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Subject: Economics

  • Skal International Asia Area (SIAA)

    The UT of Jammu and Kashmir has won the bid to host the 50th annual Skal International Asia Area (SIAA) Congress in 2021 during the annual general meeting recently against four other cities.

    Note: Skal International is not an affiliate of the United Nations. This is where a prelims  question can pull a nerve.

    Skal International

    • Skal International is a professional organization of tourism leaders around the world, promoting global tourism and friendship.
    • It is a Spain-based tourism body with 15,000 members and 150 chapters across the world.
    • The word Skal comes from Scandinavia and has a long tradition. The “Skal” is a bowl containing a welcome drink that is offered to visitors when entering a home.
    • Its members, the industry’s managers and executives meet at local, national, regional and international levels to discuss and pursue topics of common interest.
    • It is the only international group uniting all branches of the travel and tourism industry.

  • [pib] Bharatmala Pariyojana

    A total of 322 projects in a length of 12,413 km have been awarded under Bharatmala Pariyojana. Further, 2921 Km has been constructed under the Project till the date.

    Try this PYQ:

    Q.Consider the following pairs:

    National Highway: Cities connected

    1. NH 4: Chennai and Hyderabad
    2. NH 6: Mumbai and Kolkata
    3. NH 15: Ahmedabad and Jodhpur

    Which of the above pairs is/are correctly matched?

    (a) 1 and 2 only

    (b) 3 only

    (c) 1, 2 and 3

    (d) None

    Bharatmala Pariyojana

    • It is a centrally-sponsored and funded the Road and Highways project.
    • It is an umbrella program for the highways sector that focuses on optimizing the efficiency of freight and passenger movement across the country by bridging critical infrastructure.
    • The total investment for 83,677 km committed new highways is estimated at ₹5.35 lakh crore making it the single largest outlay for a government road construction scheme.
    • It works for the development of Economic Corridors, Inter Corridors and Feeder Routes, National Corridor Efficiency Improvement, Border and International connectivity roads, Coastal and Port connectivity roads and Green-field expressways.
    • The ambitious umbrella programme has subsumed all existing Highway Projects including the flagship National Highways Development Project (NHDP), launched in 1998.

  • RBI shifts focus on bond market to transmit policy signals

    The article analyses the implications of the recently concluded MPC meeting and predicts the trends for the future.

    Highlights of the MPC meeting

    • In the October meeting of the monetary policy committee (MPC), repo rate were kept unchanged at 4%, with a continuation of an accommodative stance.
    • It chose to ignore elevated levels of CPI inflation as transitory and maintaining focus on supporting growth.
    • It appears that the MPC would maintain a status quo on rates through this fiscal year.
    • The scope for further easing is anyways limited to 0.50%, as any more easing may affect household financial savings and endanger financial stability.

    Ensuring the rate transmission

    • With unchanged repo rates, the focus of the liquidity measures announced by the RBI is to further improve transmission of previous rate cuts across a spectrum of market rates and other instruments.
    • The RBI Governor assured market participants that the large supply of government bonds in the second half along with a likely pick-up in credit demand, would be accommodated through open market purchases of government bonds.

    Reducing the cost of borrowing

    • The RBI may have to buy bonds worth ₹1,000 to 1,500 billion in these operations over 2HFY21 keeping pressure on yields [which affects interest rates].
    • In a related move, to reduce the cost of borrowings for state governments, the RBI for the first time will buy state government bonds, as a special case for this year.

    Other measures

    • The extension of enhanced Held to Maturity (HTM) limit of banks on their government bonds portfolio to March 2022.
    • A new on-tap targeted LTRO window was announced, for banks to borrow up to ₹1,000 billion from the RBI at a floating rate linked to the repo rate, and invest in corporate paper issued by specific sectors and to provide loans to them.
    • In effect, the aim of the central bank is to ensure that lower policy rates determined by the macro-economic fundamentals, are reflected in lower cost of borrowings for the Centre, states and corporates.

    Containing inflation

    • Inflation outlook for this fiscal and projections for next year indicate that CPI inflation would ease, from an average of 6.8% in Q2 to 4.5% in Q4 and 4.1% by Q4FY22.
    • Headline inflation is expected to fall, as supply conditions normalize with progressive unlocking and another year of bumper farm output helps pull down food inflation.
    • Higher fuel taxes and import duties are expected to provide an upward push though.
    • Effective supply management will therefore be crucial in controlling food inflation and ensuring that it does not turn persistent and feeds into non-food inflation.

    Conclusion

    • The role of monetary policy in the is limited and the RBI focus will remain on improving transmission of policy signals through banking, bond and credit market channels.

    Back2Basics: LTRO

    • Long-Term Repo Operation (LTRO) was introduced by the Reserve Bank in February, 2020.
    • Through this policy, the central bank would provide liquidity support to commercial banks for a period of 1 to 3 years at the current repo rate, and would accept government securities as collateral in return.
    • This is in contrast to the other measures it was providing such as Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) which provide cash to banks for a period of 1 to 28 days only.

  • Reviving the private investment in infrastructure

    Declining private investment in the infrastructure needs policy overhaul. The article suggests the changes in the policy and approach on the part of the government to achieve the sustainable 40 per cent private investment in the infrastructure. 

    Declining private investment in infrastructure

    Currently, private financing into the infrastructure sector has declined to around 20 per cent of the total funding.

    Reasons for the decline are-

    • 1) the crisis in the non-banking finance sector.
    • 2) the financial challenges faced by infrastructure companies.
    • 3) the inadequately developed Indian market for infrastructure financing.
    • The Economic Survey 2017-18 has assessed India’s infrastructure financing needs at $4.5 trillion by 2040.
    • Reviving private investment flows into infrastructure to around 40 per cent will be key to attaining this threshold.

    Actions need to be taken to revive the private investment in infrastructure

    • The Vijay Kelkar committee had put out a balanced report in 2015 on overhauling the PPP ecosystem, including governance reform, institutional redesign, and capacity-building.

    Ramping up private investments in infrastructure will need action on two fronts:

    • 1) Refreshing institutions and policies for channelling financing.
    • 2) Providing a stable, durable, and empowering ecosystem for private players to partner with government entities.

    1) Institutions and policies for channelling financing

    • Due to long-duration profitability cycles of infrastructure projects, successful PPP  requires stable revenue flow assurances and a settled ecosystem to investors over long periods.
    • This could be achieved means of policy stability, assurances possibly secured by law.
    • PPP contracts also need to provide for mid-course corrections to factor in uncertainties including utilisation patterns, as well as the creation of competing infra assets.
    • Government partners in PPP arrangements need to ensure that open-ended arrangement that might entail unforeseeable risk are minimised for the private investor, including aspects such as land availability and community acceptance.

    2) Institution and policies for financing

    • There is a need to change the culture and attitude towards the conjoining of government entities and private partners.
    • Kelkar committee has stated that there needs to be an approach of “give and take” and the Government should avoid a purely transactional approach.
    • Government should avoid trying to minimise risk to themselves by passing on uncertain elements in a project — like the land acquisition risk — to the private partner.
    • This attitudinal change can be achieved by amending the Prevention of Corruption Act to encompass modern-day requirements, including factoring in the need for government agents to take calibrated risks while engaging with the private sector.
    • The private partners also need to be incentivised to focus on project outcomes, with guard-rails in place to discourage rent-seeking behaviour.
    • In sum, risk avoidance by the public entity and rent-seeking by the private partner are the twin challenges that need to be carefully addressed.
    • On the regulatory front, a compelling need would be to promulgate a PPP legislation which can provide a robust legal ecosystem and procedural comfort.

    Consider the question “Declining private investment in the infrastructure has several implications for the economy. In ligh of this, examine the factor for such decline and suggest the measures to boost the private investment in the infrastructure.” 

    Conclusion

    After we emerge out of this pandemic, a focus area for public policy has to be the creation of a modern-day, sustainable and resilient infrastructure. . Designing a fresh approach and creating a stable policy environment that provides comfort and incentives to private investors will be key to attaining this goal.

  • Is Indian economy going through stagflation

    The article analyses the challenge faced by the Monetary Policy Committee in wake of a pandemic where falling growth is accompanied by the rising inflation.

    Dilemma with inflation targetting in pandemic

    • After the RBI’s adoption of a flexible inflation targeting framework from August 2020, it became even more focused on anchoring inflation and inflation expectations than ever before.
    • But the COVID pandemic has created a dilemma for the RBI.
    • Higher-than-anticipated inflation compelled the monetary policy committee (MPC) to hold policy rates despite the contraction in April-June GDP by 23.9 per cent.

     CPI vs. WPI: Which should be focused for inflation targeting?

    • Inflation-targeting framework based on one narrow nominal consumer price index (CPI)  has highlighted the challenges of conducting monetary policy in a severe growth shock scenario.
    • Inflation targeting is particularly challenging if it coincides with a sharp increase in headline CPI inflation as in the current period.
    • The current framework has led to an excessive and obsessive emphasis on point CPI estimates, at the cost of ignoring other indicators.
    • WPI core inflation, which essentially represents the manufacturing sector, is below 1 per cent but this does not find much mention.
    • This is strange because ultimately, the GDP deflator is calculated using both CPI and WPI inflation, with the latter having a greater weight.
    • This should be taken into consideration, while reviewing the existing monetary policy framework.
    • Given the composition of the current CPI basket, RBI’s monetary policy actions can at best impact only 41.35 per cent of the overall items.
    • Food and beverages, fuel items, gold and silver tobacco/intoxicants are items over which the RBI does not have any control.[58.65 per cent of the overall items]

    This is a different time

    • In normal times, a sustained increase in food and fuel prices can lead to a generalised increase in prices.
    • But this argument is not valid in the current context where a large number of people have lost their jobs or have seen fall in incomes.
    • In the current context, higher food and fuel prices would lead to reduction in expenditure on discretionary items.
    • So there will be only a relative shift in prices, without any fear of a generalised spiral, as households will not be in any position to demand higher wages to compensate for the increase in prices of food and fuel items.
    • Given the amount of slack in the economy, a scenario of sustained generalised increase in prices seems unlikely over the next 6-9 months.

    How to measure the success of inflation targeting

    • The CPI inflation targeting framework has helped to reduce inflation expectations during FY17-FY21 on average (9.3 per cent) compared to the previous period of FY12- FY16 (12.8 per cent).
    • However, the gap between inflation expectations and actual CPI inflation has remained unchanged at 5.1 per cent during these two periods.
    • The success of the inflation-targeting framework should not only be judged by the actual CPI inflation trend, but also in terms of gap between the two.

    How RBI performed without inflation targeting framework in the past

    • Even without any formal inflation-targeting framework, India had successfully managed to keep inflation low during FY02-FY06.
    • The RBI’s stance then was based on a multiple-indicator approach to conduct monetary policy.
    • First factor that made it possible was the increase in minimum support prices of food-grains was kept below 3 per cent on average.
    • Second factor was the composition of growth which was better during this period with investment growth surpassing consumption growth by several percentage points.
    • It is for this reason that CPI inflation remained contained at 4 per cent on average during this period even with 7 per cent real GDP growth.

    Risk of structural increase in inflation

    • In the current cycle, investment growth is likely to be impacted more severely than consumption growth.
    • Given the acute weakness in the demand side of the economy, persistent problems in the real estate sector, continued deleveraging of the NBFC sector and significant job losses structural increase in inflation is limited.

    What should be the policy response

    • The scope for rate cuts remains dim in the near-term.
    • But the RBI to remain active with a host of unconventional measures, which will likely include more proactive bond purchases to ensure that market interest rates do not rise significantly due to fiscal and market borrowing-related concerns.

    Conclusion

    Given the prevailing unholy mix of growth and inflation, it is tempting to categorise India’s economic situation as one of “stagflation”. But, in our view, it is too early to conclude decisively on this matter, given the fluid nature of things.

    Back2Basics: Inflation expectations

    • Inflation expectations are what people expect future inflation to be, and they matter because these expectations actually affect people’s behavior.
    • If people expect inflation to be lower and they act on those beliefs, they could, in fact, cause inflation to be lower.
    • If businesses expect lower inflation, they may raise prices at a slower rate; they don’t want the prices of their items to look too out of line with those of their competitors.
    • If workers expect lower inflation, they may ask for smaller wage increases.
    • The combination of businesses and workers acting in this manner will result in the economy experiencing lower inflation.

     

     

     

  • [pib] Kasturi Cotton

    Now India’s premium Cotton would be known as ‘Kasturi Cotton’ in the world cotton trade.

    Kasturi Cotton

    • It is the first-ever Brand and Logo for Indian Cotton on Second World Cotton Day.
    • The Kasturi Cotton brand will represent Whiteness, Brightness, Softness, Purity, Luster, Uniqueness and Indianness.

    Do you know?

    1. Cotton is one of the principal commercial crops of India and it provides livelihood to about 6.00 million cotton farmers.
    2. India is the 2nd largest cotton producer and the largest consumer of cotton in the world.
    3. India produces about 6.00 Million tons of cotton every year which is about 23% of the world cotton.
    4. India produces about 51% of the total organic cotton production of the world, which demonstrates India’s effort towards sustainability.

  • Production Linked Incentive (PLI) Scheme

    The Ministry of Electronics and IT had approved some proposals by electronics manufacturers under its Production Linked Incentive (PLI) Scheme.

    Try this MCQ:

    Q.The Production Linked Incentive (PLI) Scheme often seen in news is related to-

    a) Electronics manufacture

    b) Khadi and Village Industries

    c) MSMEs

    d) None of these

    What is the PLI scheme?

    • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
    • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
    • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
    • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
    • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

    Tenure of the scheme

    • The PLI scheme will be active for five years with financial year (FY) 2019-20 considered as the base year for calculation of incentives.
    • This means that all investments and incremental sales registered after FY20 shall be taken into account while computing the incentive to be given to each company.

    Which companies and what kind of investments are considered?

    • All electronic manufacturing companies which are either Indian or have a registered unit in India will be eligible to apply for the scheme.
    • These companies can either create a new unit or seek incentives for their existing units from one or more locations in India.
    • Any additional expenditure incurred on the plant, machinery, equipment, research and development and transfer of technology for the manufacture of mobile phones and related electronic items will be eligible for the incentive.
    • However, all investment done by companies on land and buildings for the project will not be considered for any incentives or determine the eligibility of the scheme.

  • Kozhikode-Wayanad Tunnel Project

    Kerala CM has launched a tunnel road project that would connect Kozhikode with Wayanad.

    Try this PYQ:

    Q.From the ecological point of view, which one of the following assumes importance in being a good link between the Eastern Ghats and the Western Ghats?

    (a) Sathyamangalam Tiger Reserve

    (b) Nallamala Forest

    (c) Nagarhole National Park

    (d) Seshachalam Biosphere Reserve

    Kozhikode-Wayanad Tunnel Project

    • The 7-km tunnel, being described as the third-longest in the country, is part of an 8-km road cutting through sensitive forests and hills of the Western Ghats.
    • Its endpoints are at Maripuzha in Thiruvambady village panchayat (Kozhikode) and Kalladi in Meppadi panchayat (Wayanad).
    • The tunnel is an outcome of a decades-long campaign for an alternative road as the Thamarassery Ghat Road is congested and gets blocked by landslides during heavy monsoon.

    How will the road impact the ecology?

    • The Forest Department has identified the proposed route as a highly sensitive patch comprising evergreen and semi-evergreen forests, marshlands and shola tracts.
    • This region is part of an elephant corridor spread between Wayanad and Nilgiri Hills in Tamil Nadu.
    • Two major rivers, Chaliyar and Kabani that flows to Karnataka, originate from these hills in Wayanad.
    • Eruvazhanjipuzha, a tributary of Chaliyar and the lifeline of settlements in Malappuram and Kozhikode, begins in the other side of the hills.
    • The region, known for torrential rain during the monsoon, has witnessed several landslides, including in 2019 at Kavalappura near Nilambur and at Puthumala, Meppadi in Wayanad.

    Environmental clearance issues

    • Proponents of the project have been stressing that the tunnel will not destroy forest (trees).
    • The MoEFCC guidelines state that the Forest Act would apply not only to surface area but the entire underground area beneath the trees.
    • For tunnel projects, conditions relating to underground mining would be applicable.
    • As the proposed tunnel is 7 km long, it will require emergency exit points and air ventilation wells among other measures, which would impact the forest further.

  • Asset Reconstruction Companies

    The article argues for the greater role to Asset Reconstruction Companies by allowing them to invest in the equity [shares] of the distressed companies.

    Context

    • In a recently released paper “Indian Banks: A time to reform” Viral Acharya and Raghuram Rajan argued for a greater role for Asset Reconstruction Companies.
    • They argue that when there are fewer bids in a bankruptcy auction, the value on loans is better realised if read an asset reconstruction company takes over the borrower and places the firm under new management.

    Current limits on the role of ARC

    • The RBI limited the role of  ARC to participation in resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) only by partnering with an equity investor, which is the resolution applicant.
    • If the application succeeds, the equity investor would acquire the shares, while the ARC trust would acquire the debt.

    Background of the ARCs

    •  Some stakeholders are asking for extending the role of ARCs by allowing direct invest in the equity of distressed companies through IBC resolution just like private equity funds.
    • The RBI doesn’t appear to favour such an extended role for ARCs.
    • This is due to the uninspiring performance of the Asset Reconstruction Companies in the past.
    • At the time of the Asian Financial Crisis,  India’s non-performing assets stood at a whopping 14.4 per cent.
    •  It was in this context that the Narasimham Committee (1998) recommended setting up an ARC specifically for purchasing NPAs from banks and financial institutions.
    • Subsequently, the SARFAESI Act, 2002 created the legal framework for establishing multiple private ARCs.
    • This policy achieved only modest success.
    • The maximum average recovery by ARCs as a percentage of total bank claims stood at 21.5 per cent in 2010.
    • Since then, it has steadily declined and reached 2.3 per cent in 2018.
    • This low recovery could be the result of collateral disposal rather than genuine business turnarounds [i.e. operating the business and turning it profitable].

    Need for extending the role of ARCs

    • In 2002, India lacked an effective bankruptcy system.
    • There was no market for corporate control of distressed firms.
    • ARCs were originally designed for this peculiar institutional ecosystem.
    • They were required to hand over the distressed business back to the original promoter once they had generated enough value to repay the debt.
    • Consequently, ARCs had little incentive to turn around distressed businesses.
    • This situation completely changed in 2016 as the IBC seeks to maximise the value of distressed businesses through a market for corporate control.
    • ARCs should be able to fully participate in this market and attempt successful turnarounds by acquiring strategic control over distressed businesses.
    • In a solvent company, shareholders have stronger incentives than creditors to maximise enterprise value.
    • This is because an increase in enterprise value automatically increases the value of its equity.
    • In contrast, creditors do not benefit from increases in enterprise value beyond their individual claims.
    • If ARCs could hold more equity instead of debt in the resolved company, they would also have a stronger incentive to take strategic control to ensure successful turnaround.

    Way forward

    • The law should enable ARCs to invest in a distressed company’s equity, whether by infusing fresh capital or by converting debt into equity.
    • Effectively, an ARC should act more like a private equity fund, as Acharya and Rajan suggested.
    • This in turn would make the market for corporate control under IBC deeper and more liquid, improving ex-ante recovery rates for banks.

    Consider the question “What are Asset Reconstruction Companies? How allowing the ARCs to invest in equity of distressed companies under IBC help successful turnaround of the distressed business?”

    Conclusion

    •  If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.

    Back2Basics: Difference between debt and equity

    • Debt market and equity market are two broad categories of investment available in the general investment milieu.
    • Equity markets trade in shares or stocks of the company listed on the stock exchanges.
    • A stock in a company indicates a unit in the ownership of the company.
    • As shareholders, you become part owners of the company.
    • The largest shareholder, with 50% or more shares, becomes the owner of the company.
    • Equity markets are riskier than debt markets.
    • Debt is a form of borrowed capital.
    • The central or state governments raise money from the market by issuing government securities or bonds.
    • In effect, the government is borrowing money from you and will pay interest to you at regular intervals.
    • The principal amount is returned on maturity.
    • In the same way, a company raises money from the market by selling debt market securities such as corporate bonds.
    • The debt market is made up of bonds issued by government authorities and companies.

  • GST Council and its Functioning

    The Goods and Services Tax (GST) Council has failed to iron out differences between some States and the Centre over the plan to get States to borrow from the market to meet the shortfall in compensation cess collections this year.

    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

    About GST Council

    • The GST Council is a federal body that aims to bring together states and the Centre on a common platform for the nationwide rollout of the indirect tax reform.
    • It is an apex member committee to modify, reconcile or to procure any law or regulation based on the context of goods and services tax in India.
    • The GST Council dictates tax rate, tax exemption, the due date of forms, tax laws, and tax deadlines, keeping in mind special rates and provisions for some states.
    • The predominant responsibility of the GST Council is to ensure to have one uniform tax rate for goods and services across the nation.

    How is the GST Council structured?

    • The GST is governed by the GST Council. Article 279 (1) of the amended Indian Constitution states that the GST Council has to be constituted by the President within 60 days of the commencement of the Article 279A.
    • According to the article, the GST Council will be a joint forum for the Centre and the States. It consists of the following members:
    1. The Union Finance Minister will be the Chairperson
    2. As a member, the Union Minister of State will be in charge of Revenue of Finance
    3. The Minister in charge of finance or taxation or any other Minister nominated by each State government, as members.

    Terms of reference

    • Article 279A (4) specifies that the Council will make recommendations to the Union and the States on the important issues related to GST, such as the goods and services will be subject or exempted from the Goods and Services Tax.
    • They lay down GST laws, principles that govern the following:
    1. Place of Supply
    2. Threshold limits
    3. GST rates on goods and services
    4. Special rates for raising additional resources during a natural calamity or disaster
    5. Special GST rates for certain States