Editorials, Uncategorized

Pros of a spot gold exchange in India

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India is the world’s second largest gold consumer with an annual demand of nearly 1,000 tonnes. In spite of this, the country lacks many key elements of an efficient gold ecosystem.

Problems with the Indian gold market:

  • The gold market here is plagued by fragmentation.
  • Prices vary significantly across channels and locations.
  • The quality of gold also varies widely.
  • Jewellery rather than gold bars, gold coins, or gold-linked financial products, still dominates retail demand.
  • Large jewellers and traders mostly import refined gold from international markets, such as Dubai, causing loss of economic value and jobs in India.

What can we learn from other countries?

With the global gold market shifting from the West to the East, many Asian countries, such as Turkey, China, Singapore, and the UAE, have set up global-scale physical infrastructure for refining, storage, transport, trading and financing of gold to cater to the spurt in demand in the region.

Gold exchanges and related infrastructure set up by these countries have greatly enhanced the efficiency of their gold markets by way of:

  1. Efficient price discovery.
  2. Quality assurance.
  3. Active retail participation.
  4. Use of gold bars and gold coins.
  5. Use of gold-linked financial products instead of jewellery for investment purposes.
  6. Greater integration with financial markets through gold leasing and lending.

Key facts on Indian gold market:

  • Large players in the country procure gold directly from miners and traders in overseas gold hubs, often at a discount to the benchmark London Bullion Market prices.
  • Medium and small jewellers mostly depend on large players for supply of gold and face significant cost disadvantage.
  • Resellers are a significant source of gold for jewellers and refiners. However, there is no transparency in the activities associated with reselling of gold into the market.

How can we improve India’s situation?

According to a survey conducted by the India Gold Policy Center at IIM Ahmedabad, a national-level spot exchange would address the above mentioned problems and benefit stakeholders through transparency in pricing and standardization.

  • The survey also found that most of the small jewellers are keen to source gold through a gold exchange and, surprisingly, some large players too.

How can we improve the situation?

  • Establish a domestic and an international exchange which would allow two-way trading in physical gold and also provide derivative products for hedging.
  • The Exchange could also include gold vaulting facilities set up by experienced promoters, logistic arrangements to achieve next day delivery across the 21 major locations in India, and mechanisms for quality assurance and standardization of gold.
  • The Exchange should also offer domestic spot gold contracts and global spot gold contracts denominated in US dollars based on delivery outside the domestic tariff area.
  • Within the constraints of capital control regulations, both the domestic and global contracts on the Exchange must be open to the widest range of participants.
  • All domestic entities and foreign portfolio investors should be allowed to trade in domestic contracts.
  • Gold lending and borrowing mechanism (GLBM) should also be put in place.

What should the government do?

As in other Asian nations such as China, investment grade gold traded on the exchange should be exempt from indirect taxes such as VAT and GST, but should be subject to a Commodity Transaction Tax (CTT).

High standard of governance is the key if the Exchange is to aspire for leadership in Asian gold markets. These governance measures would include:

  • An India-responsible gold policy.
  • World class gold quality assurance.
  • Risk management.
  • High quality clearing and settlement.
  • Regulation and supervision by a credible regulator such as Securities and Exchange Board of India.

Things to be considered while setting up these exchanges:

  • Ideally, the Exchange must be promoted by neutral players (e.g. existing commodity, stock and derivative exchanges; banks; and other financial entities) instead of participants in the gold industry (e.g. jewellers, refiners and traders) because of conflict of interest.
  • Partnership with gold markets in Singapore, London and Shanghai can also be considered.
  • Minority equity participation by multilateral financial institutions such as the Asian Development Bank and the BRICS bank, and technical collaboration with professional bodies such as the London Bullion Market Association would be also valuable.

Way ahead:

The Exchange would be economically feasible if it drew a minimum trade quantity of about 100 tonnes a year, which appears quite feasible, given the annual demand of about 1,000 tonnes in India and that there are many segments of the gold market that are underserved by the existing market structure. Once the Exchange is set up, the participation balloons and vibrant contracts in the Exchange become the dominant forum for price discovery and investment in physical gold.

Conclusion:

An Exchange in India would help much to create a vibrant gold ecosystem matching India’s large share of global gold consumption, leading to efficient price discovery, assurance in the quality of gold, active retail participation, greater integration with financial markets, and greater gold recycling. It would also boost the gold monetization efforts of the centre through transparency and standardization of the gold market.

Editorials, GS-3, Science & Tech, Uncategorized

Fourth Industrial Revolution

CEOs, political leaders, social entrepreneurs, technologists and other global leaders are all at Davos to further the World Economic Forum’s mission of improving the state of the world. But, the big buzz at the World Economic Forum (WEF) in Davos this year is about the ‘Fourth Industrial Revolution’.

What is Fourth Industrial Revolution?

As described by the founder and executive chairman of WEF, Klaus Schwab, “the fourth industrial revolution is a technological revolution that will fundamentally alter the way we live, work and relate to one another”.

Background:

1st industrial revolution: The first Industrial Revolution began in Britain in the last quarter of the 18th century with the mechanisation of the textile industry, harnessing of steam power, and birth of the modern factory.

2nd industrial revolution: The Second Industrial Revolution, from the last third of the nineteenth century to the outbreak of World War I, was powered by developments in electricity, transportation, chemicals, steel, and mass production and consumption. Industrialization spread even further – to Japan after the Meiji Restoration and deep into Russia, which was booming at the outset of World War I. During this era, factories could produce countless numbers of identical products quickly and cheaply.

3rd industrial revolution: The third industrial revolution, beginning c. 1970, was digital — and applied electronics and information technology to processes of production. Mass customisation and additive manufacturing — the so-called ‘3D printing’ — are its key concepts, and its applications, yet to be imagined fully, are quite mind-boggling.

How different will be the 4th industrial revolution?

There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact.

  • The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace.
  • Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.
  • The 4th revolution will be characterized by the advent of cyber-physical systems which, while being reliant on the technologies and infrastructure of the third industrial revolution, represent entirely new ways in which technology becomes embedded within societies and even our human bodies. Examples include genome editing, new forms of machine intelligence, and breakthrough approaches to governance that rely on cryptographic methods such as blockchain.
  • Hence, it can be said that the 4th industrial revolution is conceptualised as an upgrade on the third revolution and is marked by a fusion of technologies straddling the physical, digital and biological worlds.

How does mankind benefit from this?

Like the revolutions that preceded it, the Fourth Industrial Revolution has the potential to raise global income levels and improve the quality of life for populations around the world.

  • By gaining access to the digital world, consumers will be benefited in several ways. With the advent of new technology, we get to use more and more efficient products.
  • In the future, technological innovation will also lead to a supply-side miracle, with long-term gains in efficiency and productivity.
  • Transportation and communication costs will drop, logistics and global supply chains will become more effective, and the cost of trade will diminish, all of which will open new markets and drive economic growth.

Challenges posed by this revolution:

Economists have pointed out that the 4th revolution could yield greater inequality, particularly in its potential to disrupt labor markets.

  • As automation substitutes for labor across the entire economy, the net displacement of workers by machines might exacerbate the gap between returns to capital and returns to labor.
  • With this revolution, it is also possible that in the future, talent, more than capital, will represent the critical factor of production. This will give rise to a job market increasingly segregated into “low-skill/low-pay” and “high-skill/high-pay” segments, which in turn will lead to an increase in social tensions.
  • In addition to being a key economic concern, inequality represents the greatest societal concern associated with the Fourth Industrial Revolution. The largest beneficiaries of innovation tend to be the providers of intellectual and physical capital—the innovators, shareholders, and investors—which explains the rising gap in wealth between those dependent on capital versus labor.

What will be the impact on the government?

As the physical, digital, and biological worlds continue to converge, new technologies and platforms will increasingly enable citizens to engage with governments, voice their opinions, coordinate their efforts, and even circumvent the supervision of public authorities.

  • Simultaneously, governments will gain new technological powers to increase their control over populations, based on pervasive surveillance systems and the ability to control digital infrastructure.
  • On the whole, however, governments will increasingly face pressure to change their current approach to public engagement and policymaking, as their central role of conducting policy diminishes owing to new sources of competition and the redistribution and decentralization of power that new technologies make possible.
  • Ultimately, the ability of government systems and public authorities to adapt will determine their survival. If they prove capable of embracing a world of disruptive change, subjecting their structures to the levels of transparency and efficiency that will enable them to maintain their competitive edge, they will endure. If they cannot evolve, they will face increasing trouble.

Impacts on national and international security:

The Fourth Industrial Revolution will also profoundly impact the nature of national and international security, affecting both the probability and the nature of conflict.

  • The history of warfare and international security is the history of technological innovation, and today is no exception.
  • Modern conflicts involving states are increasingly hybrid in nature, combining traditional battlefield techniques with elements previously associated with nonstate actors.
  • As new technologies such as autonomous or biological weapons become easier to use, individuals and small groups will increasingly join states in being capable of causing mass harm.
  • This new vulnerability will lead to new fears. But at the same time, advances in technology will create the potential to reduce the scale or impact of violence, through the development of new modes of protection or greater precision in targeting.

The impact on people:

The Fourth Industrial Revolution will change not only what we do but also who we are. It will affect our identity and all the issues associated with it: our sense of privacy, our notions of ownership, our consumption patterns, the time we devote to work and leisure, and how we develop our careers, cultivate our skills, meet people, and nurture relationships.

  • Also, the revolutions occurring in biotechnology, which are redefining what it means to be human by pushing back the current thresholds of life span, health, cognition, and capabilities, will compel us to redefine our moral and ethical boundaries too.

How can we be prepared for the Fourth Industrial Revolution?

  • By providing universal access to affordable education and job training.
  • By continuing to ensure basic protection for workers as the changes take place. Governments have, along with the private sector, an obligation to strengthen these core protections.
  • By modernizing infrastructure. Governments have fundamental responsibilities to build roads, bridges, railways, ports, broadband. And all of this can have profound impact on economic growth, generating well-paying jobs and bringing opportunity to areas where it does not exist.
  • By having a more progressive tax code.
  • By expanding access to capital. Existing capital and the tools that support entrepreneurship should be made widely available to people who haven’t had access to it before.

Conclusion:

In its most pessimistic, dehumanized form, the Fourth Industrial Revolution may indeed have the potential to “robotize” humanity and thus to deprive us of our heart and soul. But as a complement to the best parts of human nature—creativity, empathy, stewardship—it can also lift humanity into a new collective and moral consciousness based on a shared sense of destiny. It is incumbent on us all to make sure the latter prevails. We should thus grasp the opportunity and power we have to shape the Fourth Industrial Revolution and direct it toward a future that reflects our common objectives and values.

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Editorials, GS-3, Indian Economy, Public Admin 2, Uncategorized

Municipal Bonds

What is Municipal Bonds?

Municipal bonds (also known as munis) are debt vehicles issued by state and local governments to finance their operations and fund municipal projects. Debt instrument may be a perplexing term, but think of municipal bonds as loans from lenders to state and local governments. In the case of municipal bonds, many of the lenders are individuals and institutions.

The attractiveness of municipal bonds to individual investors is that the income paid by these bonds is typically federal income tax-free. If you live in the state in which the bond was issued, the income paid by those bonds may be state income tax-free. The same goes for if you live in a county or municipality in which the bond was issued. (USA)

With cumulative issuance of less than Rs 2,000 crore since the first issue in 1997, the municipal bonds market in India is virtually non-existent. A municipal bond is a bond issued by a local government, or their agencies.

  • They are very popular among investors in many developed nations, especially in the U.S., where these have attracted investments totalling over $500 billion and are among preferred avenues for household savings.
  • In India, the Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs.125 crore with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs.100 crore through its public issue.
  • Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds, however, there is no provision as yet for listing and subsequent trading of muni bonds on stock exchanges in India.

However, making municipal bonds work in India is a dark-horse reform for Indian public policy.

Significance of Municipal bonds:

  • Cities in India were estimated to require over Rs 40 lakh crore during 2011-2031 for capital infrastructure, whereas the aggregate annual revenues of municipalities are likely to be less than Rs 1.2 lakh crore (of which Mumbai alone accounts for Rs 30,000 crore).
  • There is massive capital investment need in municipal infrastructure and funds from programmes such as Jawaharlal Nehru National Urban Renewal Mission (JNNURM) can only partly meet the requirement.
  • Therefore, to meet their financing needs, the municipalities have to seek recourse to other means including issuance of municipal bonds. Municipal bonds can quite obviously play a pivotal, singular role in funding this gap.
  • Countries like South Africa and Vietnam are leveraging municipal bonds to fund large urban infrastructure development, with Johannesburg alone having issued bonds of $400 million (40% higher than cumulative issuances in India).
  • Municipal bonds can also simultaneously deepen the long-term infrastructure financing market in India as well as redirect retail investments into liquid securities (by city residents) away from real estate and gold.
  • By creating opportunities for citizens (as retail investors) to invest in tangible public causes in their cities, these bonds can also build strong bonds of trust between municipalities and citizens; bonds of trust that can galvanise citizen participation in cities at historic scale and to mutual financial benefit.

What needs to be done to jumpstart the municipal bonds market in India?

  • A long-term roadmap to financial self-sufficiency of municipalities needs to be drawn up covering powers over revenues and borrowings, efficiency of revenue administration (both assessments and collections) and systematic measurement, reporting and review of revenue performance. Such a roadmap will require collaborative effort between the Centre and the states.
  • There is a crying need to professionalise financial management in municipalities. The scale of funding required for public expenditure in our cities cannot be met with the human resources (both in terms of numbers and skills and competencies) that they currently possess. The revenue and finance departments of municipalities need to be urgently professionalised and made market-oriented. The Institute of Chartered Accountants of India can play a significant role here.
  • There needs to be a deliberate creation and positioning of the municipal bond brand to make it popular among citizens, and a slew of enabling measures to make them attractive.
  • Enabling measures such as making all municipal bond issuances tax-free, making investments in muni bonds by banks part of their priority sector lending and actively encouraging pension funds and insurance companies to participate in municipal bond issuances need to be put into place by respective regulators. These are presently crucial missing links.
  • Municipalities need to produce audited balance sheets each financial year and get themselves credit-rated so that they are able to access the municipal bond market in a credible and sustained manner.

Conclusion:

The Rs 50,000-crore Smart Cities Mission envisages creation of special purpose vehicles in cities that would raise monies from the capital markets. Sebi issued guidelines earlier this year for issuance of municipal bonds. Both of these are steps in the right direction, but do not cover the required distance. The Union finance ministry alone is capable of making municipal bonds work, because this requires serious domain expertise and leverage with states and regulatory institutions. SEBI, the RBI, the CBDT and the ICAI are all institutions that have roles to play and all of them fall under the broad umbrella of the Union Finance Ministry. The urban development ministry can only play a supporting role by facilitating appropriate provisions in urban schemes and shepherding State municipal administration departments. Though local self-government is a state subject, the Centre has a crucial role to play in addressing the infrastructure deficit in our cities, for which municipal bonds will be highly significant.

GS-3, Indian Economy, Public Admin 2, Uncategorized

What is ‘Swiss challenge method’?

Governments use a variety of public procurement methods. Over time, many variants have got added to the much vilified LCM (least cost method), and QCBS (quality and cost-based selection) options. Recent creative additions in India include viability gap, reverse e-auctions, and hybrid annuity

swiss

Swiss challenge is a procedure to award contracts , specially for government procurement. In Swiss challenge one person gives details of his idea & amount and government publish it. It’s like a challenge to other people to offer better amount or modification in idea.  Now if someone offer better deal for the same idea or minimum alteration than government ask original bidder to consider for the same. If he doesn’t accept, contract awarded to second party.

Watch video here!

What are the advantages?   The obvious advantages are that it cuts red tape and shortens timelines, and promotes enterprise by rewarding the private sector for its ideas. The private sector brings innovation, technology and uniqueness to a project, and an element of competition can be introduced by modifying the Challenge.

And what are the problems? 

lack of transparency and competition while dealing with unsolicited proposals. Governments need to have a strong legal and regulatory framework to award projects under the Swiss Challenge method. It can potentially foster crony capitalism, and allow companies space to employ dubious means to bag projects. Given that governments sometimes lack an understanding of risks involved in a project, direct negotiations with private players can be fraught with downsides.

In general, competitive bidding is the best method to get the most value on public-private partnership projects.

Faced with an unsolicited proposal, the government can handle it in two ways:

One, the government can either purchase the intellectual property rights for a project concept from the proponent and then award the project through a competitive bidding process in which no bidder has a pre-defined advantage.

Two, the government can offer the original proponent special rewards or advantages like “right of first refusal”. Here the original proponent is allowed to match the higher bid of a challenger, yet still allow a truly competitive process to unfold.

 

In the Indian context, the Supreme Court has upheld the validity of the Swiss Challenge as a legitimate method of public procurement subject to a series of process safeguards that the lordships have carefully laid out.

Where India adopted this Swiss method?

Indian Railways, with Cabinet sanction, has correctly chosen the Swiss Challenge for getting on speedily with the redevelopment of 400 stations. The Maharashtra Housing and Area Development Authority had used this for a housing project in Thane. The Ministry of Road Transport and Highways is examining this route for some access-controlled expressways. The Jaipur Development Authority is also reported to have announced the Mega Film City venture in this format.

The jury is still out on the success of public-private partnership (PPP) in infra projects. There have been several controversies around large scale PPP projects. Construction costs jumped significantly in the case of the Mumbai Metro. There were serious issues related to the international airport and the Airport Metro line in Delhi. The government has now brought PPP projects under the ambit of the CAG, so there is some scrutiny of projects where significant concessions including land at subsidised rates, real estate space, viability gap funding, etc. are granted by the government.

But there is still no strong legal framework at the national level, and such projects may be challenged in case of a lack of transparency or poor disclosures. Bureaucrats, who ultimately sign off on such projects, continue to be afraid to take calls that might face an investigation later. In the absence of transparency, and a strong element of competition, such projects may be prone to legal challenges. Smaller projects are better off in this respect.

GS-3, Indian Economy, Public Admin 2, Uncategorized

14th Finance Commission

  1. A Brief Introduction of Finance Commission

Article 280 of the Constitution of India provides for a finance commission as a quasi-judicial body. It is constituted by the President of India every fifth year. It consists of a chairman and four other members to be appointed by the president.

It makes recommendations about the following to the President of India:

  • The distribution of the net proceeds of taxes between the centre and the states and the allocation between the states of the respective shares of such proceeds
  • The principles that should govern the grants in aid to the states by the centre
  • The measures needed to augment the consolidated fund of states to supplement the resources of the local governments in the states on the basis of the recommendations made by the State Finance Commissions.
  • Any other method referred to it by the President in the interests of the sound finance.

The recommendations made by finance commission are only advisory in nature and hence, are not binding on the government.

  1. Fourteenth Finance Commission-  The 14th Finance Commission (FFC) was appointed under the Chairmanship of Dr. Y. V. Reddy.
  1. Major recommendations of FFC

3.1. Sharing of Union Taxes

  • increasing the share of tax devolution to 42 per cent of the divisible pool would serve the twin objectives of increasing the flow of unconditional transfers to the States and yet leave appropriate fiscal space for the Union to carry out specific purpose transfers to the States.
  • No minimum guaranteed devolution to the States.
  • As service tax is not levied in the State of Jammu & Kashmir, proceeds cannot be assigned to this State.

3.2. Local Governments

  • Local bodies should be required to spend the grants only on the basic services within the functions assigned to them under relevant legislations.
  • Distribution of grants to the States using 2011 population data with weight of 90 per cent and area with weight of 10 per cent. The grant to each state will be divided into two, a grant to duly constituted Gram panchayats and a grant to duly constituted Municipalities, on the basis of urban and rural population of that state using the data of census 2011.
  • The grants to be divided in two parts – a basic grant and a performance grant for duly constituted gram panchayats and municipalities. In the case of gram panchayats, 90 per cent of the grant will be the basic grant and 10 per cent will be the performance grant. In the case of municipalities, the division between basic and performance grant will be on an 80:20 basis.

 

The grants should go only to those gram panchayats, which are directly responsible for the delivery of basic services, without any share for other levels using the formula given by the recent SFC. Similarly, the basic grant for urban local bodies will be divided into tier-wise shares and distributed across each tier, namely the Municipal corporations, Municipalities (the tier II urban local bodies) and the Nagar panchayats (the tier III local bodies) using the formula given by the respective SFCs.

  • In case the SFC formula is not available, then the share of each gram panchayat as specified above should be distributed across the entities using 2011 population with a weight of 90 per cent and area with a weight of 10 percent. In the case of urban local bodies, the share of each of the three tiers will be determined on the basis of population of 2011 with a weight of 90 per cent and area with a weight of 10 per cent and then distributed among the entities in each tier in proportion to the population of 2011 and area in the ratio of 90:10.
  • Performance grants are being provided to address the following issues: (i) making available reliable data on local bodies’ receipt and expenditure through audited accounts; and (ii) improvement in own revenues.

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  1. Comparison with 13th Finance Commission

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  • Enhanced the share of the states in the central divisible pool from 32% (by 13th FC) to 42% which is the biggest ever increase in vertical tax devolution.
  • It has not made any recommendation concerning sector-specific grants unlike the 13th.
GS-3, Indian Economy, Uncategorized

A, B, C, D of GST Bill

What is the Goods and Services Tax (GST)?

  • As the name suggests, the GST will be levied both on goods (manufacturing) andservices.
  • A single, comprehensive tax that will subsume all the other smaller indirect taxes on consumption like service tax, etc.
  • This is how it is done in most developed countries.

Let’s know the structure of GST

  • It would have a dual structure, a Central component levied and collected by the Centre and a state component administered by states.
  • At the Central level, it will subsume Central excise duty, service tax and additional customs duties.
  • At the state level, it will include value-added tax(VAT), entertainment tax, luxury tax, lottery taxes and electricity duty.
  • The central government will have the exclusive power to levy and collect GST in the course of interstate trade or commerce, or imports. This will be known as Integrated GST (IGST).
  • Tobacco and tobacco products will be subject to GST. The centre may also impose excise duty on tobacco.

Which products are exempted from the purview of GST ?

  • Alcohol for human consumption has been exempted.

Initially, GST will not apply to:

  • Petroleum crude
  • High speed diesel
  • Motor spirit (petrol)
  • Natural gas
  • Aviation turbine fuel(ATF)

The GST Council will decide when GST will be levied on them.

What is the scope of GST Council?

The GST Council will consist of –

  • Union Finance Minister (as Chairman)
  • Union Minister of State in charge of Revenue or Finance.
  • Minister in charge of Finance or any other Minister, nominated by each state government.GST-infograph1

GST Council will make recommendations on –

  • Taxes, cesses, and surcharges to be subsumed under the GST
  • Goods and services which may be subject to, or exempt from GST
  • The threshold limit of turnover for application of GST; (d) rates of GST
  • Model GST laws, principles of levy, apportionment of IGST and principles related to place of supply.

The GST Council may decide the mechanism for resolving disputes arising out of its recommendations.

What are the advantages of GST?

  • It speeds up economic growth of India, as it will add about 1% to India’s GDP growth.
  • Replacing the cascading effect created by existing indirect taxes.
  • Uniformity in tax regime with only one or two tax rates across the supply chain as against multiple tax structure as of present.
  • Improvement in cost competitiveness of goods and services in the international market.

Why 1 per cent Additional tax on supply of goods should not be there?

  • It will be levied by centre in the course of inter-state trade or commerce, this provision impedes a key objective of GST.
  • The GST regime aims to create a harmonised national market for goods and services, and the GST Bill reinforces this objective.
  • The levy of the additional tax distorts the creation of a national market, as a product made in one state and sold in another would be more expensive than one made and sold within the same state.
  • Also, the 1% tax will result in cascading of taxes.
  • This effect will be magnified if the production and distribution chain passes through several states, and if the 1% additional tax applies at each state.
  • The burden of the cascading tax will be borne by the final consumer of the product.

Let’s look at the highlights of Constitution (122nd Amendment), GST Bill, 2014

  • The Bill amends the Constitution to introduce the goods and services tax (GST).
  • Parliament and state legislatures will have concurrent powers to make laws on GST.
  • The Bill empowers the centre to impose an additional tax of up to 1%, on the inter-state supply of goods for two years or more. This tax will accrue to states from where the supply originates.
  • Parliament may, by law, provide compensation to states for any loss of revenue from the introduction of GST, up to a five year period.

What is preventing GST from being a reality?

  • The GST constitutional amendment bill was passed in the Lok Sabha in May 2015.
  • It has been held up in the Rajya Sabha due to objections being raised by the Opposition regarding the Bill as well as issues with no direct connection to GST.
  • The Bill was also placed before a Rajya Sabha select committee, which made its recommendations regarding changes to the Bill. The Cabinet cleared these changes.

What are the Objections from Opposition?

  • The Congress wants a provision capping the GST rate at 18 per cent to be added to the Bill itself.
  • It also wants to scrap the proposed 1 per cent additional levy for manufacturing states.
  • The third demand by the Congress was to change the composition of the GST council.
  • The proposed composition is for the Council to be two-thirds comprised from states and one-third from the Centre.
  • The Congress wants the Centre’s share to be reduced to one-fourth. This demand, however, was rejected by even the Rajya Sabha Standing Committee.

Time to ponder on a few Questions! Some of these may make into Mains 2015!

#1. Will GST really make a breakthrough for economic growth in India? Discuss.

#2. Considering ongoing debate on the introduction of GST bill in Rajya Sabha, critically comment on the important features of the bill.

#3. Critically analyse the structure, objectives and issues arising out of of the Goods and Services Tax system that the government wants to introduce in India?

GS-3, Indian Economy, Uncategorized

China’s inclusion in IMF currency basket

What is a Special Drawing Right?

The fund created the SDR in 1969 to boost global liquidity as the Bretton Woods system of fixed exchange rates unraveled. While the SDR is not technically a currency, it gives IMF member countries who hold it the right to obtain any of the currencies in the basket — currently the dollar, euro, yen and pound — to meet balance-of-payments needs. So the ability to convert SDRs into yuan on demand is crucial. Its value is currently based on weighted rates for the four currencies. The SDR weightings are set every day by the IMF.

The criteria as determined by the IMF for SDR basket composition are:
1) the size of country’s exports of goods and services during the five-year period ending 12 months before the revision date:
2) the currency must be ‘ freely usable’. According to the IMF’s Articles of Agreement, a freely usable currency is a member’s currency that the Fund determines a) is widely used to make payments for international transactions and b) is widely traded in the principal exchange markets.

Will the yuan dethrone ‘king dollar’?

The yuan’s inclusion in the SDR basket will bolster its reputation as a global reserve currency. But it’s far from challenging the dollar’s roll as the world’s premier reserve currency. The yuan is only the fifth most-used currency for settling international payments. Only a fraction of global central-bank reserves are denominated in yuan. This will not have much impact on short-term demand for the yuan, given the SDR’s minor share of global reserves currently been assigned to it (about 10%).

Being a reserve currency means that it should be freely usable in the international market, that would require China to open up it’s capital market also which is currently closed to more extent. Most of the foreign transaction which takes place in China goes via route of Hongkong market.
Directly opening the market to foreign world mean losing the control of the state over the domestic asset and leave it’s value to be decided by global whims.

Getting included in the basket of IMF reserve currency means that the economy of that country is quite stable which motivates foreign institutional investors to invest in the economy. Such move will also help foreign companies to issue yuan denominated bonds (Panda Bonds) which will also help Chinese bond issuers to hedge against inflation. when a bond can be issued in country’s own currency denomination, it frees the issuers against the risks posed by inflation than when they are denominated in any other reserve currency because then the value of bond depends upon the exchange rate of the two currencies at the time of redemption.

 

GS-3, Indian Economy, Indian Polity, Public Admin 2, Uncategorized

7th Pay Commission: Why we must not grudge them a pay hike?

Many sections of the society are unhappy with the recommendations of the seventh pay commission. They are opposed to the increases in pay for Central government employees. But, when compared to pay increases and bonuses in the private sector, the pay hikes recommended by the seventh pay commission are modest.

  • Analysts warn of slippages in the fiscal deficit, a possible boost to inflation, and a setback to public investment due to these hikes. However, the finance ministry has clarified that the impact on the fiscal can be easily digested by the Indian economy.

Factors considered before setting a minimum pay in government:

Pay commissions arrive at a figure for minimum pay in government with reference to norms laid down by the 15thIndian Labour Conference (ILC) in 1957.

  • The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14.
  • The seventh pay commission has spelt out the norms it has used for determining basic needs. It has gone by food requirements specified by a well-known nutritionist along with provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing.
  • The commission has also provided an addition of 25% to the total to provide for the skill factor (the basic needs having been determined for an unskilled person).

Based on the above mentioned norms, the commission arrives at a minimum wage of Rs. 18,000 for a government employee.

  • This is 2.57 times the minimum pay in the Sixth Pay Commission.
  • The increase over the projected pay on the current basis as of January 1, 2016 is 14.3%.
  • This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54% increase following the last one.

Reversed position:

According to these recommendations, pay at the lower levels of government will be higher than in the private sector. However, at the top, the position is reversed, that is pay at higher levels of government will be lower than in the private sector.

  • Various studies have shown that pay in the private sector today is contributing towards massive inequalities in Indian society.
  • Thus, having the reversed structure in government is a useful corrective to trends in the private sector. It will help contain tensions created by rising inequality.

Impact on the finances of central government:

  • The impact of the pay hike on the Central government (including the railways) will amount to 0.65% of GDP. This is less than the impact of 0.77% of GDP on account of the Sixth Pay Commission.
  • The impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46% of GDP. In reality, the impact will be much more less as some of the increase in salary comes back to the government as taxes.

Thus, the overall impact on the fiscal at the central level is barely noticeable.

Positive implications of the hike:

  • Increased pay for government employees means greater government expenditure and hence a fiscal stimulus — provided government expenditure on other counts is not reduced and the fiscal deficit rises.
  • Greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Past trends:

  • Pay and allowances in the Central government have remained stable since 2010-11 at around 1.8-2.0% of GDP. They have been rising at roughly the same level as nominal GDP or 11-12%. This is the increase after taking into account increments, adjustments for dearness allowance and promotions.
  • Pay, allowances and pension (PAP) as a proportion of government expenditure has been declining sharply. In 1998-99, PAP was 38% of revenue expenditure. This figure has further fallen to 18% in 2015-16.

Thus, in financial terms, the workforce in government has been effectively downsized by nearly half over the past 17 years.

Government workforce in India:

  • India’s central bureaucracy (including the Railways but excluding the armed forces) has neither been increasing in recent years nor hugely bloated in absolute terms.
  • The number of employees grew to a peak of 41.76 lakh in 1994. It has declined since to 38.9 lakh in 2014.
  • Of the total, 13.8 lakh is accounted for by security-related entities (police and defence civilians). Railways and Post, which perform commercial functions, account for 15 lakh personnel.

India Vs the United States:

  • In 2012, the non-postal civilian workforce in the U.S. was 21.3 lakh. In India, the corresponding figure in 2014 was 17.96 lakh.
  • The number of personnel per lakh of population in India was 139 in 2014, way below the figure of 668 for the U.S.

The Finance Ministry has insisted that it will stick to its fiscal deficit target for 2016-17 even after providing for the SPC pay hike. The government now should concentrate on conducting periodic management audits of government departments on parameters such as cost effectiveness, timeliness and customer satisfaction. Improving service delivery in government is also the key issue which needs to be addressed.


 

  • In today’s climate of liberalisation, the socialist government is viewed withT-T-Ram-Mo-min hostility.
  • The present government is facing criticisms from the media and public at large, over the increases in pay for Central government employees recommended by the Seventh Pay Commission (SPC).

 

 

Why is the hike by SPC criticised?

The analysts believe that the hike would affect the fiscal deficit negatively, a possible boost to inflation and a setback to public investment.

Is the criticism valid?

How the does the pay commission come out with the figures?

  • The Commission has a rigorous basis for setting pay in government.
  • It arrives at a figure for minimum pay in government with reference to norms laid down by the 15th Indian Labour Conference (ILC) in 1957.
  • The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14.

 

Has SPC followed the guidelines given by 15th ILC?

  • The SPC has spelt out the norms it has used for determining basic needs.
  • It has gone by food requirements specified by a well-known nutritionist.
  • To this are added provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing.
  • There is an addition of 25 per cent to the total of the above to provide for the skill factor (the basic needs having been determined for an unskilled person).
  • The SPC report provides detailed computations for each of these items.
  • No reasonable person can accuse the SPC of being overgenerous.

 

Comparing SPC hike with sixth pay commission hike:

  • Based on above norms, the SPC arrives at a minimum wage of Rs. 18,000 for a government employee.
  • This is 2.57 times the minimum pay in the Sixth Pay Commission.
  • The increase over the projected pay on the current basis as of January 1, 2016 is 14.3 per cent.
  • This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54 per cent increase following the last one.

 

Comparing pay in government and private sector:

  • As before, pay at the lower levels of government is higher than in the private sector and at the top, the position is reversed.
  • Pay in the private sector today is contributing towards massive inequalities in Indian society. Having a very different structure in government is a useful corrective to trends in the private sector.
  • It will help contain tensions created by rising inequality.

 

Impact on government finances:

So far as the impact on government finances is concerned, the SPC numbers provide a stream of good news.

  1. The impact of the pay hike on the Central government (including the railways) will amount to 0.65 per cent of GDP. This is less than the impact of 0.77 per cent of GDP on account of the Sixth Pay Commission.
  2. The impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46 per cent of GDP. As some of the increase in salary comes back to the government as taxes, the impact, net of taxes, will be even less say, 0.4 per cent of GDP (assuming an average tax rate of around 20 per cent on government pay).

Bad news for the military personnel:

Why?

A look into the history:

Start at the beginning. There were two main categories of central government employees: the “All India Services” – the IAS, IFS, IPS, IFoS and the military.

The second is Organised Group “A” Services – Customs & Excise, Railways, Border Roads Organisation, Indian Ordnance Factory Service, and a host of others.

  • The 3rd Central Pay Commission(CPC), which was convened in 1970 (and the first without a military member), formally granted the IAS and IFS superiority over all other services.
  • In justification it argued that “an IAS officer gets an unequalled opportunity of living and working among the people, participating in planning and implementation of developmental programmes, working with the Panchayati Raj institutions, coordinating the activities of government departments in the district and dealing directly with problems of law and order.”
  • Given this responsibility, the IAS and IFS were granted an extra increment over other services.

 

The SPC bombshell recommendation is that to elevate IPS and IFoS in match with IAS and IFS leaving behind the military.

How far this move by SPC be justified?

Way Forward:

  • At the time of the Sixth Pay Commission higher wages for government employees contributed to a higher fiscal deficit.
  • This time round, the Finance Ministry insists that it will stick to its fiscal deficit target for 2016-17 after providing for the SPC pay hike. If it does so, the pay hike will not lead to greater loss for the government exchequer.
  • However, greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Connecting the dots:

  • Critically evaluate the recommendations of Seventh Pay Commission.
  • Critically examine the reasons for setting up pay commissions by successive governments over the years.
GS-3, Indian Economy, Uncategorized

Special Economic Zones (SEZ) policy in India: Issues & Challenges

Special Economic Zones (SEZ) policy in India: Issues & Challenges

  • India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965.
  • With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000 and followed by SEZ Act 2005.

Main objectives of SEZ Act:

(a)generation of additional economic activity
(b) promotion of exports of goods and services
(c) promotion of investment from domestic and foreign sources
(d) creation of employment opportunities
(e) development of infrastructure facilities

Incentives and facilities offered to the SEZs

  • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
  • 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
  • Exemption from MAT (minimum alternate tax) under section 115JB of the Income Tax Act.
  • External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
  • Exemption from Central Sales Tax.
  • Single window clearance for Central and State level approvals.

Failed SEZ policy:

  • As of September 2014, there were 564 formally approved SEZs. But only 192 were operational. Barring a few, we haven’t seen big investments.
  • The incremental employment generated was about 11 lakh in nine years.
  • Exports from SEZs grew by only 4% in 2013-14 and decreased by 6% in the next year.
  • A Comptroller and Auditor General (CAG) audit last year found that 52% of the land allotted has remained idle, even though permissions were given as far back as 2006.
  • One severe indication from CAG was that 57% of SEZs were in the IT (information technology) and ITES (information technology-enabled services) sector, and only 9.6% were for multi-product manufacturing sectors.

MAT(Minimum Alternate Tax) provisions are covered under section 115JB of the income tax act 1961. This is the minimum amount of tax which every corporate assesse is required to pay irrespective of its taxable income (Calculated as 18.5% of book profits). Such tax was initiated to improve the tax collection which was greatly affected because of majority of companies using tax holiday under section 80 IA.

Dividend Distribution Tax is the tax which is required to be paid by the company who has declared, distributed or paid any amount as dividend.

Some possible reasons for failure of SEZs:

  1. The income tax benefits were neutralized by the introduction of the 20% minimum alternate tax (MAT) and the 20% dividend distribution tax (DDT) in 2011-12.This led to companies moving out from from SEZs.
  2. The absence of complementary infrastructure outside the SEZs, like port connectivity, proved to be an hinderent for manufacturing investment.
  3. Export incentives like Focus Product and Focus Market Schemes were not extended to SEZs, making them less attractive. Exports from outside SEZs, called the domestic tariff area (DTA), enjoyed duty drawback and other duty neutralization.
  4. The force of free trade agreements made import of manufactured goods much cheaper than domestic manufacturing.

Why SEZs in china are doing better than Indian SEZs?

The SEZ model in India was inspired by China’s SEZs which were critical instruments of its export-led growth. Reasons for better functioning of SEZs in china are

  1. Location: All the zones in china are located strategically. Many are located close to ports. This makes water transport cheaper than it already is. Only some are not located close to ports. They are located close to borders. This facilitates easy trade with nearby nations.
  1. Size: China’s zones are not many in number but they are huge in size. Hainan, a province in china is one complete SEZ, which covers an area of 33,000 sq. km. Mumbai covers an area of almost 1000 sq. km. This means that China has an SEZ almost 33 times the area of Mumbai.Size means everything in an SEZ. India has SEZs which are barely 10-20 hectares in size.
  1. Laws: China has amazingly business friendly laws. Corporates need to give only one month’s notice to an employee before firing him. Contrast that to India, where you need to follow a lengthy to fire an employee if your company has more than 100 employees.
    China’s labour laws are highly flexible to the detriment of the labour class. In India the labour class is highly pampered because of the previous government’s faulty policies

Way Forward:

The SEZ policy needs a comprehensive overhaul. Piecemeal repair won’t do, and a non-partisan holistic approach is a must.

Connecting the dots:

  • Critically examine the reasons for failure of SEZ policy in India.
  • SEZ policy 2000, indicate a failed policy status. Comment on the need for continuation of SEZ policy in India.
  • Compare and contrast SEZs of China and India.