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Subject: Economics

  • Places in news: Kolkata Port

    PM Modi has renamed the Kolkata Port Trust after Dr Syama Prasad Mookerjee, at an event to mark its 150th anniversary.

    History of Kolkata’s port

    • In the early 16th century, the Portuguese first used the present location of the port to anchor their ships, since they found the upper reaches of the Hooghly river beyond Kolkata, unsafe for navigation.
    • Job Charnock, an employee and administrator of the East India Company, is believed to have founded a trading post at the site in 1690.
    • Since the area was situated on the river with jungle on three sides, it was considered safe from enemy invasion.
    • After the abolition of slavery in the British Empire in 1833, this port was used to ship lakhs of Indians as ‘indentured labourers’ to far-flung territories throughout the Empire.
    • During World War II, the port was bombed by Japanese forces.

    Its administration

    • As Kolkata grew in size and importance, merchants in the city demanded the setting up of a port trust in 1863.
    • The colonial government formed a River Trust in 1866, but it soon failed, and administration was again taken up by the government.
    • Finally, in 1870, the Calcutta Port Act (Act V of 1870) was passed, creating the offices of Calcutta Port Commissioners.
    • In 1869 and 1870, eight jetties were built on the Strand. A wet dock was set up at Khidirpur in 1892. The Khidirpur Dock II was completed in 1902.
    • As cargo traffic at the port grew, so did the requirement of more kerosene, leading to the building of a petroleum wharf at Budge Budge in 1896.
    • In 1925, the Garden Reach jetty was added to accommodate greater cargo traffic. A new dock, named King George’s Dock, was commissioned in 1928 (it was renamed Netaji Subhash Dock in 1973).
    • In 1975, the Commissioners of the port ceased to control it after the Major Port Trusts Act, 1963, came into force.

    Significance

    • After Independence, the Kolkata Port lost its preeminent position in cargo traffic to ports at Mumbai, Kandla, Chennai, and Visakhapatnam.
    • The Kolkata port is the only riverine port on R. Hooghly in the country, situated 203 km from the sea.
    • The Farakka Barrage, built in 1975, reduced some of the port’s woes as Ganga waters were diverted into the Bhagirathi-Hooghly system.

  • Explained: The fundamentals of the Indian Economy

    PM Modi highlighted the strong absorbent capacity of the Indian economy while referring to certain fundamentals. He emphasized the strength of these basic fundamentals in absorbing the shocks of ongoing economic slowdown.

    What are the ‘fundamentals of an economy’?

    • The PM has reiterated a phrase of reassurance — underscoring the strong fundamentals of the Indian economy — that has been often used by policymakers in the past when the economy is seen to be faltering.
    • When one talks about the fundamentals of an economy, one wants to look at economy-wide variables such as the overall GDP growth, the overall unemployment rate, the level of fiscal deficit, the valuation of a country’s currency against the US dollar, the savings and investment rates in an economy, the rate of inflation, the current account balance, the trade balance etc.
    • There is intuitive wisdom in looking at these “fundamentals” of an economy when it goes through a tough phase.
    • Such an analysis, when done honestly, can give a sense of how deep the strain in an economy run.
    • It can answer the question whether the current crisis just an exaggerated response to a sectoral problem or is there something more “fundamentally” wrong with the economy that needs urgent attention and “structural” reform.
    • To be sure about the broader health of the economy, one looks at the broader variables. That way, one reduces the chances of getting the diagnosis wrong.

    Their relevance

    • The first advance estimates of national income for the current financial year, released earlier in the week, found that nominal GDP was expected to grow at just 7.5% in 2019-20.
    • This is the lowest since 1978. Real GDP is calculated after deducting the rate of inflation from the nominal GDP growth rate.
    • So, if for argument sake, the inflation for this financial year is 4%, then the real GDP growth would be just 3.5%.
    • Just for perspective, the Union Budget presented in July 2019 expected a real GDP growth of 8% to 8.5% and a nominal GDP growth of 12% to 12.5%, with a 4% inflation level.

    So, what is the current state of the fundamentals?

    The data on most variables that one may call as fundamentals of the Indian economy are struggling.

    • Growth rate — both nominal and real — has decelerated sharply; now trending at multi-decade lows. Gross Value Added, which maps economic growth by looking at the incomes-generated is even lower; and its weakness in across most of the sectors that traditionally generated high levels of employment.
    • Inflation is up but the consolation is that the spike is largely due to transient factors.
    • However, a US-Iran type of conflagration could result is a sharp hike in oil prices and, as such, domestic inflation may rise in the medium term.
    • Unemployment is also at the highest in several decades.According to some calculations, between 2012 and 2018, India witnessed a decline in the absolute number of employed people — the first instance in India’s history.
    • Fiscal deficit, which is proxy for the health of government finances, is on paper within reasonable bounds but over the years, the credibility of this number has come into question. Many, including the CAG, has opined that the actual fiscal deficit is much higher than what is officially accepted.
    • Bucking the trend, the current account deficit, is in a much better state but trade weakness continues as do the weakness of the rupee against the dollar; although on the rupee-dollar issue, a case can be made that the rupee is still overvalued and thus hurting India’s exports.
    • Similarly, while the benchmark stock indices have run up, and grabbed all attention, the broader stock indices like the BSE500 have struggled.

  • National Strategy for Financial Inclusion (NSFI)

    The Reserve Bank of India (RBI) has chalked out an ambitious strategy for financial inclusion of all till 2024.

    National Strategy for Financial Inclusion (NSFI)

    • Financial inclusion is increasingly being recognised as a key driver of economic growth and poverty alleviation the world over.
    • The strategy aims to strengthen the ecosystem for various modes of digital financial services in all Tier-II to Tier VI centres to create the necessary infrastructure to move towards a less-cash society by March 2022.
    • One of the objectives of the strategy includes increasing outreach of banking outlets of to provide banking access to every village within a 5-km radius or a hamlet of 500 households in hilly areas by March 2020.
    • RBI said that the aim was also to see that every adult had access to a financial service provider through a mobile device by March 2024.
    • With the aim of providing basic of financial services, a target has been set that every willing and eligible adult, who has been enrolled under the PM Jan Dhan Yojana, be enrolled under an insurance scheme and a pension scheme by March 2020.
    • The plan is also to make the Public Credit Registry (PCR) fully operational by March 2022 so that authorised financial entities could leverage the same for assessing credit proposals from all citizens.

  • [pib] State Energy Efficiency Index 2019

    The Ministry of Power and New & Renewable Energy has released the ‘State Energy Efficiency Index 2019’.

    State Energy Efficiency Index

    • The first such Index, the “State Energy Efficiency Preparedness Index 2018”, was launched on August 1, 2018.
    • The index tracks the progress of Energy Efficiency (EE) initiatives in 36 states and union territories based on 97 significant indicators.
    • It is developed by Bureau of Energy Efficiency (BEE) in association with Alliance for an Energy Efficient Economy (AEEE).
    • It categorizes states as ‘Front Runner’, ‘Achiever’, ‘Contender’ and ‘Aspirant’ based on their efforts and achievements towards energy efficiency implementation.
    • It incorporates qualitative, quantitative and outcome-based indicators to assess energy efficiency initiatives, programs and outcomes in five distinct sectors – buildings, industry, municipalities, transport, agriculture, and DISCOMs.

    Performance evaluation

    • For rational comparison, States/UTs are grouped into four groups based on aggregated Total Primary Energy Supply (TPES) required to meet the state’s actual energy demand (electricity, coal, oil, gas, etc.) across sectors.
    • TPES grouping shall help states compare performance and share best practices within their peer group.
    • Under four categories based on TPES, Haryana, Kerala, Karnataka, Maharashtra, Himachal Pradesh, Uttarakhand, Puducherry and Chandigarh have been evaluated as progressive states/UTs in the index.
    • The top performing states Haryana, Kerala and Karnataka – are in the ‘Achiever’ category.
    • Manipur, Jammu & Kashmir, Jharkhand and Rajasthan performed the worst in each of their groups.

    Utilities of the index

    • It will help states contribute towards national goals on energy security and climate action by helping drive EE policies and program implementation.
    • It will help tracking progress in managing the states’ and India’s energy footprint and institutionalising the data capture and monitoring of EE activities by states.

  • [op-ed snap] Mining deep

    Context

    The government eased the regulations for coal mining in India.

    What does the opening mean?

    • Removal of restrictions: Until now there were restrictions on who could bid for coal mines.
    • Only those in power, iron and steel and coal washery business could bid for mines.
    • The bidders needed the prior experience of mining in India.
    • Who can buy now?: The move will open up the coal mining sector completely, enabling anyone with finances and expertise to bid for blocks and sell the coal freely to any buyer of their choice.

    Benefits of opening

    • More value extraction: The restrictions limited the potential bidders to a select circle of players and thus limited the value that the government could extract from the bidding.
    • Now the Government can extract more value from the auction of the blocks.
    • Development of coal market: Second, end-use restrictions inhibited the development of a domestic market for coal.
    • Job creation: Large investment will create jobs in the sector.
    • Increase in Demand: It will also set off demand in critical sectors such as mining equipment and heavy commercial vehicles.
    • Technology infusion: The country may also benefit from an infusion of sophisticated mining technology, especially for underground mines, if multinationals decide to invest.
    • Ease on Current account: In value terms, coal imports touched $26.18 billion in 2018-19, up from $15.76 billion in 2016-17.
    • This surge in coal imports, along with oil and electronics imports, has exerted pressure on the country’s current account in recent years.

    Why the move matters

    • 70 % of energy production in India is coal-based.
    • Until now Coal India was the only commercial miner in the country for more than four decades accounting for 82 per cent of the coal production in the country.
    • The productivity of coal is still an issue in the country. Coal is a very crucial raw material that is used in the power sector and also in cement and metal sectors.

    Way forward

    The relaxation in regulations, along with previous initiatives such as allowing 100 per cent foreign direct investment through the automatic route in commercial coal production, can aid in boosting coal production in the country and help reduce imports.

    Coal India Limited (CIL) has to be nurtured even as private players are welcomed.

  • Video based Customer Identification Process (V-CIP)

    The RBI has amended the KYC norms allowing banks and other lending institutions regulated by it to use Video-based Customer Identification Process (V-CIP), a move which will help them, onboard customers, remotely.

    V-CIP

    • The V-CIP will be consent-based, will make it easier for banks and other regulated entities to adhere to the RBI’s KYC norms by leveraging the digital technology.
    • The regulated entities will have to ensure that the video recording is stored in a safe and secure manner and bears the date and time stamp.
    • As per the circular, the reporting entity should capture a clear image of PAN card to be displayed by the customer during the process, except in cases where e-PAN is provided by the customer.
    • The PAN details should be verified from the database of the issuing authority.
    • Live location of the customer (Geotagging) shall be captured to ensure that customer is physically present in India.

  • [op-ed snap] Limited scope for sharp recovery

    Context

    In order to revive the economy, the Government must choose between tax reductions and increasing rural spending.

    The Current Status of the Indian Economy

    • 5 % in 2019-20: The first advance estimate pegs India’s economic growth at 5 per cent in 2019-20.
    • Cause of the slowdown: The slowdown can be attributed largely to a structural demand problem in the economy along with some cyclical
    • Stagnant income and stagnant incomes: Despite largely stagnant incomes, private consumption has been financed over the past few years through lower savings, easy credit, and certain one-offs such as the Seventh Pay Commission led pay-outs.
    • Private consumption is the largest driver of growth.
    • Depleting savings: The household savings rate has dipped to 17.2 per cent of GDP in FY18, from 22.5 per cent in FY13.
    • Depleting credit in the system: Overall credit in the system has dried up.

     Rural economy

    • Low wages and stagnant incomes: Rural wage growth has averaged around 4.5 per cent over the past five years, but adjusting for inflation it has been only 0.6 per cent.
    • Weak real estate sector: The rural population, which was dependent on urban real estate/construction has faced headwinds in the recent past.
    • The sector is experiencing lower private sector investments recently.

    Limited scope for a sharp recovery

    • The following factors render the scope for sharp recovery limited.
    • Consumption issue is structural:  The slowdown in private consumption is a structural issue linked to low household income growth.
    • Low job creation: Low consumption is in turn, linked to the basic problems of low job creation.
    • Low Income: Low consumption is also linked with stagnant farm incomes.
    • None of the above factors is likely to change suddenly, limiting the scope of recovery.
    • Low Investments: Investment is unlikely to rebound sharply given the challenges on both income and balance sheet of the government, private sector, and households.
    • Stressed Government consumption: Which has been supporting growth over the past few years, remains under stress.
    • The combined Centre and states’ fiscal deficit is close to 6.5 per cent of GDP.
    • The public sector is already weighing on the limited domestic financial resources, ruling out space for an aggressive fiscal stimulus.
    • NBFC’s role: Recovery will also depend on the health of the financial sector, especially that of NBFCs.

     Use of the fiscal space

    • Supply-side: The government has shown a clear preference to rely on supply-side measures (like corporate tax cut) to support growth.
    • Need to address demand-side: Expectations will be high that the upcoming Union budget addresses the demand side concerns as well.
    • Spending on rural infrastructure and employment (MGNREGA, PM-KISAN, PMGSY) can decrease pain in rural areas.
    • Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.

    Way forward

    • Widening of the tax base- Given the narrow income tax base, any sacrifice of the fiscal room would be beneficial only for a limited number of people.
    • Broad-basing of the income and consumption profile: Economic reforms in the past have worked to enhance the capacity of the top few hundred million consumers.
    • The next set of reforms should enhance the capacity of those in the middle and the bottom of the income pyramid.
    • Role of the private sector: Given the huge infrastructure gap in the country, it is essential that the private sector’s role in infrastructure creation is much more inclusive.

    Conclusion

    Reforms that increase the productivity of the factors of production, provide an enabling environment for competitive production of goods and services and ensure steady and substantial growth in purchasing power for a larger section of the population should be the focus.

     

  • Explained: Voting at the GST Council

    • Breaking the tradition of consensus-based decisions in its 37 earlier meetings, the GST Council voted for the first time in its 38th meeting held on December 18.

    GST Council voting rules

    • As per The Constitution (One Hundred and First Amendment) Act, 2016, in case of a voting, every decision of the GST Council has to be taken by a majority of not less than three-fourths of the weighted votes of the members present.
    • The vote of the central government has a weightage of one-third of the total votes cast, and the votes of all the state governments taken together have a weightage of two-thirds of the total votes cast in that meeting.
    • As of now, out of the total 30 states and UTs (excluding J&K), 20 are ruled by the NDA.
    • This essentially means that a vote in the Council could largely be an academic exercise — unless a number of the BJP’s allies switch sides.

    Impacts of imbibing Voting

    • With the precedent of voting now established, consensus at the Council could be challenged again in the future.
    • The rules of voting in the GST Council are such that the odds are stacked in favour of the Centre in the normal course.
    • However, in case of a vote, any disagreements within the ruling coalition at the Centre may bring its support below the three-fourths majority that is needed for the passage of a decision.

    Way Forward

    • Differences of opinion are likely to crop up on proposals to raise rates, especially of the lower slabs, in the future — a concern that made most states rule out an immediate rate hike in the last Council meeting, even as they were in agreement over a broader overhaul of the GST structure.
    • So far, even if states voiced their differences over a proposal in the Council, all decisions had been taken by consensus in the meetings of the GST Council.
    • With a departure from the consensus approach having been made, there could be more instances of voting exercises going forward — especially as revenue-raising measures come up in future meetings.

    Back2Basics

    GST Council

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

    How is the GST Council structured?

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

    Terms of reference

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

  • FDI in coal mining

    The Union Cabinet has approved an ordinance to amend two laws to ease mining rules, enabling foreign direct investment in coal mining.

    About the Ordinance

    • At a Cabinet meeting chaired by PM the ordinance to amend the Mines and Minerals (Development and Regulation) Act, 1957 and the Coal Mines (Special Provisions) Act, 2015 was approved.

    Benefits of the proposed FDI

    • The decision would boost the ease of doing business and increase the growth avenues.
    • The Coal India would be strengthened and the government was aiming at achieving production of one billion tonnes by 2023-2024.
    • The “end-use restrictions” had been done away with allowing “anyone to participate in the auction of coal blocks”.
    • The ordinance would strengthen the auction process of those mines whose leases were expiring on March 31, 2020. Seamless transfer of clearances would also be facilitated.

    Back2Basics

    Foreign Direct Investment (FDI)

    • A FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI are commonly made in open economies that offer a skilled workforce and above-average growth prospects for the investor, as opposed to tightly regulated economies.
    • FDI frequently involves more than just a capital investment. It may include provisions of management or technology as well.

  • Explained: First Advance Estimates (FAE)

    The First Advance Estimates (FAE) were recently released by the Ministry of Statistics and Programme Implementation (MoSPI).

    The First Advance Estimates and their significance

    • The First Advance Estimates (FAE) extrapolate a variety of data, such as the Index of Industrial Production (IIP), the financial performance of listed companies, first advance estimates of crop production etc., for the first 7 to 8 months to arrive at the annual figure.
    • The significance of the FAE is that this is the final bit of official data before the government presents its next Budget.
    • The sector-wise Estimates are obtained by extrapolation of indicators like-
    1. IIP of first 7 months of the financial year,
    2. financial performance of Listed Companies in the Private Corporate sector available upto quarter ending September, 2019
    3. 1st Advance Estimates of Crop production,
    4. accounts of Central & State Governments, information on indicators like Deposits & Credits, Passenger and Freight earnings of Railways, Passengers and Cargo handled by Civil Aviation, Cargo etc., available for first 8 months of the financial year”.

    Estimates for 2018-19

    • It estimated India’s GDP will grow by just 5 per cent in the current financial year (2019-20). Last financial year, 2018-19, the Indian economy grew at 6.8 per cent.
    • The gross value added (GVA), which maps the economic activity from the income side as against the GDP which maps it from the expenditure side, is expected to grow by 4.9 per cent in 2019-20 as against 6.6 per cent in 2018-19.

    Drivers of the GDP

    There are four main drivers of the GDP:

    • One, the private consumption expenditure – that is the expenditure that you and I make in our personal capacity. This category has grown by just 5.7 per cent in 2019-20 while it grew by 8 per cent last financial year.
    • The second driver is the expenditure made by the Government. This grew by 10.5 per cent, which is higher than the rate of growth (9.2 per cent) in the last financial year.
    • But the most disappointing number is the deceleration in business investments in the economy.
    • This driver, which is the key to sustainable long-term growth, grew by less than 1 per cent; last financial year it grew by 10 per cent.
    • This shows that while the private consumption demand is tepid, businesses have completely turned off the tap on new investments despite the government making a once-in-generation cut in corporate taxes.

    Performance in terms of GVA

    • The GVA data provides a detailed picture. Given that the overall GVA has decelerated sharply, almost all sectors have witnessed slower growth in economic activity.
    • Only “Public Administration, Defence and Other Services,“ which essentially measures how the government did, grew by 9.1 per cent.
    • All other sectors saw a GVA growth that was slower than the average growth in the last financial year.
    • The worst performing sectors are ‘Agriculture, Forestry and Fishing’, ‘Mining and Quarrying’, ‘Manufacturing’ and ‘Construction’, which are expected to see a GVA growth of 2.8 per cent, 1.5 per cent, 2.0 per cent and 3.2 per cent respectively.

    Back2Basics

    Real vs. Nominal GDP

    • GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products.
    • The market value taken at current prices is the nominal GDP.
    • The value taken at constant prices — that is prices for all products taken at an unchanged base year (2011) — is the real GDP.
    • In simple terms, real GDP is nominal GDP stripped of inflation.
    • Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year.
    • Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.