Aug-16Eco Flashcards Preview

VIAS-CA-3. ECONOMY > Aug-16Eco > Flashcards

Flashcards in Aug-16Eco Deck (29):
1

Aug-16Eco-Index

3.1. Railway Budget Scrapped?
3.2. GST Bill Passed in Rajya Sabha
3.3. Bank Consolidation:Merger of SBI Associated banks
3.4. Domestic Systemically Important Banks (D-Sibs)
3.5. Promoting Inland Waterways
3.6. Logistic Costs Saving Through Sagarmala
3.7. Bill to Amend Sarfaesi and DRT Act
3.8. Model Land Leasing Law
3.9. Tax Terrorism
3.10. Tax Battle-Apple V/S EU
3.11. Centre Owes Rs. 80,000 Cr to States: CAG Report
3.12. Central Water Commission
3.13. National Committee on Trade Facilitation
3.14. Foreign Investment in Financial Services
3.15. Dispute Over Basmati GI Tag Claim
3.16. Farming Becoming Unattractive for Youth: FAO
3.17. International Arbitration Mechanism
3.18. Inclusive Housing and India's Mortgage Market
3.19. Panel to promote card payments
3.20. Electropreneur Park
3.21. Corporate bond market
3.22. Swift: Ease of Doing Business
3.23. Formula for Production Subsidy to Sugar Mills
3.24. RBI’s Annual Report
3.25. Atal Pension Yojana (APY)
3.26. Inflation Targeting
3.27. Green Cess
3.28. Taxation Laws (Amendment) Bill, 2016

2

3.1. RAILWAY BUDGET SCRAPPED?

Why in news?
 The 92-year-old practice of presenting a separate Rail Budget is set to come to an end from the next fiscal, with the Finance Ministry accepting Railway Ministry proposal to merge it with the General Budget.
Background
 The origin of the railway budget goes back to a report by British politician William Ackworth in 1924.
 He recommended a separate railway budget, given that most of the infrastructure spending by the British government went towards building railway lines.
 Critics have lately argued that there is no constitutional or legal requirement for a separate railway budget.
 While the Union budget is a Constitutional requirement and is presented under Article 112 of the Indian Constitution, which mandates an annual financial statement, the Constitution does not talk about the railway budget in particular.
What are the implications?
 Post-merger, the issue of raising passenger fares, will be the Finance Minister’s call.
 The merger would mean, Indian Railway will get rid of the annual dividend it has to pay for gross budgetary support from the government every year.
 There are delays in completion of projects resulting in cost overrun of Rs 1.07 lakh crore in respect of 442 on going rail projects.
 The Indian Railways suffering from a massive revenue deficit, will pass on the burden to the finance ministry after the merger.
 The Finance Ministry has constituted a five-member committee to work out the modalities for the merger. The committee has been asked to submit its report by August 31.
Arguments in favour of merger
 India has 66,000 km of railway lines, of which only 17,000 km have been added since Independence. This shows the dismal performance of railways.
 The idea was recently mooted by a committee headed by NITI Aayog member Bibek Debroy, as part of the restructuring of the Railways.
 The committee had recommended that railway budget should be phased out progressively.
 Railway budget had become political tool to announce populist measures.
 It has become populist avenue for MPs demanding new trains and opposing hike in train fares.
 Unlike general budget, there is no constitutional or legal requirement for separate railway budget. A lot of resources are wasted in the process of preparing railway budget.
 It will be an important step in a series of measures to enhance the performance of Indian railways.
Arguments against the merger
 By bringing railway budget into the fold of annual budget, railways need to wait for annual budget for any changes. Railways cannot afford such long wait.
 Even though Indian Railways is a state monopoly it faces increasingly tough competition from roads and civil aviation. To compete with them it needs separate budget system.
 The merger may transform the Railways to just another government department, as it may lose its commercial character.
 There is no mechanism even from finance ministry to cater to possible revenue shortfall of railways.
 This may also slow the pace of privatization plans of the Railways.
Way forward
 Separate railway budget has its own advantages and disadvantages.
 A possibility of combined infrastructure budget can be seen as an initiative due in future. This would lead to better convergence and coordination between different transport sectors.

3

3.2. GST BILL PASSED IN RAJYA SABHA

Why in news?
 The Parliament passed The Constitution (122nd Amendment) (GST) Bill, 2014 after it was unanimously passed by the Lok Sabha by approving all the amendments made by Rajya Sabha earlier.
 The bill now will go states (15 out of total 29 states) for approval as per Article 368 of Constitution as it constitutional amendment bill dealing with changes in the features of fiscal federalism.

What is GST?
---Fig--
GST is a Value Added Tax. GST contains all indirect taxes levied on goods, including central and state level taxes. THE GST SYSTEM IS EXPLAINED IN THE INFO-GRAPHIC BELOW. LET US ASSUME A 10% TAX RATE.
Features of GST system
 It will be collected on VAT method i.e. tax at every stage of value addition.
 It will be imposed at a uniform rate @ 20% (Centre state share = 12 and 8 percent respectively).
 GST will be is levied only at the destination point, and not at various points (from manufacturing to retail outlets) and therefore reduces tax terrorism.
 the government also cleared changes in the Bill including:
a. Doing away with the additional 1 per cent tax by producing states and
b. Compensating all states for any revenue loss in the first five years post the GST rollout.
 As the next step, the Centre has to enact two laws, one on the creation of Central GST (CGST subsumes central taxes) and another on Integrated GST (IGST). The state governments, on their part, have to pass a legislation on creation of state GST (subsumes various state taxes).
 But Customs, Stamp-duties, Petroleum, Electricity tax and Alcohol are exempted from GST.
Advantages
 Governance:
 GST will get rid of the current patchwork of indirect taxes levied by centre and states such as: excise, value added tax, octroi and sales tax with one uniform tax that will be shared by both states and the Centre.
 The earlier indirect taxes were partial and suffered from infirmities, mainly exemptions and multiple rates.
 Reduced tax disputes.
 Due to easy framework it improves tax compliances. Checks tax-evasion.
 It is expected to help build a transparent and corruption-free tax administration.
 Economy
 A national seamless market will be established. This will significantly lower transit time and also improve truck utilization.
 Greater cost-competitiveness – as competitors would not get undue benefit due to location or product etc.,
 Productivity gains – in tax and logistic areas.
 It is estimated that India will gain $15 billion a year by implementing the Goods and Services Tax as it would promote exports, raise employment and boost growth.
 Both the components (central and state GST) will be charged on the manufacturing cost. This will bring down the prices and will lead to increased consumption, thereby helping companies.
 Evolved to new Economic structure both intra and inter-national
 Under GST, the taxation burden will be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.
 With the increase of international trade in services, the GST has become a preferred global standard. All OECD countries, except the US, follow this taxation structure.
 Increased tax base and tax to GDP ratio.
Challenges
 Consensus between centre and states on loss of revenue. Though this is resolved for next 5 years due to compensation by centre, it is bound to remain a challenge.
 Loss to manufacturing states as 1% additional tax is also removed in final GST bill.
 Dual control in every area.
 Credit will be available with GST network i.e., online only. This will negatively affect small businesses.
 The governments of Madhya Pradesh, Chhattisgarh and Tamil Nadu say that the “information technology systems and the administrative infrastructure may not be ready to implement GST”
 States lose autonomy to change tax rate as this will be decided by GST council. Clause 246A makes Parliament’s decisions will be overriding and binding on the States.
 Petroleum and liquor still out. They form almost 40% of India’s total trade, so significant portion is still outside.
 Administrative mechanism: In India, a merger between two government agencies is next to impossible, as long as appraisals and promotions are linked to seniority and regretfully, not performance. And integrating the revenue collection services of all states and an extremely powerful Central Service into one GST collection agent.
 Negative impact on sectors currently enjoying tax benefits such as: textiles, media, dairy, IT/ITeS, Pharma etc.

4

3.3. BANK CONSOLIDATION: MERGER OF SBI ASSOCIATED BANKS

Why in news?
 The boards of State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), the unlisted State Bank of Hyderabad (SBH), State Bank of Patiala (SBP) and Bharatiya Mahila Bank
approved the scheme of merger with State Bank of India.
Benefits of merger
 It would improve the economies of scale. This will lead to
reduction of cost on account of treasury operations, audit,
technology, among others; Better management of liquidity.
 It will help in meeting BASEL-III norms. It will take its assets
from 21.5 to 28.25 lakh crore.
 Improvement in small banks- in terms of technological
know-how, international standards, innovative products,
professional standards etc.
 Diversification of customers and assets.
 Better monitoring and regulation due to fewer banks.
 International recognition.
 Since SBI is upgrading processes to improve customer service, the customers of the merged smaller banks will get a better deal in loan rates after the merger.
Issues
 It would affect regional flavour which could lead to losing regional focus.
 Large banks lead to consolidation of risks as well e.g. Global financial crisis of 2007.
 India needs more Banking competition than consolidation- to improve banking efficiency.
 Concerns of the employees- effect on promotion prospects due to curtailment of seniority, relocation due to rationalisation of branches.
 Poor government record on mergers e.g. Air India and Indian Airlines.
Suggestions
 The govt should not rush through the process - all stakeholders must be involved in the process
 In the event of further divestment, the govt. share shall not fall below 51% in any case
 Acquiring bank shall not dominate the smaller ones- good practices of both should be combined; conscious and organized efforts to synthesize the differences must be made
Conclusion
 Bank consolidation is a tricky issue. While it is said that the long-term benefits of consolidation outweigh the short-term concerns, it must not be made a general policy. It is only to be done with right banks for right purpose with proper safeguards.
(Note: for more detail please refer May 2016 Current Affairs)

Box--Few Facts
With merger, SBI will have an asset base of Rs 37 trillion (Rs 37 lakh crore) or over $555 billion, with 22,500 branches and 58,000 ATMs. It will have over 50 crore customers.
Further, SBI's market share will increase nearly to 22 percent from 17 percent. Post the share-swap ratio, the combined entity's market capitalization after the merger will be nearly Rs 2 lakh crore.
SBI has close to 16,500 branches, including 191 foreign offices spread across 36 countries.

5

3.4. DOMESTIC SYSTEMICALLY IMPORTANT BANKS (D-SIBS)

Why in news?
 The Reserve bank of India (RBI) has recently identified public sector lender State Bank of India (SBI) and its private sector peer ICICI Bank as domestic systemically important banks (D-SIBs) in 2016.
What is it?
 SIBs are perceived as certain big banks in the country. Since the national economy is dependent upon these banks, they are perceived as ‘Too Big To Fail (TBTF)’ because of the expectation of government support for these banks at the time of distress.
 Due to this perception these banks enjoy certain advantages in the funding markets.
 There are two types of SIBs:
 Global SIBs; the identification is done by BASEL committee on banking supervision.
 Domestic SIBs; by central Bank of the country.
Need for SIB Status
 The perceived expectation can also lead to reckless practices on part of these Banks like increased risk-taking by the banks, reduction in its market discipline, creation of competitive distortions etc. All this can increase the probability of distress in the future.
 Therefore, it is required that SIBs be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.
 They are forced to have additional capital/backup against financial emergency, so that taxpayer money not wasted in rescuing them during crisis.

6

3.5. PROMOTING INLAND WATERWAYS

Why in news?
 The Centre is framing a policy to enable all major ports to set up subsidiary companies to develop inland waterways.
Background
 Govt. intends to promote inland waterways due to tremendous cost-cutting and environmental advantages.
 Govt. has already approved developing 106 new inland water projects spread across 24 states as national waterways in addition to the five existing networks under its new National Waterways Act 2016.
 However, raising funds for waterways is difficult and around Rs. 80,000 crore is needed to develop 20,000 km inland waterways, which cannot be met through Shipping Ministry’s annual budget of Rs. 1,800 crore.
 It is difficult to obtain foreign funding for these projects because they don’t have any financial credentials as of now.
New Policy
 The government intends to utilize the economic goodwill of Indian ports for the purpose. Based on the foreign currency billing a cheaper forex credit can be raised.
 All major ports have a combined turnover of Rs. 4,000 crore and an amount of Rs.50,000 crore can be raised as foreign loans at around 2.75 per cent interest.
 The subsidiary company can effectively utilize the money for developing the waterways. For example the JNPT port can develop waterways on 7-8 rivers in Maharashtra which flow from MP.
Multiple Benefits
 Reduction in logistics costs will make exports competitive in international market.
 Developing inland waterways is in direct interest of Ports as more exports will increase their business.
 The Shipping Ministry is further urging the Finance Ministry to allocate 5% of the money collected as cess on diesel and petrol for inland waterways.

7

3.6. LOGISTIC COSTS SAVING THROUGH SAGARMALA

Why in news?
A report ‘Origin Destination study on cargo traffic projections & logistics bottlenecks’ is prepared under the Sagarmala port-led development programme of Ministry of Shipping.
Key suggestions
 The need for creation of efficient infrastructure at requisite
demand and logistic chain centers.
 Promoting coastal shipping of bulk commodities like coal,setting-up coastal clusters for bulk commodities like cement & steel.
 Establishing new transshipment port.
 Creating dedicated coastal berths ports for coastal shipping.
 Setting up storage capacities at origin-destination ports to shorten turnaround time.
 Developing adequate ship-repair facilities in the maritime states.
 Providing last-mile connectivity of ports with National Highways and Railway network.
Significance
 Potential to save around INR 40,000 crores per annum by optimizing logistics flows by 2025.
 Increase in cargo traffic to 2.5 bn MMTPA by 2025
 Make Indian goods more competitive in the global markets and drive its port-led-development.

Box--Sagarmala
It is a government’s flagship program to promote (i) port-led development, (ii) Port Infrastructure Enhancement, and ‘Efficient Evacuation Infra’ to and fro from ports.

8

3.7. BILL TO AMEND SARFAESI AND DRT ACT

Why in News?
 The Lok Sabha recently passed a bill to amend the existing
Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest (Sarfaesi) Act, and the debt
recovery tribunal (DRT) Act.
 It has now been passed by both - the Lok Sabha and Rajya
Sabha.
Need
 The problem of rising NPAs is well known.
 Flaws in the existing debt recovery process have further
added to the problem of NPAs. For instance, more than 70,000 cases are pending before Debt Recovery Tribunal (DRTs).
 SARFAESI and DRT were envisaged to ensure quick disposal of cases. However, they have not met the expectations.
 The Bill seeks to address this issue. It will amend four Acts:
 SARFAESI Act, 2002,
 The Recovery of Debts due to Banks and Financial Institutions Act, 1993,
 The Indian Stamp Act, 1899; and
 The Depositories Act, 1996.
Benefits
 Faster recovery and resolution of bad debts by banks and financial institutions.
 Making it easier for asset reconstruction companies (ARCs) to function.
 Encourage more asset reconstruction companies (ARCs) to set up business in India and revamp debt recovery tribunals (DRTs).
 Works in complement with the new bankruptcy law and will provide a time-bound framework to deal with stressed assets and loan recovery.
 Will legally strengthen the banking system.
Salient features of the bill
 SARFAESI
 Allows Banks to take possession of collateral security within 30 days. This assumes importance in view of Vijay Mallaya controversy
 Expansion of regulatory powers of RBI over ARCs;
 RBI will get more powers to audit and inspect any ARC as well as the freedom to remove the chairman or any director and appoint central bank officials to its board.
 RBI will be empowered to impose penalties for non-compliance with its directives, and regulate the fees charged by these companies to banks at the time of acquiring such assets.

SARFAESI: was enacted to enable Banks and financial institutions to auction residential or commercial properties without the intervention of any court or tribunal to recover loans. It led to the formation of ARCs, enabling banks to take over the management of secured assets etc
Debt Recovery Tribunal: They are alternate to civil courts formed for enforcement and recovery of debts. It provided a faster and easier procedure for recovery
 The bill proposes to widen the scope of the registry that will house the central database of all loans against properties given by all lenders.
 Bill provides that secured creditors will not be able to take possession over the collateral unless it is registered with the central registry. Further, these creditors, after registration of security interest, will have priority over others in repayment of dues.
 Enable secured creditors to take over a company and restore its business on acquisition of controlling interest in the borrower company.
 DRT
 To move towards online DRTs- electronic filing of recovery applications, documents and written statements.
 Establish a time bound process
 Taking interest of creditors- 50% of the debt has to be deposited with DRT for filing an appeal.
 The bill also proposes to amend the Indian Stamp Act so that stamp duty will not be charged on the transfer of financial assets in favour of ARCs.
 The bill will pave the way for the sponsor of an ARC to hold up to 100% stake. It will also enable non-institutional investors to invest in security receipts issued by ARCs and mandate a timeline for possession of secured assets.
 By fast-tracking the recovery process for banks and other financial institutions.
 Widens the scope of the central registry that will house the central database of all loans against properties given by all lenders.
Issues and challenges
 Regulation of ARCs by RBI could amount to conflict of interest. This is because RBI can direct that ARCs absorb the NPAs at a higher price than they are worth. This is against global practice as well as the business of stressed asset recovery is very different from the business of banking.
 The proposed automation would require a lot of investment.
 Other problems like lack of presiding officer and staff have not been addressed by the Bill.

Box--SARFAESI: was enacted to enable Banks and financial institutions to auction residential or commercial properties without the intervention of any court or tribunal to recover loans. It led to the formation of ARCs, enabling banks to take over the management of secured assets etc
Debt Recovery Tribunal: They are alternate to civil courts formed for enforcement and recovery of debts. It provided a faster and easier procedure for recovery.

9

3.8. MODEL LAND LEASING LAW

Why in news?
Niti Aayog Panel proposed Model Land Leasing Law after an 11-member committee constituted under T. Haque has suggested the enactment of the law to permit and facilitate leasing of agricultural land.
Significance
 According to Haque, former chairman of CACP, about 20% of land holdings are managed by tenant farmers, with the figure in states like Andhra Pradesh going up to 60%.
 Presently farmers cultivating the agricultural land on lease are unable to access loans through credit institutions, insurance, disaster relief and other support services provided by the government as they don’t own the land.
 Land owners are afraid of losing their land to tenants under various tenancy laws. So, they keep on changing tenants. This makes tenants unable to benefit from various govt. schemes.
Broad framework of the model act
 Make land leasing legal.
 Remove adverse possession clause from laws of states. (Adverse possession creates fear among owners, as a tenant may claim title if he has possession of the land for specified period of time).
 Facilitate access to short-term credit and crop insurance based on a simple lease agreement for tenants.
 Allow automatic resumption of land on expiry of agreed lease period without requiring any minimum area criteria. (In some states, the criterion stipulates a minimum area to be left to the tenant on expiry of the lease to protect his future).
 Terms of lease and Rent to be determined mutually by owner and tenant Lease to be terminated within lease period by giving an advance notice of one crop season or one crop or grounds like non-payment of rent, use of land for purpose other than what was agreed upon, lease harms the land, legal framework of leasing is not farmer-friendly and both parties are not benefiting
Benefits
 To allow owners to lease out agricultural land to tenant farmers without any fear of losing it.
 To promote legalisation of land leasing.
 To ensure tenant farmers have access to institutional credit, insurance and disaster compensation without affecting the landowner title.
 This would allow unused land to be used productively, and enable tenant farmers to invest in the land and access credit and insurance.
 Will allow consolidation of farmland so that small plots that are economically unviable can be leased.
Way forward
 MP became the first state in July to draft its own law, and several others, including Gujarat, Odisha and Punjab are following its example.
 Land being a state subject, the Centre can at best convince the states to adopt a model to bring in uniformity.

10

3.9. TAX TERRORISM

Why in news?
 Recently, tax was raised by IT dept. from a PSU by an incorrect tax demand. This they did in March to meet revenue collection targets of the fiscal year, which ends in March.
 But in April the demand was cancelled and tax refunded pushing the problem to next year.
 To mend this Revenue secretary as a penal measure has ordered transfer of certain officials, which led to a dispute.
What is Tax terrorism?
The tag of Tax Terrorism is used in the context of practices such as:
 Retrospective taxation cases such as: Vodafone pricing case, Cairn India-Vedanta group case.
 Minimum Alternative Tax – though with right intentions but wrong implementation.
 Enforcement of regulations relating to tax avoidance: GAAR (General Anti Avoidance Regulations) etc.,
 The practice of raising large unjustified tax demands followed up with
a. Aggressive recovery procedures,
b. Coercive methods
 Adjusting interest rate manually so that refund payable is reduced to zero.
 Many decisions taken by discretion without proper accountability.
Impacts
 Economy: Funds that could have been put to productive use by businesses are left lying with the government.
a. Ease of doing business is negatively affected. This reduces the competitiveness of India as a market.
b. Torpedoes investor confidence.
 Governance: Such practices, which are being followed in the name of public interest, gives the tax department bad publicity.
a. Efficient service delivery is denied to taxpayers.
Way forward
 The Parthasarathy Shome Committee observed that the root cause of such unhealthy practices has been the practice of setting unrealistic revenue collection targets for tax officers in Budget. This has to be reformed.
 The basic problem is the mess of Indian tax laws, a legacy of the socialist era. The system is adversarial and tilted towards enforcement rather than compliance.
 A dramatic overhaul of the tax code is needed.
 Tax officers also need to realise that they are accountable to the public.
 Viewing every transaction with suspect will result in conditions of tax terrorism.
 Recent suggestion of RAPID.
 Recent acts of Revenue Secretary transferring the IT officials for such acts are laudable

11

3.10. TAX BATTLE-APPLE V/S EU

Why in news?
EU regulators have ordered Apple to pay up to $14.5 billion in taxes plus interest to Ireland.
Issue
 Sweet heart/ Double Irish tax strategies: help American companies keep their profits nearly tax-free abroad.
(Refer Infographics)  EU’s efforts are to squash country-specific tax loopholes.  After 2008, fiscal stimulus has become necessary and if issues of corporate tax avoidance are solved it may increase govt.’s revenue and thereby economy as a whole.
Impact  According to Apple, it will have a harmful effect on investment and job
creation in Europe.  It may affect U.S.-E.U. economic relations  Will affect the future governance of multinational corporations and cause them to revisit the tax implications of their current structure.  The real problem is uncontrolled global tax system. International tax shenanigans have real-world consequences for markets and they distort the market.  Even as big firms hoard cash abroad, they borrow money in their home country debt markets.  Unfortunately most use that debt to fund share buybacks that enrich mainly the wealthiest and add nothing to real productivity and economic growth. This only increases the wealth divide in the world, widening the toxic rift between the markets and Main Street.
Negatives
 Sovereignty: Brussels’ decision to overrule the Irish government and impose an extra $14.5 billion in taxes on Apple Inc.
 Tax or trade deals: Ireland is not free to strike its own tax deals with Apple any more than it is free to strike its own trade deals with the U.S. or Japan or Kazakhstan.
 Immigration deals: EU countries are not free to set its own immigration rules — the issue that finally provoked BREXIT in Great Britain.
So, agreements similar to BEPS agreement between G20 countries etc., have to be signed multilaterally to prevent corporate (MNC) tax avoidance.

--Fig--

12

3.11. CENTRE OWES RS. 80,000 CRORE TO STATES: CAG REPORT

Why in news?
 The CAG finding has the potential to significantly impact the finances of most States.
 According the report, Centre owes the States over Rs. 80,000 crore from its net proceeds of the period.
Background
 According to Article 279 of the Constitution, the CAG is “required to ascertain and certify the ‘net proceeds’ (any tax or duty the proceeds thereof reduced by the cost of collection), whose certification shall be final.”
 The Finance Ministry had requested for CAG certification of net proceeds of taxes afresh ante-dated from 1996-97 because of the 80th constitutional amendment.
 The 80th constitutional amendment resulted from the recommendations of the 10th Finance Commission recommendation for an alternative way of sharing proceeds of union taxes and duties between Centre and States.
Report observations
 According to the CAG report, during the certification of ‘net proceeds’, it revealed that during the period from 1996-97 to 2014-15 an aggregated amount of Rs. 81,647.70 crore was short devolved to the States.
 The revelation has the potential to significantly impact the finances of most States, because most of them could end up getting a few thousand crores each.
Way forward
 The centre should take cognizance of the report of CAG and immediately work towards the devolvement of pending dues.
 The extra funds that state receive could well be utilised for developmental needs in respective states as per their requirements.
 Care should also be taken to avoid such mistakes in future. The process of devolution should be transparent and efficient.

13

3.12. CENTRAL WATER COMMISSION

Why in news?
 A high-powered committee led by Mihir Shah submitted its report recently to PMO.
 The report was titled “A 21st Century Institutional Architecture for India’s Water Reforms: Restructuring the CWC and CGWB”.
Background
 The CWC was established in 1945, is in charge of surface water and creating storage structures such as dams and medium-scale reservoirs.
 The Central Ground Water Board (CGWB) is has objective of managing groundwater resources.
 The Shah committee was set up last year to recommend ways to restructure the CWC, which develops surface water projects, and the Central Ground Water Board (CGWB).
Recommendations of committee
 An overarching National Water Commission to be created to encourage a shift in focus from the construction of dams to decentralised management and maintenance of water.
 The CWC and the CGWB will be included in the new National Water Commission and the current personnel will be redeployed at the Centre and the regional offices.
 It should be headed by a Chief National Water Commissioner and should have full-time commissioners representing Hydrology (present Chair, CWC), Hydrogeology (present Chair, CGWB), hydrometeorology, River Ecology, Ecological Economics, Agronomy (with focus on soil and water) and Participatory Resource Planning & Management.
 The new body will forge partnerships with world class institutions, eminent experts and voluntary organisations in the water management field.
 The new body to serve as a world class capacity building, data and knowledge institution.
 The key recommendation of the committee is to shift focus from construction to decentralised management and maintenance.
Issues with the report
 CWC Civil engineers and hydrologists are against the Shah committee’s recommendations
 Main argument being that water is a state subject and such reforms from centre go against the spirit of cooperative federalism.
 According to the engineers, India can meet its food and water security requirements only through the development of surface water through the construction of dams.
 The argument engineers cite is, China with a population of 1.4 billion has created live storage capacity of 718 bcm, while India has a live storage capacity of 259 bcm for its population of 1.3 billion. We need to build more storage capacity for sustainability
Way forward
 This is the third time since 2000 that reports have been placed for restructuring the CWC and it is still unclear how seriously the government is likely to go ahead with restructuring.
 The recent water crises in the face of droughts in 2014 and 2015 and growing concerns with groundwater contamination have provided a fresh trigger towards reorganisation of CWC.
 The recommendations are futuristic and have potential to restructure water resource agencies in India.
 The recommendation should be implemented after building consensus with all stakeholders within the framework of cooperative federalism.

14

3.13. NATIONAL COMMITTEE ON TRADE FACILITATION

Background
 India in February 2016 had agreed to undertake the commitments under the Trade Facilitation Agreement (TFA) of WTO.
 It, thus, needed a national level body to facilitate domestic co-ordination and implementation of TFA provisions. Accordingly, National Committee of trade Facilitation (NCTF) has been set up.
Purpose of NCTF
 It is an inter-ministerial body on trade facilitation chaired by the Cabinet Secretary.
 It will be inclusive comprising Secretaries of all key Depts. involved in trade issues like Revenue, Commerce, Agriculture, Shipping, Health etc. as well as members from major trade associations like FICCI, CII etc.
 Its Secretariat will be housed within the Central Board of Excise and Customs (CBEC), in the Directorate General of Export Promotion, New Delhi.
 It will help in developing the pan-India road map for trade facilitation by synergizing the various trade facilitation perspectives across the country among all stakeholders.
 It will have a three-tier structure:
 National Committee- pivot for monitoring the implementation of TFA
 Steering Committee- responsible for identifying the nature of required legislative changes as well as for spearheading the diagnostic tools needed for assessing our level of compliance to the TFA.
 Ad hoc working group of experts- dealing with specific trade facilitation issues
About trade facilitation
 The TFA was agreed upon at the WTO Ministerial Conference in Bali in 2013. The agreement aims at expediting the movement and clearance of goods, including goods in transit, and establishing effective cooperation between customs and other authorities on trade facilitation and customs compliance issues.
 It will enter into force once two-thirds of WTO's 162 members formally accept the agreement.
(For more on TFA please refer to February 2016 edition of Vision current affairs)

15

3.14. FOREIGN INVESTMENT IN FINANCIAL SERVICES

Why in news?
 The Cabinet recently permitted foreign investment through automatic route in ‘other financial services’, if they are under regulators such as SEBI, IRDA, RBI etc.
 Present regulations stipulate that FDI is allowed on automatic route for only 18 specified NBFC activities. These include merchant banking, underwriting, portfolio management, investment advisory, financial consultancy, stock broking and asset management etc.
 The amendment would allow FDI in other areas like commodity broking, asset finance companies, depository participants and infrastructure debt funds.
Benefits
 Increase in financial sector efficiency due to technology transfer, innovation in products and processes and increased competition.
 This will spur economic activities.
Why financial services is an attractive sector for FDI
 Financial service is an attractive investment asset class for foreign investors because it provides them an opportunity to tap the growing middle class and the high-net-worth individuals
 With govt.’s focus on financial inclusion, the penetration of financial products would deepen. Therefore, the investors are getting attracted to the retail financial service sector as well.
 As compared to earlier times these businesses have matured now and thus risks have reduced
 Investing in financial services is a good way to capture any upturn in the economy.
 Falling inflation and interest rates also continue to attract investors to this sector.
 The fact that the sector has a strong regulator and fewer corporate governance issues is an added advantage.

16

3.15. DISPUTE OVER BASMATI GI TAG CLAIM

Background of the Issue
 In February 2016, IPAB (Intellectual Property Appellate Board) passed a judgment granting Geographical Indicator (GI) status to Basmati rice cultivated in the Indo-Gangetic Plains on the foothills of the Himalayas.
 These cover the rice growing areas in Punjab, Haryana, Himachal Pradesh, Delhi, Uttarakhand, Western U.P. and two districts of Jammu and Kathua.
 Basmati, however, is also grown in certain other areas like a few districts of Madhya Pradesh. They are demanding GI status as well.
 GI status helps in improving sale and export of the products because the GI tag is a guarantee of certain quality and is thus extremely valued in international markets.
Case of Madhya Pradesh
 It is argued that Madhya Pradesh has started growing Basmati only from the start of this century. It, thus, never had any tradition of growing Basmati which is an essential prerequisite for the grant of GI. MP, however, disputes this fact.
 Even though the new breed is allowing MP to grow Basmati, it cannot really match what one gets from the traditional areas with particular agro-climatic conditions like Punjab, Haryana etc.
Implication
 Opening up the GI for more states like MP could lead to differences in the quality of Basmati rice. This could cause reputational damage to the product in the international market.

17

3.16. FARMING BECOMING UNATTRACTIVE FOR YOUTH: FAO

Issue
 Around the world, farmers are an ageing demographic as the sector fails to attract younger talent who are heading instead to cities in search of work.
 In Africa, where 60% of the continent's population is under 24, the average age of farmers is 60.
 Around the world it’s a potential problem, particularly smallholder farmers in low-income countries.
Implications
 Agriculture productivity is already low in these economies. With only aged population left to work in the sector the situation will get worse. Direct impact on global food security.
 It may promote leasing and consolidation of land depending on local regulations.
What needs to be done?
 Need to transform agriculture so that it offers young people an appealing alternative to urban life.
 Need to innovate and develop technologies so that productivity can be improved. The long-term solution is a shift to industry in developing countries. However the shift must be gradual and for economic reasons.
 Large scale investment in infrastructure and associated fields is necessary.

18

3.17. INTERNATIONAL ARBITRATION MECHANISM

Why in news?
 India has urged the BRICS nations to develop an arbitration mechanism among them.
 A proposal was made by Finance Minister at BRICS Conference on International Arbitration.
Need for such a mechanism
 West's domination: It is observed that the arbitration centers are concentrated in west with apprehensions of biased awards against emerging economies.
 Further, the emerging economies are not adequately represented in the arbitration area thus the exigencies and concerns of developing nations are not put forward properly. Thus, there is a need for developing nations to build capacity.
 Recent example- British oil and gas explorer Cairn Energy had initiated international arbitration seeking $5.6 billion in compensation from the Indian govt. against a retrospective tax demand of Rs. 29,047 crore.
India's efforts
 India is already working towards making itself as global Arbitration hub. Earlier in June 2016, Singapore Arbitration center had agreed to open its branch office at GIFT city.
 It has made changes to its Bilateral Investment Treaty regime.
 Further, we need to show restraint as far as domestic jurisdictions of courts to interfere in those arbitrations. The enthusiasm of domestic courts to interfere in the international arbitration proceedings has brought bad publicity to Indian economy in the past.
 It has made crucial changes to the Arbitration and Conciliation Act.

19

3.18. INCLUSIVE HOUSING AND INDIA'S MORTGAGE MARKET

Why in news?
India’s roughly Rs.10 trillion mortgage market is witnessing a quiet revolution after a string of initiatives by the government and a sensitive mortgage regulator, the National Housing Bank (NHB).
Significance
 There is an estimated housing shortage of 18.7 million in urban pockets and 39.3 million in rural India. The government wants to take care of this by 2020 under “Housing for All”.
 Eight states have 80% share of the shortage of housing in urban pockets. They are MP, Rajasthan, Bihar, Tamil Nadu, Andhra Pradesh, Bengal, Maharashtra and UP.
 Banks are interested: Home loans are the safest bet for Indian bankers. In case of a default, the property can always be seized and sold to recover the money.
 Inclusive: Home loans are almost inaccessible for EWS and LIG segments which constitute the bulk of deficit. Mortgage can solve this problem.
 Potential: Mortgage penetration has been going up in India and outstanding housing loan as a percentage of GDP has risen from 2% (2002) to 9% (2012). But it’s very low compared to 20% (China) and 88% (U.K).
Steps taken
 Licensing norms for housing finance companies (HFCs) have been fairly liberal.
 The promotion of affordable housing for weaker sections through credit-linked subsidy under the Pradhan Mantri Awas Yojana. Under this scheme, a person buying her first house, costing between Rs. 3 lakh and Rs. 6 lakh, gets 6.5% interest subsidy.
 NHB offers rural housing finance to intermediaries at 6.12%. Until now, funds for 1.5 million rural units have been sanctioned.
Way forward
NHB has been looking into other aspects of mortgages as well:
 For low-cost rental housing (for migratory labourers),
 Creation of title insurance (to ensure speedy bank loans),
 Uniform stamp duty across states, a heat map to catch the first sign of bubble in the housing market in any part of the country and
 Refinancing microfinance institutions for tiny home loans.

Box--
What is Primary Mortgage market?
The primary mortgage market is the initial marketplace where the borrower gets together with the mortgage originator, whether a bank, credit union or mortgage broker, to conduct a mortgage transaction. At the closing table, the primary mortgage lender provides the funds to the borrower, which the borrower uses to complete his home purchase

20

3.19. PANEL TO PROMOTE CARD PAYMENTS

 The government has set up an eleven member panel headed by former finance secretary Ratan P Watal to suggest ways to promote electronic transactions through incentives such as tax rebates, cash back, lottery and changes in existing regulatory mechanism.
 The panel will recommend steps for leveraging unique identification number or other ID proofs for authenticating card and digital transactions and study global best practices in payments.
 It will examine setting up of a Centralised KYC registry and study the feasibility of creating a payments history of all card/digital payments to ensure “instant, low cost micro-credit” through digital means.
 The committee will study introduction of single window system of payment gateway to accept all types of cards/digital payments of govt. receipts, settling them through NPCL and look into the scope of integration of all government systems like Public Finance Management System, PayGov, Bharatkosh and eKuber.

21

3.20. ELECTROPRENEUR PARK

What is it?  It is a recent initiative taken up and funded by Ministry of Electronics and Information Technology (MeitY).
 It is managed by Software Technology Parks of India (STPI) and implemented by India Electronics and Semiconductor Association.  The objective is to incubate 50 early stage start-ups and create atleast 5 global companies over 5 years.
Benefits  The initiative will focus on IP creation and product development to increase domestic manufacturing of electronic items like smartphones, smart meters, micro ATMs, set-top boxes, etc.
 Ten most promising ideas/startups in the Electronic System Design & Manufacturing space every will be selected, and incubated every year.
 The initiative is in line with the government's Make-in- India and Startup India missions aligned with entrepreneurial and innovation focus.
 The Park will also facilitate seed funding for ventures including foreign funding.

22

3.21. CORPORATE BOND MARKET

Why in news?
 The RBI has introduced new policy measures aimed to cap the exposure of banks to corporates in the medium term.
 This is done to shift the source of funding to Indian companies from local lenders to bond markets.
Salient Features
 The latest initiative has allowed brokers to participate in corporate bond repurchases or repos, making corporate bonds eligible for borrowing from the central bank, allowing foreign portfolio investors to trade directly in corporate bonds.
 Besides allowing banks to issue rupee bonds or masala bonds, as they are dubbed in the overseas markets, to bolster their core capital and to fund infrastructure and affordable housing.  The central bank will allow commercial banks to issue rupee bonds in overseas markets — known as Masala bonds, both for their capital requirement and for requirements to finance infrastructure and affordable housing.
 An overwhelming dependence of firms and large business groups on funding from banks resulting into battered balance sheets of many Indian banks who will now face a new challenge to identify and fund a more diversified set of borrowers.

23

3.22. SWIFT: EASE OF DOING BUSINESS

Why in News?
 India has moved up four places in the World Bank’s Ease of Doing Business Report 2016 since 2015. It is now ranked at 130 (out of 189 countries) compared to 134 in 2015.
 This improvement comes after the launch of SWIFT (Single Window Interface for Facilitating Trade)
What is SWIFT?
 Central Board of Excise and Customs (CBEC) launched SWIFT on 1st April, 2016 as one of the initiative to facilitate trade and improve ease of doing business.
 SWIFT enables importers/exporters to file a common electronic integrated declaration on ICEGATE (Indian Customs Electronic Commerce/Electronic Data Interchange Gateway)
 The integrated declaration compiles the information required for Customs, FSSAI, Plant Quarantine, Animal Quarantine, Drug Controller, Wild Life Control Bureau and Textile Committee.
 It replaces nine separate forms required by six different agencies and Customs.
 CBEC has also introduced an integral risk management facility for partner government agencies (PGAs).
 This will ensure that agencies select consignments for testing and examination based on the principle risk management.

24

3.23. FORMULA FOR PRODUCTION SUBSIDY TO SUGAR MILLS

Why in News?
 The Cabinet Committee on Economic Affairs (CCEA) approved a new formula for calculating production subsidy given to sugar mills for 2015-16.
 This move has been taken after considering lower sugar production and exports.
Background
 The Centre had last year announced a subsidy of Rs. 4.5 per quintal of cane crushed during the October 2015-September 2016 period.
 This subsidy was announced on the condition that mills meet the export quota of four million tonnes and ethanol blending target.
 The previous subsidy scheme has been discontinued with effect from 19th May 2016.
What is New?
 There has been revision in the export quota and ethanol blending target for calculating the production subsidy.
 Initially, the export quota target was scaled at 15.70 kg of sugar for each tonne of “estimated cane crushing”. Now, it is scaled at 15.70 kg of sugar for each tonne of cane actually crushed by the mills.
 Ethanol supply target will be revised to actual quantity contracted by mills/distilleries for supply to Oil Marketing Companies (OMCs).
 With the revision coming into effect the production subsidy to sugar mills will go down to Rs. 600 crore as against the earlier estimated Rs. 1147.5. crore


Box--What is Ethanol Blending?
Ethanol blending refers to the practice of blending ethanol with petroleum.
It is done in order to reduce the vehicle exhaust emissions and also to reduce the import burden on account of crude petroleum.
This practice started in India in 2001.
Ethanol is one of the by-products of the sugar industry and therefore supplied by the same.

25

3.24. RBI’S ANNUAL REPORT

Why in News?
 RBI has released its Annual Report 2016 which highlights the current situation of the economy and also states future prospects.
Key Highlights of The Report
 The report says that the current prospects for the economy are brighter than the previous fiscal.
 Faster clearances of stalled projects have boosted overall business sentiment.
 Sectors such as roads and ports have seen significant improvement.
 A good monsoon and pay commission hike for government employees is likely to boost consumption which in turn will lead to pick-up in demand.
 The key challenges before the Central Bank are economic growth, curbing inflation and ensuring that banks focus on rate cut transmission and balance sheet cleanup

26

3.25. ATAL PENSION YOJANA (APY)

Why in News?
 APY has failed to meet its Phase 1 and Phase 2 targets. Public sector banks could only achieve 6.07% and 11.7% of the target in Phase 1 and 2 respectively.
What is APY?
 It is a universal social security programme for all Indians. It came into effect from May, 2015.
 Under APY, the govt. co-contributed 50% of the policy money (up to a maximum of Rs. 1000) for first five years in case of individuals, who enrolled before 31st March, 2016. This benefit is only enjoyed by those who are not income tax payers.
 APY will replace the Swavalamban scheme.
 The government also launched the Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana along with APY.

27

3.26. INFLATION TARGETING

Why in News?
 The government has notified an inflation (Consumer Price Index) target of 4% till 2021 with an upper/lower tolerance of 2 points.
What is it?
 Inflation targeting refers to the monetary policy strategy where an inflation target is set and policy formulation is done in such a way so as to achieve that specified target.
 The Reserve Bank of India officially adopted inflation targeting as a monetary policy strategy in February 2015.
 The inflation target is to be revisited once in every five years.
 In order to meet the inflation target, the RBI will raise or lower interest rates.
Significance
 Flexibility of this monetary policy approach will help RBI achieve the growth target in the short run and curtail inflation in the medium term.
 This approach is an important component of the new monetary policy framework along with the proposed monetary policy committee.

--Fig--

28

3.27. GREEN CESS

Why in news?
 The Supreme Court lifted an eight-month-old ban on the registration of large vehicles fuelled by diesel in the national capital region (NCR), making it conditional on manufacturers paying a levy for polluting the city’s air.
 Automobile makers would have to pay a levy equal to 1% of the ex-showroom price of diesel vehicles with an engine capacity above 2000cc.
Background
 Delhi was ranked the world’s most polluted city in 2014 by the WHO.
 This year, WHO ranked the quality of Delhi’s air the 11th most foul.
 The Supreme Court, in December 2015, had banned the registration of luxury automobiles and sport utility vehicles with an engine capacity in excess of 2000cc in NCR.
Impact of judgment
 The SC has also asked the Central Pollution Control Board to open an account in public sector banks to receive the green levy from big diesel car and SUV manufacturers.
 The transport authority will now register a big diesel car or SUV only if receipt of payment of green levy is shown.
 Registration officers will verify if the charge has been paid by the manufacturer/dealer.
 The apex court will also decide whether the rate of green levy on big diesel cars can be more than 1 per cent of the ex-showroom cost of the vehicle.
Arguments in favour of levy
 The ban had impacted the sales of the diesel vehicles and further had adverse impact on investments. The levy will allow the market to bounce back.
 There was also suggestion that the court extend the green cess to all diesel passenger vehicles, even those below the 2000cc capacity.
 This would have positive impact on the environment.

Arguments against the levy
 There is scepticism that green cess will not have any impact on diesel car sales, should the manufacturers pass on the cost to buyers.
 The government has argued that the court does not have the authority to impose an environment compensation charge and that this is a legislative mandate.
 The right to levy a tax is a legislative one and can’t be done by the courts. This would amount to judicial overreach.
Way forward
 The decision has put all controversy surrounding diesel fuel vehicles behind.
 This could be further extended to all diesel vehicles.
 The parliament should bring a legislation to give effect to the SC directives.
 India will move to the toughest emission standards of BS-VI from the current BS-IV by 2020, skipping an intermediate level.
 This will enable companies to focus on the more important task of making our vehicles compliant with BS-VI norms by April 2020.

29

3.28. TAXATION LAWS (AMENDMENT) BILL, 2016

Why in news?
 The Lok Sabha passed the Taxation Laws (Amendment) Bill, 2016, that seeks to amend the Income Tax Act, 1961, and Customs Tariff Act, 1975.
Features of the bill
Income Tax Act, 1961
 Demerger of public sector companies: The Companies Act, 1956 allows companies to demerge (split) into multiple companies.
 The Income Tax Act, 1961 takes into account these transfers from the parent company for taxation of resultant companies.
 The Bill clarifies that these provisions will apply in case a public sector company demerges, and the resultant company is no longer a public sector company.
 Deduction in respect of employment of new employees: The Income Tax Act, 1961 allows businesses to obtain a deduction on taxable income to the extent of 30% of the cost of recruiting a new employee.
 The Act requires that the employee should have been employed for a minimum of 240 days in previous year.
 The Bill relaxes this limit to 150 days for businesses which manufacture apparel.
Customs Tariff Act, 1975
 Customs duty on marble and granite blocks and slabs: Currently, the customs duty on imports of granite and marble used for certain purposes is charged at 10%.
 The Bill proposes to increase this to 40%.
Analysis
 Indian garments are all summer garments. The nature of this trade in itself is seasonal. Therefore, companies have been given tax incentive by amending Income tax act to help them be competitive.
 This is in line with the special package announced in June 2016 for employment generation and promotion of exports in textile and apparel sector, in line with its commitment to generate one crore jobs in the textile and apparel industry over next three years.
 The main aim of the proposed amendment in customs acts is to enable the government with greater flexibility in terms of tariffs.
 Currently, imports of marble blocks/slabs and granite blocks/slabs are subject to a combination of non-tariff measures - quantitative restrictions and minimum import price and also a tariff measures, i.e. custom duty.