Comprehensive News Analysis - 01 July 2016

A. GS1 Related

B. GS2 Related

Topic: Energy Sector

Category: Governance

Key points :

• The World Bank announced $ 1 billion in support of India’s ambitious solar generation plans, its largest financing of solar projects for any country in the world
• The projects now under preparation include solar rooftop technology, infrastructure for solar parks, bringing innovative solar and hybrid technologies to the market, and transmission lines for solar-rich States
• The commitment includes an agreement for a $ 625 million grid-connected rooftop solar programme for financing the generation of at least 40 megawatts of solar power
• “India’s plans to virtually triple the share of renewable energy by 2030 will both transform the country’s energy supply and have far-reaching global implications in the fight against climate change,” the visiting World Bank Chief said
• The World Bank Group president also signed an agreement to be the financial partner for the International Solar Alliance that aims to collaborate on increasing solar energy use around the world, with the goal of mobilising $1 trillion in investments by 2030. The Alliance, consisting of 121 countries, is led by India

Topic:Rights Issues

Category: Polity

Key points:

• Over two years after recognising transgender people as a “third gender” in a historical judgment to ensure them a dignified life, the Supreme Court clarified to the Centre that its verdict did not include lesbians, gays and bisexual persons under the category of ‘transgenders’
• The Centre has still not implemented the 2014 judgment, which directs the government to treat transgender people or eunuchs as a socially and educationally backward class. The court had directed the government to provide them with incentives and benefits in education and jobs in order to help them gain dignity, ability to fight for their constitutional rights and get accepted into mainstream society
• Instead of implementing the verdict, the government chose to return to the apex court seeking further clarifications

Topic: Education

Category: Governance

Key points:

• The success of the newly-introduced transformative education programme, which has led to the establishment of an integrated school and an elementary one in each village panchayat of Rajasthan, was highlighted in the ‘State of the World’s Children’ report for 2016 released by the United Nations Children’s Fund (UNICEF) here earlier this week
• The two categories of schools, promoted by the State government’s Education Department, are AdarshVidyalayas for classes I to XII and UtkrishtaVidyalayas for classes I to VIII. The existing senior secondary and middle schools have also been converted into schools under the new category.
• The U.N. body was helping the AdarshVidyalayas with the programme management for rationalisation of teachers and curriculum. The support extended to individual officers of the Education Department has led to encouraging results
• For the primary sections of Adarsh and UtkrishtaVidyalayas, the UNICEF has rendered assistance with child-centred pedagogy, along with continuous and comprehensive evaluation, providing an opportunity to children to learn in a participative manner that has enhanced their learning outcomes

C. GS3 Related

1. Core sector growth slows to 2.8% in May

Topic: Core Sector

Category: Economy

Key points:

• Eight core sectors of the economy posted a 2.8 per cent year-on-year growth in May, the slowest pace since 2.9 per cent in January, due to a decline in output of refinery and steel products
• These eight sectors — comprising almost 38 per cent of the weight of items included in the Index of Industrial Production (IIP) — had recorded an 8.5 per cent growth in April, which was the highest since 8.54 per cent in November 2014
• The low growth in May was on account of a contraction in output of crude oil (- 3.3 per cent versus 0.8 per cent growth in May 2015) and natural gas (- 6.9 per cent, versus – 3 per cent in May 2015) in addition to a very marginal expansion registered by refinery products (1.2 per cent versus 7.8 per cent in May 2015)
• The cumulative growth of the core sector during April to May in FY’17 was 5.5 per cent as against 2.1 per cent during the same period in the previous fiscal.

D. GS4 Related

E. Important Editorials: A Quick Glance

The Hindu

1. A fillip to growth, and maybe inflation

Topic: Fiscal Expenditure

Category: Economy

Keypoints:

• The Cabinet’s decision to raise salaries and pensions for more than one crore government employees and pensioners by implementing the Seventh Pay Commission’s recommendations will impart a fillip to consumption demand and economic growth
• With recent data from the Centre as well as the Reserve Bank of India showing that robust private consumption is a key driver of current economic momentum, additional money in the hands of the government staff and retired personnel is bound to fuel a healthy demand for a variety of goods and services
• As expected, the announcement of the pay increases has been welcomed by industry groups, from automobile manufacturers to consumer durables sellers. And with the additional payout from the government toward the enhanced pay, allowances and pensions projected to exceed Rs.1.14 lakh crore over the course of the current fiscal year ending in March 2017, the multiplier effect is bound to be significant. Inevitably, the Centre’s decision will put upward pressure on salaries in State governments as well as the private sector
• Separately, the decision to more than triple the ceiling for house building advance to Rs.25 lakh from Rs.7.5 lakh is likely to provide a much-needed incentive for more government and defence personnel to invest in housing, and thereby boost employment
• Combined with indications of a normal monsoon and the marginal impact of the fallout from Brexit so far, the portents for the economy are indeed positive
• Besides the anticipated increases in spending, the higher pay and pensions are also expected to bolster savings, which could help the banking and financial system channel funds to meet investment demand
• There are, however, some risks from the increased salary and pension outgo. In its June monetary policy statement, the RBI had flagged the upside risks to the inflation outlook posed by several factors including the implementation of the Seventh Pay Commission’s recommendations
• There is some relief on the price pressure front with the Cabinet keeping the decision on raising allowances on hold while a committee headed by the Finance Secretary examines the implications of accepting the pay panel’s prescriptions
• A higher house rent allowance would have immediately stoked retail inflation, which is already at a 21-month high
• The other concern relates to the impact on government finances, particularly the effort at fiscal consolidation. The Finance Minister is confident that the budget deficit will be contained within the 3.5 per cent of GDP target this financial year, but how this will be achieved is not yet clear

Topic:India and China

Category: International Relations

Key points:

• The Sino-Indian divide was in evidence last week following the Chinese refusal to support India’s case for entry into the Nuclear Suppliers Group. While non-entry into the Group is not the end of the world, for India lives to fight another day, of concern is what the Chinese stance implies for the bilateral relationship between the two Asian giants
• This is a relationship that has been carefully tended over the years since the mid-seventies when ambassadorial relations between the two countries were restored at the initiative of Prime Minister Indira Gandhi.
• Cut to summertime, the year being 1986. An Indian border patrol on its way to re-establish a post in the Sumdorong Chu area in the north-eastern corner of the Tawang district of Arunachal Pradesh found it had been pre-empted by a group of Chinese military personnel who had already set up camp at the same location. Tension between the two sides escalated in the period that followed, stretching through 1987.The grant of statehood to Arunachal Pradesh in early 1987 infuriated the Chinese and raised the temperature further. The situation festered, with the two sides holding their positions
• The initiative that defused the problem came from India. Prime Minister Rajiv Gandhi decided to activate a channel that had lain dormant since the fateful April 1960 visit of Premier Zhou Enlai to New Delhi.
• The visit was an unquestioned success, for it not only defused the tensions at Sumdorong Chu, leading eventually to the elimination of dangerously close confrontation between troops of the two sides in the area, but also established a template for bilateral relations that has been followed to this day
• That template basically enabled the advancement of relations in a broad spectrum of areas ranging from trade to scientific and technological exchanges, educational and cultural cooperation, even as efforts to seek a fair and reasonable solution to the boundary question between the two countries continued. The border issue did not become the arbiter of relations in other fields, which for the first time since 1962 were allowed to grow on a relatively independent trajectory
• Fast-forwarding to the present, Prime Minister Narendra Modi’s response to questions about the Chinese attitude on the Nuclear Suppliers Group (NSG) issue, after the denouement in Seoul, was measured and calibrated. He appeared to see the relationship with China as an organic continuum, evolving slowly over the last three decades
• Geopolitical rivalry and calibrated cooperation, seemingly antithetical, coexist within the framework of our relationship with China. The latter has pinned its colours to the Pakistani mast as recent developments have demonstrated. It is suspicious about our friendship with the United States, our closeness to Japan, and our naval cooperation in the East and South China Seas with these countries. It challenges us with its myriad alliances in our neighbourhood
• However, an absence of friendship, and the prevalence of suspicion did not prevent the systematic development of a management regime in our relations with China. This regime has functioned efficiently in transacting dialogue, managing tensions on the border through confidence-building mechanisms, and maintaining high-level leadership contact
• Given the agenda of national development and accelerated economic growth to meet popular aspirations, especially of our young demographic, the compass of bilateral relations with China needs to be carefully set by India. This is to enable time and space to grow comprehensive national strength and especially hone our economic and strategic capabilities. Mutual recrimination will only widen the geopolitical fissures that complicate the relationship. We must not assume that the advantage will necessarily be India’s
• It is the easiest thing for China and India to spew venom against each other. Given the residual bitterness of the past, this is the default option. There are already manifestations of this in the public space. But, consider the terrain. The Prime Minister speaks of multi-alignment, of dexterity in transacting foreign relations. As a nation, we must internalise such an approach
• This calls for more boldness and deftness in safeguarding the Indian interest through well-thought-out and nuanced steps to build even closer relations with like-minded democracies like the United States and Japan, while consolidating internal strength and resilience. Steps to further enhance strategic and defence cooperation with these countries, as also fulfilling the promise and potential of the India-U.S. civilian nuclear cooperation agreement in an expeditious manner, should be a part of this process. At the same time, existing dialogue mechanisms and trade and economic linkages with China should continue to be maintained at an even pace
• And, without indulging in the national pastime of blame-mongering, we must ask ourselves the basic question on whether the time was ripe for a concerted campaign to enter the NSG. From the very outset of this foray, we should have been aware of the barometric depths of Chinese opposition and non-responsiveness to our case. There lay dragons. We chose valour instead of discretion
• The India-China relationship has been diminished by these latest developments and their impact on the construction of a stronger edifice of bilateral interaction. Independently of the latter, we need to carefully assess the pros and cons in pursuing entry into the NSG in this current phase. On both fronts, a season of reflection is called for.

Topic:Investment

Category: Economy

Key Points:

• In less than a year, the Government of India has announced yet another set of “radical changes” in foreign direct investment (FDI) policies. The earlier announcement in November 2015 introduced changes in 15 major sectors, and the latest announcement covers nine sectors
• In the Consolidated FDI Policy that was unveiled just a fortnight earlier states: “It is the intent and objective of the Government of India to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth. Foreign Direct Investment, as distinguished from portfolio investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor.”
• Now that India has become “the most open economy in the world for FDI”, can the country expect to benefit from this form of investment?

• We would begin by trying to understand whether FDI has retained its character of being long-term inflows of investible capital in an age when global capital markets are being ruled by investors having short-term targets. Economists have always treated FDI as that component of foreign investment in an enterprise that confers “control” to the foreign investor over the enterprise. All other foreign investment was defined as portfolio investment, and this component was considered “footloose”. As regards the threshold for identifying whether an enterprise was foreign-controlled or otherwise, most countries adopted their own definitions. For instance, in the past, the Reserve Bank of India (RBI) followed the practice of identifying “foreign-controlled rupee companies”, which were companies having foreign shareholding of 25 per cent or more of total equity or where 40 per cent share is held by investors from a single foreign country
• In recent decades, the Organisation for Economic Cooperation and Development (OECD) and International Monetary Fund (IMF) have pushed for a globally acceptable definition of FDI, according to which 10 per cent or more of foreign equity constitutes the “controlling share” in an enterprise. But not all countries have adopted the OECD-IMF definition
• For instance, in India all investments other than those through the stock market are reported as FDI. India, therefore, does not make any distinction between the “controlling share” and the others as far as FDI is concerned. This implies that data on FDI for India do not allow us to make the distinction between long-term investments and portfolio investments
• Foreign investors consider “controlling share” to be vital for bringing in state-of-the-art technologies. However, given the fact that developing countries have been struggling to get access to proprietary technologies despite steep increases in FDI inflows over time, there seems to be the proverbial slip between access to technology and FDI inflows
• The OECD-IMF duo introduced some other components in the definition of FDI, the most significant of these being the inclusion of reinvested earnings. While it may be justified for balance of payments purposes, the fact is that retained earnings increase the host country’s liabilities without actually transferring resources from abroad. Retained earnings are a part of the profits earned by foreign companies in their host countries, which are in domestic currencies. Once capitalised and absorbed in the equity stock, retained earnings become conduits for larger dividend remittances in future. Further, if such earnings are used to take over domestic companies or to buy back shares from the public, then they would not add to the existing capacities
• Data provided by the UN Conference on Trade and Development (UNCTAD) show that the share of reinvested earnings has increased progressively during the recent past and by 2013 they constituted two-thirds of the FDI outflows from the developed countries. In fact, more money was flowing into the developed countries as dividend income than that was flowing out as direct investment. Thus actual cross-border equity flows that meet the conventional definition of FDI are only a fraction of the reported global FDI flows
• According to official statistics, India has seen a steep increase in FDI inflows totalling over $55 billion in 2015-16. However, in the world of high finance, FDI is not a gift horse —there are at least two sets of costs that host countries have to bear
• The first is the direct cost stemming from outflows on account of operation of foreign companies. The RBI has reported that between 2009-10 and 2014-15, outflows due to repatriations, dividends and payments for technology have together constituted a major foreign exchange drain — nearly one-half of the equity inflows during this period. The RBI also tells us that during the same period, subsidiaries of foreign companies operating in India ran negative trade balances in almost all manufacturing sub-sectors. Together with remittances and other payments, foreign subsidiaries in most sectors regularly drew out surpluses which look quite large when compared with the capital that the foreign companies were bringing in
• Apart from the direct costs, foreign investors are able to extract indirect benefits from their host economies by using bilateral investment promotion and protection agreements (BIPA). In recent years, India has faced a number of disputes with foreign investors, which arose because the latter was able to invoke the investor-state dispute settlement (ISDS) mechanism included in the BIPAs that allows disputes to be taken to private international arbitration panels. Most of the cases have arisen as the foreign investors have challenged the tax liabilities imposed by the government. The government has amended the model BIPA ostensibly to blunt the ISDS mechanism. The new model BIPA includes a strong stricture to foreign investors to make timely payment of their tax liabilities in accordance with India’s laws. It will be well worth watching as to how this instrument gels with the investor-friendly regime that has now been put in place

1. On The Right Track

Topic: Railway Budget

Category: Economy

Key points:

• A panel headed by BibekDebroy, a member of NitiAayog, has suggested that the practice of a separate railway budget be discarded. This remedy is worse than the disease.
• The step is expected to help depoliticise the Railways. Next, it is argued that it would help the government to take decisions without losing track of commercial viability. If that is the intent, the Railways needs to tackle other issues.
• Reducing the staff cost from the current 53 per cent of the revenue to at least 40 per cent when 10 to 20 per cent is the norm and commercial viability threshold in railways elsewhere. The Debroy report reveals, when nine zones became 17, efficiency only decreased
• There is nothing to show that customer service would improve if the Railways became a part of the government. If the budgets are merged, the Railways would move even further into the government, instead of moving further away from the government.
• A better option is, perhaps, to allow zones to become corporations. Let manufacturing units compete with private players. Let the zones follow standard commercial accounting practices and lure investments. The rail budget will then become irrelevant and wither away
• It is also suggested that merging the rail budget with the Union budget will facilitate account reforms. Several committees, from Sarin (1985) to Debroy (2015) have recommended accounting reforms to enable easy understanding of the true financial state of the organisation. The railway board needs to be overhauled and experts must replace employees as members
• This merger of budgets can be done only at the cost of transparency and accountability. Former railway minister, in his budget speech of 2014, said out of 676 projects in 30 years, only 327 were completed. After spending the original estimate Rs 1,57,883 crore, now the Railways needed Rs 1,82,000 crore to complete the rest. Only one out of 99 new lines sanctioned in the last 10 years has been completed. This kind of shocking revelation is unlikely to be made about the Railways in the general budget
• The Indian Railways carries 822 crore passengers in a year (2014-15). There are expectations and curiosity about the way it is run. The annual revenue of the Railways is projected to be Rs 1, 84, 820 crore. Few states have such large budgets. The organisation, clearly, needs special attention
• It may be worthwhile to recall why the railway budget was separated from the general budget in the first place. The Acworth Committee in 1921 wanted the railways to be run as a commercial organisation on sound business principles. Then, it would meet its needs from its own income, from outside the general revenues of the country. Three other committees endorsed the intent. Japan separated its railway budget from the central budget in 1919. A legislative assembly committee on September 20, 1924, passed a resolution separating the railway budget from the general budget. The government accepted it and the convention of 1924came into force. It recognised the Railways as being free to look after their own affairs and to function on “sound business principle” as a commercial undertaking, besides being a public utility
• This must continue. Merging the budgets and making it a mere department of the government would take us back by a century to pre-1924 days

Topic: Railway Budget

Category: Economy

Key points:

• On June 20, 1991, a meeting was held to brief the Prime Minister-elect, Narasimha Rao on the state of the economy — the crisis and the risk of defaulting on external payments. Since the previous December, the Chandra Shekhar government had been struggling to battle the crisis brought about by the 1980s’ policy of expansionary growth and failure of V P Singh’s government to act, as well as the first Gulf War that began in August 1990
• Surging crude prices inflated India’s oil bill hugely, and a sovereign downgrade by global credit rating agencies choked funds flow from non-resident deposits and foreign borrowings. The break-up of the Soviet Union heightened the crisis. By end-June 1991, India’s reserves of foreign currency had plunged to $ 1,124 million, adequate to cover just about two weeks of imports
• Within days of Rao taking charge, a series of meetings took place among top officials of the Prime Minister’s Office, the Finance Ministry and the Reserve Bank. One of the earliest and most significant decisions that needed to be taken was on the exchange rate. It had been clear to most policy managers — including the RBI and the Chandra Shekhar government — for quite some time then that India’s currency was overvalued, with a negative impact on export competitiveness.
• While a devaluation of the Rupee seemed the obvious step, it was fraught with political risk. Memories of the 1966 devaluation — carried out, again, during an economic crisis and under pressure from multilateral lenders — and its political fallout were still alive. But there was little option — and with an unprecedented sovereign default looming, the Rao government decided to take the plunge. The extent of devaluation was an important part of the decision — there were many in the policymakers’ team who felt it ought to be over 20 per cent
• Once approval was obtained from the Cabinet Committee on Political Affairs and RBI Governor S Venkitaramanan was informed, the operationalisation of the decision was left to Deputy Governor C Rangarajan
• In those days, RBI announced the buying and selling rates of the Rupee against the Pound Sterling at the start of each day. It used to buy four currencies: the Pound Sterling, the US Dollar, the Deutsche Mark and the Japanese Yen. It was decided that the devaluation would happen on July 1
• Manmohan Singh (the then Finance Minister) had said it was important to tackle the exchange rate quickly to kill speculation on the Rupee’s future. But the situation was dire, and the devaluation was rammed through in two stages. On July 1, the RBI announced a downward revision in the rupee’s external value against major foreign currencies. The spot selling rate for the Dollar was raised to Rs 23.04 from Rs 21.14 on June 30. Government officials called the exercise a “realignment” or “downward adjustment” of the Rupee, and Finance Minister Singh assured the media that nothing that was inconsistent with India’s national interests had been done
• Two days later, on July 3, the RBI announced a second devaluation, taking the Dollar to Rs 25.95. In a matter of three days, the Rupee had been devalued by over 18.5% against the Dollar, and by 17.4% against the Sterling in an operation that was codenamed Hop, Skip and Jump
• The erosion of international confidence over the preceding six months had shaped market sentiment. It was believed that the Rupee was bound to depreciate. And speculation was inevitable. The risk of capital flight and a run on the Rupee were a clear and present danger. The challenge was to assess how much depreciation was needed to stem destabilising expectations so that markets believed that the new parity of the Rupee was sustainable
• There was complete agreement on how much depreciation would be needed. “There were second thoughts on the mode of implementation. Even so, the decision that the new exchange rate would be Rs 25 = $1 was implemented, even if in two steps. It was termed as a realignment of the currency or an exchange rate adjustment, rather than a devaluation, in deference to political sensitivities.”
• As the Opposition attacked the government for “bowing to the IMF’s diktat”, Singh was to say on July 3 that the world community was delighted that India was taking some of these measures — and that the depreciation and scotching of speculation on the Rupee would ensure both the return of capital and renewal of international confidence in the Indian economy
• Twenty-five years later, the Rupee has emerged as one of the most stable currencies on the back of improved macroeconomic indicators. Current foreign exchange reserves (including gold) of $363.83 billion can take care of over 11 months of imports.

1. PIB

A Medium Range Surface-to-Air Missile (MRSAM) was successfully test-fired from the Integrated Test Range off Odisha Coast. The MRSAM is jointly developed by DRDO and IAI of Israel for the Indian Air Force. The missile guided by a Radar system and on-board avionics successfully hit a Pilotless target aircraft.

Many Indian industries like BEL, L&T, BDL, TATA group of companies besides other private industries have contributed to the development of a number of subsystems which have been put into use in this flight test. The MRSAM system provides reliable air defence at medium ranges.

The meeting of India-Nepal Inter-Governmental Committee on Trade, Transit and Cooperation to Control Unauthorised Trade was held on 28-29 June 2016 at New Delhi

In pursuance of India’s Act East Policy and demonstration of India’s commitment to peace and prosperity of Indo-Pacific region, Indian Naval ship Satpura arrived at Hawaii on 30 Jun 2016 to participate in the 25th edition of Exercise RIMPAC.

Exercise RIMPAC is the largest multilateral naval exercise in the world and is held biennially in the Western Pacific Ocean. Indian Navy’s association with Ex RIMPAC commenced with participation as an ‘Observer’ in 2006, 2010 and 2012. In 2014, Indian Naval participation was enhanced with deployment of Indian Naval ship Sahyadri in the 24th edition of the exercise. The current edition of the exercise is scheduled off Hawaii from 30 June – 04 August 16 and is likely to be attended by 27 countries

The Defence Minister dedicated the Defence Communication Network (DCN) to the nation.

The DCN is a strategic, exclusive, secure and state-of-the-art communication network. Implementation of DCN is a proof of strength of the Indian industry and has reaffirmed the emphasis of the Government on Make in India, program.

The DCN is a major step towards ensuring Network Centricity across the three Services, Integrated Defence Staff and Strategic Forces Command. The network provides converged voice, data and video services to the three Services based on secured system with adequate redundancy.

The fourth in the series of Follow-on Water Jet Fast Attack Craft (FO-WJFAC) for the Indian Navy was launched on 30 Jun 16 at a ceremony at Garden Reach Shipbuilders & Engineers Ltd (GRSE), Kolkata.

The Minister of Railways formally launched NIVARAN portal, an online system for redressal of service related grievance of serving and former railway employees. 

RITES Ltd., a PSU under the Ministry of Railways, has supplied 60 Broad Gauge passenger coaches (LHB type) to Bangladesh Railway (BR) against a contract agreement of 120 coaches. An intercity train with these coaches was flagged off at Dhaka the Prime Minister of Bangladesh.

During 2015, the number of domestic tourist visits to the States/ UTs was 1432 million as compared to 1282.8 million in 2014 registering a growth of 11.63% over 2014.

The top ten States in terms of number of domestic tourist visits (in millions), during 2015, were Tamil Nadu (333.5), Uttar Pradesh (204.9), Andhra Pradesh (121.6), Karnataka (119.9), Maharashtra (103.4), Telangana (94.5), Madhya Pradesh (78), West Bengal (70.2), Gujarat(36.3) and Rajasthan (35.2).

Topic: Education

Category: Governance

Key points:

• A country’s growth depends on its ability to develop and deploy human capital. The bad news for India, with a population of 130 crore, is that it ranks a lowly 105 out of 130 countries, based on the latest global human capital index, brought out by the World Economic Forum (WEF)
• With a low optimisation (57.73%) of its human capital—Finland’s at the top, with 85.86%—India is placed much below China (71), and even Bangladesh, Bhutan and Sri Lanka. Last year, the country ranked 100 out of 124 countries
• That India’s education system and infrastructure are poorly attuned to the needs of the job market is visible from the WEF index pointers for different age groups. For the 0-14 year segment, the country’s human capital rank is a much better 62, because of improved enrollment in schools. But, as one moves up the age-groupings, the lack of vocational and other training, which enhances employability, becomes evident. In the 15-24 years band, India is placed 106th, and in the 25-54 years band, it occupies the 119th spot. This state of affairs continues in the 55-64 years group (120) and it stays at this level for the 65+ age group (119).
• There are middling consolations, like being placed 39th for ‘quality of education’, 46th for ‘job training’ and 45th for ‘ease of finding skilled employees’. But, this is clearly limited to a small portion of the educated population even today
• At a time when the government is looking at bringing in necessary changes in the education system, it would do well to focus on creating employable individuals, not just graduates and post-graduates. All those getting into tertiary education must have the opportunity to engage in studies that equip them to be absorbed in the job market or become self-employed. The WEF report rightly points out that how the country adapts its education system to the digital revolution would be critical

Topic: Taxation

Category: Economy

Key points:

• Since its advent in 1991, globalisation has entrenched itself deep in Indian economic landscape. Cumulative FDI statistics corroborate this assertion, as total FDI climbed to $52 billion (in April 2016) from a meagre $2.46 billion in 2000. There is no denying, India’s prominence in the global economic order has risen phenomenally over the past quarter century. While economic policies have undergone multiple transitions under successive regimes, tax policy reforms have held centrestage, too
• In 1991, the Tax Reforms Committee laid out a framework for direct and indirect tax regimes as a part of the structural reform process, ushering a paradigm shift by lowering maximum marginal tax rates, implementing measures to broaden and deepen the tax base and reducing rate differentiation to simplify tax administration. The levy of minimum alternate tax (MAT) was introduced in 1996 to bring zero-tax companies into the tax net. Most of the bilateral tax treaties signed before 2000 were revised, and that was the singularly significant policy achievement of the first decade after liberalization
• From an indirect-tax-policy standpoint, the 1990s were marred by a highly complex tariff structure, cascading effect of the excise and sales tax regimes, and quantitative restrictions on cross-border trades. Introduction of the service tax legislation in 1994 marked a significant step forward in rationalising the services-consumption-based taxation regime
• The subsequent decade was witness to the evolution from a high tax-/duty-rate regime to a moderate-rate regime, as rates across direct and indirect taxes were systematically brought down and quantitative restrictions on cross-border trade were eased, given the focus shifted to broadening of tax base through efficient administration. Tax legislations were also calibrated to incentivise exports and infrastructure development; investments in sunrise industries and promoting economically backward areas for indigenous value-addition were notable examples
• India’s tax regime began embracing global best practices, beginning with the introduction of the transfer pricing legislation in 2001 to prevent erosion of tax base through sophisticated tax and transfer-pricing planning strategies. The OECD’s Project on ‘Prevention of Harmful Tax Practices’ raised global concerns surrounding treaty shopping and abusive tax practices; India, though not even an ‘observer status’ country, did well in paying heed to the global movement against tax avoidance which was to take shape in the subsequent years in more politically-endorsed movement in the form of ‘base erosion and profit-shifting’ projects. Incremental policy measures during 2000 to 2010 led to material contribution of direct taxes into total tax collections with growth from 22% to 35%
• The indirect tax regime underwent a structural shift in FY05 as the country embraced the value-added tax (VAT) regime moving away from archaic state sale tax regime; the VAT regime,indeed, did well in mitigating the cascading effect of state indirect taxes, albeit, the credit interlay of central and state indirect taxes remained a significant constraint for businesses.The success of the VAT regime ignited the debate for a nationwide GST
• Since 2010, India’s tax policies have been more proactive. Several consultative processes were initiated to deal with major tax controversies emerging from time to time, some of which earned us the flak of global investors
• Taxation of indirect transfers was introduced by Finance Act 2012, to deal with growing practices of tax treaty sparing through offshore investment holding structures, even though the retrospective nature of this legislation has been a question before investors. India adopted the Advance Pricing Agreement (APA) regime in 2012, to deal with rapidly mounting transfer-pricing disputes as volumes of disputed tax liabilities soared to $9.4 billion in the seven rounds of transfer-pricing audits since 2005. Evidently, APA regime has showed phenomenal outcome as more than 500 cases have been presented to the government for amicable resolution in less than three years since the framework was institutionalised
• India’s ascent in the global tax policies arena has been transformational in nature. While, historically, India has been an observer on OECD’s committees, participation as an associate member in the ongoing OECD-G20-led BEPS(Base Erosion and Profit Sharing) project is an evidence of growing closer association with multilateral forums tasked with evolving future tax policy landscape. It is likely that the future architecture of domestic tax policies in the medium- to long-term would be constructed around convergence with best practices as borne out in the form of BEPS Action Plans, 15 action points of which will be rolled out in the next 3-4 years
• There are a number of anti-avoidance measures which have been either already been legislated, or are impending, e.g., general anti-avoidance rules (GAAR), place of effective management (PoEM) rules, treaty override and taxation of the digital economy (equalisation levy). The evolution of the BEPS package through continuous consultative process will accelerate the pace of domestic tax law reforms
• India’s existing dispute resolution mechanism is set to undergo a policy shift as the focus moves from traditional forums to alternate and more transparent dispute resolution for domestic and cross-border cases, wherein the interplay of tax treaties become relevant. While the merit of historical appellate forums cannot be undermined, speedy and effective resolution of tax disputes necessitate far more sophisticated institutions such as negotiation, conciliation and/or arbitration with equal focus on administrative practices such as advance rulings and advance pricing to avoid disputes in the first place
• The BEPS Action Plan 14 advocates promoting mutual agreement procedure (MAP) as a preferred forum for resolution of disputes arising on account of misapplication of bilateral tax treaties. Besides APA and MAP, international arbitration is one of the most sophisticated and effective forums for resolving high stake cross-border tax disputes and not just investment-related disputes. It will be interesting to see if India would reconsider its hard stance on permitting arbitration in tax treaties
• Finally, the present tax administration practices call for an overhaul in line with the government’s overarching intent to broaden tax base by evolving a taxpayer-focused administration. Useful insights from global practices have emerged in recommendations submitted by successive expert committees, which would help guide the way. Clearly, the stage is set for the government to usher in next-generation reforms in matters of tax policies and ideal administrative practices

Topic: Monetary policy

Category: Economy

Key points:

• The Monetary Policy Committee (MPC) is tasked with bringing about transparency and clarity to the setting of monetary policy. The MPC, for the layperson, is the new body that will be in charge of setting interest rates. It will do what one man, the governor of the Reserve Bank of India, used to do. The problem, according to some, is that the committee’s structure has rendered it barely more than an advisory council — there is no real decision-by-committee that will take place
• The idea behind the MPC was that, with a mix of RBI and government-appointed members, it would bring balance and continuity to monetary policy and reduce the discretionary powers of any one interested party. One RBI governor is usually very different from the next, the argument went, and so what will provide monetary policy continuity when the governor changes? What if the new governor is not as strict about inflation-targeting, or as adamant that the government stick to its fiscal deficit targets?
• The Government on Monday finally notified the changes to the RBI Act that would bring the MPC to reality. In doing so, it formalised the composition of the MPC: six members, three from the RBI and three appointed by the Government. The RBI members will include the governor who will be the chairman of the committee and, most importantly, will have the deciding vote
• While the announcement of this composition in the Budget and its subsequent formalisation on Monday put to rest a lot of speculation around the issue, the decision to give the governor the deciding vote brought forward a number of critics. The argument is that giving the governor the deciding vote in effect puts monetary policy squarely in his hands, as it ever was. What change has the committee brought?
• While this may seem a valid argument, there are several benefits to having a committee in place, and still more benefits to having a committee where everyone gets to vote, but one person is first among equals. The committee can take the brunt of any pressures that vested interests might exert far better than an individual can. In other words, it is more difficult to influence six people than one person
• Also, there’s the advice. Everybody, even the RBI governor, can do with some advice
• There is a technical reason behind giving one person the deciding vote in a committee. In a voting system there is always a tussle between complete democracy and complete honesty. The problem, the economists found, was that if a system was completely democratic (that is, everybody has an equal vote) then it was subject to tactical voting — people voted in a calculated manner that didn’t necessarily display their true preferences. Put bluntly, given the chance, people try to manipulate the system
• The only way around this, according to the theorem, was to give one person more powers than the others. In this case, that would be the RBI governor’s deciding vote
• The other, more practical, reason behind making one person first among equals is to guard against the pitfalls of majoritarianism. Just looking at the results of the Brexit referendum can show how simply going by majority rules can lead to an adverse outcome. You need somebody to put the brakes on a bad decision, however popular it might be. Sure, that power should be used sparingly, but it still needs to exist
• The MPC in its current form is what is needed: a committee to diffuse the external pressure that often goes with monetary policy decisions, and an individual to protect the committee against itself

Topic: Taxation

Category: Economy

Key points:

• “In the spirit of federalism, it has been agreed that States would be administering taxpayers below ₹1.5-cr turnover” announced the chairperson of the empowered committee on GST, on June 14. The 122nd Constitutional Amendment Bill extends the power of taxation of goods as well as services to the Centre and States
• Under the scheme of taxation proposed in the Constitutional Amendment Bill, central (CGST) and state (SGST) are to be levied over a common taxpayer base. The issue of administrative arrangements under GST has hardly received any public attention and it needs to be put under the scanner. The basic idea behind introducing GST, which is to create a genuine, free-flowing, national common market, must not be lost sight of
• A well-administered GST would significantly boost the tax to GDP ratio, enhancing the Government’s capacity to address its welfare objectives besides improving growth prospects. Any lopsided and inadequately considered assignment of tax administrative powers to the States has the potential to upset the revenue balance between the Centre and the States
• The assignment of taxpayers to States can lead to a situation of fiscal imbalance for the Centre and its expenditure responsibilities, including transfers, devolution and grants to the States under GST, as the States and Centre would be administering different tax bases. A possibility of horizontal fiscal imbalance would also emerge as there could be a real possibility of the States deeming inter-State transactions as intra-State transactions, impeding the smooth accrual of revenue by locking them in litigation. This would generate demands for additional equalisation grants and/or transfers, further stressing the finances of the Centre
• Fiscal imbalance can also lead to macroeconomic problems. The problems of fiscal imbalance would affect the fiscal destiny of the Centre and, by implication, the whole country. Ironically, the concerns of fiscal destiny have always been expressed in the context of taxing rights of the sub-national units in a federal polity world over, as taxing rights are mostly dominated by the central/federal government
• Attempts to assign integrated GST (IGST) powers to SGST authorities can lead to a constitutional impasse, particularly with respect to the provisions of part XIII of the Constitution. GST law cannot espouse destination-based taxation and have embedded arrangements for the possibility of origin-based taxation and thus have the potential to “directly and immediately restrict or impede the free flow or movement of trade”
• Three drivers of change — increasing mobility of economic resources, demographic change and technology — are particularly relevant when considering the future roles of each level of government in the tax system. Despite the powers assigned to the States to tax services under the Constitutional Amendment Bill, their capability to administer tax policy in the case of services is non-existent, unlike central tax authorities who deal with both goods as well as services
• India’s taxpayer population has undergone profound changes over the last few decades in its numbers, sectoral composition, and ownership forms. One of the most profound structural changes involves the growing importance of the tertiary (services) sectors. The Indian tax administration will operate in an increasingly complex external environment
• Challenges include the implementation of an ambitious tax reform agenda and the need to promote the business climate by reducing the compliance costs of the tax system. The increasingly complex environment facing the tax system will put pressure on the tax administration’s internal administrative capacity. Potential vulnerabilities include the tax administration’s organisational structure, staff skills, and information systems
• A fundamental task of any tax administration is to collect revenues with lowest possible costs. A centralised tax agency may be able to reduce the cost of administration and compliance for the overall revenue system, including central and subnational taxes. The balance between cost efficiency and accountability may be seen differently by the States; policymakers at this level of government are likely to emphasise control of taxes, which has led to this demand for exclusive administrative rights over taxpayers below the ₹1.5-crore turnover mark. This question begs the adoption of a more national viewpoint
• A poorly performing tax affects people no matter which government is responsible for it. Recognising the political and economic reality of India a concurrent dual GST model has a lot to commend itself. It strikes a good balance between the respective fiscal autonomies of the Centre and States, and the need for harmonisation. It empowers both levels of government to apply the tax to a comprehensive base of goods and services at all points in the supply chain. It also eliminates tax cascading, which occurs because of truncated or partial application of taxes by the Centre and States
• This approach appears to be the best way to roll out the GST which will lead to actualisation of its perceived benefits

Topic: Mining

Category: Economy

Key points:

• The new National Mineral Exploration Policy (NMEP) advances transparency, mandating the open auction route for award of prospecting licence-cum-mining lease for non-fuel minerals
• The move to set-up a depository of baseline geophysical data for wide dissemination makes perfect sense, and the idea of an autonomous institute for cutting-edge research on mineral exploration is also sound. In tandem, we need to institute independent regulatory oversight. Without expertise, taxmen would struggle to allow/disallow expenses
• The minerals sector has remained undercapitalised and underexplored thanks to opacity and policy rigidities. In the past, there was no seamless system to proceed from reconnaissance surveys to prospecting licence and thereon to mining lease. The NMEP has made reconnaissance surveys by and large redundant as baseline geo-scientific data would be provided as a public good via the proposed system of national aerosurveys
• And prospecting licence-cummining lease would now be granted via competitive bidding, revenue shared with the concerned state government being the bid parameter
• It is not clear why coal or, say, coal-bed methane require a separate dispensation. In any case, it is vital that we revamp the regulatory architecture and put in place credible institutional mechanism to boost transparency and openness in minerals
• A dedicated regulatory body, with active presence in the mineral-rich states, would be better equipped to enhance private sector investment in prospecting and mining. The bottom line is that overhauling the policy for mineral prospecting and evacuation without parallel revamp of regulation and oversight would be thoroughly suboptimal. It could very well affect credibility and stem investor interest

The explosives recovered from the house of one of the five Islamic State (IS) suspects, arrested from Hyderabad could be similar to chemicals used by the bombers who struck at Brussels airport earlier this year, a senior National Investigation Agency (NIA) official said.The chemical — triacetonetriperoxide (TATP) — recovered from the house of Habeeb Mohammad, can be assembled from chemicals easily available in the market. Officials said it was the group’s leader, Mohammad Ibrahim Yazdani, an electronics engineer was the only one among the arrested men who was directly in touch with their handler in Syria. The handler, officials believe is Shafi Armar alias Yousuf Al Hindi, a former Indian Mujahideen (IM) member who had fled the country after the 2008 serial bomb blasts.

Ministry of Home Affairs has informed the Prime Minister’s Office (PMO) that they were against a proposal to allow “visa-free” entry to business visitors and tourists from eighteen key countries, including China. The ministry is against dispensing with the visa requirement for business visitors and tourists from countries belonging to the BRICS (Brazil, Russia, India, China and South Africa) and the proposed Regional Comprehensive Economic Partnership (RCEP) countries.

Money held by Indians in Swiss banks has fallen by nearly one-third to a record low of 1.2 billion franc (about Rs.8,392 crore) amid a continuing global clampdown on the famed secrecy wall of Switzerland’s banking system.This is the lowest amount of funds held by Indians in the Swiss banks ever since Switzerland began making the data public in 1997 and marks the second straight year of decline.

Two indigenously developed Tejas Light Combat Aircraft are set to join the Indian Air Force has part of the first squadron.

They will launch the new Squadron 45 ‘Flying Daggers’. The remaining 18 aircraft including four trainers are to be inducted in 2018

The government will unveil a regional connectivity scheme with a fare of Rs.2,500 for hour-long flights operating from regional airports, but only some seats on such aircraft would be available at the subsidised price

Two Taliban suicide bombers on Thursday killed at least 27 people and wounded around 40 in an attack on buses carrying newly graduated cadets on the western outskirts of Kabul, officials said.

The attacks underline the threat to security in Afghanistan about a week ahead of a NATO summit in Warsaw, where leaders are expected to discuss whether to maintain support for the Kabul government 15 years after the Taliban were driven from power.

Beyond the immediate impact, the attacks cast further doubt on any resumption of peace talks with the Taliban.

Even before the death of former leader Mullah Akhtar Mansour in a U.S. drone strike last month, prospects appeared remote after the Taliban refused to join talks sponsored by the United States, China and Pakistan.

Under new leader Mullah HaibatullahAkhundzada the insurgents have made clear they will continue attacks on the Western-backed government, and maintained their demand for international forces to quit the country.

Reacting to comments in New Delhi by US Undersecretary of State for political affairs on India’s effort to join the NSG and the South China Sea issue,China slammed the United States for trying to drive a wedge among regional countries

Western nations have reminded Sri Lanka that much more remains to be achieved in the areas of reconciliation and accountability.

In their response to an oral update made by the United Nations High Commissioner for Human Rights and the subsequent speech of Sri Lanka’s Foreign Minister at the UN Human Rights Council on Wednesday, the countries urged Sri Lanka to see to it that the commitments made in the resolution adopted by the HRC unanimously in October last were carried out.

“The year-on-year inflation measured by monthly CPI-IW (consumer price index industrial workers) stood at 6.59 per cent for May 2016, as compared to 5.86 per cent for the previous month (April, 2016) and 5.74 per cent during the corresponding month of the previous year (May, 2015),” Labour Ministry said in a statement.

Fiscal deficit in the first two months of the current fiscal was Rs 2.28 lakh crore or 42.9 per cent of Budget estimates for 2016-17, much higher than the year-ago period.

“On June 29th, 2016, the negotiation on the Double Taxation Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between Cyprus and India was successfully completed, in New Delhi” the finance ministry of Cyprus said in a statement.

Andhra Pradesh Chief Minister’s five-day tour of China ended today, with the state government signing six memoranda of understanding (MoU) with various Chinese companies for setting up different projects like capital construction, municipal water supply etc.

F. Concepts-in-News: Related Concepts to Revise/Learn:

• Solar Alliance
• Core Sector
• Seventh Pay Commission
• UNCTAD
• National Mineral Exploration Policy
• Bilateral Investment Promotion and Protection Agreement(BIPA)
• Currency Devaluation
• Medium Range Surface to Air Missile
• RIMPAC-2016
• Defence Communication Network
• GST
• World Economic Forum
• Advance Payment Agreement
• Base Erosion and Profit Sharing
• GAAR
• Monetary Policy Committee
• Tejas LCA
• CPI-IW

G. Fun with Practice Questions 🙂

Question 1: Which of the following data is/are correct about the Monetary Policy Committee as notified in the amended RBI Act,1934?

Question 2: Which of the following organisation/agency brings out the the Global Competitiveness Report?

Question 3: Which of the following statements is/are correct?

Question 4: Which of the following statements is/are correct?

Question 5: Which of the following statements is/are correct?

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