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Subject: Economics

  • We must aspire for nurturing economy

    The sight of thousands of migrant workers walking thousands of kms back home after lockdown has been the watershed moment for the collective conscience of our country. This made us think about the present economic model and policies we have been adopting. So, the answer to the problems created by the present model lies in building “nurturing economy”. What is nurturing economy? Read to know…

    Broadly, we can summarise the impact of pandemic as-

    • Unemployment is shooting up.
    • Supply chains of food and essentials have been disrupted.
    • Dark clouds of economic recession are on the horizon.

    Invisible cost of pandemic

    • The visible cost of the pandemic in terms of the lives lost are being counted by the day.
    • But the invisible cost of hunger and impoverishment of the most vulnerable sections is yet to be effectively addressed.
    • Vulnerable section- our workers, the poor and the migrants, particularly women, are at receiving end of these invisible cost.

    Health of economy before pandemic

    • The pandemic came at one of the worst possible times.
    • India’s economy has been in deep trouble since 2016.
    • In 2019-20, even before the pandemic happened, our GDP growth had dropped to 4.2 per cent, lowest growth seen in the last 11 years.
    • Even the oil prices dropped at their historic low.
    • Non-food bank credit is a good indicator of overall economic robustness.
    • By December 2019, the growth of non-food bank credit had dropped to below 7 per cent. ( lowest in the last 50 years.)

    What happened to economy after the pandemic?

    • After the pandemic arrived, matters, of course, got worse.
    • In March, $16 billion of foreign capital exited the country, which is an all-time record for India.
    • India’s unemployment rate shot up to a record high of 23.8 per cent in April.
    • In the same month, Indian exports dropped by 60 per cent.
    • This was one of the biggest drops seen in any emerging market economy in the world.
    • There is a genuine risk that this year our growth will drop to an all-time low, beating the record plunge of 1979-80.

    So, the pandemic has forced us to think about the building a nurturing economy, one in which Gandhiji’s Talisman is followed in word and spirit, one in which John Rawls ideas are implemented.

    So, What building a nurturing economy involves?

    • Our economic and political policies must not be ends in themselves.
    • Instead, these policies should involve instruments for building a society that is secular, inclusive and nurturing.
    • It should be a society where people of all religions, caste, race and gender feel wanted and at home.
    • Environment sustainability and focus on green economy is also part of nurturing economy.
    • We should strive to create a society that respects knowledge, science and technology, and culture.

    Threefold crisis emerging out of our exploitative behaviours

    • The outcome of our exploitative behaviour is a threefold crisis which describes India’s current predicament.
    • 1) Rising poverty and unemployment despite abundance.
    • 2) Rising intolerance and violence.
    • 3) Environmental catastrophe.

    Consider the question “Pandemic and the predicament of migrant labours has highlighted the lack of inclusive growth in our economy. And we must look for the solution to such shortcomings in our approach. In light of this, suggest the changes that our economy must embrace to ensure inclusive growth.”

    Conclusion

    Our ambition should not be to make India the richest nation in the world. India should be an example of an equitable society, where people are not abandoned without income and work, where no one feels the insecurity of being a minority, and of being discriminated against.

  • Issues with the ordinances on agriculture

    Following the announcement of reforms in the agri-sector, the government issued ordinances to make good on its promise. These ordinances deal with- ECA-1955, APMC Act and Contract farming. The author in this article examines whether these ordinances deliver on the promises made or not.

    1) Ordinance for amendment of APMC Act

    • ‘Farming Produce Trade and Commerce (Promotion & Facilitation) Ordinance 2020.’ seek to address the problems farmers face in selling their produce.
    • Due to the unionisation of middlemen (arhatias) and their financial clout, politicians in the states have been reluctant to amend agriculture marketing laws which are exploitative and don’t allow farmers to receive a fair price.
    • Rather than coax the states financially to correct the markets, an unregulated marketplace has been created where 15 crore farmers will be exposed to the skulduggery of traders.
    • Imagine the mayhem in stock markets if ROC and SEBI were similarly made redundant.

    Issues and benefits

    • Rather than replicate Punjab’s successful agriculture mandi model, now states will lose vital revenue to even upgrade and repair rural infrastructure.
    • The ordinance may be challenged by the states for its constitutional overreach.
    •  But, on the flip side, over time, the largest informal sector in the country will begin to get formalised and new business models will develop.
    • A different breed of aggregators will create the much-needed competition to the existing monopoly of local traders.
    • Additionally, henceforth, when farmers sell agricultural produce outside of APMC market yards, they cannot legally be charged commission on the sale of farm produce.
    • To survive, the APMCs across the nation will have to radically standardise and rationalise their mandi fee structure and limit the commission charged by traders on sale of farmers’ produce.

    2) ECA 1955: Not enough has been done

    • Here, the amendment was supposed to allay the genuine fears of traders emitting from the bureaucracy’s draconian powers to arbitrarily evoke stockholding limits etc.
    • Rather than forego its own powers for the larger good, the amendment’s fine print makes it ambiguous and leaves space for whimsical interpretations as before.
    • The trader’s uncertainty is compounded by the arbitrary import-export policy decisions which dilute the purpose of the amendment itself.

    3) Ordinance on Contract farming

    •  “The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020” tries to placate the fears of both the farmer and the contractor when they sign an agreement.
    • For the farmer, the legal recourse is never a practical choice as the persuasive powers of the aggregators’ deep pockets cast a dark shadow over the redressal process.
    • Likewise, the tediously stretched legal proceedings are dissuasion enough to either not seek redressal or settle for unfavourable terms.
    • That produce derived from contract farming operations will not be subject to any obstructionist laws is a very good step.
    • Farmer-producer organisations and new aggregators will get a boost with these laws, and become harbingers of prosperity in some small corners of the countryside.
    • There are green shoots in the ordinances, but the downside dwarfs the upside.

    So, what are the implications of these 3 reforms?

    • The union of the three ordinances appears to be a precursor to implementing the Shanta Kumar Committee recommendations to dilute and dismantle FCI, MSP & PDS which will push farmers from the frying into the fire.
    • It may also be interpreted to mean that now the sugar industry needn’t pay farmers the central government FRP or the state government SAP price for sugarcane.

    Consider the question ” There was a mention of reforms related to agri-sector in the recently announced stimulus package. Examine the issues with segments of agri-sector which necessitated these reforms.”

    Conclusion

    The reforms in these 3 areas if carried out earnestly could go a long way in helping the farmers get out of the misery and help achieve the goal of doubling of farmers income in the set time frame.

    Back2Basics: Agriculture Produce Marketing Committee Regulation (APMC) Act.

    • All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”.
    • With the exception of Kerala, J & K, and Manipur, all other states have enacted the APMC Act.
    • It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for the sale of farmers’ produce.
    • Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
    • Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers.
    • Market charges, costs, and taxes vary across states and commodities.

    Essential Commodities Act 1955

    • The ECA is an act which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or black-marketing would affect the normal life of the people.
    • The ECA was enacted in 1955. This includes foodstuff, drugs, fuel (petroleum products) etc.
    • It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
    • Additionally, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
    • The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products.
    • The Centre can include new commodities as and when the need arises, and takes them off the list once the situation improves.

    How ECA works?

    • If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
    • The States act on this notification to specify limits and take steps to ensure that these are adhered to.
    • Anybody trading or dealing in the commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
    • A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.
    • This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished.
    • The excess stocks are auctioned or sold through fair price shops.

  • What explains the new mark crosses by our Forex reserves

    At first, it seems almost contradictory. And so it is. Our foreign exchange reserves touched new high of $500 billion for the first time, but the time in which this has happened makes it paradoxical. At the time when economies around the world are touching new lows, this rise in the Forex seems all but usual. In this article, you’ll learn about the 4 factors that made it happen.

    1. Decreased oil imports

    • Usually, we import a lot of oil.
    • But the payment here is dollar-denominated since very few countries are going to accept our currency (Rupee) as is.
    • So, you have to expend dollars i.e. the foreign exchange reserves to keep the flow of crude oil intact.
    • However, with the nationwide lockdown in place, our import bill has reduced drastically.
    • We simply don’t need as much oil anymore.
    • And considering oil prices have also taken a beating simultaneously, our Forex Reserves have been piling up.
    • Less oil import. More Forex reserves.

    2. Dollars coming with foreign investors

    • Contrary to popular opinion, foreign investors have been pouring money into India of late.
    • You could attribute a bulk of these inflows to Reliance Jio.
    • They’ve been enticing investors all over the world and they’ve been doing it at a pace that belies all rational expectations.
    • They’ve raised close to $15 Bn over the course of a few months and it doesn’t look like they’re stopping anytime soon.
    • So technically, dollar inflows have spiked and therefore, Forex reserves get a boost once again.

    3. RBI preparing itself for a bad time

    • Another popular explanation is that the RBI is preparing a war chest to stave off future uncertainties.
    • At a time when the world economy is reeling from an unprecedented crisis, it’s perhaps prudent to build up reserves for a rainy day.
    • So the RBI buys gold and dollar-denominated assets using our national currency and builds up the foreign exchange reserves.
    • Inadvertently, this increases the money supply within the economy.
    • There will be more “Rupees” floating around.
    • As more Indian currency keeps entering the ecosystem, the value of the rupee depreciates.
    • And yes, the value of rupee has tumbled recently, but we are not in dire straits yet.
    • But if India’s economy takes a turn for the worse, it becomes incumbent on the RBI to ensure price stability.
    • Imagine the value of the rupee starts fluctuating wildly because of economic uncertainties.
    • The RBI has to intervene.
    • It has to exchange the foreign reserves for the Indian currency.
    • If they keep mopping up the excess Rupees floating in the system, they could ensure the value of the rupee remains stable.
    • So long as the value of the rupee remains stable, prices of commodities will follow the same cue, all things remaining equal that is.
    • Now, there’s still no clear consensus on what kind of reserves we might need if things do go south.
    • Although there have been recommendations made in the past about hoarding too much, it’s still the RBI’s call at the end of the day.

    4. The RBI is doing it for the government

    • The RBI can turn a profit if it wants to.
    • And once it does turn a profit, it can transfer a part of the surplus to the government — as dividends.
    • Now if the RBI wanted to offer the government a higher dividend, it has to simply turn a higher profit.
    • One way to accomplish this is to simply let the value of the rupee depreciate. Do not intervene.
    • Do not forego the reserves. Let the rupee tumble.
    • And so long as you don’t intervene, all the dollar-denominated assets you own will be worth more in rupee terms.
    • Consider the hypothetical example-suppose the exchange rate was 1$= Rs. 71 in March 2020, then the rupee loses value and you see the same line item once again in June 2020 will be 1$=Rs. 76.
    • The extra ₹ 5 is treated as a profit. And this profit could be ploughed back to the government.

    Consider the question “With the economy in the tailspin amid pandemic, the news of India’s Forex reserves touching the $500 billion mark for the first time provided the semblance of solace. Examine the factors that could explain this increase.”

    Conclusion

    Though there will always be the debate over the optimum value of the Forex reserves, the new level it reached in such an uncertain time for the economy is, nonetheless, a cause for celebration.

     

    Reference Source : https://finshots.in/archive/india-foreign-exchange-reserves/

  • Indian Gas Exchange (IGX): the first nationwide online delivery-based gas trading platform

    India’s first gas exchange — the Indian Gas Exchange (IGX) — was launched by the Ministry of Petroleum. The exchange is expected to facilitate transparent price discovery in natural gas, and facilitate the growth of the share of natural gas in India’s energy basket.

    Note the following things with caution from the newscard:

    • IGX allows only imported LNG and not domestically produced natural gas.

    • India’s import of LNG

    • GAIL

    • Taxation of LNG

    What is IGX?

    • The IGX is a digital trading platform that will allow buyers and sellers of natural gas to trade both in the spot market and in the forward market for imported natural gas.
    • It will allow trading across three hubs —Dahej and Hazira in Gujarat, and Kakinada in Andhra Pradesh.
    • Imported Liquefied Natural Gas (LNG) will be regassified and sold to buyers through the exchange, removing the requirement for buyers and sellers to find each other.
    • The exchange also allows much shorter contracts – for delivery on the next day, and up to a month – while ordinarily contracts for natural gas supply are as long as six months to a year.
    • This will mean that buyers do not have to contact multiple dealers to ensure they find a fair price.

    Will domestically produced natural gas also be bought and sold on the exchange?

    • The price of domestically produced natural gas is decided by the government. It will not be sold on the gas exchange.
    • However, following appeals by domestic producers that the prices set by the government are not viable given the cost of exploration and production in India.
    • A new gas policy will include reforms in domestic gas pricing and will move towards more market-oriented pricing.

    Will this make India more import-dependent?

    • Domestic production of gas has been falling over the past two fiscals as current sources of natural gas have become less productive.
    • Domestically produced natural gas currently accounts for less than half the country’s natural gas consumption; imported LNG accounts for the other half.
    • LNG imports are set to become a larger proportion of domestic gas consumption as India moves to increase the proportion of natural gas in the energy basket from 6.2% in 2018 to 15% by 2030.

    What regulatory change is required?

    • Currently, the pipeline infrastructure necessary for the transportation of natural gas is controlled by the companies that own the network.
    • State-owned GAIL owns and operates India’s largest gas pipeline network, spanning over 12,000 km.
    • An independent system operator for natural gas pipelines would help ensure transparent allocation of pipeline usage, and build confidence in the minds of buyers and sellers about neutrality in the allocation of pipeline capacity.
    • Experts have also called for natural gas to be included in the Goods and Services Tax (GST) regime to avoid buyers having to deal with different levies such as VAT across states when purchasing natural gas from the exchange.

  • Skill University

    This article highlights the utility of skill education in India. There are several benefits in its adoption. But it would require several regulatory changes. So, what are these changes?Read to know…

    3 issues with our university education

    •  The differential lockdown outcomes for skilled and unskilled workers highlight our university system’s pre-existing conditions. These are-
    • 1) Broken employability promises.
    • 2) Poor employer connectivity.
    • 3) Poor return on private investment that frustrate parents and students.

    4 ways in which skill university differs from traditional university

    • A skill university differs from a traditional university in four ways.
    • 1) It prays to the one god of employers; for governance, faculty, curriculum, and pedagogy.
    • 2) It has four classrooms; on-campus, on-line, on-site, and on-the-job.
    • 3) It offers modularity between four qualifications; certificates, diplomas, advanced diplomas, and degrees.
    • 4) And it has four sources of financing — employers, students, CSR, and loans though employers contribute more than 95 per cent of the costs.
    • Fro example,  in the case of Gujrat government’s skill university, 97 per cent of the university’s budget comes from employers.

    5 ways in which the universities are broken globally

    • First is broken promises.
    • The world produced more graduates in the last 35 years than 700 years before.
    • Second is broken financing.
    • More than 50 per cent of $1.5 trillion in student debt was expected to default even before the COVID pandemic.
    • Indian bank education loans have high NPAs.
    • The third is broken inclusiveness.
    • The system works for privileged urban males studying full-time, but today’s students are likely to be female, poor, older, rural, or studying part-time.
    • Fourth is broken flexibility.
    • Employed learners will cross traditional learners in three years, but they need on-demand, on-the-go, always-on, rolling admissions, continuous assessment, and qualification modularity.
    • And finally is broken openness. 
    • Google knowing everything makes learning how to learn a key 21st-century skill.
    • Yet too many universities are stuck in knowing.

    Let’s look into the regulatory changes needed for the Skill University

    • Skill universities are a scalable, sustainable, and affordable vehicle to massify higher education by innovations in finance.
    • But they need regulatory change.

    Following are the 3 types of regulatory changes needed

    1. Changes needed in the  UGC Act of 1956

    •  Clause 8.2.6 needs to be rewritten to equalise four classrooms -online, on-site, on-campus, and on-job-and section 22 (3) to recognise apprenticeship linked degree programmes.
    • The UGC Teacher Regulations of 2018 need rewriting: Clause 3.3.(I),(II) to redefine the qualifications, roles and numbers of teachers required, and clause 4 to recognise industry experience as a teaching qualification.
    • The UGC Online Regulations 2018 need to be rewritten: Clause 4(2) and 7(2)(3) to allow innovation, flexibility, credit frameworks, and relevance in online curriculums.
    • Clause 7(2)(2) to allow universities to work with any technology platforms.

    2. Changes needed in NAAC IQAC regulations

    • Criteria 1 and 1.2.2 to include work-based learning and work integrated learning.
    • Criteria 1.1.3 to include life skills and proctored/evaluated internships.
    • Criteria 2 and 2.3.1 to integrate online learning with university programmes.
    • Criteria 2 and 2.4.1, 3 and 6 need to be modified to recognise teachers with industry experience, and include industry-based research.
    • Criteria 4 and 4.1.2 to include industry workplaces and online classrooms as campus extensions.
    • Criteria 5 and 5.2.1 needs to be rewritten to incorporate apprenticeships.

    3. Changes needed in Apprenticeship Act of 1961

    • Clause 2, 8, 9, 21 and 23 of The Apprenticeship Act of 1961 also needs to be modified to allow and lift the licence raj for degree-linked apprentices and recognise skills universities.

    Consider the question “Skill universities, which would go a long way in increasing the employability in India are need of the hour. In light of this, examine the issues that the skill education faces and suggest the changes our education system needs to impart the proper skill education.”

    Conclusion

    Covid crisis has amplified the problems with our education system. So, the adoption of skill universities will help us improve the skill of our youth and achieve more inclusive employment, employability and education.

  • GST on processed food items

    A recent GST ruling sparked off the debate with the Authority for Advance Rulings (AAR, Karnataka Bench) suggesting parottas would be subject to a higher GST rate of 18 per cent as compared to roti.

    Try this question from CSP 2018:

    Q. Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    What is the Case?

    • Bengaluru-based food products company involved in preparation and supply of ready-to-cook items had approached the AAR regarding whether preparation of whole wheat parotta and Malabar parotta attracting 5 per cent GST.
    • The products khakhra, plain chapatti and roti are completely cooked preparations, do not require any processing for human consumption and hence are ready to eat food preparations.
    • The impugned product (whole wheat Parottas and Malabar Parottas) are not only different from the said khakhras, plain chapatti or roti but also are not like products in common parlance as well as in the respect of essential nature of the product.

    Classification of food items for GST

    • Most food items, especially those of essential and unprocessed nature, are charged nil GST.
    • But processed foods attract higher rates of 5%, 12%, or 18% depending on the food product.
    • For instance, pappad, Bread (branded or otherwise), are charged zero GST, but pizza bread is charged 5% GST.
    • Heading 1905 under the Harmonised Commodity Description and Coding System classifies pizza bread, khakhra, plain chapati or roti, rusks, toasted bread in one category, for which a 5% GST rate is levied.
    • Similarly, in the ready for consumption category, unbranded namkeens, bhujia, mixture and similar edible preparation attract 5% GST, while such branded namkeen, bhujia, mixture attract 12% GST.

  • How fuel price decontrol works — or why consumers always lose out

    India fuel prices are somewhat stagnant these days despite spikes in global crude oil prices. The key beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing companies as well. Let’s see how.

    Do you know?

    Grade of crude oil processed in Indian refineries:  ‘Sour grade’ (Oman and Dubai average) and ‘Sweet grade’ (Brent)

    Oil and India

    • In theory, retail prices of petrol and diesel in India are linked to global crude prices.
    • There is supposed to be complete decontrol of consumer-end prices of auto fuels and others such as the aviation turbine fuel or ATF.
    • It means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.

    So, why is there a divergence in the trends?

    • Oil price decontrol is a one-way street in India — when global prices go up, this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
    • But when the reverse happens and prices go down, the government — almost by default — slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices.

    How does decontrol work?

    • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits.
    • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.
    • Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.
    • While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.

    Are India’s taxes on fuels high? Obviously, Yes!

    • On May 5, the Centre announced one of the steepest ever hikes in excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol, following up on another round of sharp hikes in the first week of March.
    • All of this effectively cements India’s position as the country with among the highest taxes on fuel.
    • Prior to the increase in excise duty (in February 2020), the government, centre plus states was collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel.
    • With the second revision in excise duty in May, the government is collecting around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on 6th May 2020), according to estimates by CARE Ratings.
    • In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the UK, 45 per cent in Japan and under 20 per cent in the US.

    Do OMCs also benefit?

    • The only entity that benefits at the consumer’s expense is the government — in fact, both the Central and state governments.
    • OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices.
    • The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses.
    • It is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery.
    • Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days.

    Also read:

    [Burning Issue] Oil Prices and OPEC+

  • NITI Aayog bats for Border Adjustment Tax (BAT)

    A notable NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries.

    Note how BAT is different from the Custom Duties on imports. Refer to our B2B section.

    What is the proposed Border Adjustment Tax?

    • BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry.
    • It is proposed to be a non-creditable levy on imported goods. The idea is to bring similar goods in the imported and domestic baskets at par.

    Why need BAT?

    • Generally, BAT seeks to promote “equal conditions of the competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction.
    • The Indian industry has been complaining to the government about domestic taxes like electricity duty, duties on fuel, clean energy cess, mandi tax, royalties, biodiversity fees that get charged on domestically produced goods as these duties get embedded into the product.
    • But many imported goods do not get loaded with such levies in their respective country of origin and this gives such products price advantage in the Indian market.

    Will it be WTO compatible?

    • Countries that are members of Geneva-based global watchdog WTO have locked the upper limits of customs levies for product lines that they trade-in.
    • Any additional duty that gets imposed by WTO members are scoffed upon and in many instances, extra customs duties led to countries being dragged to international arbitration under WTO.
    • Commerce Ministry believes that the proposed extra customs duty through the Border Adjustment Tax is compatible with global trade norms.
    • Officials maintain that Article II: 2(a) of GATT allows for import charge that is equal to the internal tax of the country with respect to a “Like Product” or an item from which the imported product is made. Legal opinion on the proposed levy has also been taken.

    Back2Basics: Customs Duty

    • It refers to the tax imposed on the goods when they are transported across international borders.
    • The objective behind levying customs duty is to safeguard each nation’s economy, jobs, environment, residents, etc., by regulating the movement of goods, especially prohibited and restrictive goods, in and out of any country.

    Customs duties are charged almost universally on every good which are imported into a country. Some of these are:

    •      Basic Customs Duty (BCD)
    •      Countervailing Duty (CVD)
    •      Protective Duty
    •      Anti-dumping Duty etc.

  • Faults in section inserted for the suspension of IBC amid pandemic

    Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

    What changes were made?

    • In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
    • Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
    • The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
    • Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

    What are the issues with section 10A?

    • Section 10A provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from this period, as may be notified in this behalf”.
    • This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
    • However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
    • While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
    • The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
    • However, the proviso here expands the substantive provision in the main section.
    • Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
    • In this case the main provision appears clear, only to be obfuscated by the proviso.
    • The proviso therefore does not appear to be legally tenable.
    • As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
    • But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
    • This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

    Painting all defaults with the same brush

    • The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
    • There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
    • The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
    • Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25 due to similar reasons.
    • This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

    Issue with increasing the default amount limit

    • Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
    • This was purportedly done to protect MSMEs from insolvency petitions.
    • However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
    • The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

    Conclusion

    The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

    B2BASICS:

     Insolvency and Bankruptcy Code, 2015

    The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

    Timeline

    • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

    Insolvency Resolution Plan

    • The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

    Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

    • The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

    Information Utilities

    • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

    Bankruptcy and Insolvency Adjudicator

    • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
    • The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

    Insolvency regulators

    • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

  • Payments Infrastructure Development Fund (PIDF)

    The RBI has created a Payments Infrastructure Development Fund (PIDF) with an outlay of Rs. 500 Cr.

    Possible prelims question:
    Q. Which of the following is the major aim of Payments Infrastructure Development Fund (PIDF) recently created by the Reserve Bank of India (RBI)?
    a) Promotion of UPI payments

    b) Deploying Points of Sale (PoS) infrastructure

    c) Creation of digital wallets

    d)All of the above

    Payments Infrastructure Development Fund (PIDF)

    • PIDF aims to encourage acquirers to deploy Points of Sale (PoS) infrastructure — both physical and digital modes in tier-3 to tier-6 centres and north eastern states.
    • The setting of PIDF is in line with the measures proposed by the vision document on payment and settlement systems in India 2019-2021.
    • It is also in line with the RBI’s proposal to set up an Acceptance Development Fund which will be used to develop card acceptance infrastructure across small towns and cities.

    Its working

    • The PIDF will be governed through an Advisory Council and managed and administered by RBI.
    • It will also receive recurring contributions to cover operational expenses from card-issuing banks and card networks.
    • RBI will also contribute to its yearly shortfalls, if necessary.

    Why need PIDF?

    • Over the years, the payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc.
    • To provide further fillip to digitization of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in under-served areas.