Economic Development - 3 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

India’s Export Capabilities

Context

• India’s goods exports declined for the second successive month in March, falling a sharp 13.9% to $38.38 billion while imports dipped 7.9% to $58.11 billion.

Recent Trends: Further details

• Total goods exports in 2022-23 rose 6.03% to $447.46 billion, while the import bill surged by a steeper 16.5% to $714 billion.
• The goods trade deficit rose almost 40% to over $266 billion in 2022-23, compared to $190 billion in 2021-22.
• Despite the global headwinds [Russia-Ukraine War, U.S Fed rate hikes etc], India has surpassed its 2022-23 target of $750 billion dollars to hit $770.18 billion, which is $94 billion higher than last year’s record exports.

Export Items: Performance

• India’s uptick in outbound shipments was largely led by petroleum, up 27% to $94.5 billion, followed by electronics goods that rose 7.9% to $23.6 billion.
• The other three of India’s top five export items registered insignificant growth - Rice (up 1.5%), chemicals (1%), and drugs and pharmaceuticals (0.8%). Petroleum exports now account for 21.1% of total exports, up from 16% in 2021-22.
• Engineering goods, India’s mainstay in goods exports in recent years, shrank 5.1% to $107 billion, bringing down their share in total exports from $26.6% to 23.9%.
• Non-oil exports, contracted 0.5%, and if electronics exports were excluded too, goods shipments were 2.8% lower than 2021-22, which economists called a red flag.
• Important segments like engineering and gems and jewelry witnessed negative growth.

Import Trends

Russia

• India’s imports from Russia grew almost 370% to over $46 billion in 2022-23. Russia’s share in import leaped from 1.6% in 2021-22 to 6.5% last year, making it the fourth largest import source nation for India, behind China, UAE and the USA.

China

• China’s share of goods imports dipped to 13.8% in 2022-23 from 15.4% in 2021-22.
• However, imports from the country still grew 4.2% to reach $98.5 billion last year, while exports to China fell 28% to just $15.3 billion. Indian shipments to China now account for just 3.4% of total exports, from over 5% in 2021-22.

Petroleum

• Petroleum imports jumped about 30% to nearly $210 billion in 2022-23.

Coal

• Coal imports grew at a faster 57% to touch almost $50 billion.

Gold

• Gold imports, fell around 24% to $35 billion as global prices for the metal surged and the Rupee turned weaker.

Country comparison

• The USA remained India’s top export destination, followed by UAE, while Netherlands emerged as the third largest goods buyer, displacing China to the fourth position in 2022-23.
• Netherlands’ share of Indian exports jumped from under 3% in 2021-22 to 4.7%, recording a staggering 66.6% uptick year-on-year.
• Bangladesh and Hong Kong remained in India’s top 10 export markets, although the value of shipments to their shores contracted 27.8% and 9.9%, respectively.

The government has set a two trillion-dollar target for goods and services exports by 2030 under the new Foreign Trade policy.

India’s Recent Trade Policy

• The government unveiled its new Foreign Trade Policy (FTP) which came into force on 1 April, 2023.
• The previous policy, launched in 2015, had to be extended several times due to the pandemic and geo-political developments. 

What is the significance of FTPs?

• Under the Foreign Trade Development and Regulation Act, 1992, the government is required to formulate, implement and monitor trade policies to boost exports, facilitate imports and maintain a favourable balance of payments.
• The first five-year export-import (EXIM) policy of 1992 and the second in 1997-2002 aimed to remove many of the post-independence trade protectionist measures and promote India’s integration with the global economy.
• In 2004, the EXIM Policy was renamed FTP to adopt a comprehensive approach to India’s foreign trade. Later, FTPs were issued for 2009-14 and 2015-20.

Did the previous FTP meet its objectives?

• FTP 2015-20 aimed to boost India’s exports from $465 billion in 2013-14 to $900 billion by 2019-20.
• It introduced a new merchandise export from India scheme to provide rewards to exporters to offset infrastructural inefficiencies and associated costs and a services export from India scheme to encourage the exports of notified services.
• At the conclusion of the policy’s initial term in 2019-20, exports of goods and services reached $526.55 billion.
• Export momentum was derailed in 2020-21 by the pandemic and geopolitical tensions.

What is the duration of FTP 2023?

• The government has broken away from the conventional practice of setting a five-year cycle. The new policy is intended to be responsive to changing circumstances and will be modified as and when required.
• Additionally, the government will consistently gather input from relevant stakeholders to enhance and revise the policy.

What are its key thrust areas?

• It has four pillars. These are:

1. Replacing the incentive-based system of promoting exports with remission and entitlement-based regimes;
2. Facilitating enhanced collaboration among exporters, states, districts and indian missions;
3. Reducing transaction costs and introducing e-initiatives for ease in business operations; and
4. Developing additional export hubs.

• It also intends to simplify the export process for items falling under the Special Chemicals, Organisms, Materials, Equipment, and Technologies (SCOMET).

What are the goals and targets?

• The government aims to increase India’s overall exports to $2 trillion by 2030, with equal contributions from the merchandise and services sectors.
• The government also intends to encourage the use of the Indian currency in cross-border trade, aided by a new payment settlement framework introduced by the RBI in July 2022. This could be particularly advantageous in the case of countries with which India enjoys a trade surplus.

Way Ahead

• While the growth trend in exports is laudable, the national and state-level export policies must be aligned for seamless export flows to maintain the pace going forward.  To maintain the momentum, some of the key areas of focus are as follows:
  • Active participation of states to strengthen export infrastructure: For smooth flow of trade, well-established facilities like air cargo, multimodal logistic hubs, ICDs, etc., are vital. Therefore, to drive India’s exports further, states must evaluate the sectoral-based interventions to improve infrastructure for cost-competitive exports.
  • Mutually beneficial trade agreements: The new trade agreements must focus on sectors with higher complementarities and potential. In addition, FTA negotiation strategies must be aligned with the self-reliant strategy and the states must actively engage domestic stakeholders to bring their perspectives to the table.
  • Trade Monitoring at the State level: To augment the country’s exports, it is imperative to continuously track and monitor progress of various parameters such as export growth trends, status of logistics and infrastructure facilities, progress of export action plans, progress against the gaps in indices of trades, etc at the state level. For this, a crystal-clear plan is to be developed for rigorous trade monitoring.
• With improved domestic capabilities and alignment of Government and industries’ objectives, India can become a global manufacturing powerhouse.

Managing Thermal Stress for Sustainable Livestock Farming

Context

Thermal stress poses a serious threat to Sustainable Livestock Farming in Kerala.

• In Kerala more than 95% of the cattle are crossbreeds with low thermal tolerance compared with native Varieties. Kerala Veterinary and Animal Sciences University (KVASU) has started a project for selecting cattle in the context of climate change to cope with Thermal Stress.

What is Thermal Stress and its Impact on Livestock?

• About:
  • Thermal stress refers to the physiological and metabolic responses of animals to elevated temperatures that exceed their comfort zone.
  • It occurs when the animal's body is unable to maintain its normal internal temperature, and it results in a range of negative effects on the animal's health and productivity.
• Causes:
  • Thermal stress can be caused by a variety of factors such as high ambient temperature, humidity, solar radiation, and lack of proper ventilation or cooling mechanisms.
    • It is a significant concern in livestock farming as it can have severe economic and animal welfare consequences.
• Impact of Thermal Stress:
  • Reduced Productivity: High levels of thermal stress can cause a decline in milk production, decreased feed intake, and weight loss in livestock animals. This can lead to a reduction in productivity and income for farmers.
  • Health Issues: It can cause various health issues in livestock animals, including respiratory distress, heat stroke, and dehydration.
    • This can lead to increased susceptibility to diseases, lower immunity, and reduced lifespan.
  • Economic Losses: Livestock farmers may face significant economic losses due to thermal stress and consequent health issues and high mortality rates.
    • Farmers may also have to incur additional costs to provide their animals with cooling mechanisms, such as fans or sprinklers.
  • Environmental Impact: In order to mitigate the effects of thermal stress, farmers may have to resort to unsustainable practices such as the excessive use of water for cooling, which can have a negative impact on the environment.

How can Livestock be Prevented from Heat Stress?

• Breeding Management:
  • A good heat detection program is necessary to detect cows with marginal heat symptoms as cows exhibit lesser heat symptoms during heat stress.
  • It is always advisable to continue AI (Artificial Insemination) breeding instead of using bulls because in natural breeding both bulls and cows suffer infertility due to summer stress.
• Cooling Systems:
  • Fans in combination with water sprinkling facility can be provided but excessive sprinkling should be avoided as it can result in wet bedding and make animals prone to mastitis and other diseases. The farm should be well ventilated.
• Feeding Management:
  • Thermal stressed animals are more prone to lower reproductive and productive performance.
  • Feeding high quality forages and balanced rations can decrease some of the effects of thermal stress and boost animal performance.
• Selection of Heat Tolerant Animals:
  • Genetic selection of animals based on specific molecular genetic markers for heat tolerance can be a boon to alleviate heat stress in cattle and buffaloes by identifying the heat tolerant animals.

What is the Scenario of the Livestock Sector in India?

• The livestock sector grew at a CAGR (Compound Annual Growth Rate) of 7.9 % during 2014-15 to 2020- 21 (at constant prices), and its contribution to total agriculture GVA (Gross value added) has increased from 24.3 % in 2014-15 to 30.1 % in 2020-21.
• Dairy is the single-largest agri commodity in India. It contributes 5% to the national economy and employs 80 million dairy farmers directly.

Way Forward

• Promoting Sustainable Livestock farming involves a multi-faceted approach that includes implementing proper animal welfare practices, adopting sustainable production methods, reducing waste and emissions, promoting local and regional markets, and providing education and training programs to farmers.

EU Introduces MiCA for Crypto Regulation

Context

The Markets in Crypto-Assets (MiCA) law of European Parliament is the first comprehensive regulation for cryptos, and some expect it to become a trendsetter for crypto regulation globally.

What is MiCA Legislation?

• The MiCA law seeks to address concerns like money-laundering, protection of consumers and investors, accountability of crypto firms, stablecoins and the environmental footprint of crypto mining.
• It would regulate the “wild west” of crypto assets and provide legal certainty for those issuing crypto assets, while ensuring high standards for investors and consumers.
• It also excludes non-fungible tokens, but the EU may make a horizontal legislation for NFTs in 18 months, after a separate assessment.

How will MiCA regulate stablecoins?

• The efficacy of stablecoins, which claim to be less volatile that other cryptos, came into question after the crash of some crypto-currencies.
• The MiCA would mandate that stablecoin issuers maintain minimum liquidity to provide for sudden large withdrawals by users, and the reserves must also be protected from insolvency.
• The European Banking Authority (EBA) has been brought in to supervise stablecoins, and the law asks stablecoin issuers to provide claims to investors free of charge.
• In addition, large coins which are used as a means of payment will be capped at €200 million worth of transactions per day.

How will the new law regulate money laundering?

• MiCA requires the EBA to maintain a public register of non-compliant crypto asset service providers (CASPs).
• Additional checks will be required, in line with the EU Anti-Money-Laundering (AML) framework.

How does it address green concerns?

• Under MiCA, crypto companies will be required to declare their environmental and climate footprint.
• The European Securities and Markets Authority will develop regulatory technical standards on methodologies, content and presentation of such information.
• The EC will also have to provide a report on the impact of crypto assets on environment.
• It would introduce mandatory minimum sustainability standards for mining mechanisms, especially the proof-of-work system which raises overall computing power.

Will it affect Indian regulations?

• India’s crypto regulations seem to have taken a back seat at the moment.
• Industry executives and experts say the government and industry are more concerned about taxation.
• India levied a 30% tax on income from transfer of cryptos from April, and added a 1% tax deduction at source from 1 July.
• This, along with the overall bear market, has depressed trading volumes, and revenues of crypto exchanges.
• Indian regulators are also expected to consider rules being developed in the US before taking concrete decisions.

Back2Basics: Stablecoins

• Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).
• Advantages of asset-backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk.
• Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins.
• Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset(s) backing them, are unlikely to drop below the value of the underlying physical asset, due to arbitrage.

International Credit Card Spending Outside India under LRS

Context

The Centre has amended rules under Foreign Exchange Management Act (FEMA) Rules, bringing international credit card spends under the Liberalised Remittance Scheme (LRS).

Changes introduced

• Credit card spends outside India now fall under the LRS, allowing for the application of a higher TCS rate.
• The amendment removes the exclusion of credit card transactions from the LRS, which was previously covered under Rule 7 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000.
• The changes do not apply to payments for the purchase of foreign goods/services from India.

What is Liberalised Remittance Scheme (LRS)?

• LRS is a facility provided by the Reserve Bank of India (RBI) to resident individuals to remit funds abroad for permitted current or capital account transactions or a combination of both.
• The scheme was introduced in 2004 and has been periodically reviewed and revised by the RBI.
• Under the scheme, resident individuals can remit up to a certain amount in a financial year for permissible transactions including education, travel, medical treatment, gifts, and investments in equity and debt securities, among others.
• The limit for LRS is currently set at USD 250,000 per financial year.

Eligibility for LRS

• LRS is open to everyone including non-residents, NRIs, persons of Indian origin (PIOs), foreign citizens with PIO status and foreign nationals of Indian origin.
• The Scheme is NOT available to corporations, partnership firms, Hindu Undivided Family (HUF), Trusts etc.

Benefits provided by LRS

• LRS is an easy process that anyone can use to transfer money between two countries.
• It’s especially useful for businesses because they can use it to transfer funds to India, and investors can receive their investments back home.
• LRS also has some added benefits, like fast transfer timing and no issues with exchange rates.

Concerns with credit card spends

• The amendment aims to achieve parity between the usage of credit and debit cards, which were already covered under the LRS.
• Instances of disproportionately high LRS payments compared to disclose incomes prompted the amendment.
• Business visits of employees, where costs are borne by the employer, are not covered under the LRS.
• The data collected from major money remitters under the LRS indicated that international credit cards were being issued with limits exceeding the prescribed norm.

Exclusions and impact of the Scheme

• The government assured that the LRS scheme would not cover genuine business visits abroad by employees.
• The imposition of a 20% tax collection on source (TCS) for foreign remittances would primarily affect tour travel packages, gifts to non-residents, and domestic high net-worth individuals investing in assets like real estate, bonds, and stocks outside India.
• The Ministry emphasized that the 5% TCS levied on medical or education expenses abroad, allowed up to ₹7 lakh per year, and would remain unchanged.

RBI to Withdraw Rs 2,000 Notes from Circulation 

Context

The RBI has decided to withdraw 2000 rupees currency notes in circulation due to increasing digital payments and in pursuance of the clean note policy.

Why did RBI introduce 2000 rupee notes?

• The Rs 2000 note was introduced in November 2016 under Section 24(1) of The RBI Act 1934.
• Introduced primarily with the objective of meeting the currency requirement of the economy expeditiously after the legal tender status of Rs 500 and Rs 1000 notes was withdrawn.
• With the fulfilment of that objective, and once notes of other denominations were available in adequate quantities, the printing of Rs 2000 notes was stopped in 2018-19.
• This denomination is no longer commonly used for transactions besides, there is adequate stock of banknotes in other denominations to meet currency requirements.

Why did RBI decide to withdraw 2000 rupee currency notes?

• Since they were intended to replenish the Indian economy's currency in circulation quickly after demonetization and has achieved its objective.
• Some experts feel the upcoming state and general elections also may the reasons since the usage of cash spike these times.
• In pursuance of the ‘Clean Note Policy’ of the Reserve Bank of India, it has been decided to withdraw the Rs 2000 denomination banknotes from circulation.
• Increasing digital payments.
• The majority of the Rs 2000 denomination notes were issued prior to March 2017 and they have an estimated lifespan of 4-5 years.

What is the clean note policy?

• The Clean Note Policy seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation.
• The RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005.
• However, the notes issued before 2005 continue to be legal tender.
• They have only been withdrawn from circulation in conformity with the standard international practice of not having notes of multiple series in circulation at the same time.

What are the implications of the withdrawal?

• Slowdown economic growth in the short term - Since withdrawal could lead to a slowdown in cash based transactions.
•  Long term benefits - Even though in short term the economy may down in long term it will lead to increased transparency and efficiency in the economy.
• Banks - Ease the pressure on deposit rate hikes.
• There will be reduction in cash in circulation and that will in turn help improve banking system liquidity.
• Shorter term government securities - Improved banking system liquidity and an inflow of deposits into banks could mean that short term interest rates in the market drop as these funds get invested in shorter-term government securities.
• Clean Notes - To provide good quality currency notes with better security features to the public.

Indian currency system

• As per Section 22 of the RBI Act 1934, RBI has the sole authority to issue banknotes in India.
• RBI Act 1934 empowers RBI to issue all the banknotes except 1 Rs. note.
• Every currency note, other than Rs. 1 rupee note, bears on its face a promise from the Governor of RBI.
• The one rupee note, carries the name of India's Finance Secretary.
• Coins and 1 Rs. notes are issued by the Government of India under the coinage act 1909.
• One Rupee note is considered as coins as per the definition of coins given under Coinage Act.
• One Rupee note is issued by the Ministry of Finance and it bears the signatures of the Finance Secretary.

Exemptions on Angel Tax

Context

The Central Board of Direct Taxes (CBDT) has announced a proposal to exempt certain categories of investors from the levy of angel tax.

• The move aims to encourage investments in start-ups and ease the burden of taxation. Additionally, the CBDT has introduced five new valuation methods for resident investors, expanding the options beyond the Discounted Cash Flow (DCF) and Net Asset Value (NAV) methods.

What are the Changes Brought by CBDT Related to Angel Tax?

• Expansion to Include Foreign Investors:
  • Under the Finance Act, 2023, a relevant section of the Income-tax Act was amended to include foreign investors in the ambit of the angel tax provision.
  • Currently, if a start-up company receives equity investment from a resident that exceeds the face value of the shares, it is considered as income for the start-up and subject to income tax under the category of 'Income from other Sources' for that financial year.
    • The recent amendment extends this rule to include foreign investors as well. This meant that start-ups raising funds from foreign investors would also be subject to taxation.
    • However, start-ups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) are excluded from this provision.
• Exemptions for Government and Recognized Investors:
  • The CBDT has outlined several categories of investors that will be exempted from the angel tax. These include:
    • Government and government-related investors, such as central banks, sovereign wealth funds, and international or multilateral organisations, or where ownership of the government is 75% or more.
    • Banks or entities involved in the insurance business.
    • Entities registered with SEBI as Category I Foreign Portfolio Investors (FPI), endowment funds, and pension funds.
    • Broad-based pooled investment vehicles or funds where the number of investors is more than 50 and such fund is not a hedge fund too are exempt.
      • Hedge funds pool money from investors and invest in securities or other types of investments with the goal of getting positive returns.
      • As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches.
• Proposed Changes in Valuation Rules:
  • If a non-resident entity notified by the central government provides consideration to a company for issuing shares, the fair market value (FMV) of the equity shares may be determined based on the price corresponding to that consideration.
  • However, this consideration should not exceed the aggregate consideration received from the notified entity within 90 days of the share issuance.