Insights Daily Current Events, 27 February 2016
Topic: Indian economy – growth and development
Economic Survey Highlights
Invest in welfare, undertake reforms, says Economic Survey
Economic survey projects real GDP growth for the current financial year and 2016-17 to be in the range of 7-7.75%.
- According to CSO, growth this year will be 7.6%, lower than 8.1-8.5% growth projected in the last survey.
Important recommendations made by the survey in this regard:
- Improved investments in health and education, where India fares the worst, and adequate attention to agriculture could help India achieve higher growth rates. Four seasons of weak rainfall have demanded immediate attention from policy makers.
- The survey has advised the government to take up the unfinished agenda including the Goods and Services Tax, strategic disinvestment, de-stressing of the balance sheet of both banks and private companies, and the rationalisation of subsidies. Stretched corporate and bank balance sheets are affecting prospects for reviving private investments, and so the underlying stressed assets must be sold or rehabilitated, the survey noted.
- It also recommends restricting the cooking gas subsidy to 10 cylinders from 12 at present, raising the levels of property tax and desisting from raising the income tax threshold.
- It also recommends raising resources for recapitalising public sector banks by carefully leveraging the assets of the Reserve Bank of India and other regulatory institutions.
The survey makes a case for unpopular reforms, such as bringing agricultural incomes in the tax net, rationalisation of fertiliser subsidies estimated at Rs. 75,000 crore (excluding arrears) and the withdrawal of tax benefits which, benefit mainly the rich.
The survey has also indicated that the government would keep the fiscal deficit within the target of 3.9% of GDP in the current year.
According to the survey, Delhi is the largest recipient of FDI in the country. It is closely followed by Maharashtra and Karnataka.
Rich feed off subsidies worth over Rs. 1 lakh crore: Economic Survey
The survey notes that India’s rich feed off subsidies worth over Rs. 1lakh crore a year that are meant for the poor. While noting this, the survey has considered subsidies only on six commodities including Railways, electricity and PPF.
- It also says that various government interventions in the country have been helping the relatively better-off in society, which in turn is taking the form of explicit subsidization, and is substantial in magnitude.
Implications of such policies: Any tax incentives that are given, for example, for savings, benefit not the middle class, not the upper middle class but the super-rich who represent the top 1-2%.
Where we are losing?
- Most commodities primarily consumed by the rich have a very low tax rate, in effect subsidising them at the cost of the poor. For example, the rich consume 98% of the gold in the country, and yet gold is taxed at only 1-1.6% (the Centre and the States combined).
- The rich avail of an 88% subsidy on kerosene, amounting to Rs. 5,501 crore and 86% subsidy on LPG, amounting to Rs. 40,151 crore.
- Some commodities are subsidised more for the poor than the rich, such as railway tickets (since there are different categories of tickets), but even here, the rich avail of a subsidy of 34%.
- Similarly, the tax structure has resulted in aviation fuel being cheaper per litre than petrol and diesel. Aviation fuel is taxed at about 20% (average of tax rates for all states), while diesel and petrol are taxed at about 55% and 61%. The real consumers of ATF are those who travel by air, who essentially are the well-off.
How this was calculated?
To arrive at the quantum of subsidies availed of by the rich, the Economic Survey assumed the average tax on normal commodities at 19%, the Revenue Neutral Rate for the GST as recommended by the Subramanian panel, and a 50% tax on energy-related commodities that serves as an “appropriate carbon tax.”
- The effective subsidy availed by the rich, as calculated by the Survey, is the difference between this tax rate (19% or 30%) and the actual subsidy, measured as a negative number, or the (positive) tax rate on that commodity or service.
Private finance vital for India to reach climate goals: Survey
The Economic Survey finds that India will find it hard to meet its variety of obligations to tackle climate change without substantial help from the private sector.
Successful implementation of the Paris Agreement, the Sustainable Development Goals (SDGs) and the ambitious targets set out in the Intended Nationally Determined Contributions (INDCs) will require huge financial resources which cannot be met through budgetary sources alone. Hence, according to the survey, leveraging private finance along with public finance, both international and national, will be critical.
- The SDGs set by the United Nations last September lay the onus on countries to make significant progress on a wide range of goals including ending poverty and hunger and combating climate change.
- The INDCs are plans by governments communicated to the United Nations climate change council regarding the steps they will take to address climate change domestically.
Only 5.5% who earn are tax payers: Economic Survey
According to the survey, only about 5.5% of the people who earn pay tax in India and only 15.5% of the net national income is reported to the tax authorities.
- The tax to GDP ratio at 16.6%, as a result, is well below that of the emerging market economies of 21% and OECD average of 34%.
- On the expenditure side, India’s spending on human capital, education and health, to the GDP ratio is the lowest among BRICS and lower than the OECD and emerging market economies averages. They are in fact, lower than those of comparable per-capita GDP economies such as Vietnam, Bolivia and Uzbekistan.
What needs to be done?
- To widen the tax net and raise revenue for spending on India’s human capital development, the survey called for bringing rich farmers into the tax net, raising property tax rates and phasing out tax exemptions.
- Besides, there should be reasonable taxation of the better-off, regardless of the source of their incomes, whether it is from industry, services, real estate, or agriculture.
Inequality in India
The survey also seeks to analyse the levels of inequality in India.
- According to the survey fast growing years in the 2000s were in fact associated with rising inequality at the very top end of the Indian income distribution.
- As in many countries, there has been a growing concentration of income at the top: in 2013-14.
- The top 1%, 0.5% and 0.1% of people in the overall income distribution (the three highest income groups) accounted for 12.4%, 9.4% and 5% of the entire income of the Indian economy.
- At these levels, inequality in India is comparable to that in the U.K. and lesser than in the United States.
RBI must redeploy its capital in state-owned banks
The survey has asked the Reserve Bank of India (RBI) to deploy some of its capital in the public sector banks (PSBs).
- The survey highlighted the ratio of shareholder equity to assets (total equity as a percentage of balance sheet) for RBI is very high among various central banks, at 32%, only after Norway and well above that of the U.S. Federal Reserve and the Bank of England whose ratios are less than 2%.
- Stress, which is emanating from both banks and corporate sector, is a major impediment to private investment and a full-fledged economic recovery.
- The survey notes that if the RBI were to move even to the median of the sample (16%), this would free up a substantial amount of capital to be deployed for recapitalizing the PSBs.
However, any such move would need to be initiated jointly and cooperatively between the government and the RBI. And it will also be critical to ensure that any redeployment of capital would preserve the RBI’s independence, integrity and financial soundness.
On the other hand, banking industry experts said the idea may not go well with the RBI which insists that its regulation is ownership neutral.
State of PSBs:
Public sector banks are in need of capital as bad loans have surged in the last few years and also to meet Basel-III norms. The finance ministry estimates public sector banks will need Rs.1.8 lakh crore capital infusion for four years ending March 2018-19 while the government plans to infuse only Rs.70,000 crore during the period.
Gas prices must be linked to market
Market-determined pricing for gas in India is the best policy going forward in order to ensure greater investment, competitiveness and transparency in the sector, according to the Economic Survey.
- The survey also recommends capping the LPG subsidy to 10 cylinders per household per year from the current 12.
- Market-determined arm’s length pricing for domestic gas, with an effective regulator, to provide adequate incentive for investment and also ensure competitiveness and transparency remains the first-best solution that merits consideration. It would reflect the appropriate gas price in relation to alternative fuels.
The current gas pricing formula, in place since October 2014, mandates that the price of natural gas be revised every six months on the basis of a weighted average of rates in gas-surplus economies such as the US, Mexico, Canada, and Russia.
India has 3rd largest base of start-up firms
Within a year, the number of technology start ups in the country has grown by 40 per cent to over 4,200, making India the third largest base of technology start-ups in the world, according to the Economic Survey 2015-16.
- This has further helped create about 80,000-85,000 jobs during 2015.
- Also, Indian start-ups raised USD 3.5 billion in funding in the first half of 2015, and the number of active investors in India increased from 220 in 2014 to 490 in 2015.
- As of December 2015, eight Indian start-ups belonged to the ‘Unicorn’ club i.e had valuations greater than USD one billion.
Slow labour reforms hurt ‘good’ jobs
The economic survey has criticised the slow pace of reforms in labour laws, arguing that firms negotiate regulatory hurdles imposed to protect employees who get poor quality jobs as a consequence and suggested easier retrenchment norms and lower statutory deductions from salaries to create ‘good’ jobs.
- India’s most pressing labour market challenge going forward will be to generate a large number of good jobs. These jobs tend to be formal sector jobs.
- Two obstacles to formal sector job creation are regulation-induced taxes on formal workers and spatial mismatch between workers and jobs.
However, the slow pace of labour reform has encouraged firms to resort to other strategies to negotiate regulatory cholesterol. One popular strategy is to hire contract workers,” the survey said highlighting how “managing” inspectors to the contract labour firm has become a normal exercise for factories.
Role of Industrial Disputes Act:
Medium-sized formal sector manufacturing firms have reported labour regulations as a significant barrier to growth, specifically the dismissal norms under the Industrial Disputes Act.
- The Industrial Disputes Act 1947 requires firms with more than 100 workers to seek government’s approval before retrenching workers. The law has encouraged factories to employ contract workers to stay out of the rule books even though entrepreneurs feel ‘contract labour is not the ideal solution’ for them.
Only 35% of the 10.5 million new manufacturing jobs created between 1989 and 2010 were in the formal sector. Though the informal sector kept unemployment levels low, these jobs were much worse than the formal sector ones.
DBT “jammed” by last-mile challenge
According to the survey, the government’s big push for scaling up Direct Benefit Transfer subsidies using the JAM trinity (Jan Dhan Yojana, Aadhaar and Mobile number) is unlikely to work in rural India in the short to medium-term.
- It notes that the JAM agenda is currently jammed by the last-mile challenge of getting money from banks into beneficiaries’ hands, especially in rural India.
- The survey adds there is still some way to go before bank-beneficiary linkages are strong enough to pursue Direct Benefit Tranfer (DBT) without committing exclusion errors despite the huge improvements seen in financial inclusion due to Jan Dhan Yojna.
What needs to be done?
- The government must invest in last-mile financial inclusion by further improving banking correspondent (BCs) networks and promoting the spread of mobile money.
- Regulations governing the remuneration of BCs may need to be reviewed to ensure that commission rates are sufficient to encourage BCs to remain active.
- The Survey also suggests incentivising states by sharing fiscal saving from DBT to help fully implement JAM.
Survey outlines steps to boost Make in India
The survey has proposed a slew of steps, such as eliminating exemptions on countervailing duties on imports, monetisation of land owned by public sector companies and allowing industries to buy electricity directly from the markets to enable Make in India Initiative a success.
- The duty exemptions are favouring foreign producers over domestically made goods thus defeating the initiative.
- The efficiency of electrical energy usage has fallen with an increase in power generation capacity not being able to be capitalised by distribution companies due their financial inability to purchase electricity.
- On the issue of countervailing duty exemptions, the Economic Survey last year had also pointed out that the duties were not imposed on several items of imports. The survey had said the effective rate of excise on domestically-produced non-oil goods was about 9%. Though the effective collection rate of CVDs should theoretically be the same, in real terms it was only around 6%. This difference represents the fiscal cost to the government to the tune of around Rs.40,000 crore.
- Another factor that could have an adverse effect on the Make in India Initiative will be India’s decision to join the US-led mega regional free trade pact called the Trans-Pacific Partnership (TPP) at a future date.
Other proposed measures:
- Parts of land belonging to the state-owned companies can be converted into land banks and used to promote Smart City initiatives. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups, and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.
- Industries with a high demand for power should be allowed to absorb the excess generation capacity through open access (OA). Consumers with electricity load above one MW are permitted by the OA policy (under the Electricity Act 2003) to procure power directly from electricity markets.
- Eliminating policies — currently providing negative protection for Indian manufacturing and favouring foreign manufacturing — could be achieved by quickly implementing the Goods and Services Tax (GST. However, if delays are envisaged in rolling out the GST, a similar result could be achieved by eliminating the duty exemptions.
- Membership of the TPP would prevent the Indian government from using state-owned enterprises and government procurement as vehicles for achieving social and economic objectives, including employment generation, thereby have to compromise on the Make in India Initiative policy.
The Make in India Initiative aims to transform India into a global manufacturing hub and increase the share of manufacturing in India’s GDP from a stagnant 15-16 per cent since 1980 to 25 per cent by 2022 and create an additional 100 million jobs.
sources: the hindu.
Paper 2 Topic: Separation of powers between various organs dispute redressal mechanisms and institutions.
SC does U-turn, admits plea for Court of Appeal
The Supreme Court has admitted a Chennai lawyer’s petition for setting up a National Court of Appeal with regional benches to act as the final courts of justice in criminal and civil cases.
- With this, the court has questioned the past views of its own Chief Justices of India about bifurcation of judicial powers and a government order in 2014 that such a court of appeal is constitutionally impermissible.
The proposed court is meant to act as final arbiter of appeals against decisions of the High Courts and tribunals in civil, criminal, labour and revenue cases.
This plea was previously rejected by the centre. The lawyer had approached the Union Ministry for Law and Justice with his proposal after the Supreme Court asked the government to hear him out through a judicial order on October 10, 2014.
In its order, the Ministry cited three grounds for rejecting the idea —
- The Supreme Court always sits in Delhi as per the Constitution.
- The Chief Justices of India in the past have consistently opposed the idea of a National Court of Appeal or regional Benches to the Supreme Court.
- A National Court of Appeal would require an amendment in Article 130 of the Constitution of India which is impermissible as this would change the Constitution of the Supreme Court completely.
What the petitioner says?
The petitioner submits that establishment of a ‘National Court of Appeal’ as suggested in the case of Bihar Legal Support Society would rectify the inequality in the state of affairs in as much as the said National Court of Appeal would have benches in all possible regions of the country.
- This would also considerably reduce the cost of litigation and would enable the litigants to have the services of the lawyer who appeared for them before the High Court.
- The petitioner also argues that the Supreme Court was never intended to be a regular court of appeal against orders made by the high court or the sessions court or the magistrates. It was created as an apex court for the purpose of laying down the law for the entire country.
However, legal experts feel that setting up of regional benches will dilute the constitutional superiority of the Supreme Court.
sources: the hindu.
Paper 3 Topic: indigenization of technology and developing new technology.
Fund crunch hits Indian drug trial
A recent study has revealed that lack of funds has hit the Council of Scientific and Industrial Research (CSIR) and has prevented it from conducting a drug trial to test a novel drug-regimen for tuberculosis (TB).
- In January 2014, the Drug Controller General of India approved a phase 2b trial (a limited test of a prospective drug in humans to prove its potency) to test a combination of three TB drugs to treat multi-drug-resistant tuberculosis (MDR-TB).
- The promise of this combination — called PaMZ (PA-824 + moxifloxacin + pyrazinamide) — is to cut treatment time by at least a third. Moreover, it was purportedly effective even when tested on HIV patients.
- The drug, developed in collaboration with the international Global Alliance on Tuberculosis, was to enter phase 3, or large-scale trials last year in South Africa.
Significance of these trials:
- According to the World Health Organisation, TB kills an estimated 1.5 million people annually, and is one of the world’s deadliest diseases.
- There were also approximately 190,000 deaths from MDR-TB in 2014 and more than half of these patients were in India, China and the Russian Federation.
- Currently, people with MDR-TB require 18 to 24 months of treatment, with several pills and daily injections for at least six months.
- Apart from the health benefits, the drug trial would have been the first such attempt by the CSIR-led Open Source Drug Development (OSDD) consortium — an initiative to discover and test new drugs for infectious diseases that are widespread in poor countries by using expertise outside the confines of traditional pharmaceutical companies — to test a new drug in India.
Most drugs that are available in India are reverse-engineered versions of drugs developed in Europe or the United States. Since 2015, however, the OSDD has been shut down as a CSIR project. Hence, it is uncertain whether funds would be available next year.
Council of Scientific and Industrial Research (CSIR), established in 1942, is an autonomous body and the largest research and development (R&D) organisation in India.
- Although it is mainly funded by the Ministry of Science and Technology, it operates as an autonomous body registered under the Registration of Societies Act of 1860.
- The research and development activities of CSIR includes aerospace engineering, Structural engineering, ocean sciences, Life sciences, metallurgy, chemicals, mining, food, petroleum, leather, and environment.
sources: the hindu.
Paper 2 Topic: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
U.S. test-fires ICBMs to show rivals its power
The U.S. military recently test-fired its second intercontinental ballistic missile in a week, seeking to demonstrate its nuclear arms capacity at a time of rising strategic tensions with Russia and North Korea.
- The unarmed Minuteman III missile was test-fired at Vandenberg Air Force Base in California.
- The missile raced across the sky at speeds of up to 15,000 mph (24,000 kph) and landed a half hour later in a target area 6,500 km away near Kwajalein Atoll in the Marshall Islands of the South Pacific.
With this, the US has sent a message to strategic rivals like Russia, China and North Korea that Washington has an effective nuclear arsenal.
sources: the hindu.
Paper 2 Topic: Important International institutions, agencies and fora, their structure, mandate.
New BRICS bank set to fund green energy projects
The New Development Bank (NDB) — a multilateral lender with a focus on the Global South of the of the Brazil-Russia-India-China-South Africa(BRICS) grouping — is all set to fund more than a dozen projects this year, which will focus on renewable energy.
- The initial focus of the bank would on green energy projects.
The New Development Bank:
It is a multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa). It is seen as an alternative to the existing US-dominated World Bank and International Monetary Fund.
- The New Development Bank was agreed to by BRICS leaders at the 5th BRICS summit held in Durban, South Africa in 2013.
- The bank is set up to foster greater financial and development cooperation among the five emerging markets.
- The bank will be headquartered in Shanghai, China.
- Unlike the World Bank, which assigns votes based on capital share, in the New Development Bank each participant country will be assigned one vote, and none of the countries will have veto power.
What it does?
The New Development Bank will mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement existing efforts of multilateral and regional financial institutions for global growth and development.
- The establishment of the Bank will help India and other signatory countries to raise and avail resources for their infrastructure and sustainable development projects.
- It would also reflect the close relations among BRICS countries, while providing a powerful instrument for increasing their economic cooperation.
- It is expected to allow India to raise and obtain more resources for the much needed infrastructure development, the lack of which is coming in the way of inclusiveness and growth as of now.
- It will make available additional resources thereby recycling the savings accumulated in emerging countries which are presently being locked up in Treasury bonds having much lower returns.
sources: the hindu.
Facts for Prelims:
A new initiative called ‘Giftmilk’ has been launched in Telangana on a pilot basis. It aims to ensure nutritional support to school children. Under the initiative, school children will be given 200 milliliters of processed milk every day.