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Type: Op-ed

  • Pushback against China more likely as Quad gains momentum

    The article discusses the future pushback against China in South Asia and Indo-Pacific as Quad gains more momentum. 

    Context

    Recently, the Chinese Ambassador to Bangladesh, Li Jiming, warned Dhaka that there will be “substantial damage” in bilateral ties between China and Bangladesh if the latter joins the Quad.

    Bangladesh’s reaction

    • Bangladesh Foreign Minister A.K. Abdul Momen promptly and publicly challenged the Chinese envoy’s statement, underlining categorically that Dhaka pursues an independent foreign policy. 
    • That China’s remarks would reverberate far beyond South Asia was expected and perhaps intended.
    • The spokesperson of U.S. State Department remarked, “What we would say is that we respect Bangladesh’s sovereignty and we respect Bangladesh’s right to make foreign policy decisions for itself.”

    Implications for South Asia and Info-Pacific

    • With its message to Bangladesh, Beijing was laying down a marker that nations should desist from engaging with the Quad.
    • This episode captures the emerging fault lines in South Asia and the wider Indo-Pacific.
    • For all its attempts to play down the relevance of the Quad, Beijing realises that the grouping, with all its weaknesses, is emerging as a reality and there is little it can do to prevent that.
    • And so, it is agitated about Quad’s future role and its potential success in offering the regional states an alternative to its own strong-arm tactics.

    About Quad’s agenda

    • The Quad member states are figuring out a cohesive agenda amongst themselves and there are no plans for an expansion.
    • There is a desire to work with like-minded nations but that can only happen if the four members of the Quad can build a credible platform first.
    • Quad has not asked any country to join and no one has shown an interest.
    • But China wants to ensure that after failing in its initial attempt to prevent the Quad from gaining any traction.
    • Its message is well understood by other states who may harbour any desire of working closely with the Quad members.

    Way forward

    • Beijing has failed to prevent nations from the West to the East from coming out with their Indo-Pacific strategies.
    • It has failed to prevent the operationalisation of the Quad, and now it might be worried about other nations in the region thinking of engaging with the Quad more proactively.
    • Even Bangladesh is planning to come out with its own Indo-Pacific strategy and Beijing has now warned Dhaka that a close cooperation with the Quad should not be part of the policy mix.
    •  As the Quad gains more momentum and the churn in the waters of the Indo-Pacific leads to new countervailing coalitions against China, Beijing’s belligerence can only be expected to grow.

    Conclusion

    Beijing is more likely to demand clear-cut foreign policy choices from its regional interlocutors, as its warning to Bangladesh underscores. But as Dhaka’s robust response makes it clear, states are more likely to push back than become subservient to Chinese largesse.

  • Opportunity to expand ties with West

    The article takes an overview of the growing convergence of India’s interest with the West in the changing geopolitical scenario and opportunities it offers to India.

    Significance of G-7 Summit for India

    • Summit of the G-7, the Group of Seven industrial countries, will be hosted by the United Kingdom this week.
    • Prime Minister Narendra Modi will participate digitally in this summit.
    • This participation also marks an important step towards a new global compact between India and the West.
    • The global financial crisis of 2008, the rapid rise of China, divisions within the West during the Trump years, and the chaotic response in North America and Europe to the Covid-19 pandemic, were the factors that indicated the decline of the West.
    • In his first tour abroad as the US president wants to demonstrate that the collective West is an enduring force to reckon with under renewed American leadership.
    • For India, the G-7 summit is an opportunity to expand the global dimension of India’s growing partnerships with the US and Europe.

    Convergence of interests between India and the West

    • The challenges from an increasingly aggressive China, the urgency of mitigating climate change, and the construction of a post-pandemic international order are generating convergence between the interests of India and the West.
    • India’s current engagement with the G-7 is about global issues.
    • The idea of a global democratic coalition that is based more broadly than the geographic West has gained ground in recent years.
    • And India is at the very heart of that Western calculus.
    • For India, too, the G-7summit comes amidst intensifying strategic cooperation with the West.
    • This includes strong bilateral strategic cooperation with the US, France, UK as well as the Quad and the trilateral partnerships with France and Australia as well as Japan and Australia.
    • India has also stepped up its engagement with the European Union.

    China factor

    • India’s increasing engagement with the US and the West has been triggered in part by the continuous deterioration of the relationship with China.
    • Besides the threat to territorial security, India finds that its hopes for strong global cooperation with China have taken a big beating in recent years.
    • China is the only great power that does not support India’s permanent membership of the UN Security Council and blocks India’s membership of the Nuclear Suppliers Group.
    • At the end of the Cold War, India believed that China was a natural partner in the construction of a multipolar world.
    • India now can’t escape the conclusion that China is the greatest obstacle to India’s global aspirations and the West is an emerging partner.
    •  India has relied on Western support to fend off China’s effort to internationalise the Kashmir question after the 2019 constitutional changes.
    • India walked away from RCEP due to the growing trade imbalance with China and the negative impact of Chinese imports on India’s domestic manufacturing.
    • After China’s aggression in Ladakh last April, India has also sought to actively limit its exposure to Chinese investments and technology.

    Way forward

    • The convergence of interests between India and the West does not mean the two sides will agree on everything.
    •  There are many areas of continuing divergence within the West — from the economic role of the state to the democratic regulation of social media and the technology giants.
    • It will surely not be easy translating the broad convergences between India and the West into tangible cooperation.
    • That would require sustained negotiations on converting shared interests.

    Consider the question “The idea of a global democratic coalition that is based more broadly than the geographic West has gained ground in recent years. This offers India an opportunity to expand the global dimension of India’s growing partnerships with the US and Europe. Comment.”

    Conclusion

    While India continues to strengthen its partnerships in Asia and the global south, a more productive partnership with the West helps secure a growing array of India’s national interests and adds a new depth to India’s international relations.

  • 7 Years of UPA Government vs 7 Years of NDA Government

    The article compares the performance of the present government under Prime Minister Modi with the first seven years of the Manmohan Singh government on various fronts.

    Context

    The current government completed seven years at the Centre recently. It is time to reflect and look back at its performance on basic economic parameters over the last seven years. It may also be interesting to compare and see how it fared vis-à-vis the first seven years of UPA government (2004-05 to 2010-11) under Manmohan Singh.

    Analysing the progress by studying key economic indicator

    1)  GDP growth

    • One of the key economic parameters is GDP growth.
    • It is not the most perfect one, as it does not capture specifically the impact on the poor, or on inequality.
    • But higher GDP growth is considered central to economic performance as it enlarges the size of the economic pie.
    • The average annual rate of growth of GDP under the Modi government so far has been just 4.8 per cent compared to 8.4 per cent during the first seven years of the Manmohan Singh government.
    • If this continues as business as usual, the dream of a $5 trillion economy by 2024-25 is not likely to be achieved.

    2) Inflation

    • The Modi government scores much better on the inflation front with CPI (rural and urban combined) rising at 4.8 per cent per annum.
    • It is well within the tolerance limits of RBI’s targeted inflation band and also much lower than 7.8 per cent during the first seven years of the Manmohan Singh government.

    3) Forex reserves

    • Also, at macro level, foreign exchange reserves provide resilience to the economy against any external shocks.
    • On this score too, the Modi government fares quite well with forex reserves rising from $313 billion on May 23, 2014 to $593 billion on May 21, 2021.

    4) Food and agriculture

    • It engages the largest share of the workforce in the economy and matters most to poorer segments.
    • On the agri-front, both governments recorded an annual average growth of 3.5 per cent during their respective first seven years.
    • However, on the food and fertiliser subsidy front, the Modi government broke all records in FY21, by spending Rs 6.52 lakh crore and accumulating grain stocks exceeding 100 million tonnes in May end, 2021.
    • One area in which the Modi government performed very poorly is agri-exports.
    • In 2013-14 agri-exports had crossed $43 billion while during all the seven years of the Modi government agri-exports remained below this mark of $43 billion.
    • Sluggish agri-exports with rising output put downward pressure on food prices.
    • It helped contain CPI inflation, but subdued farmers’ incomes.

    5) Infrastructure development

    • The Modi government has done better in power generation by increasing it from 720 billion units per annum to 1,280 billion units per annum.
    • Similarly, road construction too has been at least 30 per cent faster under the Modi government.

    6) Social sector

    • Based on an international definition of extreme poverty (2011 PPP of $ 1.9 per capita per day), the World Bank estimated India’s extreme poverty in 2015 to be about 13.4 per cent, down from 21.6 per cent in FY 2011-12.
    • Even the incidence of multidimensional poverty hovered around 28 per cent in 2015-16.
    • Three key indicators can be used to assess performance on this front:
    • One, average annual person days generated under MGNREGA in the first five years since this programme started under the UPA in 2006-07 to 2010-11, which was 200 crore, and under Modi government it improved to 230 crore.
    • Two, average annual number of houses completed under the Indira Awaas Yojana and PM Awaas Yojana-Gramin, which improved from 21 lakhs to 30 lakhs per annum.
    • Three, open defecation free (ODF) which was only 38.7 per cent on October 2, 2014 and shot up to 100 per cent by October 2, 2019, as per government records.

    Conclusion

    The current government has turned out to be more welfare-oriented than reformist in revving up GDP growth. How long this welfare approach is sustainable without enlarging the size of GDP pie is an open question.

  • Simultaneous Elections in India

    The article deals with the issue frequent elections in the country and highlights the need for debate on the idea of “one nation, one election”.

    Need for debate on one nation one election

    The idea has been around since at least 1983, when the Election Commission first mooted it. The concept needs to be debated mainly around five issues.

    1) Financial costs of  conducting elections

    • The costs of conducting each assembly or parliamentary election are huge and, in some senses, incalculable.
    • Directly budgeted costs are around Rs 300 crore for a state the size of Bihar.
    • But there are other financial costs, and incalculable economic costs.
    • Before each election, a “revision” of electoral rolls is mandatory.
    • The costs of the millions of man-hours used are not charged to the election budget.
    • The economic costs of lost teaching weeks, delayed public works, badly delivered or undelivered welfare schemes to the poor have never been calculated.

    2) Cost of repeated administrative freezes

    • The Model Code of Conduct (MCC) has economic costs too.
    • Works may have been announced long before an election is announced, but tenders cannot be finalised, nor work awarded, once the MCC comes into effect.
    • Time overruns translate into cost overruns.
    • But the huge costs of salaries and other administrative expenditures continue to be incurred.
    • Add to this the invisible cost of a missing leadership.
    • Important meetings and decisions get postponed, with costs and consequences that are difficult to calculate.
    • A NITI Aayog paper says that the country has at least one election each year.

    3) Visible and invisible costs of repeatedly deploying security forces

    • There are also huge and visible costs of deploying security forces and transporting them, repeatedly.
    • A bigger invisible cost is paid by the nation in terms of diverting these forces from sensitive areas.

    4)  Campaign and finance costs of political parties

    • There is little doubt that the fiscal and economic costs of an election are not trivial, and that two elections, held separately, will almost double costs, including those incurred by political parties themselves.

    5) Question of regional/smaller parties having a level playing field

    • There are fears about the Centre somehow gaining greater power, or regional parties being at a disadvantage during simultaneously held elections.
    • However, fixed five-year terms for state legislatures in fact take away the central government’s power to dissolve state assemblies.
    •  Until 1967 when simultaneous elections were the norm.
    • The Constitution and other laws would need to be amended is obvious, but that is hardly an argument against the proposal.

    Consider the question “There are huge costs associated with the frequent elections in the country. Is simultaneous elections a solution? What are the issues involved?”

    Conclusion

    As the elections in four states and one Union territory in March-April are suspected to have contributed to the second wave of Covid infections, a well-reasoned debate on a concept as important as “one nation, one election” is called for.

  • Need to deal with distortions built into GST

    The article highlights the issues with the one state one vote system adopted in the GST Council decision making.

    Context

    The Goods and Services Tax (GST) Council in India is still engaged in a discussion on whether life-saving and hard-to-come-by products should be taxed. Such delay in decision-making can largely be explained by the distorted design and incentive structure of the GST itself.

    Imbalance in collection and distribution of taxes

    • The taxes collected under GST are accumulated by the Union government and a portion is transferred back to each state under a formula.
    • As is the case with most federal countries, there is a large imbalance in the collection and distribution of taxes between states.
    • this holds true also for income accrued to, and distributed, from the GST pool.
    • Four states — Maharashtra, Tamil Nadu, Karnataka, and Gujarat contribute nearly as much as the remaining 27 states combined.
    • Most federal countries exhibit this characteristic where a few large, rich, provinces or states contribute disproportionately.

    Variation in dependence of States on transfers from the Union government

    • Only about 30 per cent of the overall revenue of the states mentioned above — Maharashtra, Tamil Nadu, Gujarat, and Karnataka — comes from the Union government.
    • But for the remaining 27 states, roughly 60 per cent of their revenues are obtained through transfers from the Union government.
    • For the smaller Northeastern states, these transfers from the Union government constitute 80-90 per cent of their total revenues.
    •  In effect, the states that contribute the most to the GST pool are the least dependent on transfers from the Union government while the ones that contribute the least are the most dependent.

    Two problems in net-transfers in India

    1) One-sided transfers

    •  In almost every federal union, net-transfers work to reduce differences in development between states over time.
    • However, Over the last 25 years or so, net transfers have become increasingly one-sided in India.
    • That is, the quantum of net-transfers diminishes, as states become more equal through such transfers.
    • But in India, the opposite has occurred.

    2) Indirect taxes and cess

    • The Union government of the last seven years has greatly exacerbated this problem through two actions.
    • First, it has reconstructed the composition of taxation away from the fair and progressive channel of direct taxation towards the inherently regressive and unfair channel of indirect taxes.
    • Second, the Union has shifted a large proportion of taxation roughly 18 per cent of its overall revenues into cesses, a special form of taxes that remain outside the GST pool and hence do not have to be shared with the states.
    • Since 2014, cess revenues grew 21 per cent every year leading to a doubling in terms of its share of GDP.

    Implications of these two problems for fiscal federalism

    • The combined effect of these problems is that all states (collectively) get a lower share of overall revenues.
    • Individual states face an ever-increasing disparity in the ratio of funds received from the Union as a proportion of taxes collected by the Union from that state.
    • This is an affront to fiscal federalism and an assault on “cooperative federalism”.

    Issue of ‘one state one vote’ system

    • States that are more dependent on transfers from the Union want to maximise GST collections while states that are less dependent can afford to be more sensitive to citizens’ concerns.
    • The case of taxes on Covid products is perhaps the starkest instance of such differences.
    • Most large states are ready to forego this tax revenue for humanitarian considerations.
    • But 19 states representing the remaining 30 per cent of the population seem keen to continue to levy GST on Covid products.
    •  These are mostly smaller states.
    • Given the smaller population of such states, the adverse impact of Covid taxes will be minimal for them.
    • But they will reap the benefits of additional revenues from GST on Covid products levied on the much larger populations of the bigger states.

    Conclusion

    When direct tax policy decisions are legislated by Parliament, which has proportional representation from states according to their size of the population, indirect tax policy decisions should not be subject to one state one vote system.

  • Verdict on Maratha reservation ignores inequality within intermediate castes

    The article highlights the issues with Maratha reservation judgement delivered by the Supreme Court which rejected the positive discrimination of lower classes of dominant caste.

    About the verdict

    • The Supreme Court rendered a unanimous verdict on the validity of the SEBC Act, 2018 that was to grant reservation to Marathas.
    • The court held that the classification of Marathas as a socially and educationally backward class was unreasonable.
    • Court held that Maratha belonged to a politically dominant caste with significant economic resources.

    Justification for 50% limit

    • The court also concluded that the majority opinion in the Indra Sawhney case was correct and that the limit of 50 per cent for caste-based reservation did not need consideration by a larger bench.
    • The court justified the fixed quantitative limit on caste-based reservation by postulating that it was intrinsic to the fundamental principle of equality.
    • The court highlighted the need to safeguard the interests of unreserved sections and said that all sections have progressed after 70 years of independence.
    • Based on this, the court rejected the state’s argument that the breach of the limit was necessitated by the fact that the population of backward classes was over 80 per cent.

    Missed opportunity to acknowledge growing socio-economic differentiation within the dominant castes

    Growing income difference

    • If in 2011-12, the average per capita income of the Marathas was second only to the Brahmins at Rs 36,548, against Rs 47,427.
    • Their highest quintile -20 per cent of the caste group- got 48 per cent of the total income of the Marathas with a mean per capita income of Rs 86,750.
    • The lowest quintile earned 10 times less (Rs 7,198) and the 40 per cent poorest got less than 13 per cent of the total income of the caste — and were lagging behind the Scheduled Castes elite.
    • In fact, the mean incomes of the highest Dalit quintile, Rs 63,030, and that of the second-highest, Rs 28,897, were above those of the three lowest quintiles of the Marathas.

    What explains growing income difference

    • This is partly due to changes on the education front. 
    • The percentage of graduates among Dalits in 2004-05 was 1.9 per cent and has more than doubled to 5.1 per cent in 2011-12.
    • The corresponding figure for the OBCs was 3.5 per cent and has doubled to 7.6 per cent, while for the Marathas it was 4.6 per cent in 2004-05 and has come up to 8 per cent in 2011-12.
    • Correlatively, the percentage of salaried people among the Dalits was about 28 per cent in Maharashtra in 2011-12, as against 30 per cent among the Marathas.

    Issues with the Maratha quota judgment

    •  The Court refused to recognise the need for positive discrimination of the lower classes of the dominant castes which continue to be seen as a dominant bloc.
    • It fails to admit the complexity that the role of class has introduced in post-liberalisation India.
    • This is unequivocal confirmation of a dated approach to social realities and a purely arithmetic limit that finds no expression in the Constitution.
    • The judgement also raises the issue of judicial supremacy in the broad area of social policy as it could lead to undesirable exclusion of beneficiaries.
    • The court seems to have forgotten its own observation in NM Thomas case that functional democracy postulates participation of all sections of the people and fair representation in administration is an index of such participation.

    Conclusion

    The Supreme Court has rejected the determination of Marathas as backward by holding that their relative deprivation and under-representation with regard to other sections of the general category did not entitle them to affirmative action.

  • Close the vaccination gap, in global lockstep

    Why vaccination gap is cause of worry

    • By the end of May 2021, only 2.1% of Africans had received at least one dose of a COVID-19 vaccine.
    • A widely vaccinated world population is the only way to end the pandemic; otherwise, the multiplication of variants is likely to undermine the effectiveness of existing vaccines.
    • Vaccination is also a prerequisite for lifting the restrictions that are holding back our economies and freedoms.
    • If the vaccination gap persists, it risks reversing the trend in recent decades of declining poverty and global inequalities.
    • Such a negative dynamic would hold back economic activity and increase geopolitical tensions.
    • The cost of inaction would for sure be much higher for advanced economies than what we collectively would have to spend to help vaccinate the whole world.
    • The International Monetary Fund has proposed $50 billion plan in order to be able to vaccinate 40% of the world population in 2021 and 60% by mid-2022.

    Need to resist the vaccine nationalism

    • To achieve the goal set by IMF, we need closely coordinated multilateral action.
    • We must resist the threat posed by linking the provision of vaccines to political goals and vaccine nationalism.
    • The EU has been vaccinating its own population, while exporting large volumes of vaccines and contributing substantially to the vaccines roll-out in low-income countries.
    • The EU has also exported 240 million doses to 90 countries, which is about as much as used within the EU.
    • One-third of all COVAX doses delivered so far have been financed by the EU.
    • India’s Vaccine Maitri is another example of global solidarity.
    • However, this effort is still far from sufficient to prevent the vaccination gap from widening.

    Way forward

    • To fill widening vaccination gap, countries with the required knowledge and means should increase their production capacities, so that they can both vaccinate their own populations and export more vaccines.
    • All countries must avoid restrictive measures that affect vaccine supply chains.
    • We also need to facilitate the transfer of knowledge and technology, so that more countries can produce vaccines.
    • Voluntary licensing is the privileged way to ensure such transfer of technology and know-how.

    Conclusion

    The COVID-19 pandemic has reminded us that health is a global public good. Our common global COVID-19 vaccine action to close the vaccination gap must be the first step toward genuine global health cooperation, as foreseen by the Rome Declaration recently adopted at the Global Health Summit.

     

  • India-Bangladesh Relations

    The article highlights the need for Indian leaders to respect the sentiments of Bangladesh by avoiding adverse comments during elections and recognition of Bangladesh’s importance for India.

     Diplomacy with Bangladesh

    • Long-standing bilateral problems: As a neighbour nearly surrounded on all territorial sides by India, there are the inevitable bilateral problems of long duration.
    • Such problems include a perennially favourable balance of trade for India, drought and flood in the 54 transboundary rivers flowing from India to Bangladesh, and the smuggling of goods and vulnerable human beings across the approximately 4,100 kilometre land border.
    • Cultural ties with India: There are several sections who regard their Bengali roots and traditions as being of equal validity as their religious affiliation, and treasure the linguistic and cultural ties with adjacent India.
    • India’s expectations: For India’s attentions and support, India’s expectations are that a neighbour will keep India’s concerns in mind when devising and pursuing its policies.

    Steps taken to consolidate the bilateral ties

    • Bangladesh has successfully dealt with Muslim fundamentalist terrorists.
    • Bangladesh has also controlled the Northeast militant movements sheltering in Bangladesh.
    • This has facilitated the pacification of India’s Northeast.
    • Bangladesh facilitated a considerable degree of connectivity between India and its Northeast by land, river and the use of Bangladeshi ports.
    • Indian investments in Bangladesh have been encouraged.
    • There are at least 100,000 Indian nationals now living and working in that country.
    • For economic integration along with free movement of commerce and capital, the movement of persons on the lines of Nepal and Bhutan will have to be considered.

    Consider the question “To a certain degree both India and Bangladesh depend on each other for security and stability. In light of this, take an overview of the consolidation of the bilateral ties between the two countries and discuss the issues that need to be addressed between the two countries.”

    Conclusion

    Responsible individuals on both sides of the border, whether in government or the Opposition, must be actively discouraged from words and actions detrimental to the consolidation of the existing cordiality.

  • Challenges federalism faces in India

    The article highlights the challenges faced by the federalism in India in various domains and forms and suggests the ways to deal with these challenges.

    Growing tendency towards Centralisation

    • Moves to erode the powers of State governments are not new.
    • The Centre, on several occasions, has used its powers to dismiss or use the Governor to intimidate democratically elected governments.
    • During the Emergency, education was moved to the Concurrent list which was until then a State subject under the constitutional division of responsibilities.
    • However, the changes to federal relations at present are more systemic.
    • There has been increasing centralisation in resource allocations and welfare interventions.
    • After GST, the gap between the revenue that State governments are allowed to generate and the expenditure that they are expected to incur has been widening.
    • The Centre has been encroaching into domains under State government control through centrally sponsored schemes in sectors such as education and health.

    Three domains in which federalism faces challenges

    1) State-capital relation

    • At present there is growing trend towards centralising economic power in conjunction with political centralisation.
    • The consolidation and expansion of a few big business groups is taking place, probably at the expense of smaller players.
    •  On the one hand, the Centre has sought to insulate Indian big business from global competition by choosing not to enter into the Regional Comprehensive Economic Partnership (RCEP).
    • But the power of small businesses is eroded through support for GST and the call for a single national market.
    • So, big businesses are more likely to benefit from a removal of State-level barriers to trade at the expense of smaller regional players.

    2) Institutional transgression

    • Central institutions are increasingly weakening the policy levers of State institutions.
    • There are growing allegations of the misuse of institutions such as the Income Tax Department, the Enforcement Directorate and the National Investigation Agency are being used to intimidate opponents..
    •  Direct transfers to beneficiaries of welfare schemes bypassing States are also contributing to this dynamic.
    • The Centre is increasingly ignoring elected representatives of State governments, holding meetings with State secretaries and district collectors on issues that are primarily under State control.
    • Governors perform active administrative roles instead of their signatory roles.
    • To ensure national uniformity in educational institutions NEET was introduced in medical education.
    • But it subverts the affirmative action policies developed at the regional level in response to local.
    • In the domain of health, the Centre has now put State governments at a disadvantage in vaccine usage by fixing differential pricing for procuring vaccines.

    3) Socio-cultural foundations

    • Beside the legal-constitutional aspects of federalism, it is diversity in cultural foundation of regions that sustains Indian federalism.
    •  Markers of regional identities and regional socio-cultural practices are now interpreted as belonging to a pan-Indian Hindu tradition.

    Conclusion

    To stem this trend towards centralisation we need to provide more legal and constitutional safeguard to the States, strong regional political assertion and a strong federal coalition.

  • Global minimum tax may help India but can cause international disagreements

    The article deals with the issue of global minimum tax proposal floated by the US, challenges it faces and its implications for India.

    The US proposal for global minimum tax

    • In its recent proposal, the U.S. sought to impose a global minimum tax on foreign income earned by U.S. corporations.
    • The proposal is intended to disincentivise American companies from inverting their structures due to the increase in the U.S. corporate tax rate.
    • The U.S. is now discussing a floor of 15% for the minimum tax rate.
    • The proposal is similar to Pillar Two, except for the rate of the effective minimum tax.

    Similarity with Pillar Two Proposal

    • The Pillar Two proposal was the Organisation for Economic Co-operation and Development’s (OECD) plan to plug the remaining Base Erosion and Profit Shifting (BEPS) issues
    • It provide jurisdictions the right to “tax back” where other jurisdictions have either not exercised their primary taxing right or have exercised it at low levels of effective taxation.
    • For instance, if an Indian-headquartered multinational corporation (MNC) has an entity in Singapore or the Netherlands through which global operations are run, and its income from global operations is not taxed at an effective rate of 10% or 15%, then it can be taxed in India.
    • India has been part of the Pillar Two discussions and has not objected in principle to the proposal.

    How Global Minimum Tax would benefit India?

    • The proposal, along with the increased tax bill for U.S. companies, may benefit the Indian revenue department.
    • The State of Tax Justice report of 2020 notes that India loses over $10 billion in tax revenue due to the use of offshore structures, particularly through investments made by Indian residents through Mauritius, Singapore and the Netherlands.
    • This is supported by the overseas direct investment (ODI) data from 2000 to 2021 published by the Reserve Bank of India.
    • Start-ups and large Indian conglomerates commonly use offshore structures for conducting global operations.
    • Revenue from such operations is often retained offshore and not repatriated to India.
    • Tax advantages incentivise such structures, due to which taxes on such income are not paid in India.
    • Once these proposals are implemented, Indian companies would have to pay additional taxes on their offshore structures to the extent that the effective rate of tax is lower than the global minimum tax rate.

    Challenges

    • Lack of consensus: Several countries have taken a different approach to the rate of global minimum tax.
    • While France and Germany have expressed support, the EU has raised concerns regarding the high rate proposed by the United States.
    • Tax sovereignty issue: Countries have stated that the proposal infringes upon their tax sovereignty and that the fight against unfair tax competition should not become a fight against competitive tax systems.

    Consider the question “What are the factors that led to the demand of global minimum corporate tax? What will be its implications for India?” 

    Conclusion

    As economies struggle amid the COVID-19 pandemic, the necessity of encouraging trade and economic activity should be prioritised over disagreements on tax allocations. A tax-related trade war or entrenchment of unilateral levies may further harm both global and national economies.