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Subject: Economics

  • Despite the messaging, it is still advantage China

    The article examines whether India has been proving a favourable alternative to China or not.

    Is India becoming alternate supply source and investment destination?

    • Despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit China.
    • Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now.
    • Those that do leave may not choose India as a relocation destination.
    • Many U.S. companies with experience working with China are not convinced that India has China’s established industrial base and expertise.
    • They also see other Asian countries as more competitive.

    India’s strengths

    • Democracy: India’s identity as a democratic “un-China” is one of its strongest selling points.
    • Strong IPR: There is no threat of stealing of intellectual property rights.
    • No coercive tactics: Foreign companies in India are not subject to coercive tactics as in China.
    • Institutions: India’s open and vibrant press, an independent judiciary, and other advantages of democratic governance also provide a contrast to China.
    • Domestic market:India’s well-off domestic market also attracts foreign investors.

    Why China is a favoured destination

    • China offers many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product.
    • China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities.

    Way forward

    1) Focus on the States

    • India can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors.
    • Foreign capital could also greatly increase infrastructure funds beyond government spending alone.
    • India might also usefully build up new industrial centres with an eye to geography. [for instance-linking the southeast of the country to supply chains in Southeast Asia]

    2) Focus on the policy framework

    • India should take two great steps-
    • 1) Reduce the number of investments needing approval by the Centre.
    • 2)To increase intra-Ministry coordination on foreign direct investment policies.
    • The same coordination could be extended to the appointment of a high-level official or body in the Prime Minister’s Office.
    • This will ensure that all proposed economic policy changes are consistent with the goal of attracting foreign investment.

    Conclusion

    A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

  • Implications of World Bank halting ‘Doing Business’ report for India

    India’s ranking in the World Bank’s ‘Ease of Doing Business’ index has improved spectacularly. However, the World Bank recently halted its publication and announced decision to review and assess data changes for last five years.

    Background

    • Citing irregularities of data for a few countries, the World Bank halted its annual publication ‘Doing Business’ report.
    • It will conduct a systematic review and assessment of data changes that occurred subsequent to the institutional data review process for the last five Doing Business reports.

    Why India should be concerned

    • Through improved ranking India sought to attract investments to achieve the targets set for ‘Make in India’.
    • India’s success in boosting its ease of doing business ranking is spectacular, to 63rd rank in 2019, up from the 142nd position in 2014.
    • Policymakers celebrated it to signal India’s commitment to “minimum government and maximum governance”.
    • The World Bank decision to audit the ‘Doing Business’ report for the last five years may soon cause discomfort by shining a spotlight on the sharp rise in India’s ranking.
    • Study at the Center for Global Development found that the improvement in India’s ranking was almost entirely due to methodological changes.
    • During the same period, however, Chile’s global rank went down sharply, from 34th position in 2014 to 67th in 2017.
    • The contrasting experience of Chile and India casts doubts on not just the country-level data but also the changes in underlying methodologies.

    Does ease of doing business have predictive power?

    • While India’s rank drastically improved, it has meant nothing on the ground.
    • The share of the manufacturing sector has stagnated at around 16-17% of GDP, and 3.5 million jobs were lost between 2011-12 and 2017-18.
    • Annual GDP growth rate in manufacturing fell from 13.1% in 2015-16 to zero in 2019-20, as per the National Accounts Statistics.
    • India’s import dependence on China has shot up.
    • In case of Russia, ease of doing business rank jumped from 120 in 2012 to 20, but without becoming a magnet for investment inflows.
    • China, on the contrary, attracted one of the highest capital inflows but its ease of doing business ranking was low and hovered between 78 and 96 for the years between 2006 and 2017.

    Other flaws in the Index

    • The Indicators used for the index are de jure (as per the statute), not de facto (in reality).
    • The data for computing the index are obtained from larger enterprises in two cities, Mumbai and Delhi, by lawyers, accountants and brokers — not from entrepreneurs.
    • The World Bank’s own internal watchdog, the Independent Evaluation Group, in its 2013 report, has widely questioned the reliability and objectivity of the index.
    • The World Bank conducts a global enterprise survey collecting information from companies.
    • There is no correlation between the rankings obtained from ease of doing business and the enterprise surveys.

    Lack of theoretical basis: Major flaw

    • There is little in any major strand of economic thought which suggests that minimally regulated markets for labour and capital produce superior outcomes in terms of output and employment.
    • Economic history shows rich variations in performance across countries and policy regimes, defying simplistic generalisations.
    • Such simplistic basis is used under a seemingly scientific garb of the quantitative index to the disadvantage of workers.
    • To meet the ease of doing business targets, safety standards of factories are compromised.
    • For instance, in 2016, the Maharashtra government abolished the annual mandatory inspection of steam boilers under the Boilers Act of 1923 and the Indian Boilers Regulation 1950.
    •  However, no factory has complied with self-certification or submitted the third party certification.

    Consider the question “Examine the issues with the World Bank’s ‘Ease of Doing Business Index’?  What are its implications for India?”

    Conclusion

    It is time the World Bank rethinks its institutional investment in producing the ‘Doing Business’ report. India should do some soul searching as to why the much trumpeted rise in global ranking has failed miserably on the ground.

  • In news: Channapatna Toys

    The COVID-19 pandemic has dealt a crippling blow to the Channapatna Toys industry.

    Must read:

    GI Tags in news for 2020 Prelims

    All time GI tags in news

    Channapatna Toys

    • Channapatna toys are a particular form of wooden toys (and dolls) that are manufactured in the town of Channapatna in the Ramanagara district of Karnataka.
    • This traditional craft is protected as a geographical indication (GI) under the World Trade Organization, administered by the state govt.
    • As a result of the popularity of these toys, Channapatna is known as Gombegala Ooru (toy-town) of Karnataka.
    • Traditionally, the work involved lacquering the wood of the Wrightia tinctoria tree, colloquially called Aale mara (ivory-wood).
    • Their manufacture goes back at least 200 years according to most accounts and it has been traced to the era of Hyder Ali and Tipu Sultan in the 18th century.
    • The toys are laced with vegetable dyes and colours devoid of chemicals and hence they are safe for children.

    Back2Basics: Geographical Indications in India

    • A Geographical Indication is used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Such a name conveys an assurance of quality and distinctiveness which is essentially attributable to its origin in that defined geographical locality.
    • This tag is valid for a period of 10 years following which it can be renewed.
    • Recently the Union Minister of Commerce and Industry has launched the logo and tagline for the Geographical Indications (GI) of India.
    • The first product to get a GI tag in India was the Darjeeling tea in 2004.
    • The Geographical Indications of Goods (Registration and Protection) Act, 1999 (GI Act) is a sui generis Act for the protection of GI in India.
    • India, as a member of the WTO enacted the Act to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights
    • GI protection is granted through the TRIPS Agreement.

  • Issue of GST compensation to states

    The article analyses the issue of GST compensation to states under GST regime for five years and how this has turned to be contentious issues after the economic disruption caused by Covid-19.

    The basis for compensation

    • Under Goods and Services Tax (GST) regime the Centre would make good the loss in the first five years if States faced revenue deficits after the GST’s introduction.
    • States sacrificed their constitutionally granted powers of taxation in the national interest.

    GST compensation cess

    • To pay the compensation to states, GST compensation cess was introduced.
    • When the GST compensation cess exceeded the amount that had to be paid to States, the Central government absorbed the surplus.
    •  Now, the economy has slowed down dramatically and the resources raised are insufficient.
    • The Centre is raising questions about whether it is legally accountable to pay compensation.
    • The constitutional framework that ushered in the GST does not provide an escape clause for ‘Acts of God’.

    Way forward

    • As stated by the Secretary of the GST Council in the tenth meeting, the central government could raise resources by other means for compensation and this could then be recouped by continuing the cess beyond five years.
    • Monetary measures are the monopoly of the central government.
    • Even borrowing is more efficient and less expensive if it is undertaken by the Central government.
    • As equal representatives of the citizens State governments expected the Centre to demonstrate empathy and provide them relief through the Consolidated Fund of India.

    Conclusion

    Central government should consider the legal provision in the GST regime and act in the spirit of cooperative federalism.

  • What is Compensation of GST?

    With Centre-State friction over pending compensation payments under the Goods and Services Tax (GST) taking a new turn in the 41st GST Council to meet, the strain on the finances of states is likely to continue in the near term.

    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 GST?

    • GST, being a consumption-based tax, would result in loss of revenue for manufacturing-heavy states.
    • GST launched in India on 1 July 2017 is a comprehensive indirect tax for the entire country.
    • It is charged at the time of supply and depends on the destination of consumption.
    • For instance, if a good is manufactured in state A but consumed in state B, then the revenue generated through GST collection is credited to the state of consumption (state B) and not to the state of production (state A).

    Compensation under GST regime

    • Due to the consumption-based nature of GST, manufacturing states like Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu feared a revenue loss.
    • Thus, GST Compensation Cess or GST Cess was introduced by the government to compensate for the possible revenue losses suffered by such manufacturing states.
    • However, under existing rules, this compensation cess will be levied only for the first 5 years of the GST regime – from July 1st, 2017 to July 1st, 2022.
    • Compensation cess is levied on five products considered to be ‘sin’ or luxury as mentioned in the GST (Compensation to States) Act, 2017 and includes items such as- Pan Masala, Tobacco, and Automobiles etc.

    Alternatives to prevent losses

    • The input tax credit can help a producer by partially reducing GST liability by only paying the difference between the tax already paid on the raw materials of a particular good and that on the final product.
    • In other words, the taxes paid on purchase (input tax) can be subtracted from the taxes paid on the final product (output tax) to reduce the final GST liability.

    Distributing GST compensation

    • The compensation cess payable to states is calculated based on the methodology specified in the GST (Compensation to States) Act, 2017.
    • The compensation fund so collected is released to the states every 2 months.
    • Any unused money from the compensation fund at the end of the transition period shall be distributed between the states and the centre as per any applicable formula.

    Significance of GST compensation

    • States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty were subsumed under GST.
    • GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
    • Finances of over a dozen states are under severe strain, resulting in delays in salary payments and sharp cuts in capital expenditure outlay amid the pandemic-induced lockdowns and the need to spend on healthcare.

    Back2Basics:

    Goods and Services Tax

  • GIS-enabled Land Bank System

    A prototype of the National GIS-enabled Land Bank System was e-launched by Commerce and Industry Ministry for six States based on which land can be identified for setting up industries.

    Try to answer this question in short:

    Q.Discuss the benefits of digitizing land records in India.

    Land Bank System

    • The system has been developed by the Integration of Industrial Information System (IIS) with state GIS (Geographic Information System).
    • IIS portal is a GIS-enabled database of industrial clusters/areas across the states.
    • On the system, more than 3,300 industrial parks across 31 states/UTs covering about 4,75,000 hectares of land have also been mapped out on the system.
    • The information available on the system will include drainage, forest; raw material heat maps (horticulture, agricultural, mineral layers); multilayer of connectivity.
    • IIS has adopted a committed approach towards industrial upgrading, resource optimization, and sustainability.

    Various stakeholders

    • The initiative has been supported by the National e-Governance Division (NeGD), National Centre of Geo-Informatics (NCoG), Invest India, Bhaskaracharya Institute for Space Applications and Geo-Informatics (BISAG), and Ministry of Electronics and Informational Technology.

  • Disintermediation from E-commerce

     E-commerce was expected to provide the level playing field. However, Indian e-commerce has been experiencing the duopoly and new entrant faces several difficulties.

    What is disintermediation

    • The emergence of the internet was seen as a tool for marketers to reach consumers directly.
    • The term disintermediation meant taking intermediaries out of the loop.
    •  The aim was efficiency.
    • It was hoped that without local stockists and distributors in between, retail demand could be fulfilled at lower cost.
    • After all, anyone could put up a website and woo traffic.

    What is the issue?

    • Today, the gains of online market addressal have converged into the hands of a few big winners in a winner-takes-all scenario.
    • Getting an app onto handsets often involves a toll paid to e-gatekeepers.
    • These apps created an entry barrier for the new entrants.
    • So far, single-brand apps have mostly failed, regardless of price baits.
    • After all, it is hard to beat the convenience of a single-touch window that lets shoppers load e-carts with all their needs.

    Conclusion

    E-com was once about snipping out distribution networks. With market access cornered by pioneers, now others want to get past these intermediaries. Only blockbuster apps can do it.

  • Boosting demand with wage hike

    The article discusses the threat posed to the Indian economy by the subdued demand following the return of the labourers to their urban jobs.

    Rural employment issue

    • About 30 million migrant workers rushed home to their villages during the pandemic.
    • About 60 per cent of out-migration from rural India is aspiration-led.
    • Income earned in urban jobs is 2.5 higher than earned in rural area.
    • Though rural economy has been recovering faster than the urban economy, this optimism could prove short-lived, as eventually the more long-lasting determinants of rural wages could prevail.

    What are the determinants of rural wages

    1) NREGA wages

    • The government has raised the rural employment guarantee programme (NREGA) wages and outlays.
    • Demand for the scheme is outpacing supply.
    • This demand-supply mismatch means that it may not be an effective driver of higher rural wages.

    2) Low construction activities

    • Many rural Indians, especially those without land, have become building labourers.
    • 70 per cent of construction is related to real estate and property developers are dependent on funding from struggling non-banking financial companies.
    • Until this type of lending restarts, construction may not normalise.
    • And that means rural wages may not rise quickly either.

    3) Rising debt level

    • The increase in borrowing and fall in inflation over the last few years has increased the “real” indebtedness of rural Indians.
    • This affected particularly the landowners who pay villagers to farm their land.
    • This is likely to hurt their ability to pay high wages.

    3 Reasons why wage outlook could be dimmer

    • As migrant labours start to return to their urban jobs, their wage outlook appears to be bleak for 3 reasons.
    • 1) As during demonetisation, workers could find jobs again, but at lower wages.
    • 2) There could be a second-round of pandemic-led labour market weakness, driven by job losses and falling wages from the first round.
    •  3) We find that both rural and urban wages are driven by economic growth, India’s post-pandemic medium-term growth falling by one percentage point to 5 per cent does not bode well.

    Way forward

    • Weak wages could keep demand subdued. To offset this policymakers have an important role to play.
    • 1) In particular, policymakers may have to ensure that capital is allocated efficiently.
    • After all, investment is the only way to increase the economy’s capacity to create well-paying jobs.
    • 2) Bringing back investment growth would also involve capital re-allocation.
    • This means taking it away from sectors that are not working and redeploying it in sectors that are.
    • Improving the Insolvency and Bankruptcy Code procedure is a key step here.
    • 3) Another important step is to improve the health of banks as they are the ones allocating capital by giving loans.
    •  Implementation of the 5-Rs — recognition, restructuring, resolution, recapitalisation and reforms — for the banking sector may be particularly useful here.

    Consider the question “After supply-side disruption is over, India’s growth may suffer from the subdued wage growth. Suggest the steps to avoid this from happening.”

    Conclusion

    Supply disruption caused by reverse migration won’t last long, but led by lower wages, demand could remain weak, requiring policy intervention.

  • Atal Tunnel at Rohtang

    The Atal Tunnel at Rohtang, near Manali, is almost complete in all respects and will be inaugurated very soon in September.

    Tap to read more about Himalayas at:

    https://www.civilsdaily.com/the-northern-and-northeastern-mountains-part-1/

    Atal Tunnel

    • The 9-km-long tunnel is constructed under the Pir Panjal range.
    • It has been named after former PM Atal Bihari Vajpayee and will be the world’s longest highway tunnel above the altitude of 10,000 feet (3000 metres).
    • It was scheduled to be completed by May 2020, in a revised estimate, but the Covid-19 pandemic pushed back the completion by a few months due to lockdown conditions.
    • Vehicles can travel at a maximum speed of 80 km per hour. Up to 1,500 trucks and 3,000 cars are expected to use it per day when the situation gets to normal.

    What is its strategic advantage?

    • Cutting through the Pir Panjal range, the tunnel will reduce the distance between Manali and Leh by 46 km.
    • The tunnel will provide almost all-weather connectivity to the troops stationed in Ladakh.

  • Making agricultural reforms successful

    The article analyses the issues with the reforms in the agricultural marketing policies.

    Recent reforms in agricultural marketing

    • The 3 recent reforms in agricultural marketing bring major changes in policy.
    • The removal of restrictions under the Essential Commodities Act (ECA) should help attract private investment in agriculture.
    • The two new ordinances are expected to enable inter-State trade and promote contract farming, thereby providing a large number of options to farmers.

    Concerns that need to be addressed

    1) Policy credibility problem

    • The first problem is ‘time-inconsistency’ problem or the policy credibility problem.
    • This situation arises when a decision maker’s preferences change over time in such a way that the preferences are inconsistent at different points in time.
    • Because the policy signals are not very clear in the last few years as relates to agricultural marketing, as we will see below.
    • This clarity of clear signal is reflected in rollout of multiple schemes: e-NAM, PM-AASHA, PM-KISAN.
    • In 2016, the electronic national agricultural market (e-NAM) was launched with a lot of fanfare.
    • States needed to amend their respective Agricultural Produce Market Committee (APMC) Acts.
    • Several States could not or did not carry out these amendments and the e-NAM proved to be far less effective than desired.
    • As a result, the government reverted back to public price support by launching an ambitious programme, PM-AASHA, in September 2018.
    • The programme was confined to pulses and oilseeds to limit the fiscal costs.
    • However, the initial budgetary outlay did not match the level of ambition of the programme.
    • In addition to the PM-AASHA programme, two Model Acts were formulated by the Central government in 2017 and 2018 to promote agricultural marketing and contract farming in States.
    • States were required to legislate these Model Acts.
    • However, progress has been tardy and many States have not adopted the Model Acts.
    • This uninspiring performance of PM-AASHA necessitated a more radical and direct approach.
    • Thus evolved the PM-KISAN, a direct cash transfer programme, in the interim Budget of 2019-2020 (February 2019).
    • This programme involved a fixed payment of ₹6,000 per annum to each farm household with a budgetary outlay of ₹75,000 crore.
    • The frequent flip-flops in farm policy — from a market-based e-NAM to a public funded PM-AASHA and now back to market-based measures — may not inspire much confidence in the minds of private investors about the continuance of the present policies.

    2) Centre-State and State-State relations

    • Recent Ordinances were passed by the Central Government using the constitutional provisions but the implementation of the same vests with the States.
    • Also, inter-State trade involves movement of goods across the State boundaries.
    • Thus, coordination between the Central and the State governments, and also among various States becomes crucial.
    • Also, the States must have faced several problems in legislating and implementing the earlier Model Acts.
    • Thus, the Centre must engage with the States about these constraints in order to iron out the potential problems in the implementation of the ordinances.

    3) Multiple market failures and the resultant inter-linkage of rural markets

    • Absence or failure of credit and insurance markets may lead a farmer to depend upon the local input dealer.
    • This, in turn, may tie him to these intermediaries and constrain his choice of output markets.
    • Similarly, the widespread restrictions on land leasing in many States lead to an inefficient scale of production.
    • Thus, reforms in the output market alone are not sufficient.
    • Reforms in output must be supplemented and complemented with the liberalisation of the lease market and better access to credit and insurance markets.

    Consider the question “What are the reform measures taken by the government to deal with the issues in the agricultural marketing by farmers? What are the concerns with such measures?”

    Conclusion

    In conclusion, consistency in policy, collaborative approach and complementary reforms are necessary for the success of the recent agricultural market reforms.

    Back2Basics: Agricultural reform

    Read in detail about the 3 reforms form here-

    Agri reforms and way forward