Economic Development - 2 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Gold Exchange Traded Funds (ETFs)

Context:

• The amount of money flowing into Gold Exchange Traded Funds (ETFs) dropped sharply by 90% to ₹459 crore in 2022 because of the combined effects of rising gold prices, higher interest rates, and inflationary pressures.

Overview of Gold ETFs

• Gold ETFs are exchange-traded funds that aim to track the price of physical gold in the domestic market.
• These passive investment instruments invest in gold bullion and are based on gold prices.
• Gold ETF units represent physical gold in paper or dematerialized form, with one unit equal to one gram of gold of high purity.
• The flexibility of stock investment and simplicity of gold investment are combined in Gold ETFs.
• Gold ETFs are listed and traded on the National Stock Exchange of India (NSE) and Bombay Stock Exchange Ltd. (BSE) like company stocks.
• They can be bought and sold at market prices on the cash segment of BSE & NSE.
• Buying Gold ETFs means purchasing gold in an electronic form that can be traded just like stocks.
• Redeeming Gold ETFs does not result in physical gold but cash equivalent.
• Trading of gold ETFs occurs through a dematerialized Account (Demat) and a broker, making it a highly convenient way to invest in gold electronically.

How does a Gold ETF work?

Functioning of Gold ETFs:

• Gold ETFs represent physical gold bars with 99.5% purity.
• The prices of Gold ETFs are listed on the BSE/NSE website and can be bought or sold anytime through a stockbroker.
• Unlike gold jewelry, Gold ETFs can be bought and sold at the same price all over India.

Purchasing Gold ETFs:

• Gold ETFs can be purchased on BSE/NSE through a broker using a demat account and trading account.
• A brokerage fee and minor fund management charges apply when buying or selling Gold ETFs.

Risks Associated with Gold ETFs:

• Gold ETFs are subject to market risks that can impact the price of gold.
• Gold ETFs are subject to SEBI Mutual Funds Regulations.
• A regular audit of the physical gold bought by fund houses by a statutory auditor is mandatory to mitigate risks.

Benefits of Investing in Gold ETFs

• Gold ETFs offer the assurance of high-purity physical gold backing for each unit purchased.
• Real-time gold prices are transparently available for investors in Gold ETFs.
• Gold ETFs are listed and traded on stock exchanges, making them easily accessible and convenient for investors.
• Income earned from Gold ETFs is treated as long-term capital gains, making them a tax-efficient way to hold gold.
• There is no wealth tax, security transaction tax, VAT, or sales tax applied to Gold ETFs.
• Gold ETFs eliminate the risk of theft as units are held in a demat account, saving investors on safe deposit locker charges.
• ETFs can be used as collateral for loans.
• There are no entry or exit loads associated with Gold ETFs, making them an attractive investment option.

Financial Inclusion Index: RBI

Why in News:

• The Composite Financial Inclusion Index (FI-Index) for the year ending March 31st, 2022, has been published by the Reserve Bank of India.

Key Findings of the Financial Inclusion Index in India

The Financial Inclusion Index in India has shown improvement, rising from 53.9 in the previous year (2021) to 56.4.

This improvement has been observed across all sub-indices, including Access, Usage, and Equality.

Understanding the Financial Inclusion Index in India

About the FI-Index:

• The Financial Inclusion Index (FI-Index) is a comprehensive index that includes information on banking, investments, insurance, postal services, and the pension sector.
• It was developed by the Reserve Bank of India (RBI) in 2021 in consultation with the government and sectoral regulators, without any base year, and is published every year in July.

Aim of the FI-Index:

• The FI-Index aims to capture the extent of financial inclusion across India by measuring ease of access, availability, usage, and quality of financial services.
• The index comprises 97 indicators and covers various aspects of financial inclusion.

Parameters of the FI-Index:

• The FI-Index ranges from 0 to 100, where 0 represents complete financial exclusion and 100 indicates full financial inclusion.
• The index comprises three broad parameters: Access (35% weightage), Usage (45% weightage), and Quality (20% weightage).
• Each parameter includes various dimensions, which are computed based on a number of indicators.
• The FI-Index is responsive to ease of access, availability and usage of services, and quality of services for all 97 indicators.

Importance of the Financial Inclusion Index

Measuring Financial Inclusion:

• The FI Index is essential for evaluating the level of financial inclusion and determining financial services for internal policy-making purposes.

Composite Measure:

• It can be used as a composite measure in development indicators and serves as an important tool for policymakers.

Meeting G20 Indicators:

• The FI Index helps in fulfilling the requirements of the G20 Financial Inclusion Indicators that evaluate the status of financial inclusion and digital financial services nationally and globally.

Research and Analysis:

• The index is a valuable resource for researchers to analyze the impact of financial inclusion and other macroeconomic variables, which can further improve policies and services.

What is the meaning of Financial Inclusion?

Financial inclusion refers to the process of ensuring that vulnerable groups such as weaker sections and low-income groups have access to financial services and adequate credit when needed at an affordable cost. In India, financial inclusion is a critical aspect of the development process due to the country's diversity. Over the years, the combined efforts of regulatory institutions, successive governments, and civil society have helped to expand the financial-inclusion net in India. The first step towards broader financial inclusion is to have access to a transaction account since it allows people to store money and perform transactions such as sending and receiving payments. A transaction account acts as a gateway to other financial services.

The Competition (Amendment) Bill, 2022

Why in News:

• The Lok Sabha has recently tabled the Bill for amending the Competition Act of 2002.

Reforms in the Competition Act, 2002: Why Were They Necessary?

Introduction:

• Recently, amendments to the Competition Act, 2002, were proposed to the Lok Sabha. This step was taken due to the following reasons:

Impact of New Age Market:

• As the market continues to evolve rapidly with the rise of technology, artificial intelligence, and the growing significance of non-price factors, it was crucial to introduce amendments to promote sustainable market competition.

Issues with Current Acquisition Policies:

Section 5 of the Competition Act, 2002, specifies that entities involved in mergers, acquisitions, or amalgamations need only notify the Competition Commission of India based on asset or turnover. This led to the following issues:

• Gun Jumping: When two or more parties complete a notified transaction before obtaining approval or consummate a reportable transaction without informing the Commission.
• Hub-and-Spoke Cartels: In such arrangements, vertically related players act as a hub and place horizontal restrictions on suppliers or retailers. Currently, anti-competitive agreements are only prohibited among entities with similar trades. This overlooks hub-and-spoke cartels operated at different levels of the vertical chain by suppliers and distributors.

Proposed Amendments in India's Competition Law

India's competition law is set to undergo significant amendments with the introduction of the Competition (Amendment) Bill, 2020. Let's take a closer look at some of the proposed changes:

Deal Value Threshold:

• One of the most significant changes proposed is the introduction of a deal value threshold. The new Bill proposes that any transaction with a deal value in excess of ₹2,000 crores and involving parties with substantial business operations in India must be notified to the Competition Commission of India (CCI).

Substantial Business Operations:

• To determine if an enterprise has substantial business operations in India, the CCI will frame regulations. This change will enable the CCI to review transactions in the digital and infrastructure space that were previously not reported, as the asset or turnover values did not meet the jurisdictional thresholds.

Speed Up Clearance of Combination:

• Business entities seeking to execute a combination will now have to inform the CCI. The new amendment reduces the timeline for approval from 210 working days to 150 working days with a conservatory period of 30 days for extensions. The change will speed up the clearance of combinations and increase the importance of pre-filing consultations with the CCI.

Gun Jumping:

• The penalty for gun-jumping has been revised to 1% of the deal value, up from 1% of the asset or turnover.

Exemption of Open Market Purchases:

• The Bill proposes to exempt open market purchases and stock market transactions from the requirement to notify the CCI in advance.

Hub-and-Spoke Cartels:

• The amendment broadens the scope of 'anti-competitive agreements' to catch entities that facilitate cartelisation, even if they are not engaged in identical trade practices.

Settlements and Commitments:

• The Bill proposes a framework for settlements and commitments for cases relating to vertical agreements and abuse of dominance. Parties can apply for a commitment before the Director General (DG) submits the report. The CCI's decision regarding commitment or settlement will not be appealable after hearing all stakeholders in the case.

Other Major Amendments

Provision of Leniency Plus:

• The CCI may give an additional waiver of penalties to an applicant who discloses the existence of another cartel in an unrelated market, provided the information enables the CCI to form a prima facie opinion about the existence of the cartel.

Appointment of Director General:

• The appointment of a Director General by the CCI, rather than the Central government, gives the CCI greater control.

Guidelines Regarding Penalties:

• The CCI will develop guidelines regarding the number of penalties for various competition violations. For an appeal to be heard by the National Company Law Tribunal (NCLT) against the CCI's order, the party will have to deposit 25% of the penalty amount.

These proposed amendments aim to strengthen India's competition law framework and ensure fair competition in the market.

Way Forward

• The proposed changes will help the Competition Commission of India (CCI) manage the New Age market more efficiently and make its operation stronger.
• It is essential to note that the effectiveness of these changes is subject to the regulations notified by the CCI in the future.
• The government should acknowledge that the market dynamics keep changing, and laws need to be updated regularly to keep up with these changes.

Demographic Transition in India

• India has a population of 1.4 billion, which accounts for about 17.5% of the world's population.
• According to the United Nations' World Population Prospects, India is projected to surpass China as the world's most populous country in 2023.
• India is currently undergoing a demographic transition with a significant proportion of youth population.
• The Ministry of Statistics and Programme Implementation has released the 'Youth in India 2022' report, which highlights a decline in the population share of youth and an increase in the share of elderly population during 2021-2036.
• The proportion of elderly population to the total population has increased from 6.8% in 1991 to 9.2% in 2016 and is projected to reach 14.9% in 2036.
• On the other hand, the population of youth in the age group of 15-29 years comprises 27.2% of the population in 2021, which is expected to decrease to 22.7% by 2036.
• The large number of youths in India is seen as a window of opportunity for growth and development, but this opportunity needs to be seized before the window closes.

Understanding India’s Demographic Dividend

Definition:

• The demographic dividend refers to the economic growth potential that can result from changes in a population's age structure, particularly when the working-age population (15-64) is larger than the non-working-age share of the population (14 and younger, and 65 and older).

India's Median Age:

• The median age in India is 28 years, which is significantly lower than other developed countries such as the US, China, Japan, and Western Europe.

Diversity in Age Structure Among Indian States:

• India's demographic dividend varies among different states, and the status and pace of population ageing also differ. Southern states, which are advanced in demographic transition, already have a higher percentage of older people compared to the northern states. For instance, Kerala's population is already ageing, while in Bihar, the working-age population is expected to continue increasing until 2051.

Factors Contributing to Differences in Age Structure:

• The differences in age structure reflect differences in the economic development and health of the states, including access to healthcare facilities, education, and employment opportunities.

How can India Utilizing Demographic Dividend

• Increase in Fiscal Space: India can benefit from its demographic dividend by diverting fiscal resources from spending on children towards investing in modern physical and human infrastructure. This investment will increase the economic sustainability of India in the long term.
• Rise in Workforce: India's demographic dividend presents an opportunity for the country to become an economic superpower. With more than 65% of the population in the working age group, India can potentially supply more than half of Asia's potential workforce in the coming decades.
• Increase in Labour Force: The rise in the working-age population can enhance the productivity of the economy. With more people working, the country can generate more income, create more jobs, and increase overall economic growth.
• Rise in Women's Workforce: The decline in fertility rates that accompanies the demographic dividend can result in an increase in the participation of women in the workforce. This rise in women's workforce can be a new source of growth for the country.

Challenges associated with Demographic Dividend in India

Unfulfilled Educational Requirements:

• Despite over 95% of Indian children attending primary school, poor infrastructure in government schools, malnutrition, and a shortage of trained teachers have led to poor learning outcomes. Additionally, there is a gender inequality in education where boys are more likely to be enrolled in secondary and tertiary schools than girls. This is a concern as it could lead to a less skilled workforce in the future.

Low Human Development Parameters:

• India ranks at 131st position on the United Nations Development Programme (UNDP) Human Development Index 2020, which highlights the need for substantial improvements in health and education parameters. A more efficient and skilled Indian workforce is needed to reap the benefits of demographic transition.

Jobless Growth:

• There is a growing concern that India's future growth could be jobless due to de-industrialization, de-globalization, and the industrial revolution 4.0. India's labour force participation rate for the age group 15-59 years is around 53%, meaning around half of the working-age population is jobless. The informal nature of India's economy is another hurdle to reaping the benefits of demographic transition.

Absence of Proper Policies:

• The absence of proper policies is a concern as the increase in the working-age population may lead to rising unemployment, which could fuel economic and social risks. Appropriate policies are needed to support and enhance the growth potential of India's workforce.

Rise in the Share of Elderly Population:

• India's demographic dividend means a greater proportion of youth at present, which will result in a greater proportion of elderly in the population in the future. This will create a demand for better healthcare facilities and development of welfare schemes/programmes for elderly people. People in informal employment typically do not have social security, which could add a burden to the respective state.

What Should be Our Approach Forward?

Upgrading Education Standards:

• Ensure every child completes high school education and receives appropriate skilling, training, and vocational education aligned with market demand.
• Modernize school curricula and invest in new technology to establish virtual classrooms and Massive Open Online Courses (MOOCS).
• Investing in open digital universities to improve the educated workforce.

Fulfilling Health Related Requirements:

• Allocate more funding for health and ensure better health facilities are available.
• Make reproductive healthcare services accessible on a rights-based approach.

Bridging Gender Gaps in Workforce:

• Create new skills and opportunities for women and girls to support their participation in a 3 trillion dollar economy.
• Legally require gender budgeting to analyze gender disaggregated data and its impact on policies.
• Increase childcare benefits and boost tax incentives for part-time work.

Federal Approach for Diverse States:

• Implement a new federal approach to governance reforms for demographic dividend to coordinate policies between States.
• Inter-ministerial coordination for strategic planning, investment, monitoring, and course correction.
• Collaboration between Health and Education Ministries to disseminate key information to help adolescents safeguard their health and ability to learn.

Inter-Sectoral Collaborations:

• Establish mechanisms for better inter-sectoral collaboration to safeguard the futures of adolescents.
• School mid-day meals exemplify how improved nutrition benefits learning.
• Establish strong links between nutrition and cognitive scores among teenagers.

Banking System Liquidity

Why in News:

• After being in surplus mode for almost 40 months, the liquidity in the banking system has moved into a deficit mode for the first time since May 2019.

Understanding Banking System Liquidity

• Banking system liquidity refers to the availability of cash that banks require to meet their short-term business and financial obligations.
• If the banking system is borrowing from the Reserve Bank of India (RBI) under the Liquidity Adjustment Facility (LAF) on a particular day, it is said to be in a deficit liquidity position.
• Conversely, if the banking system is lending to the RBI, it is said to be in a surplus liquidity position.
• The LAF is a mechanism through which the RBI either injects or absorbs liquidity into or from the banking system to regulate the availability of credit and control inflation.

What is Causing the Banking System Liquidity Deficit?

Factors Contributing to Current Deficit in Banking System Liquidity:

• Outflow of advance tax causing temporary increase in call money rate above repo rate
  • Call money rate is the rate at which short-term funds are borrowed and lent in the money market
  • Banks use call money loans to fill the asset-liability mismatch, comply with CRR and SLR requirements, and meet sudden demands for funds
  • Participants in the call money market include RBI, banks, and primary dealers
• Continuous intervention of RBI to stabilize fall of Indian rupee against US dollar
• Uptick in bank credit
• Incremental deposit growth not keeping pace with credit demand.

Impact of Tight Liquidity on Consumers:

• Government securities yields can increase due to tight liquidity, leading to higher interest rates for consumers.
• The RBI may raise the Repo Rate, causing the cost of funds to increase.
• Banks may increase their repo-linked lending rates and the MCLR, to which all loans are linked to, resulting in higher interest rates for consumers.
• The MCLR is the minimum interest rate at which a bank can lend.

Possible Steps for the RBI to Address Liquidity Deficit

• The RBI's actions to address the liquidity situation will depend on its nature.
• If the deficit is temporary and caused by factors such as advance tax outflows, the funds may eventually return to the system, and the RBI may not need to act.
• However, if the deficit is long-term in nature, the RBI may need to take measures to improve the liquidity situation in the system.

Skill Development in India

Why in News:

• The 13th edition of the Federation of Indian Chambers of Commerce & Industry (FICCI) Global Skills Summit 2022 was recently inaugurated by the Union Skill Development and Entrepreneurship Minister.

Skill Development in India: Status and Issues

About:

• According to the 2015 Report on National Policy on Skill Development and Entrepreneurship, only 4.7% of the total workforce in India had undergone formal skill training, which is significantly lower compared to other countries like the US, Japan, and South Korea.
• The National Skill Development Corporation (NSDC) conducted a skill gap study over 2010-2014 and estimated an additional net incremental requirement of 10.97 crores of skilled manpower in 24 key sectors by 2022.
• In addition, the farm and non-farm sector workforce of 29.82 crore needed to be skilled, reskilled, and upskilled.

Issues:

• Overburdened Responsibility: Despite the launch of phase III of Pradhan Mantri Kaushal Vikas Yojana to impart skills development to over 8 lakh people in 2020-21, the District Skills Development Committees, chaired by District Collectors, are overburdened and unable to prioritize this role due to their other assignments.
• Discontinuity in Policy Process: The National Skill Development Agency (NSDA) was created in 2013 to eliminate duplicates of efforts of the Centre and resolve inter-ministerial and inter-departmental issues. However, it has been subsumed as part of the National Council for Vocational Training (NCVT), which reflects a discontinuity in the policy process.
• Enormous Number of New Entrants: A 2019 study by the National Skills Development Corporation (NSDC) estimated that 7 crore additional people in the working age of 15-59 years are expected to enter the labor force by 2023. The policy efforts must be adequate to address the huge number of youth that need to be skilled.
• Employers’ Unwillingness: India’s joblessness issue is not solely a skills problem, but it also represents the lack of appetite of industrialists and SMEs for recruiting. Limited access to credit due to banks' NPAs has led to a decline in the investment rate, negatively impacting job creation.

The Importance of Skill Development for the Workforce in India

Supply and Demand Issues

• Lack of job opportunities in India
• Professionals lacking in skill sets
• Resulting in rising unemployment rates and low employability

Rising Unemployment

• Unemployment rate in India increasing to 7-8%
• Workforce shrinking due to weak job prospects and Covid-19 lockdowns
• Labor force participation rate dropping to 40% from 46% six years ago

Lack of Skills in Workforce

• Employability and productivity of new entrants to the labor market is low
• Only 37.22% of surveyed people found employable
• 86.1% of those between 15 and 59 years had not received any vocational training

Demand for Skilled Workforce

• Incremental Human Resource Requirements projected at 201 million by 2022
• Total requirement of skilled workforce by 2023 estimated at 300 million
• Manufacturing sector to add the majority of these jobs with a target of 100 million new jobs by 2022 according to National Manufacturing Policy (2011)

Key Initiatives for Skill Development in India

Pradhan Mantri Kaushal Vikas Yojana

• Launched in 2015
• Provides short-term training and skilling through ITIs and apprenticeship scheme
• Over 10 million youth trained under this scheme

SANKALP and STRIVE

• SANKALP focuses on district-level skilling ecosystem
• STRIVE aims to improve performance of ITIs

Initiatives from Several Ministries

• Nearly 40 skill development programmes implemented by 20 central ministries/departments
• Ministry of Skill Development and Entrepreneurship contributes 55% of skilling achieved
• Nearly 4 crore people trained through various traditional skills programmes since 2015

Mandatory CSR Expenditure in Skilling

• Corporations in India invested over ₹100,000 crores in diverse social projects
• ₹6,877 crores spent on skilling and livelihood enhancement projects
• Maharashtra, Tamil Nadu, Odisha, Karnataka, and Gujarat were top five recipient states

TEJAS Initiative for Skilling

• Skill India International Project to train overseas Indians
• Launched at Dubai Expo, 2020
• Aims to skill and certify Indian workforce for market requirements in UAE

The Importance of Skill Development for India's Growth

• India has a vast potential to provide skilled manpower to the labor market due to its high "demographic dividend." However, to make this a reality, a collaborative approach is necessary involving various stakeholders, such as government agencies, industries, educational and training institutes, as well as students, trainees, and job seekers.