportunity must be the basis for deciding the level of the reserves.

  • Stamp Duty on Mutual Fund Purchases

    The Amendments in the Indian Stamp Act, 1899 has been brought through Finance Act 2019 for Rationalized Collection Mechanism of Stamp Duty across India with respect to Securities Market Instruments.

    Up till now, we knew that stamp duties are levied on property transactions, registrations etc. With the Finance Act 2019, the stamp duties are also levied on Mutual Funds.

    What is Stamp Duty?

    • Stamp duty is a legal tax payable in full and acts as evidence for any sale or purchase of a property. It is payable under Section 3 of the Indian Stamp Act, 1899.
    • The levy of stamp duty is a state subject and thus the rates of stamp duty vary from state to state.
    • The Centre levies stamp duty on specified instruments and also fixes the rates for these instruments.
    • It is usually paid by the buyer with regardless of agreement and in case of property exchange, both seller and the buyer has to share the stamp duty equally.
    • A stamp duty paid instrument/document is considered a proper and legal instrument/document and has evidentiary value and is admitted as evidence in courts.

    What is the move?

    • Beginning July 1, all shares and mutual fund purchases will attract a stamp duty of 0.005 per cent and any transfer of security will attract a stamp duty of 0.015 per cent.
    • The government had introduced changes to the Stamp duty Act last year by introducing a uniform rate of stamp duty on the trading of shares and commodities.
    • All categories of mutual funds (except for ETFs) will attract stamp duty for the first time.
    • Shares purchased by individuals at stock exchanges were charged stamp duty at different rates by respective states.

    Where all will it be applicable?

    • The stamp duty will be applicable on all transactions, including shares, debt instruments, commodities and all categories of mutual fund schemes.
    • As for mutual funds, it will be applicable on all fresh purchases, including the fresh monthly purchases in previously registered Systematic Investment Plans.
    • It will also be applicable if investors switch from one scheme to another and also in case of dividend reinvestment transactions.
    • Transfers of units from one Demat account to another, including market/off-market transfers, will also attract stamp duty.

    How does it impact the investor?

    • The impact on long-term investments by a retail investor is nominal.
    • Since the stamp duty will be charged a one-time charge, if an investor invests Rs 1 lakh in a mutual fund scheme or in stock and holds it for two years, he will have to pay a duty of only Rs 5.
    • In fact, it will be marginally lower as the stamp duty is applicable on the net investment value i.e gross investment amount less than any other deduction like transaction charge.
    • There is no duty at the time of redemption.

    What about big investors?

    • The impact is higher for investors with short-term investment horizons such as banks and corporates who invest in liquid and overnight schemes of mutual funds.

    How much revenue can it generate for the government?

    • In the financial year 2019-20, the mutual fund industry mobilized aggregate funds of over Rs 188 lakh crore.
    • A high portion of that was in overnight funds or liquid funds.
    • A 0.005 per cent stamp duty on this amount works out to Rs 940 crore.
    • If the industry continues to mobilise funds to the tune of Rs 190 lakh crore or higher, it will generate revenues of nearly Rs 1,000 crore for the government from mutual fund transactions itself.

    Back2Basics: Mutual Funds

    • MF is a trust that collects money from a number of investors who share a common investment objective.
    • Then, it invests the money in equities, bonds, money market instruments and/or other securities.
    • Each investor owns units, which represent a portion of the holdings of the fund.
    • The income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV.
    • It is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
    • All funds carry some level of risk. With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.