Department for Promotion of Industry and Internal Trade

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The Department of Industrial Policy and Promotion (DIPP) has been renamed as the Department for Promotion of Industry and Internal Trade.

Mandate for the Newly Named Department

  • The newly named department will work under the Union Ministry of Commerce.
  • The order issued by the President states that the department would deal with matters related to start-ups, facilitating ease of doing business among others.
  • The subject matter of internal trade which was under the ambit of the Ministry of Consumer Affairs has been transferred to the newly named department.
  • With this new mandate, both internal and external trade has been brought under a single Ministry (Ministry of commerce and industry).
  • This will ensure better coordination and help in promoting the growth of both segments of the trade.

Why the new mandate?

For a long time Confederation of All India Traders Association (CAIT) was demanding for a separate Ministry of Internal Trade. CAIT sees the creation of a separate department by merging Internal and external trade is a step forward in the creation of a separate Ministry.

World Economic Situation and Prospects 2019

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The UN Report World Economic Situation and Prospects 2019 discusses various challenges before the global economy. The important of them are:

Trade Tensions

  • The global trade growth moderated at 3.8 per cent in 2018 against the growth rate of 5.3 per cent in 2017.
  • The stimulus measures and direct subsidies have offset much of the direct economic impacts on China and the United States.
  • But if these trade tensions continue for a prolonged period of time it may severely disrupt the global economy.
  • The spill over effects of this trade tensions would spread through global value chains, particularly in East Asia.

Tightening fiscal conditions

  • Tightening fiscal conditions would result in a rapid rise in interest rates.
  • On the other hand, the strengthening of the US dollar could exacerbate emerging market fragilities, leading to a heightened risk of debt distress.
  • These risks can be further aggravated by global trade tensions, monetary policy adjustment in developed economies, commodity price shocks, or domestic political or economic disruptions.
  • The countries with a substantial amount of dollar-denominated debt, high current account or fiscal deficits, large external financing needs and limited policy buffers are more vulnerable to stress due to tightening fiscal conditions.

Climate risks

  • The climate change risks necessitate a fundamental shift in the way the world powers economic strategies.
  • Integrating the economic decision making with negative climate risks associated with emissions would be imperative.
  • The tools for achieving the integration would be carbon pricing measures, energy efficiency regulations such as minimum performance standards and building codes, and reduction of socially inefficient fossil fuel subsidy regimes.

Challenges in attaining SDG:

The United Nations report World Economic Situation and Prospects 2019 discusses various challenges in attaining the sustainable development goals. The challenges listed are:

  • Economic growth is uneven and is failing to reach where it is most needed. Per capita incomes would stagnate or grow only marginally in 2019 in several parts of Africa, Western Asia, Latin America and the Caribbean.
  • Even where the per capita growth is strong, economic activity is driven by core industrial and urban regions, leaving peripheral and rural areas behind.
  • The report notes that eradicating poverty by 2030 will require both double-digit growth in Africa and steep reductions in income inequality. This seems a distant possibility in the current scenario.
  • The confluence of risks is clouding and it may severely disrupt economic activity and inflict significant damage on longer-term development prospects.
  • The various risks include escalation of trade policy disputes; financial instabilities linked to elevated levels of debt; and rising climate risks, as the world experiences an increasing number of extreme weather events.

The report notes that the simultaneous appearance of several important risks endangers efforts to achieve the 2030 Agenda for Sustainable Development containing 17 specific goals to promote prosperity and social well-being while protecting the environment.

HUL GST Profiteering issue

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HUL Case:

  • National Anti-profiteering Authority (NAA) assessment has revealed consumer goods maker Hindustan Unilever Ltd (HUL) allegedly profiteering to the extent of Rs 383 crore after the large-scale goods and services tax (GST) rate cut last November.
  • On the plea by Hindustan Unilever Ltd (HUL), the Delhi High Court has stayed the fine imposed on HUL.

Why the HUL has sought a review?

The HUL has sought the review of the order of NAA before the Delhi High Court based on the following reasons:

  • NAA has made a narrow interpretation of the law and did not take into account the well-established industry practice backed by law.
  • NAA order is arbitrary since no methodology has been determined by the NAA as required under law to determine if the benefit has been passed or not.
  • Absence of any prescribed method in the GST law to calculate the undue profit earned.

HUL case is one among the others

The various decisions of the NAA are now questioned in the various High Courts.  Even the real estate firm Pyramid Infratech has moved the high court against the order of NAA.

Why the issue has become complicated?

Section 171 of the CGST act deals with profiteering. It aims to ensure that reductions in the rate of tax on any supply of goods or services or the benefit of the input tax credit are passed on to consumers and empowers the central government to constitute authority for that purpose. The National Anti-profiteering Authority (NAA) was established by the central government under this provision.

But the absence of a clearly defined method to calculate the undue profit earned has become the bone of contention. The absence of rules has created a vacuum and resulting in ambiguity in dealing with anti-profiteering measu

Bank Disinvestment

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The Finance Ministry has asked the public sector banks to gradually reduce the government’s equity to 52 per cent. Currently, some of the public sector banks have government’s holding beyond 75 per cent.

Why the disinvestment?

The decision to bring down the government’s equity to 52 per cent was taken due to the following reasons:

  • Dilution of the government’s stake will help banks to meet 25 per cent public float norms set by the SEBI.
  • To align with the best corporate practices.
  • Encourage the banks to follow the prudential lending norms.

The Ministry of Finance has authorised the Public Sector Banks to take necessary steps in bringing down the government equity based on the marketing conditions.

Rules of SEBI

A notification under the Securities Contracts Regulations (Amendment) Rules makes it mandatory for all listed entities to have a minimum public float of 25%.

Fugitive Economic Offender

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Declaration of the Fugitive Economic Offender

  • According to the Fugitive Economic Offenders Act, 2018 a fugitive economic offender is a person against whom an arrest warrant has been issued for his or her involvement in economic offences involving at least Rs. 100 crore or more and has left India to avoid prosecution.
  • The investigating agencies have to file an application in a Special Court under the Prevention of Money-Laundering Act, 2002 containing details of the properties to be confiscated, and any information about the person’s whereabouts.
  • The Special Court will issue a notice for the person to appear at a specified place and date at least six weeks from the issue of notice.
  • Proceedings will be terminated if the person appears. If not the person would be declared as a Fugitive Economic Offender based on the evidence filed by the investigating agencies.
  • The person who is declared as a Fugitive Economic Offender can challenge the proclamation in the High Court within 30 days of such declaration according to the Fugitive Economic Offenders Act, 2018.

Why in news?

  • The  Prevention of Money Laundering (PMLA) court in Mumbai has declared Vijay Mallya as a Fugitive Economic Offender.
  • Vijay Mallya is the first businessman to be charged under the new fugitive economic offender’s act 2018.

Panda Bonds

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  • Panda bonds are Chinese renminbi-denominated bonds from a non-Chinese issuer, sold in the People’s Republic of China. 
  • The first two Panda bonds were issued in October 2005 by the International Finance Corporation and the Asian Development Bank on the same day.
  • The Philippines issued its inaugural Panda bonds in 2018. It was the first ASEAN member to issue Panda bonds.
  • Why in news? Pakistan has decided to issue Panda Bonds.

Bimal Jalan Committee (RBI Reserves)

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The Reserve Bank of India (RBI) has set up an expert committee, headed by its former governor Bimal Jalan, to suggest how the central bank should handle its reserves and whether it can transfer its surplus to the government.

RBI Reserves

  • RBIs contingency fund core reserve is only around 7% of its total assets and the rest of it is largely in revaluation reserves.
  • Revaluation reserves fluctuate with corresponding changes in currency and gold valuations.
  • In 2017-18, the central bank’s contingency funds and revaluation reserves stood at ₹2.32 trillion and ₹6.92 trillion respectively.
  • The data shows that the growth in revaluation reserves has far exceeded the growth in the contingency fund.
  • While revaluation reserves have more than tripled from ₹1.99 trillion in 2008-09 to ₹6.92 trillion in 2017-18, the contingency fund has grown 50% during the same period from ₹1.53 trillion to ₹2.32 trillion.

Core Reserve and Revaluation Reserve

  • Core Reserves are considered to be of highest quality and consists mainly of share capital and disclosed reserve.
  • They are fully available to cover losses.
  • Revaluation reserves arise from revaluation of assets that are undervalued in the bank’s books, Ex: Marketable Securities.
  • The Revaluation Reserves can be used as a cushion for unexpected losses and depends mainly upon the level of certainty that can be placed on estimates.

Why the committee was formed?

The RBI and the government were at loggerhead over the transfer of surplus. The committee has been formed to look into this issue. The committee will:

  • Decide whether RBI is holding provisions, reserves and buffers in the surplus of the required levels.
  • Propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding lesser provisions than required.
  • Suggest an adequate level of risk provisioning that the RBI needs to maintain.

The committee is expected to provide for an objective criterion to address the friction between the government and the RBI.

FDI in e-commerce : New norms

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The new norms for the foreign direct investment (FDI) in e-commerce, bars e-commerce firms from selling products of entities in which they have an equity stake.

Why the new norms?

The new norms are brought in by the government to plug-in some loopholes like:

  • To bypass the rules which restricted large sellers on platforms such as Flipkart and Amazon from contributing more than a quarter of sales, online retailers had set up structures to get around those loopholes by mandating other sellers to buy from those large sellers and then, in turn, sell those products on e-marketplaces.
  • Large sellers formed multiple entities, which sold their products separately on online marketplaces.
  • The small traders were complaining that deep discounts offered by the likes of Amazon and Flipkart are driving them out of business.
  • The new norms aim to tackle the anti-competitive behaviour by e-commerce entities and to ensure that there is no wrong subsidization and the marketplace remains neutral to all vendors.

How will it affect e-commerce companies?

The impacts of the new norms are:

  • The e-commerce companies like Amazon and Flipkart would be adversely affected because Amazon has several such joint ventures, including Cloudtail and Appario. Even Flipkart has exclusive partnerships with top smartphone brands such as Xiaomi and Oppo. The new norms will adversely impact their business models.
  • The critics blame that the new norms are not in sync with the spirit of competition and free market economy because Only those exclusive arrangements that have an appreciable adverse effect on competition are prohibited under the Competition Act.

The new norms are welcomed by stating that the new norms will enable a level- playing field for all sellers especially MSMEs and help them leverage the reach of e-commerce.

Latest Stats

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Term Current Status As on
Repo Rate 6.5% 06/12/2018
Cash Reserve Ratio 4% 06/12/2018
Reverse Repo Rate 6.25% 06/12/2018
Marginal Standing Facility 6.75% 06/12/2018
Bank Rate 6.75% 06/12/2018
Statutory Liquidity Ratio 19.25% 06/12/2018
Foreign Exchange Reserve $393.12 Billion 22/12/2018

Repo rate: It is rate at which RBI lends to its clients generally against government securities.

Reverse Repo Rate: It is rate at which banks lend funds to RBI.

Marginal Standing Facility (MSF) Rate: It is rate at which scheduled banks can borrow funds overnight from RBI against government securities. It is very short term borrowing scheme for scheduled banks.

Bank Rate: It is rate charged by central bank for lending funds to commercial banks. Higher bank rate will translate to higher lending rates by banks. It influences lending rates of commercial banks.

Cash Reserve Ratio (CRR): It is amount of funds that banks have to keep with RBI. The RBI uses CRR to drain out excessive money from system.

Statutory Liquidity Ratio (SLR): It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc. It will be reduced by 25 basis points every quarter until it reaches the 18% level.

RBI autonomy debate

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Issues between RBI and Government:

  • Government wants to ease lending norms for facilitating MSMEs. RBI want to continue banks clean-up efforts instead.
  • Government wants to setup an independent Payments Regulatory Board. RBI wants it under its own purview.
  • Government and RBI differ on classification of NPAs.

Payments Regulatory Board issue:

  • Reserve Bank of India (RBI) said there is no case for having a regulator for payment systems outside the central bank.
  • The RBI had submitted a dissent note, against certain recommendations of the inter-ministerial committee for finalization of amendments to the Payment & Settlement Systems Act, 2007.
  • The draft Payment and Settlement System Bill, 2018 had made an important observation. It said that an independent payments regulatory board (PRB) needs to be established to regulate the payments sector aimed at fostering competition, consumer protection, systemic stability and resilience in the payments sector.
  • However, according to the RBI’s dissent note, the central bank believes that the PRB must remain with the central bank and headed by the RBI governor. The RBI and the government may nominate three members each to the board, with a casting vote for the governor.
  • RBI had cited the report of the Ratan Watal Committee on digital payments as recommending the establishment of the PRB within the overall structure of the RBI, arguing therefore that there is no need for any deviation.
  • In support of its stance, the RBI stated that the activities of payments banks come well within the purview of the traditional banking system, which the central bank oversees as the overarching financial regulator.
  • Thus, according to this logic, it might make better sense to have the RBI oversee the activities of payments banks as well instead of creating a brand new regulator for the growing industry.
  • The RBI, in essence, is pointing to the interconnection between the payments industry and the banking system to back the extension of its regulatory powers.
  • In conclusion, the RBI’s case makes good sense when seen from the perspective of the cost of regulatory compliance.
  • Also, there is the real risk that a brand new regulator may be unable to match the expertise of the RBI in carrying out necessary regulatory duties.

Section 7 of RBI Act:

  • The RBI is an entity independent of the government as it takes its own decisions. However, in certain instances, it has to listen to the government.
  • This provision in the RBI Act is contained in its Section 7 which says:
    1. The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
    2. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
    3. Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  • Thus, it is clear from the above that this section empowers the government to issue directions in public interest to the central bank, which otherwise does not take orders from the government.

Why is it that Section 7 is seen as an extreme measure?

  • It is important to note that Section 7 has never been used till now.
  • It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.
  • Importantly, it is not clear how this Section operates since it has never been used.

Y V Reddy (Ex RBI Governor) take on RBI autonomy:

Editorial Analysis:

  • He explains his understanding of RBI autonomy under three functions. These functions are:
    1. operational issues,
    2. policy matters, and
    3. structural reforms.
  • In the case of the first, he believed in total freedom; on the second, he preferred prior consultation with the mandarins in North Block; and on the third, he worked in “very close coordination” with the government.

Position taken by current Government:

  • The recent statement put out by the government underlines that the RBI is autonomous but within the framework of the RBI Act.
  • It is thus clear that the central bank cannot claim absolute autonomy.
  • It is autonomous within the limits set by the government and its extent depends on the subject and the context.
  • It is important to note that in a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people.
  • Experts point out that the risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.
  • It is autonomous and accountable to the people ultimately, through the government.

Concluding Remarks:

  • Option of Section 7 is certainly available to the more powerful side; but it is important to note that Section 7 is a deterrent never to be used.