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1. Impact Of Chinese Goods On Indian Industry

Hard Numbers: India-China Trade Quantum

  • China is India’s largest goods trading partner and the bilateral trade reached $89.6bn in 2017-18, from $38bn in 2007-08.

  • China’s share in India’s imports stands at 16.6% in FY1718.

  • Trade deficit with China at $63bn constitutes more than 40% of India's total trade deficit.

  • Between FY0708 and FY1718, Indian exports to China increased by $2.5bn but the imports, however, increased by $50bn.

  • China has increased prices of bulk pharma drugs by 1200% over the last two years, impacting prices of finished products by Indian pharma industry.

  • No bilateral trade agreement between the two, to accord preferential treatment to the Chinese products.

  • The Parliamentary Standing Committee on Commerce tabled a report titled “Impact of Chinese goods on Indian industry” in Rajya Sabha.

 

Highlights of the Report

  • Numerous anti-dumping investigations have been initiated against China; also majority (i.e. 102/144) of the enforced anti-dumping duties are against Chinese products.

  • All the industries affected by the dumping are not able to reach Directorate General of Anti-Dumping and Allied Duties (DGAD) on account of high cost involved in moving the applications.

  • Delayed action in the part of DGAD causes permanent damage to the industry in question, leaving little or no

  • How Chinese goods find their way to Indian markets?

  • Dumping of cheap Chinese products.

  • Under-invoicing of Chinese goods: causes revenue loss to the Government as well as puts the domestic manufacturers at a disadvantage in terms of price of like items.

  • Re-routing of products via countries that have FTAs with India.

  • Flouting of Rules of Origin norms e.g. setting shops in Least Developed Countries(LDC) arrangements under Duty Free Tariff Preference (DFTP) scheme.

  • Mis-declaration and mis-classification of prohibited goods.

  • Smuggling of proscribed items: In April to December 2017-18, as many as 1,127 cases of smuggling have been registered by India, recovering more than Rs 5.4 billion worth of Chinese goods.

  • Circumvention of duties due to lax implementation of Indian regulations.

 

scope for remedial measures.

  • No impact assessment of anti-dumping/counter-veiling duties by the government leading to non-review of such duties, renders the anti-malpractices framework ineffective.

  • One estimate suggests that due to the dumping of Chinese solar panels, nearly two lakh jobs are lost as nearly half of our domestic industry capacity remains idle.

  • Chinese products are certified/ registered quite easily and faster by India's Bureau of Indian Standards. To the contrary, Indian products suffer delays and high fee for getting certified/ registered with Chinese authorities before exporting into China.

 

Reasons for deluge of Chinese imports to India

  • Chinese imports flood the Indian markets due to high demand owing to large size of the Indian market and also competitive prices of these products. Elaborative reasons behind this phenomenon include:

  • Industry-friendly lending rates, lower logistics and energy costs as compared to India: On account of costlier energy, finance and logistics, Indian goods are costlier by about 9% in the global market. Chinese industry gets loans at 6%, compared to 11-14% in India. Logistics costs are 1% of the business in China, compared to 3% in India.

  • Chinese exports largely constitute manufactured products related to expanding sectors such as telecom and power (while Indian exports to China are primary products largely).

  • Support by the Chinese government e.g. export rebate, state-owned enterprises, tax discounts within the provinces.

  • Currency manipulation for export competitiveness.

  • Non-transparent trade policy, unfair trade practices such as exports subsidies that are against the WTO regulations.

  • Robust and integrated global value chain along with leveraging of economies of scale.

  • Infrastructure required to address the demands of quality checks is inadequate.

  • Delays in firming up the Quality Control Orders (QCOs) helps the Chinese industry monopolise its low quality goods in the market e.g. toys, low-quality LEDs etc.

 

Implications for the Indian Economy

  • Labour-intensive industries such as textiles, solar, firecrackers etc., in India are worse affected by Chinese imports.

  • Many MSMEs in the stainless steel industry have shut down.

  • Direct and indirect tax collections take a hit due to smuggling, under-invoicing etc. This will fall further as domestic manufacturers shrink or dissolve in future.

  • Aims and targets of the Make In India programme are undermined.

  • Banking sector, already reeling under the NPAs, faces further stress.

  • Low-quality products from China adversely impact the environment.

  • Manufacturers are turning into traders, having negative impact on the employment.

  • Overt dependence on imports of key products such as the bulk drugs can have cascading effects on supply of many products, employment etc., in addition to self-reliance, national interests and security in critical situation

 

Recommendations of the Report

  • Governmental should provide financial assistance to recognized industry forums to improve the access of MSMEs/SSIs to trade remedial measures.

  • Creation of a DGAD platform for continuous dialogue with the Indian industry on WTO non-compliant subsidies.

  • Shortening of time period for investigations and notifications.

  • Stringent implementation of anti-dumping framework, to check smuggling, misclassification and other trade malpractices.

  • Augmentation and strengthening of the Directorate of Revenue Intelligence (DRI) workforce.

  • Working out a formal arrangement with China, to avail price and other relevant information on imports suspected of under invoicing – for Indian Customs administration.

  • Better enforcement of FTAs and Rules of Origin norms by a joint verification/ certification mechanism with the partner countries.

  • Study of the likely impact of the tariff concessions under ongoing RCEP negotiations on our domestic industry, to ensure zero cost to Indian industrial health.

  • Easing of the restrictive and discriminatory clauses being faced by the Indian Industry in public tenders and implementation of Public Procurement (Preference to Make in India), Order 2017 in spirit. State governments should also be sensitized in this regard.

  • Steeping up the surveillance of Land Ports especially in the Indo-Nepal Border and North East border.

  • Support to the Bureau of Indian Standards (BIS) in terms of availability of technical manpower and infrastructure Identification and inclusion of more products under technical regulations specifying compliance.

  • Representation of BIS on SWIFT to further add to the effectiveness of the latter.

 

Countervailing duty (CVD)

  • Additional import duty that is imposed to neutralize the negative effects of subsidies

  • Safeguard duty

  • Tariff imposed to restrict imports of a product temporarily (take “safeguard” actions) if its domestic industry is injured or threatened with injury caused by a surge in imports

  • Anti-dumping duty (ADD)

  • Protectionist tariff that a domestic government imposes on foreign imports that are priced lower than their value in their home market

  • Inverted Duty Structure

  • It implies a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods.

  • This makes domestically produced goods more expensive that their imports from other countries.

  • Sensitization of enforcement agencies like Customs authorities, State Governments etc. to work in co-ordination with the Regulators.

  • Necessary and immediate review of the existing inverted duty structure.

  • Production subsidy or incentives should entail government tariff protection, to match the Chinese assistance so that our domestic production gets a real boost.

  • Constitution of steering committee to oversee the revival of the API industry, including reviving PSUs like IDPL and Hindustan Antibiotics, especially at the time when many APIs units in China are closing due to strict environment norms there.

  • To protect the solar industry, ADD may be

  • SWIFT – Single Window Interface for Facilitating Trade

  • Single Window provides a single platform for relevant agencies like Wildlife, Drug Control, Animal Quarantine, Plant Quarantine, FSSAI and Textile Committee for necessary clearance or certification before the goods are released inland from the ports

  • Optimal use of SWIFT can ensure effective quality control of all the imports of products under QCO/technical regulations.

  • levied in a differential manner to facilitate level pegging for domestic industry.

  • Solar power industry must explore the avenues of protection under CVD since Chinese solar industry enjoys WTO non-complaint subsidies of the Chinese Government.

  • Import of finished toy products from China must be banned as it has affected 50% of the domestic toy industry and traditional skills are getting lost with artisans migrating to other vocations.

  • Stringent penal actions to create effective deterrence against unscrupulous elements.

  • Creation of public opinion in the country to discourage buying of sub-standard imported product, with

 

API – Active Pharmaceutical Ingredients

  • These are those constituents of drugs that are responsible for effects produced by these drugs. The other constituents of the drugs called excipients are chemically inactive substances, which help carry APIs to the body system or target organ etc.

  • engagement of the industry, thus popularising ‘Swadeshi apnao’ (buy made-in-India products).

  • Steps being taken

  • Since India and China are the members of the WTO, no restrictions can be imposed on the WTO-compliant trade. While the action to be taken on the basis of the Report is yet to be determined, certain measures have already been taken to protect the domestic industry and to curb the flood of Chinese imports that include:

 

Market Economy Status of the WTO

  • MES is accorded by the WTO to the countries where economic decisions and the pricing of goods and services are guided solely by open competition, with little or no government intervention or central planning

  • China’s bid for this status is opposed by the US, the EU, India and other parties

  • If granted this status, imposition of anti-dumping duties and other trade defences gets difficult to impose against such a nation.

  • Safeguard duty has been imposed on the solar cell imports from China and Malaysia for two years, till July 2020.

  • DGAD has recently opened an assistance counter for the help of the MSME Sector.

  • Recent creation of an integrated single umbrella National Authority, namely, Directorate General of Trade Remedies (DGTR) will be effective in providing comprehensive and swift trade defence mechanism in India.

  • Measures have been taken to increase the efficacy of Risk Management System (RMS) – to tighten the inspection infrastructure at the entry points.

  • Introduction of the GST will help in business efficiency, better record-keeping infrastructure, easier audits and controls and creation of uniform market across the country.

  • India needs to stay firm on its non-MES status stand to China at the WTO to ensure protection to its domestic industry.

 

2. Project Sashakt

Present status of Non-Performing Assets

  • Gross non-performing assets (NPAs) with the banking rose to ever time high 11.6% in March 2018.

  • Around 85% of these bad loans were with the PSBs. The GNPA for PSBs stands at 15.7%. PSBs condition is particularly bad as compared to private banks because they have to lend under various government objectives and under the compulsion of social banking.

  • The Reserve Bank of India has already warned that the gross NPA ratio of scheduled commercial banks could rise to 12.2% by March 2019.

 

About Project Sashakt

  • It aims to strengthen the credit capacity, credit culture and credit portfolio of public sector banks.

  • It is a five-pronged strategy towards resolution of stressed assets, as recommended by Sunil Mehta Committee.

  • Small and Medium Enterprise (SME) resolution approach

  • It is applicable for loan exposure up to Rs.50 crore.

  • For this, a resolution plan based on simple metrics and Standard Operating Process (SOP) will be arrived at within 90 days of detection of stress by individual banks.

  • Internal SME steering panel(s) should be established by banks for formulating and validating these schemes, including provision of additional funds.

  • Bank-led resolution approach

  • It is for loans between Rs.50 crore and Rs.500 crore resolution, led by a consortium of lenders, needs to be completed within 180 days, failing which the asset would be referred to the National Company Law Tribunal (NCLT) for insolvency proceedings.

  • Under this, banks would sign inter-creditor agreement, according to which lenders with exposure to stressed accounts will appoint a lead bank as its agent to formulate a resolution plan.

  • The resolution plan has to be approved by voting by lenders holding at least 66 per cent of the debt.

  • The independent steering committee appointed by the Indian Banks Association (IBA) has to validate the process within 30 days.

  • AMC/AIF led resolution approach

  • Under this, loans above Rs.500 crore would be resolved through an independent asset management company (AMC) which would be funded by alternative investment fund (AIF).

  • AIF would raise funds from foreign and institutional investors. Banks may also invest if they wish. Besides, AIFs can also bid for assets in NCLT.

  • The price discovery of these NPAs will be through open auction by the lead bank in which asset reconstruction companies (ARCs), AMCs and other investors can participate.

  • NCLT/IBC approach: It also envisages invocation of IBC if other options fail. The resolution route is also applicable to larger assets already before the National Company Law Tribunal (NCLT) and any other asset whose resolution is still pending.

  • Asset-trading platform to be created for trading of both performing and NPAs.

 

Benefits

  • It will ensure the operational turnaround of the banks and stressed companies and help retain and recover the asset value.

  • The plan doesn’t involve government interference as it would entirely be led by banks. Also, it does not require any law to be enacted. All provisions comply with existing regulation of banking sector. Hence it will speed up process of resolution.

  • It is seen as an effort to create a market for assets which is commendable.

  • The inter creditor agreement will prevent the earlier delays in decisions making among lender banks and will work and implement the resolution plan swiftly.

  • The resolution process will help bring in credible long-term external capital and limit the burden on the domestic banking sector.

  • It also ensures robust governance and credit architecture to prevent a similar build-up of non-performing loans in the future.

 

Challenges

  • The strategy appears to be incremental as none of the approach attempts early resolution of NPAs in banks.

  • There is nothing new in the resolution plan. All the approaches like setting up focused verticals for management of stressed assets, SME Steering Committee are in operation in most of the banks in one form or the other. Besides, 26 ARCs and a couple of resolution advisory service companies are already in operation for NPA resolution.

  • The bank-led resolution approach has failed in the past. Also, here the key challenge would be to arrive at a consensus, as the exposure is held by multiple banks/lenders.

  • ARCs are low-capital institutions. They have to mobilize resources for large scale NPA resolution. But only a few investors have come in so far.

  • ARCs are smaller institutions compared to banks and depend on people’s investment. If that money is to be used for buying stressed asset they will be answerable to public.

  • The issue of price at which the banks should transfer the assets to ARCs has always been contentious. There often is a mismatch between the price quoted by bank and the ARCs.

 

3. Municipal Bonds

SEBI Guidelines on municipal bonds, 2015

  • As per the SEBI Regulations, 2015, a municipality or a Corporate Municipal Entity (CME) should meet certain conditions:

  • The ULB should not have negative net worth in any of three immediately preceding financial years.

  • Non-default: The municipality should not have defaulted in repayment of debt securities or loans obtained from banks or financial institutions during the last 365 days.

  • Non wilful defaulter: The corporate municipal entity, its promoter, group company or director(s), should not have been named in the list of the willful defaulters published by the RBI.

  • Municipal bonds should have mandatory ratings above investment grade for pubic issue. The bonds should have a three-year maturity period and financial institutions including banks should be appointed as monetary agencies.

  • Municipalities need to contribute at least 20% of the project cost.

  • SEBI allowed urban local bodies to raise money through the issue of revenue bonds as well. Municipal bonds where the funds raised are kept for one project are termed revenue bonds. Servicing of these bonds can be made from revenue accrued from the project.

 

About Municipal Bonds

  • Municipal Bonds are marketable debt instruments issued by ULBs either directly or through any intermediate vehicle (Corporate Municipal entity/statutory body/special purpose distinct entity) with an objective to on-lend towards projects implemented by the ULB.

  • The funds raised may be utilized towards implementation of capital projects, refinancing of existing loans, meeting working capital requirements etc., depending on powers vested with the ULBs under respective municipal legislation.

  • Bangalore Municipal Corporation was the first ULB to issue Municipal Bond in India in 1997.

 

Significance of Municipal bonds

  • Can Solve financial woes of Indian cities: These can be the solutions to the financial issues of Indian cities which, according to Isher Judge Ahluwalia Committee in 2011, require Rs. 40 Trillion at constant prices over next 20 years.

  • Leverage future cash flows to finance capital expenditure: As per CARE rating estimates, large municipalities in India could manage to raise Rs 1000 crore to Rs 1500 crore every year by issuing municipal bonds.

  • Attract new long-term investors and resources into urban projects: this includes insurance funds, mutual funds and external funds. It also provides greater flexibility in terms of revenue and repayment options.

  • As a force multiplier for improving internal processes: requires ULBs to implement a stringent reporting and disclosure standard which ushers in greater transparency and accountability towards citizens.

  • Boost quality of life in cities: The money raised from municipal bonds can boost quality of life in cities, enhancing job prospects in the locality and may also prove a good investment option for investors.

  • Prerequisite for effective issuance as per ‘Guidance on use of Municipal Bonds’ issued by Ministry of Finance in 2017

  • Financial Discipline and information disclosure: accounting discipline, quality of financial reporting and periodicity of information dissemination and disclosures by ULBs are key demands for long term investors.

  • Ring Fenced Projects: this along with approved DPRs help build investor confidence.

  • Shelf of Project for sustainable financing: ULBs are required to view municipal bonds as an ongoing alternative financing channel rather than as a one off initiative. Multi-year plans along with a prioritized shelf of projects to be financed by future bond issuance should be prepared.

  • Escrowed Revenues: to address risk perception of investors escrowing can be done to earmark specific revenue streams of ULBs for debt servicing so as to improve visibility and certainty of cash flows to investors which would then improve credit quality and issue rating of bonds.

 

Way forward

  • As bonds have to be repaid through cash flows, the urban governments should strengthen their own revenue base from other sources as well, such as property tax reforms and user charges.

  • Money raised from the bonds should not be diverted for other purposes as done earlier by several State governments in their projects.

  • India would need policies to reduce the risks in municipal bonds, following model can be adopted for this:

  • Japan provided a sovereign guarantee to Japan Financial Corporation for Municipal Finance.

  • The Development Bank of South Africa uses its balance sheet to support municipal bond issues.

  • Denmark uses pooled finance/ joint bond issue mechanism to protect bond holders in case one city in the pool defaults. (Some cities in Tamil Nadu and Kerala experimented with this)

 

4. Framework For Bond Market Development

More about news

  • The proposal was announced in Budget for 2018-19 that SEBI will consider mandating, beginning with large corporate, meeting about one-fourth of the companies' financing needs from the bond market.

  • Over time government has taken a number of steps to deepen the bond market. Some of them are:

  • Mandatory reporting requirement of OTC (over the counter) trades in bonds and dissemination of the data in public domain

  • Setting up of dedicated debt segment on exchanges

  • Electronic bidding platform for private placement

  • As a result, the share of bond market in comparison to bank financing has seen a steady growth. Further, FY 2016-17 was a watershed year when share of bond market financing overtook that of bank financing.

 

Proposed New Bond market Framework

  • The framework is proposed to be implemented from April 1 next year.

  • It will be applicable to large corporates, i.e., which has an outstanding long term borrowing of at least Rs 1 billion, credit rating of AA and above and intends to finance itself with long-term borrowings (borrowings above 1 year)

  • SEBI may decide on reducing the threshold of rating framework from “AA” to “A” after making an assessment of the capacity of the bond market to absorb even lower rated issues.

  • The large corporate will have to garner at least 25 per cent of their borrowings made in 2019-20 through bond market.

  • Comply or Explain approach for the initial two years of implementation.

  • In case of non-fulfillment of the requirement of market borrowing, reasons for the same will have to be disclosed as part of the “continuous disclosure requirements”.

  • After 2 years if there is any shortfall in compliance, a monetary penalty in the range of 0.2 per cent to 0.3 per cent of the shortfall will be levied.

 

Issues in bond financing of infrastructure projects

  • The lack of depth and liquidity of domestic local currency bond markets makes bond financing difficult

  • Credit rating gaps is also one of the problems. According to ratings by the three international credit rating agencies, the share of infrastructure bonds rated AA or above is about 52% in the EU, but only around 16% in Asia.

  • Infrastructure bonds pose a challenge for corporate issuers because their credit ratings are lower than those of governments. This raises the cost of debt financing.

 

Benefits

  • This move will create the right structure for future borrowing and the financial system will emerge stronger than before.

  • This will reduce reliance on banks for financing corporate which are reeling under bad debts and simultaneously develop a liquid and vibrant corporate bond market.

  • By starting off with AA-rated companies, SEBI has ensured that there is minimum risk of default.

  • It will make India par global practices where bond markets dominate and banks are investors in this market.

  • Bonds are an ideal tool for financing long-term infrastructure projects, and can thus help to fill the region’s infrastructure investment gap.

 

5. Limited Liability Partnerships

Limited Liability Partnerships

  • It is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm.

  • The LLP as a separate legal entity, is fully liable of its assets but liability of the partners is limited to their agreed contribution in the LLP. o It limits the liability of partners as far as civil cases are concerned.

  • In such a partnership, partners can’t be held liable for another’s misconduct or negligence.

  • Foreign Direct Investment in an LLP is also allowed and it can be in the form of capital contribution or by way of acquisition of profit shares.

  • Owing to flexibility in its structure and operation, it is useful for small and medium enterprises, in general, and for the enterprises in services sector, in particular.

  • It is governed by the provisions of the Limited Liability Partnership Act, 2008.

  • The LLP Act 2008 confers powers on the Central Government to apply provisions of the Companies Act, 1956 as appropriate. Central Government also has powers to investigate the affairs of an LLP, if required, by appointment of competent Inspector for the purpose. o Registrars of Companies (ROC) is appointed under Companies Act and is under Ministry of Corporate Affairs.

  • Its primary duty is to register companies and LLPs under respective states and UTs and ensure their compliance with statutory requirements.

  • Since laws are less stringent for LLPs, it is a preferred option for businesses. Over 50,000 private companies converted to LLPs during April-November 2017 due to-

  • It has lower registration cost.

  • It does not have requirement of compulsory audit.

  • LLPs are also tax efficient as they are exempt from dividend distribution tax and minimum alternative tax.

  • However, like shell companies, inactive LLPs can be used for tax evasion and money laundering. Hence, the government is now taking steps to deregister inactive LLPs to prevent generation of black money.

 

6. Draft E-Commerce Policy

Need of e-commerce policy

  • Following factors necessitates better and clear policy response and coordination among various wings of the government:

  • Rapid growth in e-commerce: India’s e-commerce sector, currently estimated to be worth around $25 billion, is expected to grow to $200 billion by 2020. According to an estimate by the finance ministry, the size of the digital economy in India will be $1 trillion by 2022 and it will account for close to 50% of the entire economy by 2030.

  • Increasing investment: The potential of the market has drawn in giants such as Amazon, Walmart, Alibaba, SoftBank and Uber to invest millions of dollars to become dominant players in this space. After covering the metros and large cities, the bigger e-commerce firms are poised to go for next phase of expansion in tier-II and tier-III towns, where the expansion of 3G and 4G networks have put consumers online.

  • Better standing on international table: A national e-commerce policy will also enable better negotiations on multilateral issues with the World Trade Organization.

 

Key proposals under draft

  • Establish Central Consumer Protection Authority (CCPA): It will act as the nodal agency for intra-government coordination on e-commerce policies and hearing complaints from both the public as well as e-commerce companies.

  • Mandatory registration: It provides for mandatory registration of all e-commerce operators whether domestic or foreign.

  • Uniform legislation: It also proposes a single legislation to address all aspects of digital economy.

  • FDI policy for e-commerce: It proposes 49% FDI under the inventory model for firms to sell locally-produced goods on their online platforms. The control of such firms will remain with Indians. At present, 100% FDI is allowed in online stores that follow the marketplace model; no FDI is permitted in firms following the inventory model.

  • A separate wing will be set up in the Enforcement Directorate to handle grievances related to foreign investment in e-commerce.

  • There should be differential voting rights for Indian founders with minority stakes giving founders more control.

  • Data Localization: It strongly recommends data localization i.e. data that will be considered as critical should necessarily be located in India. For this, various suggestions are given:

  • Infrastructure status to data centres/server farms as well as easy access of physical infrastructure for setting up the centres.

  • A two-year sunset period for the industry to adjust before localization rules becomes mandatory.

 

What is a marketplace and inventory-based model?

  • Marketplace based model of e-commerce means providing an information technology platform by an e-commerce entity on a digital & electronic network to act as a facilitator between the buyer and seller.

  • Inventory based model of e-commerce means an e-commerce activity where inventory of goods and services is owned by e-commerce entity and is sold to the consumers directly.

  • Only personal data or community data collected by “internet of things” devices in “public space” will need to be stored in India.

 

For MSME related

  • Allow MSME to follow inventory-based models for selling locally produced goods through an online platform.

  • Exemption from GST: Currently, MSMEs with revenue of less than Rs.20 lakh a year are not subject to GST if they sale offline whereas they have to pay GST if they sell goods on online platforms.

  • Such companies may also be allowed up to 49% foreign investment.

 

For merger and acquisition

  • Mandatory examination by Competition Commission of India (CCI) of competition-distorting mergers and acquisitions below the existing threshold. This assumes significance in the light of the recent acquisition of Flipkart by US retail major Walmart.

  • Sunset clause for deep discounting: A maximum duration should be set for “differential pricing strategies”. CCI and the department of industrial policy and promotion (DIPP) will oversee this proposal.

 

Tax related proposals

  • Centralized registration instead of local registration of e commerce companies for GST purposes.

  • Modifying relevant GST provisions in order to create a level-playing field between online and offline delivery of goods and services.

  • Use principle of ‘significant economic presence’ as the basis for determining ‘Permanent Establishment’ for tax assessment.

 

Regulating price distortions

  • Prohibits e-commerce players from “directly or indirectly influencing” sale prices.

  • Prohibition of bulk purchases of branded goods like mobile phones, fashion items which lead to price distortions.

 

Benefits

  • The draft e-commerce policy is comprehensive and encompasses all aspects of the e-commerce business, data privacy and taxation, a host of technical aspects such as technology transfer, server localization, and connectivity issues.

  • The regulator will ensure consumer protection from online frauds and compliance with foreign investment caps in e-commerce.

  • Data localization move will help private sector companies comply with the norm to store a copy of a user’s personal data in the country as laid down by the Srikrishna committee on data localization.

  • It will also provide boost to MSME sector through various provisions mentioned in policy which will lead to revenue as well as employment generation.

  • The 2-year sunset clause for data localization will provide some time to the domestic industry to prepare for the data storage procedures before actually imposing the legislation.

  • It will be able creating a level playing field for foreign and domestic players in the Indian market.

 

Challenges/issues

  • The logic of protecting domestic industry against foreign giants with deep pockets is against the principle of liberalization.

  • Data sharing and localization will create issue of intellectual property rights of companies and will have significant impact on the way they do business.

 

Issues of discount

  • Restriction on discounting by e-commerce players to protect offline players are over stated given in Indian groceries and food market which makes up half of India's retail spend, online players account for less than one per cent of the market.

  • Setting a price floor can also impede local players from offering attractive deals

  • Curb on discounting has already been tried in the past and might not be easily implementable.

  • Introducing unnecessary regulations could result into slowing down of yet another sector.

  • With online discounts gone, the consumer will lose out.

  • It will put restrictions on retail strategies of ecommerce majors.

  • Certain states have protested against the Centre’s intrusion by framing laws for retail, which remains a state subject.

  • Coordination between various ministries like Ministry of commerce and Ministry of Electronic and IT is an issue because of contradictory views on the matter.

 

Way forward

  • State government must be taken aboard for policy formulation and implementation.

  • The regulation of e-commerce transactions should be left to the Competition Commission of India rather than making vague regulations which are open to abuse.

  • The policy must be facilitating ‘ease of doing business’ with minimum regulation and should offer a level-playing field to foreign and domestic players.

 

8. Global Digital Tax Rules

About the Global Digital Taxation issue

  • Digitalisation allows more traditional business models (such as e-commerce) to sell to consumers without the need for physical presence in the customer jurisdiction. It also paves the way for new business models, based upon user participation, to generate income without making any traditional sales to the user base in question e.g. social media businesses that generate revenue through advertising sales.

  • Currently international laws provide for the companies to be taxed in the jurisdiction in which they have a physical presence instead of end user based taxation. However, digital businesses generate revenues from

 

Case of recent digital tax disputes

  • In Ireland, European Commission found that Apple paid 0.005% to Irish tax authorities in 2014, far below the corporation tax rate of 12.5%, which led to the tax dispute between the two.

  • markets without a significant physical presence in a country but do not pay taxes there.

  • These weaknesses create opportunities for Base Erosion and Profit Shifting (BEPS) which require a need to ensure that profits are taxed where economic activities take place and value is created.

  • UN Committee of Experts on International Cooperation in Tax Matters in their October 2017 report Tax challenges of digitalization also emphasized for a stronger action. Committee’s position was based on the fact that Developing countries are often the main source of tax revenue loss in the digital economy, as they provide a substantial consumer and user base, but are less likely to host digital economy businesses.

  • An OECD report identifies three common features of highly digitalized businesses: cross-jurisdictional scale without mass; a heavy reliance on intangible assets, especially intellectual property (IP); and the importance of data, user participation, and their synergies with IP.

 

Significance of the move

  • Digital companies operating across borders would have to pay taxes where their users are located rather than just where they have a physical presence.

  • European Commission in March 2018 proposed new rules to ensure that digital business activities are taxed in a fair and growth friendly manner in the EU. Under the proposed rules, the multinational digital companies with significant digital revenues in Europe will have to pay a 3% tax on their turnover on various online services.

  • Many jurisdictions have begun to introduce unilateral rules to tax digital economy, for instance:

  • In 2016, France extended its tax on the distribution of audio-visual content to include online video- on-demand services that are provided for free but monetized through advertisements shown to viewers.

  • Italy has adopted a levy on digital transactions that is expected to become effective from 2019, aiming to ensure level playing field between digital and traditional businesses and capture activities presently uncaptured by corporate tax rules.

  • Tax authorities in Saudi Arabia and Kuwait have introduced the concept of a ‘virtual service Permanent Establishment’, which is deemed to exist even with no physical presence in the countries.

  • Similar interim measures have been adopted by other nations like Australia, Israel, Turkey, New Zealand, Hungary, etc.

  • The OECD and G20 nations constituted the BEPS project that typically targets tax strategies aimed at artificially shifting profits to low or no tax jurisdictions. Action Plan 1 of this project deals with the tax aspects of the digital economy.

  • International bodies such as the OECD are working on longer-term ideas about how to revamp tax on digital earnings and will build a global consensus on the issue by 2020.

 

India’s Position

  • In India, the digital economy is pegged at about $450 Billion and is expected to grow to over $ 1Trillion in the next 3-4 years. The expansive digital world would include e-commerce, app stores, crypto currencies, Internet of Things (IoT), Big Data, and cloud computing among others.

  • In Budget 2015-16, a 6% equalization levy was introduced to bring to tax payments made for online advertisement services.

  • The 2018-19 Budget proposed to suitably amend the Income Tax Act to tax digital firms. However, as the existing Double Taxation Avoidance Agreements (DTAAs) are not covered under the proposed changes, it will require India to renegotiate tax treaties.

  • According to the amendments proposed in the budget, the IT Act will provide “significant economic presence” which includes a download of data or software in India or engaging interaction with a prescribed number of users in India through digital means.

  • India pitched for a global mechanism technically called Multilateral Instrument (MLI) which would be a permanent measure to tax digital companies that earn revenues from a large user base in the country. This would automatically amend bilateral tax treaties to include the taxation provisions for digital business.

 

Concerns

  • About Multilateral Convention to Implement Tax Treaty related Measures to prevent Base Erosion and Profit Shifting (MLI)

  • It offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.

  • It also implements agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.

  • Policy challenges: Digitalization raises a large number of public policy challenges and is also changing the nature of policy making itself.

  • Concerns raised by some EU members themselves: As these measures may affect some of their companies, the international partners may respond with retaliatory measures. For instance, Germany is concerned that a shift towards taxing companies where services are consumed rather than physical presence of the company could end up hitting its lucrative car manufacturers in long term.

  • Low tax EU members such as Ireland and Luxemburg fear of losing multinational companies situated in their low tax jurisdictions.

  • May seem discriminatory: US consider such measures to single out its digital companies as major digital companies are based in USA.

  • EU’s interim digital tax plans target a company’s revenue rather than profit: This goes against international consensus on corporate taxation.

  • The inconsistent unilateral rules adopted by several nations might end up increasing tax burden of digital firms.

 

Way Forward

  • The world over, policymakers are facing challenges over the issue of taxing digital economy transactions, while many countries have introduced provisions to tax some of these transactions, there is a need for a separate tax code which could bring greater transparency to transactions around the digital economy. This could include: 35  

  • A mechanism specially constituted to address digital economy transactional issues in a time-bound manner will also address many of the taxpayer’s grievances.

  • Support for the growth of industry with additional tax incentives for taxpayers using the digital economy space for transactions as well as for innovators.

  • The code should be reviewed frequently by industry experts and include newer types as they evolve.

 

8. Ease Of Doing Business Rankings For States

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  • In 3rd edition of the annual ranking of all states and UTs under the Business Reform Action Plan (BRAP) conducted by DIPP and the World Bank, Andhra Pradesh stood to be the best in India to do business.

  • Telangana and Haryana in second and third spots, while Meghalaya stood last at 36th position. Jharkhand and Gujarat stood fourth and fifth respectively.

  • The ranking was introduced with the aim of triggering competition among states to attract investments and improve business climate.

 

About Business Reform Action Plan (BRAP)

  • The aim of this exercise is to improve delivery of various Central Government regulatory functions and services in an efficient, effective and transparent manner.

  • The reform plan has expanded from 285 to 372 action points till 2017.

  • States and UTs have conducted reforms to ease their regulations and systems in areas such as labour, environmental clearances, single window system, construction permits, contract enforcement, registering property and inspections.

  • States and UTs have also enacted Public Service Delivery Guarantee Act to enforce the timelines on registrations and approvals.

  • The current assessment under the BRAP 2017 is based on a combined score consisting of Reform evidence score that is based on evidences uploaded by the States and UTs and Feedback score that is based on the feedback garnered from the actual users of the services provided to the businesses.

 

9. Rythu Bandhu Scheme

About Rythu Bandhu Scheme

  • It is first of a kind investment support scheme for farmers which involves cheque payments to farmers based on their landholdings. The government gives every beneficiary farmer Rs. 4,000 per acre as “investment support” before every crop season.

  • The objective is to help the farmer meet a major part of his expenses on seed, fertiliser, pesticide, and field preparation.

  • The scheme covers 1.42 crore acres in the 31 districts of the state, and every farmer owning land is eligible.

 

Benefits

  • The scheme will avert the need for going to moneylenders for money before every crop season and help rid of debts over the 4-5 years.

  • The government will issue cheques rather than make Direct Benefit Transfer (DBT) which eliminates the possibility of banks adjusting DBT money against farmers’ previous dues.

  • It can be the template for social and agricultural policy. It is seen as a trial for universal basic income in the country.

 

Challenges/ Drawbacks

  • About Universal basic Income (UBI)

  • It is an unconditional cash transfer to every citizen of the country periodically.

  • Argument in favour of UBI

  • Poverty and vulnerability reduction: UBI will result in equitable distribution of wealth

  • Choice: Citizens have a choice of using welfare spending as they see best. Also, Increased income will increase the bargaining power of individuals, as they will no longer be forced to accept any working conditions.

  • Better targeting: As all individuals are targeted, exclusion error is zero.

  • Insurance against shocks: This income floor will provide a safety net against health, income and other shocks.

  • Improvement in financial inclusion as Payment – transfers will increase the demand for financial services, thereby, leading to investment in the expansion of service network of banks.

  • Psychological benefits: A guaranteed income will reduce the pressures of finding a basic living on a daily basis.

  • Administrative efficiency: UBI in place of a plethora of separate government schemes will reduce the administrative burden on the state.

 

Arguments Against UBI

  • Conspicuous spending: Households may spend this additional income on wasteful activities or on temptation goods like alcohol, tobacco.

  • Moral hazard: A minimum guaranteed income might make people lazy and opt out of the labour market.

  • Gender disparity induced by cash: Men are likely to exercise control over spending of the UBI which may not always be the case with other in-kind transfers.

  • Fiscal cost given political economy of exit: Given the large population size, the fiscal burden on government would be high. Also, once introduced, it may become difficult for the government to wind up a UBI in case of failure.

  • Political economy of universality – ideas for self-exclusion: Opposition may arise from the provision of the transfer to rich individuals as it might seem to trump the idea of equity and state welfare for the poor.

  • Lack of proper land records resulted in many farmers left out of the scheme. Several cheques have been returned due to discrepancies in names or survey numbers.

  • The scheme does not exclude rich farmers and wealthy landlords. The scheme does have a provision under which cheques can be returned to the local authorities. But that provision is only voluntary.

  • The scheme leaves out tenant cultivators which constitutes an estimated 40% of Telangana’s farming population and mostly coming from the poorest and most disadvantaged backgrounds. • A committee on analytics under IIT-Mumbai professor NL Sarda has told the government to set up a National Integrated Data System (NIDS), citing lack of metadata or additional contextual information as a major deficiency for all indicators.

  • The proposed NIDS will create an integrated database system linking separate datasets with a common standard so that data can be easily correlated and a standard protocol for data exchange and data access be created.

 

10. Common Database For Economic Indicators

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  • Issues with the present system

  • The current practice of data analysis entails collecting data from different sources and analyzing it on a spreadsheet.

  • Indian Official Statistical System is divided into silos, each with its own information architecture and lacking interoperability across the entire spectrum of datasets.

  • Even when data is collected on a single subject with a regular frequency, users do not get access to a proper database that facilitates creation of user defined analytical report.

  • None of the present public Datasets provide metadata to end users as and when data is consumed whereas today’s technology allows providing of relevant metadata associated with any data as and when users are consuming that data.

  • Give more credibility to data: It will give credibility to India’s growth numbers and improve the consistency of key statistics by checking it for coherence and transparency and alignment with each other.

  • Overcome the current shortcomings: The system is expected to overcome the shortcomings of the current compilation method wherein the establishment-based data of Annual Survey of Industries and enterprise-level data of MCA21 are not integrated.

  • Give deeper insight into functioning of economy: This is intended to give deeper insight into the functioning of corporate sector with respect to national income accounting.

  • Provide a single view of data available in official statistical system: NIDS is being considered as an integrating framework that would enable users of official statistics to have a single view of data available in the official statistical system irrespective of the fact that underlying databases are distributed and managed by different central and state departments.

  • Significantly reduce “time to release” of data for policy makers and general public.

August Indian Economy

11. Logistic Sector

Highlight of the LPI 2018

  • LPI ranking of India has decreased from 35th in 2016 to 44th in 2018.

  • The score of India has reduced significantly for all the LPI six parameters.

  • Germany has been ranked first and Sweden stood at second rank under LPI 2018.

 

What is Logistic?

  • Logistics is a network of services that support the physical movement of goods, trade across borders, and commerce within borders. Logistics encompasses an array of activities beyond transportation, including warehousing, brokerage, express delivery, and critical infrastructure services such as terminals.

 

Importance of Logistic sector in India

  • Employment: It employs over 45 million people and is growing at the rate of 15% with certain sub-sectors growing at even 30-40% per annum.

  • GDP: India spends around 14.4% of its GDP on logistics and transportation.

  • Manufacturing Sector: Logistics sector provides efficient and cost-effective flow of goods on which other commercial sectors depend.

 

Challenges of Logistic Sector in India

  • High driven by man-power and underleveraged by an unorganised and fragmented industry structure.

  • Transportation linkages are highly saturated because of high freight tariff, low terminal quality and less flexibility in carrying different types of products.

  • Technology: Huge transformation is needed in terms of technology like automated storage and retrieval system, online cargo solutions, GPS cargo track etc.

  • Tax: A complicated tax regime places several challenges as payment of multiple state and Centre taxes results in considerable loss of time in transit and fragmentation of warehousing space.

 

Emerging Trends in logistic Sector

  • Skill Man-power: In the context of emerging efficient supply chain management, there will be huge demand of domain expertise equipped with specific skill set, especially in developing countries.

  • Environmentally Friendly Logistic: It is become imperative for logistic performer to seek eco-friendly shipping option because- 23% of all energy related CO2 emission come from transportation.

  • Resilience to Cyber Threat: the growing integration of digital space in logistic supply chain management demands a huge investment in cyber security.

 

Way Forward

  • Coordination in infrastructure planning: will help to reduce the high transaction costs prevalent in the economy.

  • Reforms in urban planning: This includes the problem associated with urban conglomerations in terms of road and peripheral infrastructure- should be ease-out, so that time-monetary cost associated with logistic supply chain would be minimised.

  • Engagement of all stakeholders: Blueprints and policy regulations should be based on global standard involving multiple stakeholder. Presently, policy involves few stakeholders such as government and big industries. This makes policies prone to avoidable trial and error events.

  • Investment in value addition: Dust-proofing at a storage place still does not command the kind of premium in India that it should, and as a result, the logistics service provider does not invest in such provisions.

 

12. Coal Mine Surveillance & Management System (Cmsms) And ‘Khan Prahari’ App

Background

  • Illegal mining is carried out either by extraction of coal without obtaining a valid mining lease from the government or by mining in areas outside lease-hold areas of coal companies.

  • Illegal coal mining not only causes a loss to the nation’s resources but is also harmful to the environment.

  • Leads to accidents and loss of life to persons engaged in illegal mining due to roof falling, water flooding, poisonous gas leaking, occurrence of underground fire etc.

  • Facilitates corruption leading to law and order problems: Creates unaccounted assets and black money and encourages involvement of mafia.

  • Water balance is disturbed in and around the locations of illegal mining

  • Adverse impact on the conservation of precious fossil fuel and causes environmental degradation.

  • Around 17,603 tonne of coal has been recovered from illegal mining in 2017-18.

  • The detection of illegal coal mining activities is mainly done at the Central Mine Planning and Design Institute, wherein satellite data is scanned to track coal mining activity taking place outside the authorised leasehold area.

  • Since law and order is a state subject, the responsibility of curbing illegal coal mining lies primarily with the state and district administration under the Mines and Minerals (Development and Regulation) Act.

 

Coal Mine Surveillance & Management System (CMSMS)

  • The basic objective of CMSMS is reporting, monitoring and taking suitable action on unauthorised coal mining activities.

  • It is a web based GIS application through which location of sites for unauthorised mining can be detected.

  • The basic platform used in the system is of Ministry of Electronics & Information Technology’s (MeiTY) map which provides village level information.

  • The system will use satellite data to detect changes by which unauthorised mining activity extending beyond the allotted lease area can be detected and suitable action can be taken on it.

 

Major reasons for illegal mining of coal:

  • Large scale rural unemployment and poverty.

  • Organised marketing network controlled by coal mafias/influential person.

  • Easy availability of old, abandoned, unused, closed coal mines.

  • Geographically scattered, isolated peripheral patches of coal deposits.

  • Apathy of State government Officials.

  • Inadequate infrastructure of law enforcement agencies.

 

Measures suggested to stop illegal mining of coal

  • Awarding the job of coal/sand transportation to villagers’ Cooperative to ensure villagers participation in the mining activities

  • Outside the leasehold areas, illegal mining generally takes place at some patches of coal deposit at shallow depth from the surface. Some of the coal blocks can be awarded by the Central Govt. to the state Governments on nomination basis and the State Govts. can get the mining done through the villagers’ Co-operative formed by the nearby villagers of the mine.

  • State Police administration should be strengthened with proper infrastructure and modernization for controlling the Mafia as well as for stringent patrolling.

  • Legal provisions should be made to confiscate the equipment used in illegal Mining.

  • The complaint originating from coal mines allotted to Coal India will go to Coal India Offices and those originating from coal blocks not allotted to Coal India will go straight to the State Government Officers and for each complaint the alert will also go to the District Magistrate and SP of the district.

 

Khan Prahahri

  • It is a tool for reporting any activity taking place related to illegal coal mining like rat hole mining, pilferage etc.

  • One can upload geo-tagged photographs of the incident along with textual information directly to the system.

  • The identity of the complainant shall not be revealed.

 

13. Amendment in the definition of 'petroleum'

Changes in New Definition

  • Petroleum means "naturally occurring hydrocarbon in the in the form of natural gas or in a liquid, viscous or solid form, or a mixture thereof but does not include coal, lignite and helium occurring in association with petroleum or coal or shale".

  • The old definition contained the phrase “free state" which prevented private players to explore shale, which was reserved for only government-owned entities like ONGC. By removing the word free, it now allows hydrocarbons in absorbed state like shale to be exploited.

 

Implications

  • The amendment would open up exploration of all hydrocarbons including traditional oil and gas, shale, coal bed methane and hydrates -- in the same field. This is in line with the new Hydrocarbons Exploration and Licensing Policy (HELP).

  • This should help in enhancing exploration and production of hydrocarbons, thereby increasing India’s energy security and reducing our imports.

  • However certain challenges remain:

  • the exclusion of natural gas from the purview of GST remains a deterrent to attracting large-scale investments as neither the producers nor the consumers are able to set off the taxes paid on their input and output.

  • Another impediment could be absence of recent data on actual reserves of shale in the country.

 

14. Crisil Drip Index

About the Crisil Drip Index

  • DRIP Index move away from simply measuring the rainfall volumetric data and captures the interaction between the most critical aspect of vulnerability (irrigation) and weather shocks.

  • The higher the CRISIL DRIP score, the more adverse the impact of deficient rains.

 

Highlight of the Index

  • The index showed that four states -- Bihar, Karnataka, Maharashtra and Uttar Pradesh -- and five crops -- jowar, soyabean, tur, maize and cotton – are most hurt by deficient rains.

  • DRIP results highlight some stress in Madhya Pradesh, where rains are still normal (with deficiency of 9%). But given that irrigation is weak, it is likely to have impacted sowing.

  • Stress is also visible in Gujarat, West Bengal and Andhra Pradesh, where the DRIP scores are not only higher than in 2017 — which was a good rainfall year — but also above the average of the past five years. Broadly, therefore, these four states are seeing more stress.

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