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Subject: Economics

  • State Reforms Action Plan Rankings 2019

    Andhra Pradesh has bagged the first rank among all the states in the country in the state business reforms action plan-2019 (BRAP-2019), representing ease of doing business for Atmanirbhar Bharat.

    About the Ranking

    • It is the annual ease of doing business index of states and UTs of India based on the completion percentage scores of action items points of annual Business Reforms Action Plan (BRAP) under the Make in India initiative.
    • This ranking is based on the implementation of the business reform action plan.
    • Some of the key focus areas are access to information and technology, the setting up of a single-window system, construction permit enablers and land administration, according to DPIIT.
    • It based on the progress of states in completing annual reform action plan covering 8 key areas.

    The top ten states under the State Reform Action Plan 2019 are:

    1. Andhra Pradesh
    2. Uttar Pradesh
    3. Telangana
    4. Madhya Pradesh
    5. Jharkhand
    6. Chhattisgarh
    7. Himachal Pradesh
    8. Rajasthan
    9. West Bengal
    10. Gujarat

  • Reforming tax system

    The article discusses two recent measures announced by the government to bring in the transparency in the tax system.

    Issue of lower tax collection and way out

    • An economic contraction this year will severely impact tax collections.
    • Changing tax rates or the tax base in response is difficult and a hurried approach can have wider consequences.
    • So, the only tool available is to urge voluntary compliance.
    • Compliance is achieved through a fine balance between enforcement and encouragement.
    • Despite enforcement-driven measures in the past the taxpaying population has remained at only 6 per cent.
    • Thus, the only way to boost collections is to build trust between the administration and the taxpayer.

    Relation between complexity of system and compliance

    • A taxpayer has to interact with the tax system at numerous instances.
    • While interacting, if the taxpayer perceives the system to be complex, such perception affects compliance.
    • Perceived complexity can discourage individuals from filing returns.
    • This could reflect simply in the difference between the number of taxpayers and the returns filed: which is around 20 million.
    • Such behaviour is bound to impact tax collection.

    Recent government measures to bring transparency

    1) New taxpayer’s charter with some new features

    • The charter is a document that lists a taxpayer’s rights and obligations.
    • A taxpayer’s charter is often perceived as a means to build taxpayer’s trust.
    • The rights and obligations mentioned in India’s new charter are in line with global practices.
    • There are 3 interesting additions in the new charter: 1) commitment to reducing compliance costs 2) holding its authorities accountable 3) publishing a periodic report of service standards.
    • A tax ombudsman can ensure that some of these standards are met, however, in 2019, the cabinet approved the abolition of the quasi-judicial post.

    2) Faceless assessment

    • This relates to the frequent complaint of taxpayers about corruption and delay.
    • To end personal interface, e-assessment was introduced in 2019.
    • Developing this idea further, faceless assessment now seeks to further automate the case selection and the distribution function of the assessing officer.
    • The intent is to divest and distribute the functions of a single assessing officer so that assessment is carried out in a fair manner.

    Consider the question “What are the factors responsible for low tax compliance in India? What are the steps taken by the government to increase compliance?

    Conclusion

    If the commitment to a fair and impartial system and a time-bound resolution of matters is to be met, the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.

  • Priority Sector Lending (PSL)

    The RBI has released a revised priority sector lending guidelines to augment funding to segments including start-ups and agriculture.

    New Priority Sector Lending (PSL) guidelines

    • Bank finance of up to ₹50 crores to start-ups, loans to farmers both for installation of solar power plants for Solarization of grid-connected agriculture pumps and for setting up compressed biogas (CBG) plants have been included as fresh categories eligible for finance under the priority sector.
    • This has come to align it with emerging national priorities and bring a sharper focus on inclusive development, after having wide-ranging discussions with all stakeholders.
    • It will enable better credit penetration to credit deficient areas, increase the lending to small and marginal farmers and weaker sections, boost credit to renewable energy, and health infrastructure
    • The targets prescribed for ‘small and marginal farmers’ and ‘weaker sections’ are being increased in a phased manner.
    • Higher credit limit has been specified for farmer producer organisations (FPOs)/farmers producers companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price.

    Back2Basics: Priority Sector Lending

    • PSL is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections.
    • This is essentially meant for an all-round development of the economy as opposed to focusing only on the financial sector.
    • The broad categories of priority sector for all scheduled commercial banks are as under:
    1. Agriculture and Allied Activities (Direct and Indirect finance)
    2. Small Scale Industries (Direct and Indirect Finance)
    3. Small Business / Service Enterprises
    4. Micro Credit
    5. Education loans
    6. Housing loans

  • What counts as ‘Act of God’?

    Amid disruptions caused by Covid-19, the Finance Minister has referred to an Act of God while businesses are looking at a legal provision, force majeure, to cut losses.

    Note the key differences between the Act of God and Force Majeure.

    Evoking “Act of God”

    • The force majeure or “Act of God” clause has its origins in the Napoleonic Code.
    • The finance ministry had issued an office memorandum inviting attention to the force majeure clause (FMC) in the 2017 Manual for Procurement of Goods issued by the Department of Expenditure.
    • It clarified that the pandemic should be considered a case of natural calamity and FMC may be invoked, wherever considered appropriate.

    What is a force majeure clause?

    • The law of contracts is built around a fundamental norm that the parties must perform the contract.
    • When a party fails to perform its part of the contract, the loss to the other party is made good.
    • However, the law carves out exceptions when the performance of the contract becomes impossible for the parties.
    • A force majeure clause is one such exception that releases the party of its obligations to an extent when events beyond their control take place and leave them unable to perform their part of the contract.
    • FMC is a clause that is present in most commercial contracts and is a carefully drafted legal arrangement in the event of a crisis.
    • When the clause is triggered, parties can decide to break from their obligations temporarily or permanently without necessarily breaching the contract.
    • Companies in such situations use the clause as a safe exit route, sometimes in opportunistic ways, without having to incur the penalty of breaching the contract.

    Difference between the two

    • Both concepts elicit the same consequences in law.
    • Generally, an “Act of God” is understood to include only natural unforeseen circumstances, whereas force majeure is wider in its ambit and includes both naturally occurring events and events that occur due to human intervention.

    What situations legally qualify for use of force majeure?

    • While some contracts have clauses with standard circumstances, some contracts would have specific circumstances that are more focused.
    • For example, a shipping contract would have a force majeure clause that could cover a natural disaster like a tsunami.
    • If an event is not described, then it is interpreted in a way that it falls in the same category of events that are described.
    • An FMC is negotiated by parties, and events that could potentially hamper the performance of the contract are catalogued.
    • It is not invoked just by expressing that an unforeseen event has occurred.
    • In case a contract does not have a force majeure clause, there are some protections in common law that can be invoked by parties.
    • For example, the Indian Contract Act, 1872 provides that a contract becomes void if it becomes impossible due to an event after the contract was signed that the party could not prevent.

    Global precedents dealing with COVID-19 pandemic

    • In China, where the Covid-19 outbreak originated, the Council for Promotion of International Trade is issuing force majeure certificates to businesses.
    • China’s Supreme People’s Court had recognised the 2002 SARS outbreak as a force majeure event.
    • Singapore enacted the Covid-19 (Temporary Measures) Act in April to provide relief to businesses that could not perform their contractual obligations due to the pandemic.
    • The Paris Commercial Court in July ruled that the pandemic could be equated to a force majeure event.
    • In the UK, the Financial Conduct Authority has brought in a test case before the High Court to look into business insurance contracts and interpret the standard wordings in such contracts.
    • The International Chamber of Commerce has developed a Model Code on the force majeure clause reflecting current international practice.

  • [pib] NIDHI-EIR Programme

    A brochure featuring Entrepreneurs in Residence (EIR) under the National Initiative for Developing and Harnessing Innovations (NIDHI) programme was launched by Dept. of Science and Technology (DST).

    Try this MCQ:

    Q.The NIDHI-EIR Programme sometimes seen in news functions under the:

    a)Ministry of Science & Technology

    b)Ministry of Commerce and Industry

    c)Ministry of Finance

    d)Ministry of Micro, Small and Medium Enterprises

    About NIDHI-EIR

    • DST has announced a National Initiative for Developing and Harnessing Innovations (NIDHI) is an umbrella programme for nurturing ideas and innovations into successful startups.
    • EIR programme is one of the programs introduced under NIDHI to inspire the best talents to be entrepreneurs, to minimise the risk involved in pursuing start-ups, and to partially set off their opportunity costs of high paying jobs.
    • It provides tremendous opportunities for innovative entrepreneurs to expand their networks and get critical feedback on their ventures in order to promote their entrepreneurial career goals and aspirations.

    The opportunities under NIDHI-EIR program include:

    • Guidance from experienced, innovative and highly successful entrepreneurs on the business concept, strategy or venture and insight into specific industries or markets.
    • Best practices for starting a business and broaden the professional network.
    • Co-working spaces for developing the idea into a marketable product.

  • Reforms that will lead to economic Poorna Swaraj

    The article discusses the long term and short term strategy to deal with the disruption caused by the pandemic and using it to bring about the reform in various sectors.

    Context

    • The pain of COVID is real, GST shortfall of Rs 3 lakh crore, expected new bad loans of Rs 3 lakh crore, and a 25 per cent first quarter contraction of GDP.
    • COVID will end, the last quarter was unique, and COVID has created a policy window for overdue reform.

    3 Questions to be answered to determine short term measures

    • 1) Are we at the start, middle, or end of the virus?
    • This matters because life will be tentative until companies and individuals know where we are.
    • 2)Will companies will they save for a rainy day or live for today?
    • This matters because lower demand is fantastic for the environment but fatal for the economy (the paradox of thrift).
    • 3) Do we have an effective solution for professions that can’t be done without social distancing until the vaccine arrives?
    • All policy can do in the short run is ensure that disease doesn’t lead to death, unemployment doesn’t lead to hunger, and working capital problems don’t lead to bankruptcy.

    Factors in favour of India in the long run

    • Our post-COVID, post-Trump, post-China, post-GST, and post US Federal Reserve economic strategy must recognise factors in our favour.
    • China’s territorial arrogance may be premature.
    • China’s credit to GDP is an unsustainable 300 per cent, many of its big companies will not survive when faced with open market, and its domestic consumption is not sufficient to substitute for global trade.
    • China’s military overreach is unifying the region and creating coalitions and alliances that they will regret but India will enjoy.
    • Muted global growth means oil prices will remain low; this is a huge macroeconomic gift for a country like India.
    • The global digitisation supercycle creates insatiable demand for software talent which would be big advantage for India.
    • Over the next few decades, most rich countries will struggle to grow.
    • This forces investors to overprice growth. And because of our past sins, India is the only big country with decades of growth left.

    Reforms India need

    • Our problem is not jobs but productivity.
    • This needs compliance reform-taking an axe through our 67,000 compliances and 6,700 filings.
    • Labour law reform.
    • Banking reform: raising our credit to GDP ratio from 50 per cent to 100 per cent by licensing more banks and fixing existing ones.
    • Education reform.
    • Ease-of-doing-business reforms: reduce the number of ministries from 52 to 15.
    • Civil service reform:cut the number of people in Delhi with the rank of Secretary from 250+ to 50, a risk-averse bureaucracy must be sidestepped or overruled.

    Consider the question “The disruption caused by the pandemic offers a window for India to create enduring change through economic reforms to take advantage of the opportunity provided by the pandemic. Discuss.”

    Conclusion

    We should focus on creating climate change for our entrepreneurs, firms, and citizens with reforms that will give them economic Poorna Swaraj. And take our per capita income of $2,500 to $10,000 in five years. If not now, then when?

  • E-commerce rules 2020

    The article analyses the various restrictions under The Consumer Protection (E-Commerce) Rules, 2020 to regulate all commercial transactions and issues with such restrictions.

    Context

    • The recent rules relating to e-commerce, issued by the ministry of consumer affairs, food and public distribution, under the Consumer Protection Act, 2019 needs some changes.

    What the recent rules specify

    • The Consumer Protection (E-Commerce) Rules, 2020, notified on July 23, regulate all commercial transactions sold over a digital or electronic network.
    • The e-com rules currently recognise two e-commerce business models, namely, marketplace model and inventory-based model.
    • The rules have separate specified provisions for marketplace- and inventory-based entities.
    • The e-com rules require that all information on the return, refund, exchange, warranty and guarantee, delivery and shipment of the goods or services being sold, including their country of origin, be provided on the platform.
    • Such details enable consumers to make an informed decision.

    What the new rules seek to achieve

    • The country of origin requirement is significant as India and several other countries are currently re-negotiating their free trade agreements.
    • E-com rules prohibit unfair trade practices by entities and sellers on marketplaces and manipulation of price.
    • The entities are prohibited from manipulating the price of the goods or services to gain unreasonable profit by imposing unjustified price or charges on consumers.

    Issues with the rules

    • It remains unclear as to what would constitute price manipulation.
    • It also remain unclear how the e-commerce entities and sellers are expected to navigate these roadblocks without falling foul of such provisions.
    • Both the marketplace entity and sellers are now required to set up a grievance redressal mechanism, small businesses may not be in a position to comply.
    • The rules also prohibit an e-commerce entity from levying a charge for cancellation post confirmation.
    • While the provisions may be intended as safeguards that ensure a level-playing field, some of these conditions are impractical.
    • Applying identical rules does not convey a business-friendly approach.

    Investment restrictions

    • The Foreign Exchange Management (Non-debt Instruments) Rules, 2019 currently recognise the marketplace and inventory model.
    • It permit 100% FDI under the automatic route to marketplace entities as also to those engaged in single-brand retail.
    • Foreign investments, up to 51%, are permitted in multi-brand retail with prior government approval.
    • As per the non-debt rules, entities engaged in single-brand retail are permitted to undertake retail trading through e-commerce.
    • However, single-brand retail trading through e-commerce has to open a brick-and-mortar store within two years from the date it commences online retail.
    • Retail trading, in any form, by means of e-commerce, is not permissible for entities engaged in inventory-based multi-brand retail trading and having foreign investment.

    Consider the question “What are the objectives sought to be achieved through The Consumer Protection (E-Commerce) Rules, 2020 to regulate commercial transactions? What are the issues with the rules?”

    Conclusion

    The commercial sector is anxious for India to consider relaxing some of these requirements, or extending the time period for compliance, given that brick-and-mortar operations may not be possible in the foreseeable future.

    Source-

    https://www.financialexpress.com/opinion/e-commerce-rules-a-one-size-fits-all-approach-some-need-to-be-relaxed/2071953/

    Back2Basics: Invenetory model and marketplace model

    • Marketplace model of e-commerce means providing of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between buyer and seller.
    • The main feature of the market place model is that the e-commerce firm like flipkart, snapdeal, amazon etc. will be providing a platform for customers to interact with a selected number of sellers.
    • Inventory model of ecommerce means an ecommerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.
    • The main feature of inventory model is that the customer buys the product from the ecommerce firm.

  • Aiming for wider consumer base and directing public spending accordingly

    The article suggests the widening of consumer base rather than increasing consumption. To augment that, the government should also direct the spending towards such sectors which would help in broadening of the base.

    Prescription for long term growth: Broadening the consumer base

    • India entered the pandemic with declining growth and limited scope for a conventional and large fiscal stimulus.
    • The NSS 68th round consumption survey indicates that in urban India, the top 20 per cent of the population accounted for nearly 55 per cent of discretionary consumption and 45 per cent of all consumption.
    •  The narrow consumption base coupled with uncertainty over the demographic dividend could belie India’s long-term investment attractiveness.
    • With or without the pandemic, the prescriptions for long-term growth remain the same — broaden the consumer base.
    • This broadening of the consumer base should happen through empowering the low and middle-income consumers.

    Why can’t the government just spend to revive growth

    • 1) Temporary incomes coupled with job/income uncertainty will induce precautionary savings without any impact on growth.
    • 2) With revenues declined, funding of additional expenditure is through higher borrowings.
    • Any incremental debt should be seen in the context of future investments being hampered due to current consumption.
    • India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. 

    Way forward

    • India needs to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
    • To achieve this we will need well-paid employment for the bottom and middle segments.
    • The “safe” group of India’s workforce is extremely small.
    • The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category.
    • Within this segment, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract.
    • These sharp skews in consumption and labour become a substantial risk for a consumption-led growth in the aftermath of a crisis.
    • The PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce.
    • 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
    • The rebuild and recover phase should aim for a wider consumer base with infrastructure and manufacturing as the two pillars.
    • To make manufacturing easier, the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
    • Policies should not become too inward-looking such that export promotion becomes difficult.

    Directing public spending and policies appropriately

    • Most public spending should be directed towards roads, railways, infrastructure, healthcare and educational facilities.
    • To promote infrastructure creation along with private sector participation, the government needs to charge an economic price for goods and services such as power, irrigation, and public utilities.
    • Establish the rule of law with minimal interference in pricing, streamline processes for quick approvals and ensure timely payments to private operators.
    • The government should also signal its vision along with a financing strategy through sharper expenditure management, enhanced market borrowings, setting up of a Development Financing Institution, and an asset monetisation programme.

    Conclusion

    To achieve economic growth of 7-8 per cent the government needs to start addressing large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles.

  • AGR dues issue in Telecom Sector

    The Supreme Court has held that telecom firms will get 10 years to clear their adjusted gross revenue or AGR dues and that the National Company Law Tribunal (NCLT) should decide whether or not spectrum can be sold under the Insolvency and Bankruptcy Code.

    Try this PYQ:

    Q. In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below:

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

    Supreme Court rule on AGR dues

    • In its judgment, the SC gave all telcos a 10-year timeline to complete the payments of AGR dues, instead of the old 20-year schedule suggested by the DoT.
    • It also directed telcos to pay 10 per cent of the total AGR dues by March 31, 2020, following which they can make payments in annual instalments between 2021 and 2031.
    • The non-payment of dues in any year would lead to the accrual of interest and invite contempt of court proceedings against such companies.
    • A crucial issue of whether the spectrum could be sold under IBC will now be decided by the National Company Law Tribunal.

    What is AGR?

    • Adjusted Gross Revenue (AGR) is the usage and licensing fee that telecom operators are charged by the Department of Telecommunications (DoT).
    • It is divided into spectrum usage charges and licensing fees, pegged between 3-5 per cent and 8 per cent respectively.

    What is the issue about?

    • All the telecom companies that operate in India pay a part of their revenues as licence fee and spectrum charges to the Department of Telecommunications (DoT) for using the spectrum owned by the government.
    • In its definition of AGR, the DoT had said that telcos must cover all the revenue earned by them, including from non-telecom sources such as deposit interests and sale of assets.
    • The telecom companies were opposed to this and had challenged this definition of AGR in several forums, including the Supreme Court.
    • On October 24, 2019, the SC had upheld the DoT’s definition of AGR.
    • Though the telcos sought a review of the judgment, it was dismissed by the top court which had then insisted that telcos clear all the dues by January 23, 2020.

  • GST reforms and compensation issue

    The GST compensation issue raises the need for reform in the system. The article discusses this issue and suggests reform.

    Background

    • Three years ago, the Centre and the States of the Union of India struck a grand bargain resulting in GST.
    • The States gave up their right to collect sales tax and sundry taxes, and the Centre gave up excise and services tax. 

    Issue of compensation

    • Consent of the states was secured by a promise of reimbursing any shortfall in tax revenues for a period of five years.
    • This reimbursement was to be funded by a special cess called the GST compensation cess. 
    • The promised reimbursement was to fill the gap for an assured 14% year on year tax growth for five years.

    Why is the Centre denying GST compensation

    • As the economy battles a pandemic and recession, the tax collection has dropped significantly.
    • At the same time, expenditure needs are sharply higher at the State level.
    • Using an equivalent of the Force Majeure clause in commercial contracts, the Centre is abdicating its responsibility of making up for the shortfall in 14% growth in GST revenues to the states.

    Why Central government is wrong in denying the compensation

    •  1) The States do not have recourse to multiple options that the Centre has.[like sovereign bond or a loan against public sector unit shares from the Reserve Bank of India]
    • 2) The Centre can get loans at lower rates of borrowing from the markets as compared to the States.
    • 3) In terms of aggregate public sector borrowing, it does not matter for the debt markets, nor the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
    • 4) Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilisation, which is the Centre’s domain.
    • 5) Using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
    • It will weaken the foundation of cooperative federalism.

    Reforms needed

    • GST is a destination-based consumption tax, which must include all goods and services with very few exceptions.
    • That widening of the tax base itself will allow us to go back to the original recommendation of a standard rate of 12%, to be fixed for at least a five-year period.
    • Some extra elbow room for the States’ revenue autonomy could be allowed by States non VATable surcharges on a small list of “sin” goods.
    • In the long term there are many changes in consumption patterns, production configurations and locations, which cannot be anticipated and hence a static concept of Revenue Neutral Rate cannot be reference.
    • The commitment to a low and stable rate is a must.
    • We must recognise the increasing importance of the third tier of government. 
    • After 28 years of the 73rd and 74th Amendments, the local governments do not have the promised transfer of funds, functions and functionaries.
    • Of the 12% GST, 10% should be equally shared between the States and the Centre, and 2% must be earmarked exclusively for the urban and rural local bodies.
    • Fresh approach also calls for an overhaul of the interstate GST and the administration of the e-way bill.

    Consider the question “Discuss the issue related to GST compensation to the States by the Central government. Suggest the measures changes in the GST regime to deal with flaws.”

    Conclusion

    GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.