IASCLUB Daily Current Affairs : 06 July 2019

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Economic Survey 2019 — new ideas to policy prescriptions

Topic: GS -III: Economic Development

The government’s economic survey has projected that economic growth in the current fiscal year could rise to 7% from the 6.8% in 2018-19 — the slowest rate of growth in five years.

Macroeconomic Indicators

  • The survey, presented to parliament on Thursday, has flagged the challenges on the fiscal front following an economic slowdown impacting tax collections amid an expected surge in agri-spending.
  • It has underlined the need for India to shift gears to accelerate and sustain a real GDP growth rate of 8% in order to achieve the target of becoming a $5 trillion economy by 2025.
  • It flags the need for a “virtuous cycle” of savings, investment and exports to be catalyzed and supported by a favorable demographic phase required for sustainable growth. Private investment has been highlighted as a key driver for demand, capacity, labor productivity, new technology, creative destruction and job creation.

New ideas

  • The survey, the first by new chief economic advisor Krishnamurthy V Subramanian, takes off from the acronym-heavy editions associated with his predecessor, Arvind Subramanian, while it is a tad weak on policy prescriptions.
  • The Survey, therefore, lays out an agenda for behavioural change by applying the principles of behavioural economics to several issues including gender equality, a healthy and beautiful India, savings, tax compliance and credit quality. This includes a transition from ‘Beti Bachao Beti Padhao’ to ‘BADLAV’ (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi), from ‘Swachh Bharat’ to ‘Sundar Bharat’, from ‘Give it up” for the LPG subsidy to ‘Think about the Subsidy’ and from ‘Tax evasion’ to ‘Tax compliance’.

Policy prescriptions

  • The Survey flags the case for intervention in the case of “dwarfs” (firms with less than 100 workers) despite being more than 10 years old, account for more than 50% of all organized firms in manufacturing by number. In this context, it calls for a sunset clause of less than 10 years, with necessary grand-fathering, for all size-based incentives and a deregulating labor law restrictions to create significantly more jobs, as evident from Rajasthan.
  • It calls for a need to ramp up capacity in the lower judiciary, including a focus on delays in dispute resolution. Contract enforcement biggest constraint to improve Ease of Doing Business ranking; much of the problem is concentrated in the lower courts.
  • Calls for policy changes to lower overall lifetime ownership costs and make electric vehicles an attractive alternative to conventional vehicles.

Problem areas

  • While the investment rate was expected to pick up following improvement in consumer demand and bank lending, the goods and services tax, farm schemes will all pose challenges on the fiscal front, the report said. Fiscal deficit has been pegged at 3.4% of GDP for 2018-19. There are apprehensions of slowing growth, which will have implications for revenue collections.
  • Crude oil prices are projected to decline in 2019-20, which could push consumption. Flags need to gear up for ageing population; necessitating more healthcare investment, increasing retirement age in a phased manner.

Aadhaar can be interchanged with PAN for filing tax returns

Topic: GS -III: Economic Development

The Union Budget 2019-20 has proposed to make Aadhaar interchangeable with PAN, thereby allowing people without PAN to file income tax returns using only their Aadhaar.

  • Further, the Finance Minister proposed allotting Aadhaar to non-resident Indians, arriving in India, on an expedited basis.
  • More than 120 crore Indians now have Aadhaar.
  • According to data with the Central Board of Direct Taxes (CBDT), 42 crore PAN cards have been issued, of which only 23 crore have been linked with Aadhaar. However, the annexure to the Minister’s speech makes it clear that the intent is not to replace PAN with Aadhaar as the primary identity proof when it comes to income tax.
  • While it is proposed to make Aadhaar interchangeable with PAN to enable those without PAN to file tax returns, “the Income Tax Department shall allot PAN to such persons on the basis of Aadhaar after obtaining demographic data from the Unique Identification Authority of India (UIDAI).”
  • In other words, if you do not have a PAN and want to file income tax returns, you can do so, but you will still be allotted a PAN. Those who have already linked their PAN with their Aadhaar can choose which ID they want to use while filing taxes.
  • So far, non-resident Indians with an Indian passport had to wait for 180 days after their arrival in India before they can apply for Aadhaar. The Budget proposed to remove this waiting time.

Fiscal deficit target revised downwards to 3.3%

Topic: GS -III: Economic Development

The government is estimating a fiscal deficit of 3.3% of GDP in financial year 2019-20, lower than the 3.4% estimated earlier in the interim Budget presented in February.

  • The main reason for this is an increase on the revenue side, while expenditure is being controlled. Ratings agencies and tax analysts say there is a risk of missing the 3.3% target if tax revenue falls short of the target.
  • Indirect taxes are going up by only 15%. This brings realism to it. It also includes the effect of the excise duties and the income tax measures, so this is very realistic. There is also an increase in the non-tax side as we are expecting more dividends.

Sizeable saving

  • The government is aiming to lower the Central government deficit to 3.3% of GDP in fiscal 2020 from 3.4% in fiscal 2019. To achieve this goal, it is relying on one-off disinvestment income, as well as higher taxes on the rich, and increased excise duties on petrol, diesel, precious metals and tobacco products.
  • The government has budgeted a higher disinvestment target for 2019-20 of ₹1.05 lakh crore, compared to the ₹80,000 crore budgeted in the previous year. Apart from this, Mr. Garg said, the government had budgeted a dividend from the Reserve Bank of India amounting to about ₹90,000 crore.

Reduction in collections

  • The data presented in the Economic Survey released on Thursday shows that there is a risk of tax revenue falling well short of expectations if the trend in 2018-19 is maintained.
  • While the government predicted a total revenue of ₹17.2 lakh crore in its revised estimates for 2018-19, the data in the Survey showed this was actually ₹1.6 lakh crore lower. The bulk of this reduction in collections was due to tax receipts falling well short of the mark.
  • Notably, the government has cut the allocations for several major schemes. Most significant of these is the ₹4,334 crore cut for the Swachh Bharat scheme.

 

RBI can supersede NBFC board

Topic: GS -III: Economic Development

Non-banking finance companies that are facing a crisis of confidence saw a slew of measures from the Budget to restore investor confidence.

More in news:

  • The Reserve Bank of India also stepped in as it announced additional liquidity support to the sector through banks to the tune of ₹1.34 lakh crore, after the Finance Minister concluded her budget speech.
  • The government has decided to give more powers to the Central bank to regulate the non-banking finance companies and the regulator will have the power to supersede the board of the shadow banks, apart from those owned by the government.
  • According to the Finance Bill, if the RBI is satisfied that in the ‘public interest’ or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of the depositors or creditors, the board can be superseded for a maximum five years and an administrator can be appointed.
  • The RBI will also regulate housing finance companies which are under the purview of the National Housing Bank.
  • Following the budget announcement that for purchase of high-rated pooled assets of financially sound NBFCs, of not more than ₹1 lakh crore, the government will provide one-time six months’ partial credit guarantee to public sector banks for first loss of up to 10%, the RBI has decided to provide required liquidity to the banks against their excess G-sec holdings.
  • The central bank has also decided to frontload the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) which will enable the banks to avail additional liquidity of ₹1.34 lakh crore.
  • The budget also proposed that foreign institutional investors and foreign portfolio investors will be allowed to invest in debt securities by shadow banks, which help NBFCs to raise more funds.
  • The budget also provided some tax incentives to the NBFCs by treating them on par with banks.

Growth capital for public sector banks

Topic: GS -III: Economic Development

After cleaning up the balance sheets of the State-run banks, the government has now provided additional capital to them to boost credit growth, apart from meeting regulatory requirements.

Announcing the capital infusion, Union Finance Minister Nirmala Sitharaman said, “Public sector banks are now proposed to be further provided ₹70,000 crore capital to boost credit for a strong impetus to the economy.”

More in news:

  • According to bankers, about 50% or ₹35,000 crore will be the growth capital after meeting regulatory requirements. The infusion is higher than what the market expected, around ₹50,000 crore.
  • Indicating the worst is behind for the banking sector, the Minister said the bad loans of the commercial banks had come down by over ₹1 lakh crore over the last year, and there was a record recovery of over ₹4 lakh crore due to the Insolvency and Bankruptcy Code.
  • The provision coverage ratio is now at its highest in seven years, and domestic credit growth has risen to 13.8%, Ms. Sitharaman said, adding six public sector banks were out of the Prompt Corrective Action (PCA) framework of the RBI.

Making a pitch for PPP model in Railways

Topic: GS -III: Economic Development

Union Finance Minister proposed a capital expenditure of ₹1,60,175.64 crore for the Railway Ministry for 2019-20 in Budget 2019-20. This is the highest-ever allocation for the national transporter, surpassing last year’s ₹1,48,528 crore.

 More in news:

  • Saying the Railways network will require an investment of about ₹50 lakh crore till 2030, the Minister pitched for the public-private partnership (PPP) model to achieve faster development.
  • The outlay comprises ₹65,837 crore from budgetary support, ₹267.64 crore from the Nirbhaya Fund, ₹10,500 crore from internal resources and ₹83,571 crore from extra budgetary resources.
  • While ₹7,255 crore has been allocated for the construction of new lines, gauge conversion received ₹2,200 crore, doubling ₹700 crore, rolling stock ₹6,114.82 crore and signalling and telecom ₹1,750 crore.
  • The allocation for passenger amenities has been increased by ₹1,000 crore to ₹3,422 crore.It is estimated that railway Infrastructure would need an investment of ₹50 lakh crore between 2018 and 2030. Given that the capital expenditure outlays of the Railways are around ₹1.5 to ₹1.6 lakh crores per annum, completing even all sanctioned projects would take decades. It is therefore proposed to use Public-Private Partnership to unleash faster development and completion of tracks, rolling stock manufacturing and delivery of passenger freight services.

‘One nation, one grid’ proposed

Topic: GS -III: Economic Development

A power sector package is in the offing along with a new tariff policy to ensure uninterrupted power for all, Finance Minister Nirmala Sitharaman announced in her maiden Budget speech on Friday.

  • Shedding light on the ‘One nation, one grid’ plan for affordable power to States, she said the much-needed power reforms — such as the power tariff reform — should be soon taken up.
  • The government is going to work with the State governments to remove the barriers in the implementation of the ambitious UDAY scheme for the turnaround of power distribution companies.
  • The distribution sector holds the key to the long-term fortunes of the power sector as discoms have so far been the weakest link in the electricity value chain. Government’s UDAY scheme has faced criticism of late owing to mounting debt and dues of discoms.

High-level panel

  • The Finance Minister proposed to set up a high-level empowered committee to look into retirement of old and inefficient power plants and address low capacity utilisation of gas-based power plants.

Editorial section:

Choosing the long view – The Hindu

Bucks for the banks – The Hindu

Falling far short of the goal – The Hindu

Searching for reform signals – The Hindu

A Budget that goes nowhere – The Hindu

 

 

 

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