Indian Economy
Q1. National Rail Plan (NRP) for 2030 aim to tackle the challenges obstructing the development of Railways in India. Elucidate (10M)
Introduction
The Indian Railways is the lifeline of India. With its vast network across the length and breadth of India, it is not just a mere transporter of passengers and goods but also a social welfare organization. Indian Railways (IR) has the 4th longest rail network in the world. Recently government has launched National Rail Plan 2030 to upgrade Indian railway to meet current market demand.
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Challenges hindering the development of Railways in India:
- Congested networks: Over-stretched infrastructure with 60% plus routes being more than 100 percent utilized, leading to a reduction in the average speed of passenger and freight trains.
- Efficiency: Low efficiency of the Railways in terms of the human resources it employs, and their capacity.
- Decline in the growth of internal revenue generation: A decline in the growth of internal revenue generation has meant that Railways has been funding its capital expenditure through budgetary support from the central government and borrowings.
- Centralised decision making: Currently, decision making in Railways is centralised. The Railway Board has the powers of policy making, operations, and regulation. Railway zones have very limited powers with regard to raising their own revenue.
- Safety and poor quality of service delivery: There have been a number of accidents and safety issues. However, it has declined off late. g. Balasore train accident.
- Poor cleanliness of trains and stations, delays in booking/train departures and arrivals and in booking tickets are key issues.
- Competition from the Aviation Industry: Due to an increased quality of life and rapid lifestyle changes necessitated by an increase in personal disposable income, the Indian railways are also facing stiff competition from airlines as a means of transportation and travel which doesn’t bode well for the railways.
- A vicious cycle for Railways: Poor finances of Railways had led to low investment in infrastructure. Low investment means Railways’ infrastructure and services take a hit (resulting in low speed, delays, and safety issues).
Role of National Rail Plan (NRP) for 2030: Indian Railways have recently prepared a National Rail Plan (NRP) for India – 2030 to create a ‘future ready’ Railway system by 2030. it aims to tackle these challenges in following ways.
- Focus on freight: Formulate strategies based on both operational capacities and commercial policy initiatives to increase modal share of the Railways in freight to 45% (from 27%) by 2030.
- Reduce transit time of freight substantially by increasing average speed of freight trains to
- Network Expansion: The NRP focuses on expanding the railway network by identifying and developing new corridors, including high-density routes and freight-specific routes.
- National Rail Plan, Vision 2024: As part of the National Rail Plan, Vision 2024 has been launched for accelerated implementation of certain critical projects by 2024 such as
- 100% electrification, multi-tracking of congested routes,
- upgradation of speed to 160 kmph on Delhi-Howrah and Delhi-Mumbai routes,
- upgradation of speed to 130kmph on all other Golden Quadrilateral-Golden Diagonal (GQ/GD) routes and
- elimination of all Level Crossings on all GQ/GD route.
- Identify new Dedicated Freight Corridors: to arrest the trend of falling market share of railways in the country and also will shift the advantage in favour of rail transport.
- Safety and Security: The NRP gives utmost priority to safety and security measures. It focuses on upgrading infrastructure, implementing advanced signalling systems, enhancing track maintenance practices, and ensuring the availability of modern safety equipment.
- Public-Private Partnership (PPP): To mobilize resources and expertise, the NRP promotes increased participation of the private sector through PPP models. It encourages involvement of the Private Sector in areas like operations and ownership of rolling stock, development of freight and passenger terminals, development/operations of track infrastructure etc.
- Skill Development and Human Resource Management: It focuses on training in new technologies, safety protocols, customer service, and operational efficiency. By investing in human resources, the plan aims to improve service quality and customer satisfaction.
Conclusion
The need of the hour is to find a balanced solution that would incorporate the pros of both private and government enterprises and enhance the image of Indian Railways as it continues to serve the world’s largest democracy.
Q2. Assess the need, challenges and opportunities that may arise for the Indian tax regime with the implementation of the global minimum tax and harmonization of the capital gains tax? (15M)
Introduction
Over 130 countries have agreed to implement a global minimum tax regime to address profit shifting and tax base erosion. This move aims to reduce the practices of multinational corporations (MNCs) that have benefited the most from globalization by shifting profits and tax revenues to low-tax countries.
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The global minimum tax regime seeks to discourage tax competition through lower tax rates and ensure that MNCs pay their fair share of taxes regardless of where their sales are made.
Need that may arise for the Indian tax regime with the implementation of the global minimum tax:
- Revenue Generation: The Indian government may see a need to generate additional tax revenue by ensuring that MNCs pay their fair share of taxes and prevent profit shifting to low-tax jurisdictions.
- Tax Base Protection: Implementing the global minimum tax helps protect the tax base by reducing tax competition among countries, ensuring that profits are appropriately taxed where economic activities occur.
Challenges:
- Rolling back of earlier regime: For India, it could mean rolling back the equalisation levy and Significant Economic Presence rules. The government will reportedly take that decision once the global tax deal is implemented.
- Loss of revenue from some industry: Large Indian headquartered MNEs may also need to comply with Pillar One rules and India will need to share its taxing right with other countries.
- Reduce the ability of government to use tax as incentive: A potential downside of global minimum rate is reduced ability of governments to use tax incentives to pursue specific policy objectives, such as promoting innovative activities or economic development.
- for instance, via investment tax incentives or tax incentives for research and development.
- Changing norm in SEZs: The subsidiaries of foreign MNE Groups set-up in SEZs (special economic zones) claiming section 10AA benefits, and entities involved in infrastructure sector claiming deductions under section 80-IA series, etc. may come within Pillar 2 radar due to the effective tax rate being below 15%.
- Jurisdictional Competition: As countries adopt the global minimum tax, there is a risk of tax base erosion if some jurisdictions continue to offer attractive tax incentives. India may face challenges in ensuring compliance and preventing profit shifting to lower-tax jurisdictions.
Opportunities:
- Lower tax evasion: India loses about $10 billion to tax abuse through profit shifting every year — the second-largest tax revenue loss in Asia. This norm is expected to lower the chances of tax evasion by MNCs.
- Taxation benefits: For outbound structures, low-taxed foreign subsidiaries may be impacted wherein tax may be collected on such income in India under income inclusion rule.
- Tax Justice Network estimates India to gain about $4 billion annually under the new norms.
- International Cooperation: The global minimum tax regime presents an opportunity for India to enhance international cooperation and collaboration on tax matters.
- It allows for a coordinated approach among countries to tackle tax avoidance and profit shifting, promoting fairness and transparency in the global tax system.
- Improved Investor Confidence: By aligning with international tax standards and adopting a global minimum tax, India can enhance investor confidence.
- A transparent and predictable tax regime encourages both domestic and foreign investments, driving economic growth and development.
Recently, the government has stated its intention to revisit the capital gains tax regime to rationalise the plethora of differential holding periods, tax rates and asset classification.
Need that may arise for the Indian tax regime with the harmonization of the capital gains tax:
- Consistency in tax rates: At present, there is a lack of consistency in tax rates or holding periods of different types of instruments falling within the same asset class.
- Harmonisation of capital gain tax is expected to bring consistency in tax rates.
- Indexation: An added complexity is that certain assets are eligible for indexation and others are not. Indexation benefit is not available.
- for example, in the case of LTCG arising from the transfer of listed equity share, or a unit of an equity-oriented fund, or a listed REIV / InvIT unit.
Challenges:
- Policy Alignment: Harmonizing the capital gains tax would require aligning the domestic tax laws with the international standards. This process may involve making significant changes to existing tax provisions, which could be complex and time-consuming.
- Administrative challenges: Tax authorities need to have the necessary resources, expertise, and systems in place to enforce the new rules effectively. Building and strengthening this capacity may require investments in technology, training, and infrastructure.
- Valuation and Compliance Challenges: Harmonization may introduce challenges related to the valuation of assets and determining capital gains. Ensuring consistent and accurate valuation across various asset classes could pose difficulties for taxpayers and tax authorities.
Opportunities:
- Investment: the harmonisation of capital gains tax would encourage investment decisions to be guided by factors other than just the distinction in the holding period and tax rates.
- Benefits to NRI: the tax rates differ for residents and non-residents e.g., the tax rate for capital gains arising from the sale of unlisted shares/bonds/debentures for residents is 20 percent whereas for non-residents it is 10 percent.
- The non-resident Indians have to pay tax on the long-term capital gains and short-term capital gains without adjusting the basic exemption limit of 2.5 lakh.
- Taxpayer-friendly initiatives: The same would also align with the government’s agenda for taxpayer-friendly initiatives such as common income-tax return forms and could lead to effective compliance.
- Bring down litigation: a suitable clarification to treat the capital gains as exempt even in cases of acquisition by Government agencies/Boards, etc. could bring clarity and avoid litigation leading to the smooth implementation of infrastructure objectives of the Government.
Conclusion
In line with India’s growth story, the government must consider its objectives of spurring investments and simplifying the law while reviewing the provisions for capital gains taxation, which would go a long way in ushering ‘Amrit Kaal’ for taxpayers.
Ethics
Syllabus: “Accountability and ethical governance Strengthening of ethical and moral values in governance;”
Q3. Why is it difficult to ensure ethical governance in developing countries when compared to developed countries? Discuss using suitable examples (10M)
Introduction
Ethical governance is a governance model based on a set of moral values. While the values are ideals for governments across the world, developing countries face specific challenges given their history and socio-economic growth scenario.
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Features of ethical governance
- A value-based governance that strives to make the government-citizen interaction smoother and to enhance mutual trust and cooperation between the two.
- The governance mechanism makes its functioning transparent and stays accountable to the people.
- The officials are ideally expected to exhibit values of compassion, impartiality, equality, integrity and probity in governance.
- In essence, beyond the efficiency and effectiveness goals, an ethical governance model aims for offering a corruption-free, violence-free governance based on rule of law.
- Nolan Committee’s seven principles of public life – Selflessness, Integrity, Objectivity, Accountability, Openness, Honesty, and leadership.
Challenges for ethical governance in developing countries
- Bureaucratic culture:
- Most developing countries are former colonies that are attuned to stringent and hierarchical bureaucratic
- Given this fact, the attitude of the officials as well as the traditional administrative mechanisms that are overburdened and more regulatory in nature, stand as barriers to values of compassion, empathy and citizen-friendly governance.
- The problem of red-tapism in India.
- Low level of technological progress:
- Information and communication technologies are one of the key tools that aid in materialising ethical governance.
- For instance, the digitalisation measures to check leakage of benefits in welfare programmes.
- Developing countries, with relatively low level of technological progress, thus trail back in the progress towards ethical governance.
- Information and communication technologies are one of the key tools that aid in materialising ethical governance.
- High level of corruption:
- The resource crunch and low level of socio-economic development in developing countries drives both people and administrative personnel to collude for corruption and bribery.
- Corruption at any level undermines the efforts at ensuring a transparent and just governance.
- Transparency International’s annual corruption index reveal that developing countries, especially those in Africa, the Middle East and Asia witness high corruption levels.
- Low public awareness:
- The low level of literacy and less knowledge on rights among majority of the population in developing countries leads to lack of accountability among the officials and the ruling class.
- In Nigeria, concerted anti-corruption and other ethical governance efforts show less-encouraging results as the people themselves are ingrained in corrupt practices and unethical practices for long. This further increases the lethargic attitude among some officials.
- Other factors:
- Patronage, favoritism and nepotism dilute public interest in governance
- Negligence due to overburden
- Delays in grievance redressal mechanisms
- The low level of literacy and less knowledge on rights among majority of the population in developing countries leads to lack of accountability among the officials and the ruling class.
Conclusion
While ethical governance is a tool for development, the developmental issues themselves stand in the way of ethical governance. Strengthening mechanisms as the Citizens Charter and Right to Information as well as training officials to bring in an attitudinal change for a people-friendly behaviour and mindset can go a long way in ensuring ethical governance in developing countries.
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