đŸ’„Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

Subject: Economics

  • Punjab’s new Right to Business Bill

    The Punjab Cabinet this week gave its approval to a Punjab Right to Business Bill, 2020, a law aimed at ensuring ease of doing business for the Micro, Small and Medium Enterprises (MSME) sector.

    Punjab Right to Business Bill, 2020

    • Under the law, an MSME unit can be set up after ‘In-Principle’ approval from the District Bureau of Enterprise, headed by the Deputy Commissioner, working under the guidance of the State Nodal Agency, headed by the Director, Industries.
    • Approval for units in approved Industrial Parks will be given in three working days.
    • For new enterprises outside approved Industrial Parks, the decision on the Certificate shall be taken by the District Level Nodal Agency within 15 working days, as per the recommendations of the Scrutiny Committee.

    What is the timeframe for unit owners to comply?

    • Unit owners will have three and a half years after setting up the unit to obtain seven approvals from three departments: the sanction of building plans; issuance of completion/occupation certificate for buildings; registration of new trade licences.
    • The industries involving hazardous processes will have to obtain a Fire NOC and get approval for the factory building plan before setting up the unit.
    • All units will have to get environmental clearance from the Pollution Control Board beforehand.

    Why was a law needed, rather than an executive order?

    • According to the government, the Act will have overriding powers over various Acts of different departments that make approvals necessary before the setting up of small and medium units.
    • This purpose could not have been achieved by an executive order.
    • How the law actually works on the ground remains to be seen, however.

  • [pib] Assam Inland Water Transport Project

    India and the World Bank signed a loan agreement of $88 million for Assam Inland Water Transport Project.

    Assam Inland Water Transport Project

    • A majority of Assam’s more than 361 ferry routes cross the Brahmaputra or serve its islands, providing a crucial means of transport to thousands of commuters in both the urban and rural areas of the Brahmaputra Valley.
    • The project will draw guidance from ‘working with nature’ principles that aim to design new infrastructure or rehabilitate existing infrastructure in a way that works with natural river processes.
    • The terminals will have better access, lighting and signage while the new vessels will allow for individual seats, and separate toilets. Moreover, a strengthened regulatory regime will ensure reduction in overloading, adherence to time schedule and better crew standards.
    • The Project will help Assam improve the passenger ferry infrastructure and its services and strengthen the capacity of the institutions running the inland water transport.

    Significance

    • Inland Water Transport is also a more sustainable mode of transport. And Assam has the largest network of navigable waterways in India.
    • It provides low-carbon and low-cost options when compared to the cost of constructing and maintaining flood-resilient roads and bridges across the long stretches of the Brahmaputra river.
    • Technically better-designed terminals and energy-efficient vessels (both new and retrofitted) will make the ferry services more sustainable with least disruption to nature.

  • [op-ed snap] Power replay

    Context

    Five years after the launch of UDAY, power-sector once again seems to be going deep into the troubles.

    Where the Discoms stand now?

    • Losses increased: The losses of state-owned distribution companies (discoms) risen.
    • Dues increased: Discom’s dues for power purchases have also surged.
      • Dues owed by discoms to power producers, both independent and state-run entities, stood at Rs 80,930 crore.
      • Of these, Rs 71,673 crore extends beyond the allowed grace period of 60 days.
      • Rajasthan leads the states with the most dues, followed by Tamil Nadu and Uttar Pradesh.

    Components of UDAY and progress made

    • The UDAY scheme, which involved state governments taking over the debt of discoms, had three critical components
    • First-Reduction in AT&C losses: While progress has been made on some of these fronts, it hasn’t been in line with the targets laid out under UDAY.
      • AT&C (Aggregate Technical and Commercial) losses have declined in some states, but not to the extent envisaged.
      • Under UDAY, discoms were to bring down AT&C losses to 15 per cent by FY19.
    • Second- Timely revision of tariffs: While some states have raised power tariffs, the hikes have not been sufficient.
      • In tariff revision decisions political considerations prevailed over commercial decisions.
    • Third- elimination of the gap between per unit of cost and revenue realised: The gap between the average cost per unit of power and the revenue realised has not declined in the manner envisaged.
      • Because of this discoms were forced to reduce their power purchases and delay payments to power producers.

    Way forward:

    • The new plan, being formulated by the government reportedly, aims to address these issues by-
      • Reducing electricity losses.
      • Eliminating the tariff gap.
      • Smart metering.
      • Privatising discoms.
      • Having distribution franchisees.
    • Altering incentive structure: Along with the above, the Centre should also look at altering the incentive structures of states in order to ensure compliance.
    • Provision of penalties: Stiff penalties need to be imposed for not meeting the targets laid out in the new scheme.

     

     

     

  • [op-ed snap] Reset and reform

    Context

    With the Indian economy caught in the middle of a socio-economic upheaval, the government needs to make its focus on the economy clear and pronounced.

    India in the middle of a socio-economic upheaval

    • Weakening economy: The economy has been weakening for a couple of years now.
    • Social upheaval: The social upheaval is new but its seeds have been fermenting for a while.
    • Consequences of the two: The social and economic sides of an economy are not divorced from each other.
      • Each influences the other and the current quagmire threatens to unleash the worst type of feedback between the two.

    Consequences for the employment

    • Most severe consequence due to the interaction between the social and economic sides is unemployment.
    • Rising unemployment disproportionately affects the young.
    • India’s job market: India whose median citizen is in the 30s and which is inducting 10 million new young people to the job market every year.
    • Demographic dividend turning into a curse: This dynamic, popularly hailed as India’s demographic dividend, can rapidly turn into a demographic curse if the employment situation doesn’t improve.

    Falling investment rate, increased risk perception

    • Where will the jobs come from? The job creators are entrepreneurs, conglomerates, and multinationals.
      • It is in their nature to take investment risks as long as the returns are high enough.
    • Investment rates below 30: In India, investment rate fell well below 30 per cent a while back.
      • Falling returns: The returns on investment were not compensating entrepreneurs for the risk.
      • The recent social upheaval is only adding to the perceived risk.
    • Wait and see approach: The more investors adopt a “wait-and-see” approach, the worse the job situation will become.

    Way forward

    • Structural reforms: The government needs to announce a clear plan and timeline for structural reforms.
    • Prioritising domain competence in staff: The government has to start staffing technical positions by prioritising domain competence and empowering these hires with policy relevance.
    • Maintaining the integrity of institutions: The government need to maintain the integrity of institutions tasked with the regulation of corporations and banks, monetary policy management, data collection/dissemination and law enforcement.
    • Accommodate dissent: The government also needs to desist from trying to drown out protesting voices with state muscle power.

     

  • HSN Code

     

    No imports will be allowed without HSN code into the country clarified the Union Minister of Commerce & Industry.

    What is HSN Code?

    • HSN code stands for “Harmonized System of Nomenclature”.
    • This system has been introduced for the systematic classification of goods all over the world.
    • HSN code is a 6-digit uniform code that classifies 5000+ products and is accepted worldwide.
    • It was developed by the World Customs Organization (WCO) and it came into effect from 1988.
    • The main purpose of HSN is to classify goods from all over the World in a systematic and logical manner. This brings in a uniform classification of goods and facilitates international trade.

  • [op-ed of the day] GST may not have been revenue-neutral

    Context

    In theory, the shift to GST made eminent sense, yet in practice, some of these expectations have been belied.

    Why have GST collections not measured up to expectations?

    • This could be due to a combination of three factors:
    • First:  The tax rates under GST are lower than in the earlier regime-GST was not revenue neutral, to begin with.
    • Second: There has been massive tax evasion due to under-reporting, input credit scams and fake invoices
    • Third: A slowing economy has impacted firm revenues, and thus tax collections.

    GST should have been revenue-neutral but it is not

    • Fitment exercises not carried out: The fitment exercise should have been undertaken in a manner so as to ensure that collections pre and post GST are the same.
      • But, this fundamental principle was not adhered to, and other considerations dominated.
      • Revenue neutrality Vs. Multiple objectives: The GST council began its deliberations not with the single objective of revenue neutrality, but with multiple objectives in mind.
      • Closeness to existing tax: Council wanted to ensure that rates were close to the existing tax incidence (accounting for cascading); to ensure minimal impact on inflation.
      • Not regressive: The council also wanted the proposed rate structure was not regressive in nature.
      • The council wanted that items of mass consumption were not taxed at a higher rate.
      • Achieving all these objectives simultaneously proved a difficult task.

    The issue of tax evasion

    • It is difficult to arrive at firm estimates of the scale of the problem but there are some indications of its size.
    • In West Bengal, it was estimated that the value of goods (July 2017 to March 2018) entering a state appeared to be under-reported by around Rs 50,000 crore.
    • Rs 60,000 crore in Madhya Pradesh, and Rs 1,50,000 crore in Maharashtra.
    • Numerous cases of tax fraud and fake invoice scams have also been detected since then

    Problems involve and possible solutions

    • Invoice matching:  It is argued that invoice matching will help if implemented it from the beginning.
      • It could have helped plug the loopholes.
    • Issue of under-reporting: It is debatable whether invoice matching can end under-reporting (collusion) and fake invoices.
    • Limit of state capacity in handling cases: The Central and state administrations can intervene in only about 3 lakh cases in a year.
      • Their capacity to track lakhs of transactions on a daily basis is questionable.
    • Slowing economy: Already existing structural issues have been compounded by the slowing economy.

    Way forward

    • There are certain options available to the government.
    • First: Either recalibrate the expectation or carry on the efforts to plug the loopholes and the shortcoming in the system.
    • Second: Lower the cut-off for composition scheme. A higher level simply encourages business “splitting”.
    • Third: Reduce exemptions.
    • Fourth: The council must deliberate on the rate structure, bringing it in line with pre-GST levels.

  • [op-ed snap] A rough patch

    Context

    High inflation has reduced the fiscal space available for a rate cut.

    RBI target of 6% breached.

    • CPI at 7.35 %: Retail inflation, as measured by the consumer price index (CPI), has surged to 7.35 per cent in December 2019.
    • Latest inflation data seems to corroborate fears articulated by the Monetary Policy Committee (MPC) in its December meeting.
    • In the meeting, MPC refrained from cutting the benchmark repo rate.

    Consequences for the economy

    • Reduced scope for fiscal slippage: High inflation reduced the space for further easing of policy rates.
      • Even after clarity over the extent of the Centre’s fiscal slippage emerged.
    • Rise in yield for 10-year securities: The 10-year G-sec yields have reacted sharply to these developments, rising to 6.67 on Tuesday.
      • Offsetting operation twist: Rise in yield resulted in offsetting the impact of the RBI’s recent open market operations.
    • Inflation targeting under stress: The combination of weak economic activity and higher than expected supply-side inflationary pressures has put the inflation-targeting regime under test.

    Reasons for the inflation rise and chances of easing

    • Food prices rise: Much of the rise in the headline inflation number can be traced to higher food prices.
      • Food inflation has risen to a near six-year high of 14.12 per cent in December 2019, up from 10.01 per cent in the previous month.
      • Vegetable prices have surged to 60.5 per cent in December, contributing nearly 3.7 percentage points to the headline numbers.
    • Chances of ease in coming months: While vegetable crop cycles tend to be short, and supply-side pressures may ease in the coming months.
      • The stickiness in prices of protein items is likely to provide a floor for food inflation.

    Bleak outlook for inflation easing

    • No short-term return to normal level: Food inflation is unlikely to revert to previous levels in the short term.
    • Household inflation expectations, a key metric in the MPC’s assessment, are more responsive to food inflation, this will further exert upward pressure on MPC.
    • A factor of hostilities in the Middle East: The uncertainty over oil prices on account of hostilities in the Middle East, adds to the bleak outlook for inflation.

    Conclusion

    With limited fiscal space for a meaningful stimulus, the government intends to support the economy during this rough patch, and return growth to a higher trajectory.

     

  • [pib] BIS Gold Hallmarking

    Gold hallmarking is being made mandatory to ensure consumers are not cheated, are better informed about purity and corruption is removed.

    Gold Hallmarking

    • Bureau of Indian Standards (Hallmarking) Regulations, 2018 were notified w.e.f. 14.06.2018. BIS is running a hallmarking scheme for gold jewelry since April 2000.
    • The BIS Act 2016 has enabling provisions under Section 14 & Section 16 for mandatory hallmarking of Gold jewellery & artefacts by the Central Government.
    • This made it compulsory for all the jewelers selling  Gold jewellery and artefacts to register with BIS & sell only hallmarked Gold jewellery & artefacts.
    • The caratage is marked on jewelry in addition to fineness for convenience of consumers, e.g. for 22 carat jewelry, 22K will be marked in addition to 916, for 18 carat jewelry, 18K will be marked in addition to 750 and for 14 carat jewelry, 14K will be marked in addition to 585.

  • [op-ed of the day] Economic reforms are best done brick by boring brick

    Context

    Rather than big bang measures or a stealthy agenda, India can count on small but significant improvements.

    Reforms only in crisis or by stealth

    • The accepted conventional wisdom is that economic reforms in India happen only in a crisis or by stealth.
    • Reforms in the crisis
      • Reforms of 1991 : The big example of the former are the 1991 reforms.
      • In 1991 the country faced a huge foreign exchange crisis, resulting partly from the fiscal profligacy of the previous decade.
      • 1999 telecom sector reforms: Another example is from 1999 when the telecom sector was in near bankruptcy, and that crisis led to the shift away from fixed fee for spectrum to revenue sharing.
      • The situation of no other choice: In both cases, there was considerable opposition to those reforms, but they were pushed through because the crisis left no other choice.
    • Reform by stealth: Other than a crisis, more often than not, it has been economic reform by stealth.
      • In the form of executive orders: These reforms are often in the form of an executive decision rather than legislation. Following are the examples of it-
      • Expansion of the list under licence: The expansion of the list of items under the Open General Licence for imports, which is a reform of protectionism, or the reduction in the set of industries reserved for small-scale businesses.
      • Electoral bond introduction: A more recent example of stealth reform was the insertion of an electoral bond scheme in the Finance Bill of 2018.
      • Advantages of going stealth: Reform by stealth offers the advantage of going in either direction.
      • In 2013, faced with a potential currency crisis, the Reserve Bank of India (RBI) quietly retracted the limits on the liberalized remittance scheme (LRS).
      • Problem with stealth reforms: Stealth reforms are introduced stealthily but when they do not yield the desired result they are rolled back unpredictably, increasing uncertainty in policies of the government.

    Persistent, encompassing, creative incrementalism in reforms

    • The Economic Survey of 2015 pretty much ruled out Big Bang reforms in India, calling instead for “persistent, encompassing, creative incrementalism” on them.
    • This is the right mantra.
    • What incrementalism means: It implies continuity, not slowness, a sustainable speed that gives reforms predictability and stability. Following are its examples of it-
    • Reform in food subsidy: Example of incrementalism could be reforms that are being carried out in food subsidies.
      • First: Reduce the leakages of the subsidy to non-farmers.
      • Thus, when procurement is done, payments go directly to their Aadhaar-linked accounts.
      • This will lead to non-farmers getting eliminated,
      • Second-Pay subsidy only to the poor: It will lead to subsidy savings, allowing us to limit the subsidy only to poor farmers.
    • Sovereign gold bond scheme: The use of paper gold greatly reduces imports of the physical metal and outgoes of foreign exchange.
      • The sale of these bonds is being expanded, and they would eventually be everywhere, even at post offices.
    • Aggregate licence by RBI: The next example is from a new category called account aggregators licensed by RBI.
      • It allows users’ control over the digital data trail that their transactions generate, and they can monetize it or use it to enhance their creditworthiness.
      • This is an incremental reform with huge ramifications.

    Conclusion

    • The reforms cited above are incremental, not a big bang, persistent but not slow, open and not by stealth, and finally, imaginative too, since they respond to real needs.
    • Effective reforms are those that are done brick by brick, the boring measures that chip away at everything that constrains high, inclusive and sustainable growth.

     

  • [op-ed of the day] Revisiting the NBFC Crisis

    Context

    While India was trying to deal with the problems arising out of the large NPA accumulated by the commercial banks, the Indian financial sector was dealt with another blow in the form of the NBFC crisis.

    Effects of IL&FS and DHFL collapse:

    • Balance sheets affected: The collapse of these two big entities affected the balance sheets of banks and mutual fund companies.
    • Credit crunch: It also resulted in a credit crunch that dampened demand and pushed a slowing economy towards recession.
    • Tarnished image of NBFCs: Being leaders in the industry, their failure has tarnished the image of the NBFC sector as a whole.

    Types of NBFCs and their numbers

    • Total number: As of September 2019 there were a total 9,642 NBFCs in India.
    • Deposit-taking NBFC (NBFCs-D): Only 82 of India’s NBFCs were deposit-taking institutions (NBFCs-D) permitted to mobilise and hold deposits.
    • Non-deposit taking NBFCs (NBFCs-ND): The rest of the NBFCs which are not deposit-taking, are categorised as non-deposit taking NBFCs.
      • They did not have access to the savings of ordinary households.
      • For this reason, the majority of these institutions were not considered to be entities that needed strict regulation
    • Systematically important (NBFCs-ND-SI): Of a large number of non-deposit taking NBFCs (NBFCs-ND), only 274 were identified as being systematically important (NBFCs-ND-SI), by virtue of having an asset size of â‚č500 crores or more.

    Significance of NBFCs as expressed by assets holdings

    • A significant player in the financial markets: As at the end of March 2019, these two sets-NBFCs-D and NBFC-ND-SI- held assets that amounted to almost a fifth of that held by the scheduled commercial banks.
      • This made them significant players in the web of credit, as well as large enough as a group to affect the health of the financial sector.
    • Non-deposit taking NBFCs must rely on resources garnered from the “market,” including the banking system, besides the market for bonds, debentures, and short-term paper.
    • Extension of financial entities: Individual investors would only be marginally involved in direct investment in these instruments.
      • So, the NBFCs are essentially extensions of the activity of other financial entities such as banks, insurance companies, and mutual funds.

    Concentrated lending by NBFCs

    • Industry getting lion’s share: Industry accounted for the biggest chunk of lending, amounting to 57% of gross advances in September 2019.
      • Much of this lending to industry went to the infrastructural sector.
    • At second place-retail sector: A second major target for lending by the NBFCs was the retail sector, with retail loans accounting for 20% of gross advances.
      • Within the retail sector, vehicle/auto loans accounted for as much as 44% of loans.

    What went wrong?

    • Diversification by commercial banks: Following a surge in capital flows into India which began in 2004, banks were flush with liquidity.
      • Under pressure to lend and invest to cover the costs of capital and intermediation and earn a profit, banks were looking for new areas into which they could move
      • Increase in retail lending by banks: The pressure resulted in a significant increase in retail lending, with lending for housing, automobiles and consumer durables.
      • There was also a substantial increase in lending to the infrastructural sector and commercial real estate.
    • Why NBFCs flourished even in the face of competition by banks? What the growth of the NBFCs indicates is that banks were unable to exhaust the liquidity at their disposal.
      • Banks were also unable to satisfy the potential for lending to these sectors, providing a space for NBFCs to flourish.
    • The willingness of NBFCs suited the banks: The willingness of the NBFCs to enter these areas suited the banks in two ways.
      • First, it permitted the banks to use their liquidity even when they themselves were stretched and could not discover, scrutinise and monitor new borrowers.
      • Banks could lend to the NBFCs, which could then take on the tasks associated with expanding the universe of borrowers to match the increased access to liquid funds.
      • The second was that it helped the banks to move risks out of their own books.
    • Short term lending to NBFCs, and long-term lending by NBFCs: Banks accepts short term deposits, so there is limit in their ability to lend that short term deposits as a long term debt.
      • On the other hand, these were the sectors to which additional credit could be easily pushed.
      • Lending to NBFCs that in turn lent to these sectors, appeared to be a solution to the problem.
      • Bank lending to the NBFCs was short term, and the latter used these short-term funds to provide long-maturity loans
      • NBFCs expected that they would be able to roll over much of these loans so that they were not capital short.
      • Role of rating agencies: What they needed for the purpose were ratings that ranked their instruments as safe.
      • The ratings companies were more than willing to provide such ranks.
    • The two risks involved in this model: The NBFC-credit build-up was an edifice that was burdened with two kinds of risks.
      • First risk: A possible default on the part of borrowers.
      • The probability of which only increases as the universe of borrowers is expanded rapidly to exhaust the liquidity at hand.
      • The second risk: The second was the possibility that developments in the banking sector and other segments of the financial sector would reduce the appetite of these investors for the debentures, bonds and commercial paper issued by the NBFCs
      • Since the NBFCs banked on being able to roll-over short-term debt to sustain long-term lending.
      • A slowdown in or halt to the flow of funds would lead to a liquidity crunch that can damage the balance sheet of these institutions.
    • Which of the two risks is involved in the present crisis? The crisis that affected the NBFCs was a result of both kinds of setbacks.
      • First setback: Loans to areas like infrastructure, commercial real estate and housing went bad.
      • Second setback: With the non-performing assets problem in the commercial banking sector curtailing their access to bank lending.
    • Why the problem turned systemic? Given the importance of ratings and “image” in ensuring access to capital, some firms with the requisite image were able to mobilise large sums of capital and expand their business.
      • When entities like that go bust, the response of lenders and investors to the event tends to be drastic, with systemic effects on the sector as a whole.

    Conclusion

    The episode was a shadow banking crisis that has had far-reaching consequences for the economy as a whole. Therefore, its high time that measures are taken to avoid the occurrence of such a crisis in the future.