Economy

All (4265)Current Affairs (4243)Mains Practice (77)Mains PYQs by Subjects (40)

Tax on Popcorn: India’s GST formula sparks Outrage

Context: The Goods and Services Tax (GST) Council’s move to tax popcorn differently based on its sugar or spice content has drawn criticism from the opposition and sparked social media outrage, with two former government economic advisers questioning the tax system introduced in 2017.

Relevance of the topic:

Prelims: Key aspects of GST.

Mains: GST- Benefits & Challenges.

GST on Popcorn

The GST Council announced different tax rates for popcorn based on its sugar or spice content.
Following are the new differential rates, which come into effect immediately:
- Non-branded popcorn mixed with salt and spices - 5% GST
- Pre-packaged and branded popcorn- 12% GST
- Caramel popcorn- 18% GST
Until now, popcorn was taxed differently across States.
Rationale behind 18% tax on caramel popcorn: Popcorn with added sugar (caramel) is categorised as a sugar confectionery, thus attracting a higher tax rate under GST.

Criticism: The GST system has run into similar controversies in the past, like taxing chapatis differently from layered flatbreads, different rates for curd and yogurt, and cream bun versus bun and cream served separately.

Complexity of GST: Differential tax rates for similar products questions the rationale behind introducing GST to simplify indirect tax regime.
Inconvenience to citizens: Calculating differential taxes can become very difficult for common people.
Difficulty in enforcement: Already existing loopholes in GST implementation can be widened with differential taxation rates.

Taxes consumed under GST:

Central Taxes	State Taxes
Central Excise Duty	Sales Tax/VAT
Additional Excise Duty	Central Sales Tax
Excise Duty under Toilet and Medicinal Preparation	Octroi Duty
Additional Customs duty	Purchase Tax
Service Tax	Tax on Advertisements
Krishi Kalyan Cess	Tax on Lotteries & Gambling
Swachh Bharat Cess	Entertainment Tax

Benefits of GST:

For Taxation System:
- Simple, Efficient, Transparent: GST has streamlined indirect tax structure by subsuming multiple taxes (subsumed 17 taxes and 13 cesses) into a single tax.
- With uniform tax on supplies of goods and services, India turned into one market.
- Record GST collections & doubling of tax base: from 60 lakh to 1.2 crores (in 2022).
- Parity on imported & local goods.
For Industries:
- Reduced compliance burden.
- Boost MSME sector through GST Compensation Scheme.
- Greater formalisation of the economy.
For Consumers:
- Average tax rates have reduced.
- More than 50% of Goods and Services in CPI comes under the exempted category.
For Logistics sector:
- Reduce traffic congestion at Inter-state borders. Reduced petrol and diesel consumption.

Challenges with GST:

Multiplicity of tax rates adds to complexity.
Controversy over GST Compensation mechanism.
Delays in GST Refunds.
Implementation challenges due to loopholes, exemptions and differential tax rates for similar products.

Also Read: Challenges in GST Implementation

CII suggests changes in Priority sector lending norms

Context: The Confederation of Indian Industry (CII) has proposed reforms in the Priority-sector lending (PSL) framework suggesting inclusion of emerging sectors and high-impact sectors like digital infrastructure, green initiatives, healthcare and innovative manufacturing into the PSL framework.

Relevance of the topic:

Prelims: Questions based on Priority sector lending.

Mains: Analytical question on needs to expand PSL criteria.

What is Priority sector lending?

Priority sector lending is a practice of lending a certain portion of a bank’s funds to specific sectors of the economy identified as priority sectors by regulatory authorities.
The policy tool is aimed at ensuring that key sectors crucial to the nation’s development receive adequate financial support or credit.
These sectors include- Agriculture and allied sectors, MSME, Export credit, Education, Housing, Social Infrastructure, Renewable Energy etc.

Also Read: Priority Sector Lending

Needs to reform PSL framework:

Change in sectoral dynamics: The sector dynamics like contribution in GDP has changed with time. For instance, Traditional sectors like agriculture have seen a reduction in their GDP contribution to 14% now, while PSL allocations to the sector remain at 18 percent. So, a recalibration in the PSL framework is needed to reflect current economic reality.
Requirements of sunrise sectors: Sectors like green energy, and digital infrastructure lack funding opportunities, therefore they require inclusion in the PSL for credit flow.
Learnings from globe: Nations like Brazil and Indonesia provide cheap and priority loans to emerging sectors like green initiatives.
Fostering promising growth: Providing PSL to sectors like digital infrastructure can ensure sustainable returns to the banks due to their profitable nature.

Issues in PSL reforms:

Vulnerable sectors: Various sectors like agriculture and small industries sectors are already less attractive for banks. Changes in the PSL norms will negatively impact funding in these sectors.
Exploring alternatives: Sectors like digital infrastructure are attractive for private investors and venture capitalists due to their scope and productivity. So, alternate funding mechanisms can be explored for them, without tapping into PSL.
Possible public resistance: The change in norms may be perceived as an anti-welfarist approach leading to opposition and backlash.
Uncertain potential: Emerging sectors like green initiatives lack proper research and their economic potential might be overestimated. This may lead to the issues in recovery of loans.

Way Forward

Reducing stagnant sector share: Stagnant and reducing sectors like agriculture need to be rationalised, while alternate mechanisms like private financing can be explored for these sectors.
Phased implementation: PSL norms need to be transformed in a phased manner by analysing the long-term and short-term impacts on the various stakeholders.
Pushing for holistic reforms: A holistic approach needs to be devised to enhance funding in emerging sectors. Liberalising the bond market and promoting private financing can be explored in this regard.

Way Forward: Priority sector norms are crucial to give a boost to the unserved and underserved sectors of the economy. But, reforms in PSL are crucial to keep the pace with economic dynamics, emerging opportunities and transforming social setup. Though these reforms need to be in a phased manner and should be extensively consulted with stakeholders.

Expanding funding base of NBFC

Context: National lending ecosystem requires the growth of Non-Banking Financial Company (NBFC) to promote inclusive and sustainable growth. However, NBFCs are burdened due to limited funding sources which hinder their ability to scale.

Relevance of the Topic: Prelims: Basics of NBFC institutions. Mains: Funding prospects, issues and suggestions for NBFCs.

About Non-Banking Financial Company:

NBFCs are the Non-banking financial institutions, registered under the Companies Act, 1956, that provide diverse financial facilities like lending, pension and insurance.
They do not have a full banking license and cannot accept deposits from the public.
NBFCs have played a pivotal role in making formal credit accessible to MSMEs, retail sectors and underserved populations.
- The sector contributes 12.5% to the country's GDP.
- The sector's credit share has grown from 15% in 2014 to 22.5% of total Scheduled Commercial Bank credit in 2024.
- The growth of NBFCs has been supported by diverse funding streams like bank loans, commercial papers and other debt instruments- where term loans and debentures consist of 75% of borrowings.

Role of NBFCs in Economy:

Credit access to the underserved sectors like small businesses, rural areas, and the informal sector.
Promoting financial inclusion by institutionalisation of the lending market in India, eliminating the unregulated lenders.
Driving infrastructural growth by funding the long-term and risky infrastructure projects, as banks lack the capacity to fund large projects due to their asset-liability mismatch.
Strengthening the financial market through the activities like leasing, hire-purchase and securitisation, improving the overall efficiency of the financial system.
Contributing capital formation as the NBFCs mobilises the resources, savings and investments to foster economic growth.

Constraints in NBFC funding:

Over-regulated bond market: As pension and insurance companies have a mandate to invest 75% on pools in AAA rating bonds only pose funding constraints for NBFC.
Liquidity challenge: NBFC often face liquidity challenges as they borrow short-term funds but lend long-term loans in the real estate and infrastructure sector.
- Example- IL&FS crisis of liquidity.
Limited Foreign funding: High regulatory restrictions and limited allowance of FDI in the financial sector like NBFC pose a challenge to funding.
High cost of borrowing: NBFCs, as compared to banks, get high interest market loans influenced by their credit rating to sustain their operations.
Limited access to public deposits: Only a few NBFCs are allowed to accept public deposits limiting their sources for sustainable funding.

Steps taken to address issues:

Extending liquidity support to the banks by measures like Targeted Long-Term Repo Operations by RBI.
Promoting co-lending models to reduce the burden of funding on the NBFC.
- Co-lending is a mechanism in which NBFCs partner with banks to co-lend to reduce asset-liability burden.
SEBI’s recent Liquidity Window Facility (LWF): It aims to improve the liquidity of corporate bonds (by significantly expanding retail participation in the corporate bond market). LWF can bridge the gap between public deposits and bond investments by providing investors with an exit option on predetermined dates.

What more can be done? There is a need to liberalise the bond market for the NBFC. The mandate to invest a major chunk in high-rated bonds needs to be relaxed to some extent, so that NBFCs can receive long-term and sustainable funding contributing to the economic growth of the nation.

Opinion Trading and the Need for its Regulation

Context: The government is having a strict eye on the Opinion trading platforms, questioning their validity on parameters of 'game of skill’ and 'game of chance’.

Relevance of the Topic:Mains: GS and Ethics paper; scope of impacts,provisions and opinion on legality.

Opinion Trading

Opinion trading platforms are the applications that seek the opinion of people on diverse fields in 'Yes’ or 'No’.
Allows betting: These apps allow the user to bet some amount and win on the basis of their answer.
Rise in domain: Various applications like Probo and MPL opinion trading are growing by receiving funding or more than 35,000 crores. Also, there is an expansion of the user base, for instance Probo has a user base of more than 5 crore.

Game of Chance versus Game of Skill

1. Definition:

Games of chance are the games whose outcomes are based on luck or random factors, with the minimum influence of players' decision making.
- Examples: Casino games and Dice games
- Legal status in India: These games are considered as gambling and addressed by the State laws. Further, they are heavily taxed and regulated.
Games of skill are the games based on the decision-making, expertise and strategy along with the players knowledge.
- Examples: Esports and Video games
- Legal status: Considered as competitive in nature and are not regulated under gambling regulations.

Note:

India is the fastest growing mobile gaming market and the annual revenue of the overall Indian gaming industry is expected to almost double to $6 billion by 2028 from $3.1 billion in 2023.
Under the 7th Schedule of the Indian Constitution, the States have the authority to regulate the realms of "betting and gambling." Different states of India have enacted their own legislation on betting and gambling.

Debate over Opinion Trading:

Opinion trading as Game of Skill:
- Dedicated skill committee: Platforms argue that they have constituted the dedicated skill board to look into the skill required to answer the questions.
- International precedences: Countries like the US have a separate regulator for the opinion trading platforms like Kalshi, an opinion trading platform of the US.
- Choice of fields: Platforms argue that their questions are majorly based on the politics, sports and major global events that require long-term analysis and experience to answer.

Opinion trading as Game of Chance:
- Random events: The questions are based on the random events that have no role of skill and decision-making.
  - Example: ‘Will Australia be able to take three wickets in the last over?’ Such questions are random in nature.
- Using legal loopholes: The platforms are using legal voids to avoid the regulations.
  - Example: Platforms lack questions based on Stock market to avoid SEBI regulations.
- Uncontrollable circumstances: The results of the events asked are beyond a person's ability to predict and influence, making it a chance based domain.

Legal status on Opinion Trading in India:

There is no dedicated regulatory body to regulate opinion trading. Though certain aspects of applications fall under the purview of the IT Ministry.

Way Forward

Dedicated regulator: A dedicated regulator can help in reducing the arbitrariness in the domain of Opinion Trading.
Learning from international experiences: India can learn from the nations like the US to regulate the Opinion trading by defining the do's and don'ts.
Public guidelines: The IT Ministry and the Finance Ministry can issue guidelines for the public to make them aware about the risks associated with such platforms.

Conclusion: Regulating opinion trading in India is crucial to ensure transparency and safety of public money. Clear guidelines, stringent monitoring and robust penalties can curb the manipulations and misinformation. A balanced approach fostering market innovation, ease of doing business and prompt regulation by the government can ensure a fair market for consumers and investors of such applications.

New cables to enhance India's Internet Connectivity

Context: Two new optical fiber cables namely India Asia Xpress (IAX) and India Europe Xpress (IEX) are expected to be functional in near future to enhance internet connectivity of India.

Relevance of the topic:

Prelims: Bharat Net Scheme; International Telecommunication Union (ITU).

Mains: Detailed questions on connectivity infrastructure in India.

Major Highlights:

As of 2024, India is connected to the global internet by 17 international undersea cables: SEA-ME-WE 3, Bay of Bengal Gateway, and Europe India Gateway.
Two new cable systems are set to launch in India in the coming months. The cables- IAX and IEX are cumulatively over 15,000 Km in length. They are owned by Reliance Jio with a strategic investment from China Mobile.
- IAX connects- Chennai and Mumbai with Singapore, Thailand and Malaysia in Asia.
- IEX connects- Chennai and Mumbai with France, Greece, Saudi Arabia, Egypt and Djibouti.

About Undersea Cables

Submarine or undersea cables are high-capacity optic fibre cables laid on the ocean floor to provide global connectivity for high-speed data exchange.
There are about 400 submarine cables worldwide that handle about 99% of international data traffic. Examples: JUNO, Asia-America Gateway, MAREA etc.

Advantages of Undersea Cables:

The undersea cables are designed to offer higher bandwidth and low latency.
These undersea cables i.e. Optical fiber cables offer low power loss and are immune to EM (Electro-magnetic) interference.
Over long distances, these cables are more cost effective compared to satellites.
The cables have minimal environmental footprint and are designed to last for around 25 years.

Disadvantages of Undersea Cables:

They are vulnerable to physical damage to them from shipping and fishing activities.
These cables are not suitable for regions vulnerable to disasters such as mudslides, typhoons etc. Satellites are used for such scenarios.
The submarine cable system requires repeaters at regular intervals.
The cables are used for espionage by countries. There have been instances where nations have intercepted data for espionage, raising concerns about data security.
The installation of the fiber network is very much expensive which requires huge investment. Undersea cable repair is slow, tedious and expensive.

International Telecommunication Union (ITU):

ITU is a specialised agency of the United Nations that focuses on issues related to information and communication technologies established in 1985.
Headquarters: Geneva, Switzerland
India is a member nation.
Report associated: Global Cybersecurity Index.

Bharat Net Scheme:

The scheme, launched by the Government of India, aims to boost the internet connectivity in the nation, especially the remote and rural regions.
It primarily advocates the usage of Optical Fiber Cable to enhance the connectivity to remote regions.
It targets to connect 2.5 Lakh Gram Panchayats with high speed broadband connection.
Universal Service Obligation Fund is used for the funding of the project. Where USOF is a corpus collected by the levies on the telecom operators.

Undersea Cables and India’s Opportunity:

Strategic Location of India: India's advantageous position in the Indian Ocean, brings it at the crossroads of major international trade and data transmission routes. Hence, India can serve as a vital node or connectivity hub for global internet traffic.
Enhancing regional connectivity: India has 17 prominent undersea cables and is expanding even further. The infrastructure can be leveraged to provide connectivity solutions to neighbouring countries (Sri Lanka, Bangladesh, Maldives, East Africa etc.) This can increase India’s strategic influence as well as provide economic gains.
Strategic leadership: India can play an active role in the International Telecommunication Union to shape global standards for connectivity and cybersecurity.

Certain challenges to Internet Connectivity in India:

Cost overrun as the delay in the projects due to land acquisition leads to the elevation in the cost of the project.
Coordination issues: In India, there are multiple agencies and coordinating bodies involved in Telecom regulation namely Telecom tribunal and Consumer tribunals; creating a coordination issue due to overlapping jurisdiction.
Security Issue: Submarine cables are susceptible to disruptions (intentional or accidental damage to cables) and espionage risks at strategic chokepoints. E.g., Malacca Strait. This could impact data transmission.

Way Forward: The new ecosystem of optical fiber will boost the economic development in India, though the challenges can be addressed with a common coordinating agency and inviting Public-Private Partnership funding. Also, new means of connectivity like satellite based internet like Starlink can also be explored.

New Bill to punish Unregulated Lending

Context: Recently, the government has proposed a new bill ‘BULA (Banning of Unregulated Lending Activities)’ which seeks to make unregulated lending a cognisable and non-bailable offense.

Relevance of the topic:

Prelims: Questions of various banking and finance regulation bodies.

Mains: Analytical question scope on need and impact of such law.

Major Highlights:

The draft bill aims to address both traditional and digital lending.
Definitions:
- The draft bill defines ‘unregulated lending activities’ as lending that is not covered by any laws governing regulated lending, whether conducted digitally or through other means.
- It defines ‘public lending activity’ as the business of financing by any person whether by way of making loans or advances or otherwise of any activity other than its own at an interest, in cash or kind, but does not include loans and advances given to relatives.
Punishment: Violation of the law would be considered a cognisable and non-bailable offense.
- Lenders who offer unregulated loans will be punished with a minimum 2 years of jail term that can be extended to 7 years, along with a fine ranging from Rs 2 lakh to Rs 1 crore.
- Lenders who use unlawful methods to harass borrowers or recover loans will face imprisonment from 3 to 10 years and fines.
The investigations would be transferred to the Central Bureau of Investigation (CBI) if the lender, borrower, or properties are located across multiple states or union territories, or if the total amount involved is large enough to significantly impact public interest.

Impacts of Unregulated Lending:

Unregulated lending is an umbrella term that includes the non-institutional financing i.e., loans from moneylenders, shroffs, unregistered fintech companies etc. It leads to:

Parallel Economy: Unregulated lending paves a way for parallel economy or the shadow economy that is often used for money laundering.
Undermines Monetary Policy efforts, as the unregulated lenders are beyond the purview of RBI. Example: If RBI increases Repo to control inflation, it will only reduce lending from regulated entities, while the unregulated entities will continue to lend leading to limited impact on inflation targeting.
Exploitation of Borrowers: Unregulated loans leads to the exploitation due to the exaggerated interest rates resulting in suicides. Example: Chennai IT professional succumbed to harassment by loan application.
Threatens National Security as the majority of the fraud digital lending applications were funded from China, posing threat to Indian economic security.

Regulating Mechanisms for Lending Activities:

Regulating bodies
- Reserve Bank of India, 1934
- Security and Exchange Board of India oversees corporate lending activities.
Regulating Acts
- RBI Act, 1934
- Banking Regulations Act, 1949
- State Moneylenders Act (specific to states)

Way Forward to control menace of Unregulated Lending:

Create accessible complaint portals to report complaints about the fraud lenders and lending applications.
Carpet ban on illegal lending applications. Example: Over 300 fraudulent loan Applications were banned in India under the IT Intermediary Guidelines and Digital Media Ethics Code, 2021.
Promoting institutional lending by simplifying access to formal credit or incentivising people to choose Banking and NBFC institutions to get loans. Example: Easy loans via Small Finance banks.

Conclusion: Lending is a critical activity to sustain economic growth especially in nations like India where a major chunk of the economy is dominated by small businesses and MSMEs. Prompt regulation and intelligence about the lending market dynamics can resolve the issue of unregulated lending.

RBI asks States to sustain Fiscal Prudence

Context: Recently, the Reserve Bank of India (RBI) has released a report on “State Finances — A Study of Budgets of 2024-25.” The report emphasises the need for sustained fiscal prudence to states while prioritising growth-enhancing capital spending.

Relevance of the Topic: Prelims: Key facts related to fiscal deficit, debt management, Fiscal Responsibility and Budget Management (FRBM) Act.

Observations by RBI:

1. Positive Trends:

Rising Capital Expenditure: Capital expenditure increased from 2.4% of GDP (2021-22) to 2.8% (2023-24) and budgeted at 3.1% of GDP in 2024-25. This reflects improvement in the quality of expenditure.
Deficit Management: State governments have contained their gross fiscal deficit (GFD) within 3% of GDP (gross domestic product) and Revenue deficit at 0.2% of GDP during 2022-23 and 2023-24.
Declining Debt levels: States’ total outstanding liabilities have declined from 31.% of GDP (March 2021) to 28.5% at March 2024.
Policy Reforms: State-specific fiscal responsibility legislations (FRLs), along with tax and expenditure reforms have strengthened states’ finances over the past two decades.

2. Concerns:

Rise in Subsidies burden: There is a sharp rise in expenditure on subsidies, driven by:
- farm loan waivers
- free/subsidised services (like electricity to agriculture and households, transport, gas cylinder)
- cash transfers to farmers, youth and women.
Too many Central government schemes reduce flexibility of State government spending and dilute the spirit of cooperative fiscal federalism.
Persistent high level of subnational debt calls for a credible roadmap for debt consolidation.
- Through the states’ total outstanding liabilities have declined to 28.5% (March 2024), but they still remain:
  - above the pre-pandemic level (25.3% at end-March 2019).
  - above the 20% ceiling by Fiscal Responsibility and Budget Management (FRBM) Act, 2017.

Suggestions by RBI:

States need to rationalise their subsidy outgoes so that subsidy spending does not crowd-out capital expenditure.
Rationalisation of centrally sponsored schemes to free up budgetary space to meet State-specific expenditure and reduce fiscal burden of both Union and State governments.
Develop a transparent and time-bound debt consolidation roadmap, aligned with macroeconomic objectives such as debt sustainability, resilience, and fiscal flexibility.
Consistent reporting of contingent liabilities and off-budget borrowings to enhance fiscal transparency and aid in assessing fiscal health of States.
Improving public expenditure efficiency by implementing outcome budgeting, i.e., linking spending to measurable outcomes.
Adoption of climate budgeting to integrate climate action into fiscal planning.
Leverage technologies like artificial intelligence and machine learning to utilise micro-data generated by state departments for improved public policy and better governance.
Timely and adequate transfers to local bodies by States to strengthen decentralised governance. A multi-pronged approach is required to refine the process of appointment of State Finance Commissions (SFCs), data collection and improving the quality of SFC reports.

Conclusion: Overall, the State governments have made progress in fiscal consolidation, there is scope for further improvement in expenditure efficiency, outcome and climate budget, transparent data reporting and use of modern techniques. Efforts by States in these areas will pave the way for higher economic growth with macroeconomic stability.

Sovereign Gold Bond Scheme

Context: The Union government is considering discontinuing the sovereign gold bond scheme due to the high cost of financing the scheme. The recent developments like reduction of import duty on gold in the Union budget 2024-25, have raised the questions over the effectiveness of the SGB scheme.

Relevance of the Topic: Prelims: Features of Sovereign Gold Bonds.

What are Sovereign Gold Bonds (SGBs)?

Definition: SGBs are government securities (debt securities) denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
Key Features:
- Denomination: One gram of gold and in multiples thereof.
- Minimum investment: One gram with a maximum limit of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government.
- Interest rate: 2.50 per cent (fixed rate) per annum on the amount of initial investment.
- Maturity Period: 8 years
- Lock-in Period: 5 years
The money raised through SGBs is counted as part of Fiscal Deficit.

Rationale of Sovereign Gold Bonds scheme:

To encourage citizens to invest in gold bonds. This would reduce the demand of physical gold and thus reduce gold imports. (Gold imports are a significant contributor to India’s trade deficit).
To shift a part of the domestic savings used for the purchase of physical gold into financial savings.
To bring the idle gold lying with Indian households into the economy.

Who can invest in the SGBs?

Persons resident in India as defined under Foreign Exchange Management Act, 1999.
Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.

Who are the authorised agencies to sell SGBs?

Bonds are sold through offices or branches of:

Nationalised Banks
Scheduled Private Banks
Scheduled Foreign Banks
Designated Post Offices
Stock Holding Corporation of India Ltd.
Authorised stock exchanges

Benefits of Sovereign Gold Bonds:

Alternative to Physical Gold: SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated.
Interest Earnings: Investors earn an interest of 2.5% per annum which is payable semi-annually on the investments.
Market-Linked Returns: The redemption price is linked to the prevailing gold market price which ensures the gains from price appreciation.
Loan Facility: SGBs can be used as collateral for loans as it offers financial flexibility.
Liquidity: It also provides the option for premature redemption from the fifth year as well as tradability on stock exchanges.
Tax benefits: SGBs are taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax on redemption of SGB to an individual has been exempted.

Challenges and Concerns with SGBs:

High Financing Costs: There are concerns that the cost of financing the fiscal deficit through SGBs is quite high and does not align with the benefits accruing to investors from the scheme.
Reduced SGB Value: The government in Budget 2024-25 has reduced the gold import duty from 15% to 6%. As the price of gold has decreased due to lower import duty, the value of SGBs, which are linked to gold prices, has also declined. This has made SGB less attractive.
Reduced Demand of SGB: Due to diminishing demand for SGB, the government has reduced the number of SGB issuances from 10 tranches per year to just two. In the current fiscal year (2024-25), no issuance of SBG has taken place so far.
Limited Tax Base: Despite the government's efforts to reduce physical gold holdings, there has been limited success in expanding the investor base for gold bonds.

What are Alternative Investment Funds (AIF)?

Context: Alternative Investment Funds (AIFs) have emerged as a key instrument for high-net-worth individuals and institutional investors in India as they facilitate investment in high-risk, high-return ventures. However, concerns have surfaced regarding their misuse to bypass financial regulations.

Relevance of the Topic: Prelims: Key facts about Alternative Investment Funds.

About Alternative Investment Funds (AIFs):

Definition: AIFs are private investment vehicles that pool funds from sophisticated investors for investment in start-ups, infrastructure, and other high-return avenues, regulated by Securities and Exchange Board of India (SEBI) under AIF regulations, 2012.
Eligibility: Minimum fund corpus of ₹20 crore; Individual investments must exceed ₹1 crore.
Significance: AIFs contribute to economic growth by funding critical sectors like infrastructure and start-ups, and they attract foreign and domestic capital.
Types of AIFs in India (as per SEBI):
- Category I: Invest in start-ups, infrastructure, social ventures.
- Category II: Includes private equity funds and debt funds.
- Category III: Hedge funds and other complex strategies for short-term returns.

	Mutual Funds	Alternative Investment Funds (AIFs)
*Investors*	Retail investors with low investment size	High Net Worth Individuals and institutional investors with a minimum capital of ₹1 Crore.
*Risk*	Relatively lower due to diversified portfolios and strict regulatory norms	High risk investments, typically targeting categories with high-returns
*Nature of products*	Standard products for all Investors	Customised and Niche products
*Regulation*	Heavily regulated by SEBI under Mutual Funds Regulations, 1996.	Regulated by SEBI (under AIF regulations, 2012) but less stringent than mutual funds.

Key Laws Governing Financial Sector:

SEBI Act (1992): Focuses on investor protection and regulation of securities markets.
Insolvency and Bankruptcy Code (2016): Provides framework for resolving corporate insolvency.
Foreign Exchange Management Act (FEMA, 1999): Manages foreign exchange market and regulates cross-border investments.

Challenges with AIFs:

Circumvention of Regulations:
- Misuse of AIFs to bypass financial regulations in areas like Non-Performing Assets (NPA), Insolvency and Bankruptcy Code (IBC), and foreign exchange laws.
- Recently, ₹1 lakh crore of AIF investments (~20%) flagged for regulatory concerns.
Investor Protection:
- Industry's call for lighter regulations vs. SEBI's mandate for robust investor protection.
- Concerns over conflict of interest in valuation practices.
High Costs: The small number of AIF investors makes compliance and accreditation costs prohibitive.

Regulatory Framework and SEBI’s Measures:

Digital and Simplified Compliance: Introduction of a simplified code of conduct for AIF regulatory compliance.
Focus on Accredited Investors: Proposal to adopt global standards by introducing the Accredited Investor (AI) model for AIFs.
Valuation Oversight: Proposal for a framework similar to credit-rating norms to address valuation conflicts of interest.
Fund Manager Registration: Suggested dual-layer regulation with responsibilities assigned to both fund managers and funds to improve efficiency.

Way Forward:

Strengthen Regulatory Framework:
- Enforce robust checks on fund structures to prevent regulatory circumvention.
- Introduce clearer guidelines for valuation and conflict resolution.
Adopt the Accredited Investor Model:
- Implement global best practices to ensure investments align with investor qualifications.
- Reduce accreditation costs by expanding the investor base and encouraging intermediaries to handle the process.
Leverage Technology and Transparency:
- Leverage AI and other digital tools for efficient regulatory compliance.
- Mandate transparent disclosures on fund objectives, risks, and valuation practices.
Striking a Balance: Maintain a balance between regulatory stringency and promoting industry growth, as reflected in SEBI’s commitment to investor protection. Avoid overregulation that could stifle innovation and growth in the AIF industry.

Debate around Legalisation of Minimum Support Price

Context: The Parliamentary Standing Committee on Agriculture has recently recommended that the Government should legalise Minimum Support Price (MSP) to ensure price stability and promote investment by farmers. On the other hand, the Supreme Court appointed Committee of Farm laws has opined that such a move would go against the interests of farmers as well as Indian Agriculture.

Relevance of the topic:

Prelims: Key aspects of Minimum Support Price (Determination of MSP, Difference between FRP and MSP)

Mains: Debate about Legalisation of MSP; Way Forward.

Details about Minimum Support Price (MSP) regime:

Declaration of MSP by Cabinet Committee on Economic Affairs (CCEA) based on the recommendations of the Commission on Agricultural Costs and Prices (CACP).
Coverage of Commodities: 22 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, sesamum, sunflower, safflower, Niger seed), and 3 commercial crops (copra, cotton and raw jute).

Determinants of MSP:

Demand and Supply
Cost of Production
Price trends in the market, both domestic and international
inter-crop price parity
Terms of Trade (ToT) between agriculture and non-agriculture: ToT refers to the ratio of Prices received by Farmers on agricultural commodities to the Prices paid by the Farmers to purchase non-agricultural goods and services.
Likely implications of MSP on consumers of that product.

How are the MSPs fixed?

MSP is fixed at 1.5 times the cost of production.

Approaches to measure the cost of production:

A2 Approach, which includes the cost of inputs such as seeds, fertilizer, labour.
A2+FL Approach, which includes A2 and the implied cost of family labour (FL).
C2 Approach, which includes the implied rent on land and interest on capital assets and A2+FL.

Note: Presently, India follows A2+FL approach to declare MSP at 1.5 times the cost of production.

Difference between FRP and MSP:

Fair and Remunerative Price for Sugarcane is declared under Sugarcane control order 1966 issued under Essential commodities Act, 1955 and hence it enjoys legal status. It means that it is legally binding for the sugarcane Industries to purchase sugarcane from farmers at FRP, else it would be considered illegal.
However, MSP does not enjoy statutory recognition. This means that there is no onus on the traders to buy crops at MSP.

Debate about Legalisation of MSP:

Way Forward

As highlighted by Eco Survey 2019-20, in any free-market economy, Government intervention, sometimes though well intended, often ends up adversely affecting the market. Hence, rather than legalising MSP, the Government can focus on the following strategies:

Flexibility to the States: Legalisation of MSP can be prerogative of the States as per their specific agricultural policy priorities. The States can provide for a legal backing for such procurements at their own costs - as the recent Punjab Amendment Act does. Similarly, Kerala has recently announced MSP for fruits and vegetables. Some States also announce bonuses on the MSP announced by the Centre.
Reintroduce Farm laws (SC Appointed Committee on Farm Laws) to liberalise agriculture marketing and give freedom to farmers to sell the commodities wherever and whomever they want.
Promote Inverse Fork-to-Farm Strategy (Dalwai Panel): Encourage farmers to grow crops based upon the prevailing demand as it would fetch them higher prices.
Enhancing Bargaining power of Farmers: Even though the Government does not declare MSP for Milk, Farmers get higher prices as they have been organised into cooperatives. Hence, bargaining power of farmers can be enhanced through:
- Organising Farmers into FPOs.
- Strengthening E-NAM
- Promotion of Contract Farming
- Promotion of Negotiable Warehousing Receipts (NWRS)
- Strengthen futures market for efficient price discovery and hedging of risks by farmers (Eco Survey 2023-24)
Replace Open-ended Procurement policy by Closed ended procurement policy to discourage cultivation of Rice and Wheat. (SC appointed Committee on Farm Laws)
Bring Agricultural Marketing (Dalwai Panel) under Concurrent list for greater coordination between Centre and States.

Indian Trade Deficit at record $37 Billion

Context: The Ministry of Commerce and Industry has released the goods trade deficit data of November 2024. India's goods trade deficit widened to record $37.84 billion.

Relevance of the topic:

Prelims: Prelims consist of conceptual and factual questions based upon Current and Capital Account Deficit.

Mains: Analysis on Current Account Deficit (CAD) and its impacts on Nation's Economy.

Major Highlights:

The reason for the high goods deficit is credited to the rise in the gold import which accounted for 20% of the import bills.
The widening trade deficit has raised concerns about its impact on India’s current account deficit (CAD) and the value of the rupee. Economists predict that the current account deficit could widen to 1.4% of GDP, up from the earlier estimate of 1%.

Implications of High Current Account Deficit:

Currency Depreciation: A high CAD results in increased demand for foreign currency to pay for imports. This results in depreciation of Rupee.
Foreign Exchange Reserve Depletion: A high CAD increases demand for foreign currency, thus leading to depletion of forex reserves. The Central bank used the forex reserves to finance the deficit and stabilise the currency. Example; India’s forex reserves declined by $50 billion in recent months due to market interventions.
Increased debt liabilities due to disadvantageous situations in the exchange rate.
Shakes investors confidence over the economy, as the high CAD may degrade the credit rating due to enhanced debt liabilities.
Imported Inflation: Currency depreciation, as a result of high CAD, leads to increase in the price of imported goods. This results in imported inflation, especially in goods like fuel and edible oil.

Way Forward to bridge the Current Account Deficit:

Boosting export competitiveness by improving infrastructure, reducing production cost and diversifying the export basket.
- Example: Germany and South Korea model to enhance export competitiveness by promoting infrastructure and skills of labour.
Import substitution by promoting the domestic goods and facilitating the local manufacturer.
- Example: Atmanirbhar Bharat initiative to promote local manufacturing.
Encouraging the service exports (IT, finance, health services) to balance the goods import in India.
Reducing crude oil import by promoting the alternate energy sources like e-vehicles, solar power, wind energy etc.
- Example: FAME initiative of government of India.
Conclude Trade agreements to reduce tariffs and promote hassle free trade with partner nations.
- Example: Diplomatic efforts to conclude EFTA and FTA with the UK.

Conclusion: India can reduce the current account deficit by comprehensive and multidimensional strategy by combining efforts like, boosting exports in IT, attracting FDI, promoting tourism and reducing reliance on energy imports. Also, learnings from the best practices of Germany, China, Vietnam and Singapore can provide impetus to the target of India to reduce CAD.

Credit Guarantee Scheme for e-NWR based Pledge Financing

Context: Central Government launched a Credit Guarantee Scheme which provides a corpus of Rs 1,000-crore for post-harvest finance availed by farmers against electronic negotiable warehouse receipts (e-NWRs).

Relevance of the topic:

Prelims: Salient Features of the scheme; Electronic-Negotiable Warehouse Receipt (e-NWR).

Mains: Benefits of the scheme

What are Credit Guarantee Schemes?

Credit Guarantee refers to a situation where the loan to the applicant is backed by a party without the need for any external collateral or third-party guarantee.
Here, the loan sanctioned by the member lending institution is backed by the scheme which provides the guarantee cover for a large portion of the loan amount.

Electronic-Negotiable Warehouse Receipts (e-NWR):

The negotiable warehouse receipt (NWR) system, launched in 2011, allows transfer of ownership of a commodity stored in a warehouse without having to deliver it physically.
An e-NWR is available only in electronic form. These receipts are issued in negotiable form, making them eligible as collateral.
Warehousing Development and Regulatory Authority (WDRA) regulates the entire operation under NWR.

About Credit Guarantee Scheme for e-NWR based Pledge Financing:

Objective: To help farmers easily access post-harvest loans by leveraging electronic warehouse receipts.
Total Corpus: Rs. 1000 Crores
Coverage: Loans up to Rs. 75 lakhs for agricultural purpose; up to Rs. 200 Lakhs for non-agricultural purpose.
Eligible Institutions: All scheduled banks and all cooperative banks.
Eligible Borrowers: Small and Marginal Farmers, Women, SC/ST/PwD Farmers, other farmers, MSMEs, Traders, FPOs and Farmer cooperatives.
Risks covered: Credit and warehouseman risks.
Guarantee coverage:
- 85% for loans up to Rs. 3 Lakhs.
- 80% for loan between Rs. 3 to 75 lakhs for small and marginal farmers/ women/ SC/ ST/ PwD
- 75% for other borrowers.

Benefits of the Scheme:

Increase post-harvest lending: Currently, post-harvest lending stands at Rs. 40,000 crore out of total agricultural lending of Rs 21 lakh. Lending against e-NWRs is just Rs 4000 crore.
Improved Trust for Banks: It addresses the default arising out of both Credit risk and Warehouseman risk.
Access to Vulnerable Section: The scheme majorly focuses on Small and Marginal Farmers, Women, SC, ST and Divyangjan (PwD) farmers with a minimal guarantee fee.
Avoid distress selling by farmers: Currently, farmers are compelled to sell their produce even if the price crashes, to get money to invest in the next cycle of crops. As this scheme takes off, farmers can submit their produce and get issued e-NWRs which will act as collateral for banks to issue required loans. Farmers can sell their produce when the price goes up.