GS-3, Indian Economy, Uncategorized

Essay on economic reforms in yesteryear decades

The 21st century was marked with measures to propel India’s business and economic reforms, pace for which was set in the early 1990s.

It triggered the process with a free trade agreement (FTA) with Thailand in 2003, followed by a Comprehensive Economic Cooperation Agreement with Singapore in 2005.

Under the aegis of Foreign Trade Development and Regulation(FTDR) Act, 1992, enacted with a view to augmenting international trade,  rolled out foreign trade policy (FTP) with selective incentive regime for targeted trades.

Qualitative easing of trade barriers was ably complemented by exchange control reforms in the form of Foreign Exchange Management Act (FEMA) of 2000 replacing archaic law of 1973.

The (implemented in 2004) marked a significant step in Parliament’s resolve to ensure fiscal discipline. After giveaways of 2008-10, the Act was amended in 2012 with revised goals, focusing on effective revenue deficit and medium-term expenditure framework.

India embraced reform of competitive policies in line with application of World Trade Organization (WTO) principles. Whilst the Monopolistic and Restrictive Trade Act (MRTPA) which had been in force since 1969, as mandated by Article 38 and 39 — part of Directive Principles of States — stood in the way of prompting market-force based competitive business practices.

In a major policy shift from curbing monopolies, to promoting competition, a new Competition Act was enacted in 2002, to replace MRTP Act. The Competition Commission of India and Competition Appellate Tribunal were instituted as apex bodies to oversee effective implementation of the law.

Rush of foreign investments followed a liberal approach to foreign direct investment (FDI) policy, which catapulted India to double digit billion dollar FDI growth in past decade ($30 bn+). Fortunately, progressive liberalisation of FDI has sustained since then, including the recent policy move to permit composite FDI caps across sectors, and allowing FDI up to 49 percent (under automatic routes) in most sectors except a few which require protection due to socio-economic reasons.

Permitting FDI in newer entity forms, i.e. LLPs, AIFs, REITs and InVITs were bold policy moves initiated by successive governments, and hopefully shall unleash the growth potential of capital starved India in key sectors, particularly telecom, infrastructure and real estate.

The alter ego of FDI policy — i.e., Monetary Policy of the Reserve Bank of India — has undergone periodic review to level the field for investors in debt instruments; recent policy moves to allow rupee denominated bonds (masala bonds) and overseas borrowings in rupees provide much needed natural hedge from Forex risk to Indian companies, and reduces the end-use arbitrage vis-à-vis equity instruments.

reforms have been at the forefront, though more on policy and less on administration. Finance Act 2001 introduced the transfer pricing rules prescribing arm’s length standards for cross border transactions.

A series of tax incentives were rolled out in the past decade targeting high growth economic sectors, including special economic zones described as a wonder baby, pushing exports and accentuating employment, particularly in the area of R&D, BPO and KPO services.

In 2005, India embarked on an important indirect tax reform by replacing archaic sales tax regime with contemporary VAT regime, signalling a move towards partial VAT at the state level and gave confidence to the Centre to announce a nationwide GST, which is currently mired in political battle. During the same period, service tax legislation was broad based and eventually all services (barring negative list) were covered by 2013.

In recent years, India has embraced a contemporary and best practice-driven tax policy stance. In the past decade, India has been a significant contributor at multilateral forums (such as OECD, UN) in the global tax policy arena. Historically, India assumed an observer status at the OECD’s committee on fiscal affairs, in the wake of OCED’s project on ‘Preventing harmful tax practices’.

More recently, the OECD and G20 led BEPS project witnessed India’s participation as an associate member, i.e. at par with OECD member countries. This by itself underlines the distance India has come in the global political order in shaping tax policy.

A host of other legislative and policy initiatives are in works — start-up policy; draft bankruptcy code; ordinance to modernise arbitration and conciliation legislation; setting up of commercial courts, India’s policy on permitting arbitration in bilateral tax treaties, implementation of financial sector legislative reforms, etc. Clearly, the executive and legislative have their task cut out — only if economic wisdom prevails over political missions.

Editorials, Geography, GS-1, Indian Economy, Uncategorized

Tackling the demographic challenge

Until recently, India’s large population was considered to be a huge barrier to prosperity and progress. Economists predicted that India was a “population bomb” waiting to explode.

  • However, in the post-liberalisation era, with China showing the way and proving that a massive population can be harnessed for societal and economic progress, a new mantra is being chanted—demographic dividend.

What is Demographic Dividend?

Demographic dividend, as defined by the United Nations Population Fund (UNFPA) means, “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-working-age share of the population (14 and younger, and 65 and older).”

  • In other words, it is “a boost in economic productivity that occurs when there are growing numbers of people in the workforce relative to the number of dependents.”

Challenges before policy makers:

Technological change is making labour partially or wholly redundant in a number of sectors, across the world. Even where labour is still necessary, increasing complexity of production requires labourers to have a minimum skill level that is much higher than the skill level required during the labour-intensive output boom in China and South-East Asia in the past decades.

  • The paucity of good quality schools, proper infrastructure and facilities, and well-trained teachers poses enormous challenges in primary and secondary level education.
  • The huge dropout rate—more than half of India’s literate youth drop out of the education system by the age of 15—is a cause for concern.
  • There is also the politically volatile issue of caste-based reservations in higher education which has become a source of continuous strife for the youth across all states in the country. Denying meritorious students the opportunities in higher education that they rightly deserve—due to political reasons—is damaging both for the nation and for the morale of the youth.
  • Then there is the fractious issue of medium of instruction at schools. The debate over the preference for English—which is the global language of business—versus regional languages continues endlessly.

The issue of Job Satisfaction:

An alarming aspect of the current employment situation is that a large proportion of employees are not in a very happy situation. According to a study, nearly 40% of employed people are not satisfied with their job profiles. The major reasons for dissatisfaction cited are un-secure jobs, low salaries, stressful environment, and mismatch between job and qualification.

Composition of women workforce:

Another appalling concern is that a significant proportion of qualified women drop out of the workforce for reasons ranging from no suitable jobs in the locality—particularly in rural areas—to family responsibilities and marriage. This is not only a huge loss of valuable human resource, but also has a deleterious impact on family incomes.

Stats:

In the absence of good quality universal education at the primary, secondary and tertiary levels, India continues to produce poor quality workforce.

  • There are roughly 480 million people (38%) who belong to the working-age group in India. Of these, 62% reside in rural India and nearly 73% of them (333 million) are literate.
  • Currently, a little over 10% (48 million) of literate youth are graduates or have higher degrees. Nearly 53% of the youth have studied up to the higher secondary (12th class) level.
  • Currently, 60% of graduates, 70% of post-graduates and 85% profession degree/diploma holders are from urban India.

Despite strides made by successive governments in achieving the goal of education for all, India continues to lag behind other developing countries.

What needs to be done?

To be able to harness the potential of this large working population, which is growing by leaps and bounds, new job generation is a must. The nation needs to create ten million jobs per year to absorb the addition of young people into the workforce.

  • Improved infrastructure, skill development, access to easy finance, reducing barriers to entrepreneurship and forums for mentorship of emerging entrepreneurs in partnership with corporates are some of measures.
  • The current situation calls for more and better schools, especially in rural areas. It also calls for better transportation links between rural areas and regional urban hubs.
  • The government must also ensure better quality of jobs with a focus on matching skill-sets and job opportunities.
  • There is a need to look into these qualitative issues of job satisfaction, job profile and skill matching, and the creation of opportunities for entrepreneurship in order to be able to harness the vast potential of human resources.

Conclusion:

It is imperative that policy-makers deal with the situation on multiple fronts. Universal education, value-added skills accretion and massive growth in employment in the formal sectors should be the key focus areas. Unfulfilled aspirations of the youth can quickly turn to frustration, leading to violent outbursts. There is also a need to engage with the youth and create an enabling environment for entrepreneurship. Failure to do so would not just mean a missed opportunity in terms of harnessing the demographic dividend, but the ensuing rise in unemployment and poverty could undermine the advances made on the economic front and foment societal upheaval.

Editorials, GS-3, Indian Economy, Uncategorized

Impact of US FED rate hike

Watch video here!

Summary:

The US central bank recently raised its benchmark federal funds rate for the first time in more than nine years. The rate had been next to zero since December 2008 and is now increased by a quarter points. This move affects everything from capital flows to stock markets. Experts say that this move is just a beginning of rate hike process. Raising of interest rates means all those who have been using ‘free money’ and those who intended to will have to pay for it. Investors who have used and deployed it in emerging markets have a built-in cost, the hedging cost of currency fluctuation. Rise in interest rates signals that the country’s economy is doing well and investors would rather bet on the US markets than the riskier emerging markets (EMs), since they save on the cost of hedging.

In October 2014, the Fed ended quantitative easing after injecting $3.5 trillion into the American economy. Now, the Fed has raised interest rates just a wee bit, but this has massive implications for the global economy. The cost of capital has gone up after years of free money for banks. This will make credit more expensive for borrowers. This hike will strengthen the dollar vis-s-vis other currencies. This means that money might flee other economies to gush into the American economy because the US will be more of a safe haven as China stumbles, emerging economies wobble, Japan remains paralysed and the eurozone crisis carries on. The strengthening of the dollar will make imports expensive for emerging economies. Volatility will certainly increase in the global economy. Fewer investment dollars will now leave American shores. This might exacerbate the slowdown in emerging economies.

With the exception of 2011, foreign investors have been net buyers of domestic equities in the last five out of six years since 2009. But with this hike, some foreign investors are expected to book profit in their holdings in Indian shares and bonds; they are likely repatriate funds back to the US, where buying high interest rate bearing bonds will become an attractive bet. A dollar outflow and the resultant slide in the rupee’s value could hurt profitability of many companies in India. Companies that borrowed dollars from overseas banks will be the worst hit as repaying loans will become costlier, hurting bottom-lines. India’s retail inflation has crept up to a 14-month high of 5.41% in November driven by costlier food items. While retail inflation measured by the consumer price index (CPI) that captures changes in shop-end prices inched up from 5% in October, wholesale prices also mirrored a similar rising trend. A weaker rupee could fan inflation further. Imported raw material such a copper, aluminum and machinery will turn costly and squeeze profit margins. This may prompt companies to raise prices of consumer goods such as cars and televisions.

However, according to some experts, the impact of a rate hike in the US on India will be limited because of strong fundamentals. As a net commodity exporter with limited dollar debt exposure, healthy foreign exchange reserves and a stable polity, India should suffer at worst a slight drop in the rupee’s dollar value. Even this may be temporary as money flowing out of badly-affected economies may be redirected to India. India is better placed than the rest since its fiscal deficit is shrinking, current account deficit is reasonable at 2%, its dependence on exports is limited and external balances are improving. Also with a small part of India’s sovereign debt being held by foreigners or denominated in foreign currency, chances of rupee emerging a gainer in the near-term are high. Though in the short-term, capital outflows and weakness in stocks and bonds are anticipated, markets should be prepared for volatility, if the Fed makes aggressive moves.

GS-3, Indian Economy

WTO Talk Explained!

The meeting is in Nairobi, but everyone is talking about the Doha round of negotiations. Why?
Formed in 1995, the WTO has 162 member countries. In 1999, violent protests by activists shut down the WTO meeting in Seattle, US, forcing the organisation to restart the new round in 2001 in Doha, the capital of Qatar. This round focused on the problems of developing countries, aiming to provide them a level playing field in the global trading system that critics say is tilted in favour of the rich nations, specially the US and EU.

The bloc of rich nations, critics say, has successfully stonewalled efforts to reform their trade-distorting farm subsidies that have derailed export competitiveness in agriculture. At the same time, they have pushed through issues of importance to their interests, such as the Trade Facilitation Agreement that will further open up markets to their goods and services.

This agreement was pushed through in Bali, where the last ministerial was held in December 2013, even as India’s food stockpiling policy was held up. More on this policy later.

Why is this round of talks important?
The Nairobi ministerial will define the future direction of WTO and the multilateral trading system. In the face of dogged opposition from activists, the developed world has taken to signing regional trade pacts such as the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.

These agreements, which bring together the rich countries in a secretive pact with emerging economies, hit at the very heart of a free and fair multilateral system. The club of the elite can bypass the rules enshrined in WTO and also exclude the majority of the world’s developing countries from a very large chunk of trade. Both China and India are excluded from these trade agreements.

Further, the rich nations are asking for the Doha round of negotiations to be junked, claiming it has delivered very little so far. This has set up a clash with two sides staking out hardline positions on the basic question: should the focus be on implementing the development agenda of the Doha Round as the developing countries insist or should it be junked as the rich countries demand.

What are the major sticking points?
The major sticking point is the elimination of agriculture subsidies of the rich countries to spur export competition in global agriculture. Under a 2006 ministerial agreement, these were to be eliminated by 2013. This did not happen. In fact, new policies, such as the US Farm Bill of 2014 have ensured that there will be no cut in their export subsidies.

All attempts by developing countries to reach a compromise have failed over the years. In the latest attempt in November, just weeks before the Nairobi conference, Brazil, Argentina and some other members came up with a compromise proposal that would see developed countries getting rid of their export subsidies by 2018. But this, too, was cold-shouldered.

The developed countries have refused to acknowledge that agriculture subsidies have been the single biggest stumbling block to a more equitable trade order.

Is it just about agriculture?
No. In recent rounds, the rich nations have been pretty brazen in pushing negotiations on new issues such as a second Information Technology Agreement and elimination of tariffs for environmental products under the Environmental Goods Agreement. 

Analysts point out that India has already paid a huge price for entering into such agreements. The first Information Technology Agreement, which India signed in 1996, forced it to eliminate tariffs on more than 200 IT products, virtually decimating its hardware industry.

India is under tremendous pressure to join the second Information Technology Agreement and the Environmental Good Agreement. But experts say if the country is keen to establish indigenous industrial capabilities and create employment as Prime Minister Modi’s pet project Make in India envisages, signing these agreements would preclude such possibilities.

Who are India’s allies at the meeting?
This is where it gets tricky. The developed countries have been pushing what they calls the “new approach”, part of which entails the categorisation of China and India as part of the developed bloc. Both countries have resisted the notion that developing nations should be redefined on the basis of growth rates. To strengthen their position, they have put together a seemingly strong coalition of the BRICS nations (Brazil, Russia, India, China, South Africa), other developing countries and the least developed countries.

Unlike in Bali when it was not able to bring the least developed countries on board, this time, India has this time around aligned itself firmly with the issues of interest to the poorest nations. But not everyone is convinced this alignment will work.

For one, Brazil now is clearly in the camp of rich nations ever since its ambassador Roberto Azevedo took over as WTO Director General two years ago.

Two, India itself is pursuing closer ties with the US. “We know that India is interested in reinforcing its economic relations with the US and is talking of how we should not be left out of the regional trade agreements that are being discussed,” said Dinesh Abrol, a professor at the Institute for Studies in Industrial Development. “If New Delhi thinks it is better to join the mega trade agreements then how do you expect India to resist the US and EU on the new issues of investment, government procurement, competition, environment, energy security, labour and regulatory coherence?”

So what could happen in Nairobi?
Developing countries face a hard bargain since developed countries are determined to fast track the trade liberalisation agenda while brushing aside the development dimension, says Biswajit Dhar, professor at Jawaharlal Nehru University’s Centre for Economic Studies and Planning.

As such, “the demise of the Doha agenda is a highly probable scenario,” predicts Dhar, one of the foremost trade analysts in the country. “The argument will be that if Doha Round has not progressed satisfactorily in 14 years, it has very little chance to move forward. No questions are likely to be asked as to who stalled the progress in the negotiations.”

What stand has the Indian government taken?
Commerce Minister Nirmala Sitharaman has been trying to exude optimism. She has repeatedly said that India will not budge from its stand on agricultural issues including the country’s contentious public stockholding of food crops which came under attack in the last ministerial in Bali. India pays its farmers above market price for their grain harvests, which the US and EU countries have argued amounts to giving them an unfair advantage over foreign producers, thus violating WTO rules. India, however, maintains this is essential for its food security.

The minister has also made clear that India does not intend to yield on the Special Safeguard Mechanism which allows countries to temporarily raise tariffs to deal with surging imports and subsequent price falls.

But how long India will be able to withstand the pressure tactics of developed nations to drop the Doha agenda is a big question

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?

Indian Economy, Uncategorized

For Make in India, we must create intellectual property and its jurisprudence

There are two  key pre-requisites. One, India has to support innovation and the creation of intellectual property at multiple levels: of policy, import duty, financial outlays and legal support. Two, Indian entrepreneurs must show ambition to operate on global scales of quality and quantity.

Create Intellectual Property:

It is welcome the government proposes to reduce the tax break for R&D to 100%. This must be supplemented with subsidy to the extent of 100% for valid research, whether in-house, contracted out to specialized labs or university departments. Subisdies are scrutinized and audited far better than tax exemptions.

India’s import duties are inefficient, often ‘inverted’, meaning, the duty on components is higher than that on the finished product—it is cheaper to import the final product than to assemble it locally using imported components. A higher tax on the finished good than on components will certainly encourage import of components and local assembly. But the resultant value addition would be make-believe, not made in India, the product of the duty differential.

Take phone components, with zero import duty and zero countervailing duty (CVD). The phone itself has a 12% CVD, alongside zero import duty. So Indian brands import semiknocked down kits from China at zero duty, add negligible value and sell at a mark-up while pocketing a fat excise duty concession.

To avoid both killing domestic production with inverted duties as well as spurious local value addition that reaps duty differentials, and to promote true manufacture in India, which takes advantage of proximity to India’s huge market and low wage costs, import duty has to be the exact self-same rate on all imports, whether raw material, component or finished good, each of which will enjoy that rate of real effective protection. And this rate should be kept low.

Build Judicial Capacity

To develop innovation, R&D is not enough. The legal system must support it, by protecting the transient monopoly for the creator granted via intellectual property. In the case of fast-changing technology, there is probably a case for sharply lowering the patent period from the 20 years of the pharma world, but this has to be done via global consultation. But for Indian companies to be in a position to license technologies and claim royalty, they will have to begin by licensing others’ technologies, building them into their products, paying royalty for the privilege, and learn to improve on these on their own.