Economic Development: January 2024 UPSC Current Affairs | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly PDF Download

Navigating GST Challenges

Context

The latest figures on Goods and Services Tax (GST) revenue highlight a troubling trend: there is uneven consumption growth among different Indian states, indicating a possible lack of harmony in the overall economic rebound of the nation.

What are the Major Takeaways From the Recent GST Related Data?

• Overall GST collections increased by 11.7% during the first nine months of the fiscal year 2023-24 compared to the same period in 2022-23. 
• State GST collections experienced a more significant growth rate of 15.2% compared to Central GST, indicating varying consumption trends among states.
• There are notable disparities among states regarding GST revenue. States such as Madhya Pradesh, Maharashtra, and Karnataka demonstrated strong growth in state GST revenues ranging from 17% to 18.8%, whereas others like Gujarat, West Bengal, and Andhra Pradesh experienced single-digit growth or even a decline.
• Private consumption expansion is at its lowest, with the National Statistical Office (NSO) estimating private final consumption expenditure (PFCE) growth for the year at a mere 4.4%, marking the slowest growth since 2002-03 (excluding pandemic periods). 
• PFCE refers to the expenditure by resident households and non-profit institutions serving households (NPISH) on the final consumption of goods and services, whether domestic or international.

What is Goods and Services Tax?

• About: GST is a value-added tax system that is levied on the supply of goods and services in India.
  • It is a comprehensive indirect tax that was introduced in India on 1st July 2017, through the 101st Constitution Amendment Act, 2016, with the slogan of ‘One Nation One Tax’.
• Tax Slabs: The primary GST slabs for regular taxpayers are currently 0% (nil-rated), 5%, 12%, 18%, and 28%.
  • There are a few GST rates that are less commonly used, such as 3% and 0.25%.
• Benefits of GST:
  • Simplified Tax Regime: GST replaced a multitude of indirect taxes, making compliance easier and reducing paperwork for businesses.
  • Increased Transparency: The online GST portal simplifies tax administration and promotes transparency in the system.
  • Reduced Tax Burden: Lower prices due to the elimination of cascading taxes benefit consumers.
  • Boosted Economic Growth: By removing tax barriers and improving efficiency, GST is expected to contribute to higher economic growth and job creation.
• GST Council: The GST Council is a constitutional body responsible for making recommendations on issues related to the implementation of the GST in India.
  • As per Article 279A (1) of the amended Constitution, the GST Council was constituted by the President.

What are the Current Major Challenges Related to GST in India?

• Complexity and Compliance Burden: The structure of GST in India is intricate, featuring numerous tax slabs, which results in heightened compliance obligations. This complexity presents a significant challenge for businesses, particularly smaller enterprises, as they navigate and adhere to the diverse set of regulations.
  • Technology and Infrastructure Readiness: The effective implementation of GST heavily relies on robust technological infrastructure. Challenges such as businesses lacking technological preparedness and discrepancies in technology adoption can impede the smooth operation of the GST network.
  • Input Tax Credit (ITC) Verification: Government authorities have recently uncovered and dismantled over 29,000 fraudulent firms involved in evading GST payments.
• Multiple Registrations Across States: Businesses operating in various states must undergo separate registration processes in each state to comply with GST regulations. This requirement for multiple registrations adds to the administrative burden and increases compliance expenses for businesses with a nationwide presence, exacerbating logistical complexities.

Way Forward

• Simplify and Rationalize Tax Structure: Simplifying the GST tax structure by reducing the number of tax slabs.
• A more straightforward and uniform tax system would ease compliance for businesses and promote a clearer understanding of tax obligations.
• Streamline Compliance Procedures: Work towards simplifying and streamlining compliance procedures to reduce the administrative burden on businesses. This could involve harmonizing return filing processes, ensuring timely refunds, and implementing user-friendly interfaces for tax filings.
• Focus on Anti-Evasion Measures: Strengthen measures to curb tax evasion, especially through fake invoices and fraudulent activities.
• Utilizing advanced data analytics and technology to identify suspicious transactions, and implement stringent penalties for non-compliance to deter fraudulent practices.

World Economic Situation and Prospects Report for 2024

According to a United Nations report, India is forecasted to achieve a growth rate of 6.2% in 2024, driven by sturdy domestic demand and substantial expansion in both the manufacturing and services industries.

About the Report

• The World Economic Situation and Prospects 2024 is a report produced by the United Nations Department of Economic and Social Affairs (UN DESA), in partnership with the United Nations Conference on Trade and Development (UNCTAD) and the five United Nations regional commissions etc.
• The world economy continues to face multiple crises, jeopardizing progress toward Sustainable Development Goals (SDGs).
• In 2024, the world must seize the opportunity to create a more inclusive, resilient global economy that works for everyone, everywhere.

Highlights of the Report

Global Economy

• The global economic growth rate is expected to decelerate from approximately 2.7% in 2023 to 2.4% in 2024, falling below the pre-pandemic growth rate of 3%. Despite the world economy exhibiting greater resilience than anticipated in 2023, it conceals both immediate risks and underlying structural vulnerabilities. Many developing nations, particularly those deemed vulnerable or low-income, continue to face sluggish growth prospects, complicating efforts to fully recover from pandemic-induced losses.
• Global trade in goods and industrial production remain notably feeble due to both cyclical and structural challenges. During the third quarter of 2023, the manufacturing Purchasing Managers' Index signaled contraction in all major economies except India. Short-term factors such as slowing global demand, lingering trade tensions among major trading partners, and geopolitical conflicts are impacting trade flows, with the conflict in Ukraine and sanctions against Russia further shaping global trade dynamics.
• The report emphasized that climate change-induced events significantly impacted the South Asian region in 2023, with intensified droughts affecting large parts of India, Nepal, and Bangladesh, while Pakistan witnessed above-average rainfall. Warmer temperatures are expected to increase power demand and strain local hydropower resources amid reduced precipitation, potentially leading to power shortages that could constrain industrial activity, as has been observed in some South Asian countries in recent years.
• Post-pandemic, the global labor market displays divergent trends between developed and developing nations. Developed countries have seen a robust recovery, characterized by low unemployment rates, such as 3.7% in the US and 6.0% in the EU in 2023, alongside increasing nominal wages and a narrowing wage gap. However, real income losses and labor shortages present ongoing challenges.
• Concerns about global inflation, which have been prominent over the past couple of years, are beginning to ease. Global headline inflation decreased from 8.1% in 2022 to an estimated 5.7% in 2023 and is projected to further decline to 3.9% in 2024.
• Debt sustainability has become a pressing issue, particularly for developing countries, as rising debt levels and shifting global financial conditions pose significant challenges.

Indian Economy

• The United Nations adjusted its forecast for India's Gross Domestic Product (GDP) growth in the calendar year 2024 downward from 6.7% to 6.2%. According to the report, GDP in the broader South Asian region expanded by an estimated 5.3% in 2023 and is anticipated to grow by 5.2% in 2024, primarily due to a robust expansion in India, which continues to maintain its status as the world's fastest-growing major economy. 
• India's GDP is expected to rise to 6.6% in 2025. The projected 5.2% growth in 2024 will be largely driven by resilient private consumption and robust public investment.
• In 2022, Foreign Direct Investment (FDI) inflows into India increased by 10%, positioning it as the third-largest recipient country for announced greenfield projects. Another factor contributing to fixed capital formation in the country is the increased government expenditure on infrastructure projects such as roads, railways, and renewable energy initiatives, which can stimulate private sector investment.
• Developing countries, including India and Brazil, are facing challenges accessing financing in international capital markets due to high levels of external debt and persistently rising interest rates.
• Labor market indicators in India showed improvement over the year, with labor force participation reaching its highest level since the onset of the pandemic in August. The unemployment rate averaged 7.1% in September, marking the lowest value in a year.
• The report highlighted that consumer price inflation in India is expected to decrease from 5.7% in 2023 to 4.5% in 2024, remaining within the two to six percent medium-term inflation target range set by the Central Bank.

Concerns over Insolvency and Bankruptcy Code, 2016

Context

The implementation of the Insolvency and Bankruptcy Code (IBC) in 2016 aimed to achieve multiple goals, such as optimizing the value of debtors' assets, fostering entrepreneurship, facilitating prompt case resolution, and maintaining a fair balance among stakeholders' interests. Nonetheless, recent events have sparked doubts regarding the efficacy of the code and its resolution procedures.

What are the Key Issues with the IBC?

• Minimal Repayment Percentage: According to the Reserve Bank of India's (RBI) 2023 Financial Stability Report (FSR), the approval process for resolution plans typically entails purchasers making only around 15% payment, with banks not collecting any additional interest for years. This has sparked concerns regarding the efficacy of the repayment process.
• Settlement and Retrieval: Recent settlements and resolutions, like the case of Reliance Communications Infrastructure Ltd. (RCIL), have raised alarms due to the small settlement amounts and prolonged resolution durations. For instance, the RCIL settlement accounted for just 0.92% of the debt, and it took four years to finalize the resolution plan, well beyond the prescribed maximum of 330 days. Ideally, Financial Creditors (FCs) should receive both principal and interest.
  
• Time-consuming procedures for identifying and acknowledging defaults contribute to diminished recovery rates, delaying the commencement of resolution proceedings and further reducing recovery rates.
• Haircuts and Recovery Rates: The notion of "haircuts," involving the writing off of loans and accrued interest, has gained traction. Promoters exploit this by benefiting from substantial haircuts from bankers or the National Company Law Tribunal (NCLT). Following resolutions, borrowers and Insolvency Professionals (IPs) often remain affluent, while lenders suffer, and banks are relieved of liability, as only companies are declared insolvent, not their owners, resulting in depositors bearing the brunt. Consequently, financial creditors experience low recovery rates, with some cases realizing as little as 5% of the outstanding loan.
  

• Realizable Value: According to the 2023 FSR released by the RBI, creditors experience low returns, with banks or financial institutions typically recovering only 10-15% in NCLT-resolved cases involving large corporations. However, the RBI notes that creditors realize 168.5% of the liquidation value and 86.3% of the fair value.
• The FSR reports that out of 597 liquidations, only 3% of the admitted claims, totaling Rs 1,32,888 crore, were recovered.
• While banks apply current interest rates on loans to various sectors like agriculture, education, MSMEs, and housing, including penalties for delays, there's a differential treatment when it comes to corporates.
• The minimal returns from liquidations raise concerns about the efficacy of the recovery process.

Regulatory Concerns

• FSR Findings: The FSR raises multiple concerns regarding the Corporate Insolvency Resolution Process (CIRP), noting that admitted claims fall short of dues and creditors are recovering only a fraction of the liquidation and fair values.
• Parliamentary Standing Committee Report: The 32nd report of the Parliamentary Standing Committee on Finance expresses worries about low recovery rates, massive haircuts reaching up to 95%, and delays in the resolution process, with over 71% of cases pending for more than 180 days. This deviation from the original intent of the code, as envisaged by Parliament, raises issues with Resolution Professionals (RPs) and Insolvency Professionals (IPs). The report also suggests the implementation of a professional code of conduct for the Committee of Creditors (COCs) and setting a limit on haircuts.
• Limited Judicial Capacity: A shortage of judges hampers the IBC resolution process, leading to slower case processing and prolonged resolution times.

What are the Key Highlights of the Insolvency and Bankruptcy Code, 2016?

Overview:

• The Insolvency and Bankruptcy Code (IBC) of 2016 establishes a structure for addressing the insolvency and bankruptcy of entities, including companies, individuals, and partnerships, within specified timeframes.
• Insolvency occurs when an individual or entity's liabilities surpass their assets, rendering them unable to generate sufficient funds to meet their financial obligations as they fall due.
• Bankruptcy signifies the legal declaration of an individual or company's incapacity to settle their outstanding debts.
• The Insolvency and Bankruptcy Code (Amendment) Act of 2021 modifies the original IBC of 2016, particularly targeting the insolvency resolution process for micro, small, and medium enterprises (MSMEs), aiming for expedited, cost-effective, and value-optimized outcomes for all stakeholders.

Objectives:

• Enhancing the value of debtors' assets.
• Fostering entrepreneurship.
• Ensuring prompt and efficient resolution of cases.
• Safeguarding the interests of all involved parties.
• Fostering competition in the market and economy.
• Establishing a framework for managing cross-border insolvency cases.

IBC Procedures:

• Insolvency and Bankruptcy Board of India (IBBI): The IBBI serves as the regulatory body overseeing insolvency proceedings in India, led by a Chairperson and three full-time members, appointed by the government, possessing expertise in finance, law, and insolvency, with additional ex-officio members.
• Adjudication of Proceedings: The National Companies Law Tribunal (NCLT) oversees proceedings concerning companies, while the Debt Recovery Tribunal (DRT) handles cases involving individuals.
• Courts have a crucial role in authorizing the initiation of resolution processes, appointing professionals, and validating creditors' final decisions.

Insolvency Resolution Process under the Code:

• Initiated by either the debtor or creditor following a default.
• Insolvency professionals manage the process, furnishing financial details to creditors and supervising asset management by debtors.
• A 180-day moratorium shields the debtor from legal actions during the resolution phase.

Committee of Creditors (CoC):

• Comprising financial creditors and formed by insolvency professionals, the CoC determines the destiny of outstanding debts, deliberating on debt restructuring, altering repayment schedules, or liquidating assets.
• Failure to reach a decision within 180 days results in the liquidation of the debtor's assets.

Liquidation Process:

• Proceeds from asset sales are distributed in the following order: first, insolvency resolution expenses, including remuneration for insolvency professionals; second, secured creditors with collateral-backed loans; third, dues to workers and other employees; fourth, unsecured creditors.

Way Forward

• Implement measures to ensure a higher repayment percentage in the resolution plans. This may involve stricter evaluation criteria for approving plans, emphasizing the need for a substantial upfront payment by the purchaser, and incentivizing timely repayments.
• RBI's decision to implement a maximum ceiling of credit to a single corporate house at Rs 10,000 crore is crucial for reducing the burden of banks during write-offs.
• As the original objectives have not been fulfilled, a full review of IBC and NCLTs is urgently needed.
• Reevaluate the concept of "haircuts" and implement measures to prevent abuse by promoters. Introduce safeguards that ensure a fair distribution of losses between promoters and financial creditors.
• Enhance transparency in the resolution process by ensuring regular updates on the status of cases and reasons for delays.

Decline of Saffron Production in Kashmir

Context 

The renowned saffron fields of Kashmir, renowned for yielding the most expensive spice globally, are in dire straits due to the infiltration of cement factories. Despite being the world's second-largest saffron producer, with an annual output averaging 11-12 tonnes, trailing only behind Iran, the saffron industry in the region is declining, posing economic hardships for the local farmers.

What Factors Contribute to the Decline in Saffron Production?

• Close proximity of cement factories to saffron fields results in the emission of substantial amounts of dust, which detrimentally affects both the quality and quantity of saffron harvests. Over the past two decades, saffron cultivation in Pulwama has seen a significant 60% decrease due to the pollution caused by cement factories.
• The impact of cement dust on saffron is profound. It contains harmful gases such as nitrogen oxides, sulphur dioxide, and carbon monoxide, which harm delicate saffron flowers. This dust leads to reduced chlorophyll levels, blockage of stomata in leaves, hindered light absorption and gas exchange, premature leaf shedding, and inhibited growth. Furthermore, it negatively affects the crocin content, responsible for saffron's color, thus diminishing the medicinal and cosmetic value of Kashmiri saffron.
• Various environmental factors exacerbate the decline in saffron production, including climate change, unexpected rainfall, and land diversion for urbanization and industrialization. Mechanized plowing also disrupts saffron cultivation, which heavily relies on favorable climatic conditions.
• Despite farmers' resistance and protests against the establishment of cement factories near saffron fields since 2005 due to environmental concerns, authorities have allowed these industries to operate in close proximity to saffron cultivation.
• The saffron market presents challenges to farmers, with decreasing prices, quantity, and quality, leading to financial hardships and a bleak outlook for the industry.

What are the Key Facts About the Kashmiri Saffron?

• Saffron Production and Pricing: For a while, saffron production has been confined to a small region in the Union territory of Jammu & Kashmir. The Pampore region, often referred to as the Saffron bowl of Kashmir, is the primary source of saffron. This prized spice, extracted from the stigma of the saffron flower (scientifically known as Crocus sativus L), is known as "kong" in Kashmiri, "zaffran" in Urdu, and "kesar" in Hindi. Kashmiri kesar holds significant value, fetching prices as high as Rs 3 lakhs per kilogram. Obtaining a gram of kesar requires the labor-intensive process of extracting it from around 160-180 flowers.
• Season: Saffron corms are typically cultivated in India during June and July, and sometimes in August and September. Flowering begins in October.
• Cultivation Requirements: Saffron thrives at altitudes around 2000 meters above sea level, requiring a 12-hour photoperiod. While it can grow in various soil types, it flourishes best in calcareous, humus-rich, and well-drained soil with a pH between 6 and 8. Ideal climate conditions range from summer temperatures not exceeding 35 or 40°C to winter temperatures of about –15 or –20°C. Adequate annual rainfall of 1000-1500 mm is also necessary.
• Crocin Content and Color: Kashmiri saffron boasts an 8% crocin content, higher than other varieties which typically contain around 5-6%.
• Benefits of Kashmiri Saffron: Kashmiri saffron is renowned for its medicinal properties, including blood pressure regulation, treatment of anemia and migraines, and aiding in insomnia. Additionally, it offers cosmetic benefits such as improving skin quality, reducing pigmentation, and minimizing spots. It is an essential ingredient in traditional dishes and widely used in beverages, confectionery, dairy products, and food coloring.
• Recognition: In 2020, the Indian government awarded Geographical Indication (GI) certification to saffron cultivated in the Kashmir Valley. The Saffron Heritage of Kashmir is recognized as one of the Globally Important Agricultural Heritage Systems (GIAHS), which are agroecosystems characterized by their rich agrobiodiversity, traditional knowledge, and sustainable management practices. These sites, including those maintained by farmers, herders, fisherfolk, and forest communities, contribute significantly to livelihoods and food security. The Food and Agriculture Organization of the United Nations has acknowledged over 60 such sites worldwide through its GIAHS Programme.

Way Forward

• Implement and enforce strict environmental regulations to mitigate the impact of cement factories on saffron fields.
• Ensure regular monitoring and penalties for industries contributing to pollution near saffron cultivation areas.
• Facilitate collaboration between the government and saffron growers to address concerns and find sustainable solutions.
• Support initiatives for diversifying the livelihoods of saffron farmers, offering alternative sources of income.
• Allocate funds for research and development in saffron cultivation, focusing on creating varieties resilient to environmental challenges.
• Invest in technology that minimizes the impact of pollutants on saffron crops, ensuring sustainable growth and maintaining quality.

Debt Sustainability and Exchange Rate Management

Context

 The International Monetary Fund (IMF) has recently published its yearly Article IV consultation report on India, tackling important matters related to the country's ability to sustain its debt and manage its exchange rates.

What are IMF’s Projections Related to India’s Economic Outlook?

• Debt Sustainability: The IMF has raised concerns regarding India’s ability to sustain its long-term debt. It has projected that India’s overall government debt, covering both the Central and State governments, could potentially reach 100% of GDP by the fiscal year 2028, particularly in adverse scenarios.
• Debt Management Challenges: The report has emphasized the necessity for more cautious debt management practices. It stresses the vital importance of financing to achieve climate change mitigation objectives and to enhance resilience against natural disasters.
• The Indian Finance Ministry has disputed the IMF’s debt projections, dismissing them as a worst-case scenario rather than an imminent reality.
• Exchange Rate Dynamics: The IMF has reclassified India’s de facto exchange rate regime from "floating" to "stabilized arrangement" for the period from December 2022 to October 2023. This reclassification reflects observations about controlled fluctuations in the value of the rupee due to interventions by the Reserve Bank of India (RBI).
• Stagnant Credit Ratings: Despite being recognized as the fastest-growing major economy, India's sovereign investment ratings have remained unchanged for a significant period. Agencies such as Fitch Ratings and S&P Global Ratings have maintained India’s credit rating at ‘BBB- with stable outlook’ since 2006, citing concerns about weak fiscal performance, high debt burdens, and low per capita income.

What is India’s Current Debt Scenario?

• Government's Current Debt Levels: By March 2023, the central government's debt amounted to ₹155.6 trillion, approximately 57.1% of GDP. In contrast, State governments held debt equivalent to about 28% of GDP. The Finance Ministry noted that India's public debt-to-GDP ratio reached 81% in 2022-23, significantly exceeding the levels set by the Fiscal Responsibility and Budget Management (FRBM) target. The 2018 amendment to the FRBM Act outlined debt-to-GDP targets for the Centre, States, and their combined accounts at 40%, 20%, and 60%, respectively.
• Interrelated Factors Contributing to India's Increasing Debt Levels:
  • High Fiscal Deficit: Persistent government spending surpassing revenue generation results in deficits financed through borrowing. This is influenced by:
  • Significant Expenditure Commitments: Substantial outlays on social welfare programs, subsidies, and defense.
  • Sluggish Revenue Growth: Tax reforms failing to adequately boost revenue collection, leading to a revenue-expenditure gap.
  • Global Geopolitical Events: Events such as the Russia-Ukraine conflict and escalating commodity prices can disrupt the economy, increase import costs, and necessitate borrowing to maintain stability.
  • Informal Economy and Tax Evasion: The sizable informal economy hampers efficient tax collection. Tax evasion and informalization in sectors like agriculture and small businesses limit revenue, potentially compelling the government to resort to debt financing.
  • Guarantees and Contingencies: Government guarantees for public sector entity loans and contingent liabilities, like potential losses from public-private partnerships, indirectly contribute to debt.
  • Exchange Rate Fluctuations: Fluctuations in exchange rates affect the cost of servicing foreign currency-denominated debt, potentially amplifying the overall debt burden.
• Legislation for Debt Management in India:
  • The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) aimed to instill financial discipline in government fiscal operations and reduce the country's fiscal deficit. The FRBM Act established specific debt-to-GDP targets for the Centre and States. 
  • However, disruptions caused by the pandemic significantly elevated debt-to-GDP ratios, surpassing the specified thresholds. Despite several years since its enactment, the Government of India has struggled to meet the FRBM Act targets.

What Measures can India Take for Sustainable Debt Management?

• Short Term: Fiscal Consolidation:
  • Targeted Reforms: Streamlining subsidies, reforming public sector enterprises, and reducing administrative inefficiencies and strict adherence to FRBM Act targets can free up resources for debt repayment and productive investments.
  • Improved Tax Efficiency: Strengthening tax administration and tackling tax evasion can significantly boost revenue without excessive borrowing.
• Long Term Growth-Oriented Strategies:
  • Skill Development and Education: Investing in human capital through education and skill development programs enhances productivity and competitiveness, leading to higher economic growth and improved tax collection.
  • Export Promotion: Diversifying export markets, incentivizing high-value exports, and addressing competitiveness challenges can boost foreign exchange earnings, potentially reducing the need for external debt.

Supreme Court Verdict on Adani-Hindenburg Case

Context

The Supreme Court declined the initiation of a fresh investigation into the Adani Group, despite existing accusations related to stock manipulation and various infringements.

Background of Adani-Hindenburg Case

• The Adani-Hindenburg case revolves around allegations leveled by Hindenburg Research against the Adani Group in January 2023. Hindenburg Research, a US-based short seller, accused the Adani Group of engaging in accounting fraud, manipulating stock prices, and improperly utilizing tax havens. 
• The report also asserted that the Adani Group was involved in what it described as "the largest con in corporate history."
• Following the release of the report, the Adani Group experienced a significant decline in its stock market value, with nearly $150 billion being wiped out at its lowest point. 
• This decline also led to the cancellation of a ₹20,000 crore share sale. Subsequently, the Securities and Exchange Board of India (SEBI) became involved in the matter.
• In January 2024, the Supreme Court ruled that the circumstances surrounding the case did not justify transferring the investigation away from SEBI. 
  
• The court emphasized that the market regulator should conclude its investigation in accordance with the law. SEBI was granted a three-month period to conclude its probe.

What was the Adani-Hindenburg Case?

The Adani-Hindenburg issue revolves around allegations made by Hindenburg Research, a US-based institute specializing in forensic financial research. Founded in 2017 by Nate Anderson, the institute focuses on uncovering corruption, fraud, and irregularities in the business world.

• Hindenburg Research and Short-Selling
  • Hindenburg Research is known for its expertise in activist short-selling. Short selling, as defined by the Securities and Exchange Board of India (SEBI), involves selling borrowed shares with the expectation of repurchasing them at a lower price. It is a strategy that contrasts with traditional stock market investments, where investors buy shares anticipating a rise in their value.
• Hindenburg’s Allegations Against the Adani Group
  • Hindenburg Research alleges that the Adani Group, a conglomerate with interests spanning various sectors, including ports, logistics, power generation, agribusiness, and more, has been involved in extensive stock manipulation and accounting fraud schemes, totaling ₹17.8 trillion (US$ 218 billion) over several decades.
• Key Points of Hindenburg’s Allegations
  • Adani’s family allegedly controlled offshore shell entities in tax havens such as the Caribbean, Mauritius, and the United Arab Emirates.
  • Research firm, Hindenburg, asserts that these entities were involved in corruption, money laundering, and taxpayer theft.
  • The offshore entities are accused of diverting funds from publicly listed companies within the Adani group.
  • Allegations suggest that the offshore structures were used for illicit financial activities, potentially impacting the integrity of the Adani family’s business operations.
• Market Reaction and Concerns
  • The release of Hindenburg’s report led to a significant fall in the stock prices of Adani Group companies. This, in turn, raised concerns about the conglomerate’s ability to repay the substantial debt it has accumulated from Indian banks. The risk associated with lending large sums against shares is compounded by the potential drop in share prices if the company fails to meet its debt obligations.
• Impact on Investors and LIC
  • Investors, including the Life Insurance Corporation of India (LIC), experienced sharp declines in their investments due to the report. The uncertainty surrounding the Adani Group’s financial stability has sparked fears among investors about potential losses.

Supreme Court’s Adani-Hindenburg Verdict

• Dismissal of Further Investigation: The Supreme Court declined requests for an additional probe to be conducted by either a Special Investigation Team or the Central Bureau of Investigation, opting to trust the current investigation by SEBI.
• Trust in SEBI’s Inquiry: The court saw no cause for scepticism regarding SEBI’s ongoing investigation and instructed it to complete the remaining segments within a three-month timeframe.
• No Need for Regulatory Revisions: The Supreme Court determined there was no necessity to compel SEBI to reverse recent modifications to the Foreign Portfolio Investors regulations and the Listing Obligations and Disclosure Requirement Regulations.

Adani-Hindenburg Case Timeline

Consequences of the Supreme Court’s Decision on Adani-Hindenburg Case

• Positive Market Reaction: The Supreme Court’s ruling led to a favourable reaction in the market, with Adani’s market capitalization increasing to ₹15 trillion, reflecting a resurgence in investor trust.
• Validation of SEBI’s Role: The judgement emphasises the significance of SEBI in the continuing investigation, underlining the critical role of regulatory authorities in upholding market fairness.
• Emphasis on Greater Transparency: The situation highlights the necessity for enhanced transparency and stronger regulation in financial markets, particularly in light of the issues regarding offshore entities and shareholding regulations.

Interest Rate Adjustments in Small Savings Schemes

Context

Recently, the Union government made changes to the interest rates of specific small savings schemes for the initial quarter of 2024.

• The Sukanya Samriddhi Account Scheme (SSAS) witnessed an increase in returns from 8% to 8.2%, while the interest on 3-year time deposits rose from 7% to 7.1%.
• However, several other small savings schemes, including the widely popular Public Provident Fund (PPF), maintained their existing interest rates.

Continued Freeze on PPF Rates

The interest rate for the Public Provident Fund (PPF) remains unchanged at 7.1%, maintaining its static status since April 2020. This marks the sixth consecutive quarter without any adjustment. Notably, prior to the last Lok Sabha election in January 2019, there were substantial increases in returns on various schemes, including the PPF, which was raised to 7.9%. However, this time, the PPF rate has remained constant for yet another quarter.

Stagnant Rates despite RBI Recommendations

Despite recommendations from the Reserve Bank of India (RBI) suggesting a PPF return of 7.51% for the October to December 2023 quarter, in accordance with the formula-based rates system implemented in 2016, the rates have been kept unchanged at 7.1%. Similarly, rates on 5-year recurring deposit (RD) accounts were expected to increase to 6.91% for the upcoming quarter but have also remained unchanged at 6.7%.

Factors Influencing Rate Adjustments

Interest rates for the next quarter, as per the adopted formula, are linked to government bond yields prevailing between September and November 2023, specifically for securities with corresponding maturities. The decision to maintain stability in some small savings schemes’ rates, including the PPF, may be attributed to various economic factors and the government’s strategic approach to managing returns in line with prevailing bond yields.

Impact on Investors and Tax Implications

This decision has implications for investors relying on these small savings schemes for stable returns and tax benefits. Both the PPF and the Sukanya Samriddhi Account Scheme (SSAS) offer tax-free returns, making them popular among investors seeking tax-efficient savings options.

Sukanya Samriddhi Account Scheme (SSAS)

Introduced in 2016 under the "Beti Bachao – Beti Padhao" initiative, the SSAS aims to benefit girl children. Parents or guardians of girls aged 10 or younger can open accounts under this scheme, which carries higher interest rates and tax benefits.

Public Provident Fund (PPF) Scheme

The PPF Scheme, introduced in 1968 by the Finance Ministry’s National Savings Institute, is popular for its tax savings, returns, and safety. It aims to help individuals make small savings and provides guaranteed returns.

Conclusion

The recent adjustment in interest rates for select small savings schemes reflects a nuanced approach by the government toward managing returns in line with economic conditions. However, maintaining the PPF rate stagnant for multiple quarters raises questions about the government’s strategy amid evolving economic landscapes and RBI’s recommendations. Investors should continue to assess the implications of these rate adjustments on their financial portfolios and future investments.

RBI Guidelines on Inoperative Accounts and Unclaimed Deposits

Context

The RBI has issued directives regarding the categorization of accounts and deposits as either inoperative accounts or unclaimed deposits. These guidelines are to be adhered to by Commercial Banks (including RRBs) and all Co-operative Banks.

Importance of these guidelines for inoperative accounts and unclaimed deposits

• Reducing risk of frauds: Inoperative accounts have often been used for money laundering and committing frauds.
• Mobilising of funds parked in inoperative accounts: Around Rs 1-1.30 Lakh crores is expected to be parked in inoperative Bank accounts and Rs 42,270 crore of unclaimed deposits are lying with banks as of March 2023.
• Streamlining direct benefit transfers and scholarships from central and state governments: banks open zero balance accounts for beneficiaries of Central/State government schemes and for students who receive scholarship. Central and State governments have been expressing difficulty in crediting cheques/Direct Benefit Transfer/ Electronic Benefit Transfer/ scholarship amount in these accounts as they are also classified as inoperative due to non-operation for two years.

Inoperative Account

• A savings/current account shall be treated as inoperative if there are no ‘customer induced transactions’ in the account for a period of over two years. Thus, bank induced transactions will not be considered for classifying any account as inoperative.
• Customer induced transaction is in the nature of:
• Financial transaction initiated by or done at the behest of account holder by the bank/third party.
• Non-financial transaction like 
• KYC updation done in face-to-face or through digital channels. 
• Banks shall activate inoperative accounts/unclaimed deposits.

Unclaimed Deposits

• Any credit balance in a bank deposit account that remains inactive for ten years or more, or any unclaimed amount left untouched for the same duration, must be transferred by the bank to the Depositor Education and Awareness (DEA) Fund Scheme managed by the RBI.
• Unclaimed Deposit Reference Number (UDRN): When a bank transfers an unclaimed deposit or account to the RBI's Depositor Education & Awareness Fund, a unique identifier, known as the Unclaimed Deposit Reference Number (UDRN), is generated through the Core Banking Solution for each such account.
• Banks are required to publish details of unclaimed deposits and their corresponding UDRNs, which have been transferred to the RBI's DEA Fund, on their respective websites. These details will be updated on a monthly basis.
• Banks shall segregate accounts opened for the above purposes in their Core Banking Solution, so that the stipulation of inoperative account is not applicable to these accounts due to their non-operation for a period of more than two years.  

Interest Payments and charges

• Interest on savings accounts shall be credited on a regular basis irrespective of the fact that the account is in operation or not.
• Banks are not permitted to levy penal charges for non-maintenance of minimum balances in any account that is classified as an inoperative account. 

Activation of Inoperative Accounts

• Banks are required to activate inoperative accounts and unclaimed deposits, including frozen accounts, only after complying with KYC guidelines such as Customer Due Diligence, Customer Identification, and risk categorization.
• The activation of inoperative accounts and unclaimed deposits in the Core Banking Solution (CBS) will only occur upon obtaining authorization from another officer at the same level or higher.
• Upon the removal of the inoperative status based on KYC verification and updating, banks are mandated to automatically inform the account holders via SMS and registered email.
• Banks must provide the facility for KYC updating to activate inoperative accounts and unclaimed deposits at all branches, including non-home branches, and through the Video-Customer Identification Process (V-CIP).
• There will be no charges imposed for activating inoperative accounts.
• Transactions in reactivated inoperative accounts will be regularly monitored for at least 6 years.

Review of Accounts

• Banks shall undertake atleast an annual review of accounts, where there are no customer induced transactions for more than year.

India’s Steel Sector

Context

The Competition Commission of India (CCI) conducted a study on iron ore pricing and exports, highlighting concerns about varied pricing and recommending discouraging iron ore exports in the country.

What did CCI say?

What is Iron Ore?

Iron ore refers to rocks and minerals from which metallic iron can be extracted economically. It typically contains iron oxides, and the primary types include hematite, magnetite, and taconite.

Status
India is self-sufficient in iron ore production. It contributes 7% to global production. India ranks as the 4th largest producer globally. India is the 2nd largest producer of steel in the world after China

Distribution of Iron Ore

• India is endowed with abundant resources of iron ore, with the largest reserve of iron ore in Asia.
• The iron ore mines occur in close proximity to the coal fields in the northeastern plateau region which adds to their advantage.
• States:
  • About 95% of total the reserves of iron ore are located in the States of Odisha, Jharkhand, Chhattisgarh, Karnataka, Goa, Telangana, Andhra Pradesh and Tamil Nadu.
• Mines:
  • In Odisha, iron ore occurs in a series of hill ranges in Sundergarh, Mayurbhanj and Jhar. The important mines here include Badampahar (Mayurbhaj), Kiruburu (Kendujhar) and Bonai (Sundergarh).
  • Jharkhand has some of the oldest iron ore mines and most of the iron and steel plants are located around them.
  • Important mines include Noamundi and Gua in Poorbi and Pashchimi Singhbhum districts, further extending to Durg, Dantewara and Bailadila.
• Other regions:
  • Karnataka – Sandur-Hospet area of Ballari district, Baba Budan hills and Kudremukh in Chikkamagaluru district and parts of Shivamogga, Chitradurg and Tumakuru districts.
  • Chandrapur, Bhandara and Ratnagiri districts of Maharashtra; Karimnagar and Warangal districts of Telangana; Kurnool, Cuddapah and Anantapur districts of Andhra Pradesh; Salem and Nilgiris districts of Tamil Nadu
  • Goa has also emerged as an important producer of iron ore.

Significance of iron ore

• International trade:
  • The two main types of iron ore found in India are haematite and magnetite. It has great demand in the international market due to its superior quality.
• Industrial use and applications:
  • Iron ore is the source of primary iron for the world’s iron and steel industries.
  • It is therefore essential for the production of steel, which in turn is essential to maintain a strong industrial base. Almost all (98%) iron ore is used in steelmaking.
• Larger significance:
  • Most part of the economy in the above regions, especially the four states of Jharkhand, West Bengal, Odisha and Chhattisgarh revolves around these raw materials (iron and manganese).

Steel sector in India

The state of the steel sector in India is key to its economy, accounting for 2% of the GDP in FY 21-22. The major steel-producing states include Odisha, Jharkhand, Chhattisgarh, Karnataka, Maharashtra, Gujarat, and West Bengal, with Odisha leading in production.

Challenges Faced by the Steel Sector

Government Initiatives for the Steel Sector in India

Conclusion

Engaging with policymakers and international bodies is crucial to advocate for fair CBAM policies. Collaborative efforts with other industries and countries can address unique challenges in the Indian steel sector.

Inflation in India: Demand vs. Supply

Context

In India, inflation is mainly driven by factors on the supply side. However, according to a publication by the Reserve Bank of India, there are occasions when demand factors also exert a notable influence on inflation.

Causes of Inflation in recent times

• Pandemic:
  • During Covid-19, supply disruptions were the main cause of inflation.
  • Lockdowns caused a major decline in production and demand which led to a drop in economic growth.
  • Due to weakened demand, the commodity prices decreased.
• Rising pressures on commodity prices:
  • As the economy began to reopen with distribution of vaccines and release of pent-up demand, demand recovered more rapidly than supply
• Geopolitical crisis:
  • Russia-Ukraine conflict in 2022 further led supply chain challenges and added to commodity price pressures.
  • Israel Hamas conflict, attacks in the red sea and drought in the Panama Canal have led to supply chain disruptions and affected commodity prices.

Methodology for Assessing Inflation

More About Inflation