💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Economic crisis without culprit

    Contradictions in the present crisis

    • India registered negative economic growth in 1972-73, 1965-66 and 1957-58.
    • All these were drought years.
    • 1957-58 also registered a significant balance of payments (BOP) deterioration and 1979-80 witnessing the second global oil shock following the Iranian Revolution.
    • Farmers harvested a bumper rabi crop last year and public cereal stocks at 94.42 million tonnes as on July 1 were also 2.3 times the required level.
    • There’s no shortage today of food, forex or even savings.
    • Foreign exchange reserves were at an all-time high of $538.19 billion.
    • So, the real GDP decline of 5-10 per cent for 2020-21 would be the country’s first-ever not triggered by an agricultural or a BOP crisis.

    “Western style” demand slowdown in India

    • What India has been going through is a full-fledged recession bereft of consumption and investment demand.
    • Households have cut spending.
    • The same goes with businesses. Many have shut or are operating at a fraction of their capacity and pre-lockdown staff strength.
    • This demand-side uncertainty and the resulting economic contraction is something new to India.
    • Banks are also facing a problem of plenty.
    • While their deposits are up 11.1 per cent, the corresponding credit growth has been just 5.5 per cent.
    • At some point when all this reduced spending and investments leads to a further contraction of incomes, it is bound to reduce savings as well.

    Why the government is not spending?

    • Solution in such a situation is the spending by the government.
    • There are three probable reasons why government isn’t doing that.

    1.Optimism

    • Hope that once the worst of the pandemic is behind us, people will start spending and businesses, too, will spring back to life.
    • However, this assumes the economy wasn’t doing all that badly previously and that the lockdown hasn’t caused too much of permanent damage.
    • The truth is that growth had already slid to 3.9 per cent in 2019-20.

    2.State of Government finances

    • In 2007-08 global financial crisis, the Centre’s fiscal deficit was only 2.5 per cent of GDP, whereas it stood at 4.6 per cent in 2019-20.
    •  The space for a fiscal stimulus, in other words, is very limited compared to that time.

    3.Sustainability of debt

    •  Between 2007-08 and 2019-20, the Centre’s outstanding debt-GDP ratio has come down from 56.9 to 49.25 per cent.
    • So has general government debt, which includes the liabilities of states, from 74.6 to 69.8 per cent.
    • Economists such as Olivier Blanchard have shown that public debts are sustainable provided governments can borrow at rates below nominal GDP growth (i.e. GDP unadjusted for inflation).
    • The nominal GDP averaged 11.1 per cent during  2014-15 to 2018-19.
    • As against this, the weighted average interest rate on Central government securities ruled between 6.97 per cent in 2016-17 and 8.51 per cent in 2014-15.
    • Only with nominal GDP growth falling to 7.2 per cent in 2019-20, and most likely zero this fiscal, has the Blanchard debt sustainability formula come under threat.

    Way forward

    • Government can take lessons from the Vajpayee period when the weighted average cost of Central borrowings more than halved from 12.01 per cent in 1997-98 to 5.71 per cent in 2003-04.
    • In the last four months, yields on 10-year Indian government bonds have softened from 6.5 to 5.9 per cent and even more for states — from 7.9 to 6.4 per cent.
    •  Interest rates will fall further as banks have nobody to lend to.

    Consider the question “Examine how covid induced economic recession is different from the past recessions? What are the options with the government to deal with the situation?” 

    Conclusion

    Governments should borrow and spend. They need worry only about GDP growth, real and nominal.

    Sources: https://indianexpress.com/article/opinion/columns/a-crisis-without-villains-6557602/

  • Correcting the agri market

    The article analyses the highlights the importance of post harvest infrastructure for the better price realisation of agri-commodities. It also suggests the two areal which could help the farmers in this regard.

    Purpose of Agriculture Infrastructure Fund

    • Creating post-harvest physical infrastructure is as important as the changes in the legal framework (like the recent ordinances).
    • The recently announced Rs 1 lakh crore Agriculture Infrastructure Fund (AIF) will be used over the next four years.
    • This fund will be used to build post-harvest storage and processing facilities.
    • NABARD will steer this initiative in association with the Ministry of Agriculture and Farmers Welfare, largely anchored at FPOs.
    • The creation of the AIF presumes that there is already large demand for storage facilities and other post harvest infrastructure.

     Reforms in 2 areas which could help farmers get better price realisation

    1) Negotiable warehouse receipt

    • More and better storage facilities can help farmers avoid distress sellingimmediately after the harvest.
    • But small farmers cannot hold stocks for long as they have urgent cash needs to meet family expenditures.
    • Therefore, the value of the storage facilities at the FPO level could be enhanced by a negotiable warehouse receipt system.
    • FPOs can give an advance to farmers, say 75-80 per cent of the value of their produce at the current market price.

    How NABARD can play an important role

    • Since NABARD is also responsible for the creation of 10,000 more FPOs, it can create a package that will help these outfits realise better prices
    • FPOs will need large working capital to give advances to farmers against their produce as collateral.
    • NABARD can ensure that FPOs get their working capital at interest rates of 4 to 7 per cent.
    • Currently, most FPOs get capital from microfinance institutions at rates ranging from 18-22 per cent per annum which is not economically viable unless the off-season prices are substantially higher than the prices at harvest time.

    2)Improving Agri-futures markets

    • A vibrant futures market is a standard way of reducing risks in a market economy.
    • Several countries — be it China or the US — have agri-futures markets that are multiple times the size of those in India.

    Way forward

    • 1) NABARD  should devise a compulsory module that trains FPOs to use the negotiable warehouse receipt system and navigate the realm of agri-futures to hedge their market risks.
    • 2) Government agencies dealing in commodity markets — the FCI, NAFED, State Trading Corporation (STC) — should increase their participation in agri-futures.
    • That is how China deepened its agri-futures markets.
    • 3) The banks that give loans to FPOs and traders should also participate in commodity futures as “re-insurers” for the healthy growth of agri-markets.
    • 4)  Government policy has to be more stable and market friendly.
    • In the past, it has been too restrictive and unpredictable.

    Consider the question “Creating post-harvest physical infrastructure is as important as the changes in the legal framework. In light of this, highlight the importance of recently announced Agriculture Infrastructure Fund and suggest the measures to increase the price realisation of agri-products by farmers.” 

    Conclusion

    India needs to not only spatially integrate its agri-markets (one nation, one market) but also integrate them temporally — spot and futures markets have to converge. Only then will Indian farmers realise the best price for their produce and hedge market risks.

  • RBI’s Positive Pay system

    The new ‘Positive Pay’ mechanism was recently introduced by the Reserve Bank of India (RBI).

    Try this PYQ:

    With reference to digital payments, consider the following statements:

    1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
    2. While a chip-pin debit card has four factors authentication, BHIM app has only two factors of authentication.

    Which of the statements given above is/are correct? (CSP 2018)

    a) 1 only
    b) 2 only
    c) Both 1 and 2
    d) Neither 1 nor 2

    What is the move?

    • Issuers will be able to send all details to their bank, thereby ensuring faster clearance of cheques above Rs 50,000.
    • All cheques will be processed as per the information sent by the account holder at the time of issuance of cheques.
    • This will cover approximately 20 per cent of transactions by volume and 80 per cent by value.
    • It will make cheque payments safer and reduces instances of frauds.

    What is Positive Pay Mechanism?

    • Positive Pay is a fraud detection tool adopted by banks to protect customers against forged, altered or counterfeit cheques.
    • It crosses verifies all details of the cheque issued before funds are encashed by the beneficiary.
    • In case of a mismatch, the cheque is sent back to the issuer for examination.
    • By following such a system, a bank knows of a cheque being drawn by the customer even before it is deposited by the beneficiary into his/her account.

    How does the mechanism work?

    • Under Positive Pay feature, the issuer will first share the details of the issued cheque like cheque number, date, name of the payee, account number, amount and the likes through his/her net banking account.
    • Along with this, an image of the front and reverse side of the cheque is also required to be shared, before handing it over to the beneficiary.
    • When the beneficiary submits the cheque for encashment, the details are compared with those provided to the bank through Positive Pay.
    • If the details match, the cheque is honoured. However, in the case of mismatch, the cheque is referred to the issuer.
    • In this way, any cheque where any sort of fraud has happened cannot be cleared at all and hence, a depositor’s money can be protected.

  • One Sun, One World, One Grid (OSOWOG) Initiative

    The Union Ministry of New and Renewable Energy (MNRE) has put calls for proposals to the One Sun, One World, and One Grid (OSOWOG) initiative on hold till further notice.

    Try this PYQ:

    Q.Consider the following statements:

    1. The International Solar Alliance was launched at the United Nations Climate Change Conference in 2015.
    2. The Alliance includes all the member countries of the United Nations.

    Which of the above statements is/are correct? (CSP 2016)

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

    OSOWOG Initiative

    • Under the project, India envisaged having an interconnected power transmission grid across nations for the supply of clean energy.
    • The vision behind the OSOWOG mantra is ‘The Sun Never Sets’ and is a constant at some geographical location, globally, at any given point of time.
    • With India at the fulcrum, the solar spectrum can easily be divided into two broad zones viz. far East which would include countries like Myanmar, Vietnam, Thailand, Lao, Cambodia etc. and far West which would cover the Middle East and the Africa Region.

    Implementation

    • The OSOWOG would have three phases. In the first phase Phase I, Middle East, South Asia and South-East Asia would be interconnected.
    • In the second phase, solar and other renewable energy resources rich regions would be interconnected.
    • In the third phase would vie for global interconnection of the power transmission grid to achieve the One Sun One World One Grid vision.

    Benefits of the project

    • Attracting investment: An interconnected grid would help all the participating entities in attracting investments in renewable energy sources as well as utilizing skills, technology and finances.
    • Poverty allevation: Resulting economic benefits would positively impact poverty alleviation and support in mitigating water, sanitation, food and other socio-economic challenges.
    • Reduced project cost: The proposed integration would lead to reduced project costs, higher efficiencies and increased asset utilization for all the participating entities.

    Issues with project

    • It is hindered with the issues of intricate geopolitics, unfavourable economics, unwarranted globalisation and undue centralization that act against the concept.

  • What is the Business Responsibility Report?

    In efforts to have a single source for all non-financial disclosures by corporates, a government-appointed panel has made various proposals on business responsibility reporting, including putting in place two formats for disclosing information.

    Try this PYQ:

    Which one of the following is not a feature of Limited Liability Partnership firm? (CSP 2010)

    (a) Partners should be less than 20

    (b) Partnership and management need not be separate

    (c) Internal governance may be decided by mutual agreement among partners

    (d) It is corporate body with perpetual succession

    What is the Business Responsibility Report (BRR)?

    • Business Responsibility  Report is a disclosure of the adoption of responsible business practices by a  listed company to all its stakeholders.
    • This is important considering the fact that these companies have accessed funds from the public, have an element of public interest involved, and are obligated to make exhaustive disclosures on a regular basis.
    • BSR is to be submitted as a part of the Annual Report.
    • It contains a standardized format for companies to report the actions undertaken by them towards the adoption of responsible business practices.
    • It has been designed to provide basic information about the company, information related to its performance and processes, and information on principles and core elements of the BSR.

    SEBI recommendations for BSR

    • As per the report, reporting may be done by top 1,000 listed companies in terms of their market capitalization or as prescribed by markets regulator SEBI.
    • The reporting requirement may be extended by MCA (Ministry of Corporate Affairs) to unlisted companies above specified thresholds of turnover and/ or paid-up capital.
    • The panel has suggested two formats for disclosures — a comprehensive format and a “lite version” — and also called for the implementation of the reporting requirements in a gradual and phased manner.
    • Smaller unlisted companies may adopt a lite version of the format, on a voluntary basis.

  • RBI revises guidelines for opening Current Accounts

    The article explains the salience of the RBI’s recent restriction on the opening of current accounts by the companies.

    Context

    • RBI has put restrictions on who can open a current account with which bank.

    What are the restrictions and why it matters

    • A company that has borrowed from a bank cannot open a current account with another bank.
    • It can open a current account with its lending banks under some circumstances.
    • Otherwise such company is encouraged to use the cash credit and overdraft facilities under which it has borrowed.

    Let’s understand why it matters

    • Firms borrow from PSU banks, but open current accounts with private or foreign banks.
    • When transactions move to current account of banks other than the lending bank, it loses visibility on end use of the funds.
    • Basically the PSU bank has no idea where the money has gone.
    • For example, when a firm gets money from its customers, instead of parking it with the lending bank it puts it in the current account with another bank.
    • The lending bank has no way of knowing if the loan is going bad wilfully or otherwise.

    Why private banks may oppose the move

    • Easy revenue source has got blocked.
    • They can, of course, start lending to firms to retain this business but that would mean taking risk.
    • It would be far safer to be with retail customers who have neither power nor lawyers to defend them against sharp banking practices.

    Why it matters to bank customers

    • Vanishing money raises the cost of funds to the bank and results in higher lending rates and lower deposit rates for us.
    • For taxpayers, it means regular use of our funds to recapitalize the banking system that periodically goes bankrupt due to loans gone bad.
    • So, an overall tightening of the system is great news.

    Conclusion

    For too long have the citizens been punished with greater scrutiny, tighter rules, higher costs and fewer benefits as compared to the suits. We should let the banks hand-wring, but celebrate the closure of each loophole as it happens.

    Back2Basics: What is the current account?

    • A current account is like a savings bank account, but with many facilities for swift and multiple transactions, overdraft facilities and it carries no interest.
    • Banks like to sell these accounts as they enjoy huge floats, or money that just sits with the bank waiting to be used by the depositing firms.

  • Making up for shortfalls in GST collection

    The article deals with the issue of shortfall in the GST compensation cess and the challenge Central government faces to pay the promised compensation to the states.

    Background of the cess

    • GST subsumed several taxes, including those which were the preserve of the States.
    • Therefore it required an amendment to the Constitution of India.
    • The amendment affected the Seventh Schedule, so it required ratification by the legislatures of half the States.
    • Before the GST, States exporting goods to other States collected a tax.
    • But the GST is a destination-based tax, i.e., the State where the goods are sold receive the tax.
    • This implies that manufacturing States would lose out while consuming States would benefit.
    • So, in order to convince manufacturing States to agree to GST, a compensation formula was created.
    • Under which States were promised compensation for loss of revenue for a period up to five years.
    • The Act for compensation to states assumed that the GST revenue of each State would grow at 14% every year, from the amount collected in 2015-16.
    • This scheme is valid for five years, i.e., till June 2022.

    Compensation cess fund

    • A compensation cess fund was created from which States would be paid for any shortfall.
    • An additional cess would be imposed on certain items and this cess would be used to pay compensation.
    • The Act states that the cess collected and “such other amounts as may be recommended by the [GST] Council” would be credited to the fund.
    • In the first two years of this scheme, the cess collected exceeded the shortfall of States.
    • In the third year, 2019-20, the fund fell significantly short of the requirement.

    The problem and its source

    •  A key source of the problem is that the 2017 Act guaranteed a tax growth rate of 14%, which is unachievable this year.
    • The 14% target was too ambitious to start with.
    • Given the government’s inflation target at 4%, this implied a real GDP growth plus tax buoyancy of 9%.
    • But, the Central government is constitutionally bound to compensate States for loss of revenue for five years.

    Solution to the problem

    1) The Constitution could be amended to reduce the period of guarantee to three years thus ending June 2020.

    • But most States would be reluctant to agree to this proposal.
    • It could also be seen as going back on the promise made to States.

    2) The Central government could fund this shortfall from its own revenue.

    •  The Centre’s finances are stretched due to shortfall in its own tax collection combined with extra expenditure to manage the health and economic crisis.

    3) The Centre could borrow on behalf of the cess fund.

    • The tenure of the cess could be extended beyond five years until the cess collected is sufficient to pay off this debt and interest on it.

    4) the Centre could convince States that the 14% growth target was always unrealistic.

    • If the Centre can negotiate with States through the GST Council to reset the assured tax level, it could then bring in a Bill in Parliament to amend the 2017 Act.

    Consider the question “What were the reasons for making provisions under GST for paying the states compensation for tax revenue shortfall? What are the implications of the provision for the Central government?”

    Conclusion

    The Constitution makes it obligatory for the Centre to make up for shortfall by the States. The cess collected will not be sufficient for this purpose. The GST Council, which is a constitutional body with representation of the Centre and all the States, should find a practical solution.

    B2BASICS

    Source: https://www.thehindu.com/opinion/op-ed/making-up-for-shortfalls-in-gst-collection/article32319744.ece

  • Increasing dependence on indirect taxes and issues with it

    India, with a tax-GDP ratio of 10.9 per cent in 2019 needs an overhaul of its tax system. This article analyses India’s growing dependence on indirect taxes and its implications for the poor.

    Important changes in direct taxes

    • The wealth tax was abolished in 2016.
    • Wealth tax was replaced by a 2 per cent surcharge on super-rich individuals with taxable income of over Rs 10 crore.
    • But the government rolled back the increase in surcharge in 2019.
    • Corporate taxes were slashed from 30 per cent to 22 per cent to attract foreign investors and induce Indian companies to invest.
    •  Cuts in corporate tax that have resulted in a revenue loss of Rs 1.5 lakh crore have contributed to making the state poor.

    Increasing indirect taxes and cess

    • The share of indirect taxes has increased by up to 50 per cent of the gross tax revenue in FY2019 from 43 per cent in FY2011.
    • The combined share of customs and excise duties and value-added tax reached an all-time high of 10.5 per cent of GDP.
    • This high was following a three-year-long steady increase in customs or excise duty on commonly used goods, such as petroleum products, metals and sugar, automobiles and consumer durables.
    • This is also when the service tax was hiked steadily to 18 per cent under GST from 12.4 per cent in 2014.
    • Swachh Bharat cess and Krishi Kalyan cesses were imposed in addition to GST.
    • The permanent nature of these cesses has been widely opposed by the states and criticised by the CAG.
    • CAG has pointed out the lack of transparency and incomplete reporting in accounts on the utilisation of amounts collected under cesses.
    • All of this is troubling because indirect taxes often penalise the poor and the middle class more than the rich.

    Case for the wealth tax

    • High tax rates on the wealthy in Europe have played a key role in ensuring a strong social security net for the poor.
    • This successful example should encourage India to consider the rationale for a wealth tax.
    • Higher taxes on the super-rich could be used for cash transfers and a fiscal stimulus, that, in India, at 1 per cent of GDP each, have been negligible so far.
    • A wealth tax, a COVID-19 cess on the super-rich and a surcharge on the super-rich for their income from listed equity shares are critical for mitigating the current situation.

    Issues with such policy

    • Cuts in corporate taxes, increased indirect tax revenues, decreased capital expenditure and practically no change in revenue expenditure on health and education show that India’s taxation policy is more business-friendly than pro-poor.
    • This is happening at a time when a supply-side oriented approach to the economy is counter-cyclical.
    • Faced with increased expenditure amid pandemic Centre increased the duty on fuel by a record Rs 10 per litre on petrol when global crude prices have been falling.
    • This speaks of the government’s increased dependency on indirect tax-based revenues.

    Examine the implications of India’s growing dependence on indirect tax revenue? Suggest the measures to reduce such dependence.

    Conclusion

    COVID-19 may be a blessing in disguise if it allows India to reform its tax system in order to make it work towards inclusive growth and sustainable development rather than targeting only investment-led economic growth.

    bACK 2 BASICS
    GO THROUGH THE ARTICLE BELOW FOR MORE INFORMATION ON TAXATION:

    Taxation in India: Classification, Types, Direct tax, Indirect tax

  • What is Balance of Payments?

    India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports said the Commerce and Industry Ministry.

    Try this PYQ:

    Q.In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis? (CSP 2019)

    1. The foreign currency earnings of India’s IT sector
    2. Increasing the government expenditure
    3. Remittances from Indians abroad

    Select the correct answer using the code given below.

    (a) 1 only

    (b) 1 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

    Balance of Payment

    • BOP is the oldest and the most important statistical statement for any country.
    • In a nutshell BOP of a country is “a systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year”.
    • Economic Transactions include all the foreign receipts and payments made by a country during a given financial year.
    • Foreign receipts include all the earnings and borrowings by a country from the other countries.

    Read the complete thread, here, at:

    India’s Balance of Payments: Current Account, Capital Account, Goods and Services Account

  • What is the Negative Imports List for Defence?

    The Defence Ministry announced a list of 101 items that it will stop importing.

    Try this question for mains:

    Q.Being one of the top importers of defence equipment India is well placed to enhance its domestic manufacturing capacity of defence equipment. Yet, India lacks it after repeated attempts to achieve it. Examine the reasons for this and suggest measures to overcome this anomaly.

    Negative Imports List

    • The negative list essentially means that the Armed Forces—Army, Navy and Air Force—will only procure all of these 101 items from domestic manufacturers.
    • The manufacturers could be private sector players or Defence Public Sector Undertakings (DPSUs).

    Why such a decision?

    • Reduce imports: As per the Stockholm International Peace Research Institute, which tracks defence exports and imports globally, India has been the second-largest importer between 2014 and 2019 with US$ 16.75 billion worth of imports.
    • Boost domestic industry: By denying the possibility of importing the items on the negative list, the domestic industry is given the opportunity to step up and manufacture them for the needs of the forces.
    • Boost exports: The government has been hoping that the defence manufacturing sector can play a leading role in boosting the economy, not just for the domestic market, but to become an exporter as well.

    Items included in the negative list

    The items mentioned in the negative imports list include:

    • water jet fast attack craft to survey vessels, pollution control vessels, light transport aircraft, GSAT-6 terminals, radars, unmanned aerial vehicles, to certain rifles, artillery guns, bulletproof jackets, missile destroyers, etc.

    Impact of the move

    • The items in the list are of proven technologies and do not involve any critical or cutting-edge technology for a next-generation weapon system or platform.
    • Little benefits for domestic players in short-run: Against each of these items are mentioned a year when import embargo would kick in, leading to apprehensions that demands will be placed with foreign vendors until then, leaving very little for domestic producers.
    • The biggest challenge for the government and the armed forces will be to keep this commitment to domestic producers in the event of an operational requirement.