September 2020 Economic Affairs

Sakshi Education

FinCEN and FIU-IND
Over 2100 Suspicious Activity Reports (SARs) were filed by banks with the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The FinCEN files identify at least USD 2 trillion in transactions between 1999 and 2017 flagged as possible evidence of money laundering or other criminal activity by compliance officers of banks and financial institutions.

Key Points
It was set up in 1990.

It serves as the leading global regulator in the battle against money laundering.

It collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.

SAR is a document filed by banks and financial institutions to report suspicious activity to the USA FinCEN.

These are meant to red flag, within 30 days of the transaction’s occurrence: criminal funds or any form of dirty money; insider trading; potential money laundering; terror financing; any transaction that raises suspicion.

These are used to detect crime but cannot be used as direct evidence to prove legal cases.

There are details of banking transactions that give a clear indication of round-tripping, money laundering or dealings with shell-like entities.

FinCEN shares SARs with law-enforcement authorities including FBI, US Immigration and Customs.
MSP Raised for Rabi Crops
The Cabinet Committee on Economic Affairs has marginally increased the Minimum Support Price (MSP) of six rabi crops for 2021-22.

Rabi crops are agricultural crops that are sown in winter and harvested in the spring in India. Eg. wheat, barley, mustard etc.

Key Points
MSP rates were hiked for wheat, barley, gram, masoor dal (lentil), safflower, and rapeseed and mustard.

However, the MSP has seen a lower hike compared to 2020-21. The wheat MSP has seen an increase of just 2.6% — the lowest increase in 11 years.

The increase in MSP is in line with the principle of fixing the MSPs at a level of at least 1.5 times of the All-India weighted average Cost of Production as announced in Union Budget 2018-19.

The increase in MSP comes in the midst of a vehement protest by farmers, who fear that new agricultural marketing reforms will result in the phasing out of MSP and public procurement.
Chendamangalam Saree for a GI tag
The government identified Chendamangalam sari/saree for a Geographical Indication (GI) tag.

Background
In floods of 2018, the tiny handloom village of Chendamangalam was left reeling from the deluge that devastated Kerala.

Looms, yarns and finished goods had been destroyed and in handloom society.

Since then, Care 4 Chendamangalam (C4C), which works with weavers in Kerala, brings the eponymous GI-tagged sari for a fund-raiser exhibition.

C4C has two objectives: the first is to revive the cluster, the second is to train the next generation.

C4C started interactions with the society of woman weavers in January 2019 and hopes to help them reap benefits by 2021.

Details
Chendamangalam is a small town near Ernakulam, Kerala.

The town was part of the ancient port complex of Muziris and known for its fine cotton spun here by the DevangaChettiars, a community of weavers originally from Karnataka.

The GI-tagged Chendamangalam sari is recognisable by its puliyilakara border, a thin black line that runs abreast with the sari’s selvedge.

It has extra-weft chuttikara and stripes and checks of varying width.

The saris made from the fine-count cotton yarn of 120s, 100s and 80s take between two to four days of painstaking labour, depending on the design vocabulary.
All about Essential Commodities (Amendment) Bill, 2020
The Parliament passed the Essential Commodities (Amendment) Bill, 2020. The Bill replaces an Ordinance promulgated in June 2020 and amends the Essential Commodities Act (ECA), 1955.

Key Points
Removes commodities like cereals, pulses, oilseeds, edible oils, onion and potatoes from the list of essential commodities.

Aims to remove fears of private investors of excessive regulatory interference in their business operations.

Ensures that interests of consumers are safeguarded by regulating agricultural foodstuff in situations such as war, famine, extraordinary price rise and natural calamity.

However, the installed capacity of a value chain participant and the export demand of an exporter will remain exempted from such regulation so as to ensure that investments in agriculture are not discouraged.

Background:
The ECA 1955 was used to curb inflation by allowing the Centre to enable control by state governments of trade in a wide variety of commodities.

The states imposed stock limits to restrict the movement of any commodity deemed essential. It helped to discourage hoarding of items, including food commodities, such as pulses, edible oils and vegetables.

However, the Economic Survey 2019-20 highlighted that government intervention under the ECA 1955 often distorted agricultural trade while being totally ineffective in curbing inflation.

Such intervention does enable opportunities for rent-seeking and harassment.

Rent-seeking is a term used by economists to describe unproductive income, including from corruption.

Traders tend to buy far less than their usual capacity and farmers often suffer huge losses during surplus harvests of perishables, since large stocks held by traders can be outlawed under the ECA 1955 anytime.

This led to farmers being unable to get better prices due to lack of investment in cold storage, warehouses, processing and export.

Also with the Food Corporation of India (FCI) controlling stocks before, there were less investment and buyers.
Non-utilisation of Cesses & Levies
The Comptroller and Auditor General of India (CAG) told Parliament that the Centre has only transferred 60% of the proceeds from cess/levies in Fiscal Year 2018-19 to the relevant Reserve Funds and retained the balance in the Consolidated Fund of India (CFI).

Key Points
The Centre had collected Rs. 2.75 lakh crore from 35 cesses/levies in FY19. However, it has only transferred Rs. 1.64 lakh crore and retained Rs. 1.1 lakh crore in the CFI.

Rs. 40,000 crore of GST Compensation Cess was not credited to the related Reserve Fund.

Rs. 10,157 crore of the Road and Infrastructure Cess collected was neither transferred to the related Reserve Fund nor utilised for the purpose for which the cess was collected.

Rs. 2,123 crore of Universal Service levy and Rs. 79 crore collected as National Mineral Trust levy was not transferred to the relevant Reserve Funds.

Social Welfare Surcharge on Customs amounting to Rs. 8,871 crore was levied but no dedicated fund for the same was envisaged.

Non-creation/non operation of Reserve Funds makes it difficult to ensure that cesses and levies have been utilised for the specific purposes intended by the Parliament.

In addition, Rs. 1,24,399 crore, representing the Cess on crude oil collected between 2010-20, had not been transferred to the Oil Industry Development Board (designated Reserve Fund) and was retained in CFI.
Plastic Parks Scheme
The Ministry of Chemicals & Fertilizers has approved setting up of 10 Plastic Parks in the country.

The Parks are being set up in the states of Assam, Madhya Pradesh, Odisha, Tamil Nadu, Jharkhand, Uttarakhand and Chhattisgarh.

A Plastic Park is an industrial zone devoted to plastic enterprises and its allied industries.

Background:
The share of India in world trade of plastics is very low. India's share in the USD 1 trillion global plastic exports market is about 1%.

The Indian Plastics industry is large but highly fragmented with dominance of tiny, small and medium units and thus lacks the capacity to tap this opportunity.

The Scheme for setting up of Plastic Parks has been formulated with a view to synergize and consolidate the capacities through cluster development.

Supports setting up of a need based 'Plastic Parks’ - an ecosystem with requisite state of the art infrastructure and enabling common facilities to assist the plastic sector move up the value chain and contribute to the economy more effectively.

Major Objectives:
Increase the competitiveness, polymer absorption capacity and value addition in the domestic downstream plastic processing industry through adaptation of modern, research and development led measurers.

In the petrochemical supply chain, the plastics industry can be classified into two categories.

First, the manufacturing of polymers, which is called ‘upstream’.

The second one is conversion of processable polymers (plastic raw materials) into useful end products, which are classified as ‘downstream’.

Achieve environmentally sustainable growth through innovative methods of waste management, recycling, etc.
Ranking of States on Support to Startup Ecosystems: DPIIT
The Results of the 2nd edition of Ranking of States on Support to Startup Ecosystems were released by the Department for Promotion of Industry and Internal Trade (Ministry of Commerce & Industry).

DPIIT has recently released the Ease of Doing Business Rankings of the States-2019 based on the State Business Reform Action Plan.

Key Points
The rankings were started with an objective of fostering competitiveness, mutual learning and propel States and Union Territories (UTs) to work proactively towards uplifting the startup ecosystem.

The 2019 Ranking Framework has seven broad reform areas consisting of 30 action points ranging from institutional support, easing compliances, relaxation in public procurement norms, incubation support, seed funding support, venture funding support, and awareness and outreach.

To establish uniformity and ensure standardization in the ranking process, States and UTs have been divided into two groups.

Category Y: All UTs except Delhi and all States in North East India except Assam.

Category X: All other States and UT of Delhi.

The States and UTs were classified as: Best Performers, Top Performers, Leaders, Aspiring Leaders and Emerging Startup Ecosystems.

Gujarat was the Best performer in Category X followed by Karnata and Kerala. Uttar Pradesh and Tamil Nadu occupied the lowest positions.

Andaman and Nicobar Islands was the Best performer in Category Y. Sikkim secured the bottom place.

Gujarat had secured the Best Performer position previous year as well.
Financing the Fiscal Deficit
India, being one the hardest hit major economy due to Covid-19, faces the challenge of managing its fiscal deficit.

Borrowing more and monetizing the deficit are the options being considered by the government and Reserve Bank of India (RBI) to finance the fiscal deficit.

Key Points
As per the official data, the Centre’s fiscal deficit for the first three months of fiscal 2020-21 (April-June) was Rs. 6.62 lakh crore, which is 83% of the budgeted target for the whole year.

As per the economists, the fiscal deficit may end up as high as 8% of the Gross Domestic Product (GDP), far exceeding the budget’s goal of 3.5%.

The GDP contracted by 23.9% in the first (April-June) quarter of 2020 compared to the same period (April-June) in 2019.

The manufacturing sector is also contracting, as per the recent IHS Markit India Manufacturing Purchasing Managers’ Index (PMI).

The output of eight core industries contracted for the fourth consecutive month - shrinking by 15% in June 2020.

The Financial Stability Report from RBI also shows an increase in bad loans and Non-Performing Assets (NPA)
Estimate of India’s Growth
Global rating agency Moody’s has revised its forecast of India’s growth. It has estimated a double-digit contraction to be at 11.5% during the current fiscal year.

Agency also projected India’s debt burden at around 90 per cent of GDP in the current fiscal and the Centre’s fiscal deficit to be close to 7.5 per cent of gross domestic product.

In the previous fiscal, India’s debt burden was 72 per cent of GDP, while the fiscal deficit stood at 4.6 per cent.

Key Findings
India’s GDP contracted by 23.9 per cent year-on-year in the April-June quarter, following the economic impact of the nationwide lockdown.

The collapse in GDP was one of the sharpest among all major G-20 economies.

India now expect real GDP to contract by 11.5 per cent in the fiscal year starting April 2020, much weaker than our previous forecast of a 4 per cent contraction.

The sharp decline in growth will result in materially weaker government revenue.

Moody’s had in June downgraded India’s sovereign rating to ‘Baa3’ - the lowest investment grade - just a notch above junk status, with a negative outlook.

The country’s credit profile is increasingly constrained by low growth, high debt burden and the weak financial system.

Mutually reinforcing risks from deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength.

Growth challenges – including weak infrastructure, rigidities in labour, land and product markets, and rising financial sector risks – continue to constrain the economy’s potential.

The nature of stress among non-bank financial institutions (NBFIs) and banks is still being revealed and may prove deeper and broader.
Borrowing options proposed by GST Council
13 states have given their consent to borrowing options proposed by GST Council to meet compensation shortfall.

The 12 States which have preferred to opt for Borrowing Option 1 are Andhra Pradesh, Bihar, Gujarat, Haryana, Karnataka, Madhya Pradesh, Meghalaya, Sikkim, Tripura, Uttar Pradesh, Uttarakhand and Odisha.

Only one state, Manipur has so far opted for the Borrowing Option 2.

Six more states - Goa, Assam, Arunachal Pradesh, Nagaland, Mizoram and Himachal Pradesh will be giving their option in a day or two.

Background
The GST Council in its 41st meeting had given two borrowing options to its member states to enable them to meet their compensation shortfall. The two options were decided by the GST Council in a meeting on August 27.

The Option 1 offered the States to borrow the shortfall arising out of GST implementation, estimated at 97 thousand crore rupees approximately to be borrowed through issue of debt under a special window coordinated by the Ministry of Finance.

The Option is to ensure steady flow of resources similar to the flow under GST compensation on a bi-monthly basis.

The Option-2 has offered the States to borrow the entire compensation shortfall of two lakh 35 thousand crore rupees (including the Covid-impact portion) through issue of market debt.
Inflation Data: August 2020
The inflation data for the month of August 2020 was released. The inflation data includes retail inflation and wholesale inflation data.

The retail inflation is measured by the Consumer Price Index (CPI).

The wholesale price-based inflation is measured by Wholesale Price Index (WPI).

Key Points
The retail inflation growth dipped to 6.69% in the month of August. It was at 6.73% in July 2020.

However, the retail inflation continued to grow beyond the Reserve Bank of India’s (RBI) upper margin of 6%.

The Central government has mandated the RBI to keep inflation within the range of 4±2%.

This inflation range (4% within a band of +/- 2%) was recommended by the committee headed by Urjit Patel in 2014.

The growth in retail inflation was primarily due to a rise in meat and fish prices that saw a 16.50% on-year rise in August.

The Consumer Food Price Index (CFPI) or the inflation in the food basket eased to 9.05% in the month of August. It was at 9.27% in July 2020.
Banking Regulation Amendment Bill, 2020 Introduced in Parliament
The new Banking Regulation (Amendment) Bill, 2020, is tabled on the first day of the Parliament's Monsoon Session.

The Bill was introduced by Finance Minister Nirmala Sitharaman ans was withdrawn in March 2020, before the Covid-19 pandemic. Teh amendment comes as the 277 urban cooperative banks have reported losses during the COvid-19 pandemic.

Provisions of the Bill:
The Bill will provide the Reserve Bank of India (RBI) powers to restructure cooperative banks.

The Bill will bring cooperative banks under the umbrella of RBI and would not affect state cooperative laws.

As per the bill, with prior recommendation of RBI, the co-operative banks will be able to raise the money by public issues and private placements of equity, the preference shares and through unsecured debentures.

The bill recommended to empower RBI for amalgamation of banks in order to remove the cap for the withdrawals by depositors and to smoothen the process of lending operation of the bank.

In general, the Bill proposes to strengthen the co-operative banks by enabling access to capital, increasing professionalism, improving governance and ensuring sound banking through RBI.
Parliamentary Committee Report on Startups
The Parliamentary Standing Committee on Finance tabled a report related to startups in Parliament. The Government of India has initiated a Startup India Scheme in 2016.

Key Points
Indian start-ups need to reduce their dependence on China and the USA, so that India becomes self-reliant by having several large domestic growth funds powered by domestic capital.

E.g Small Industries Development Bank of India (SIDBI) Fund-of-Funds vehicle should be expanded and fully operationalised to play an investment role.

A fund-of-funds also known as a multi-manager investment—is a pooled investment fund that invests in other types of funds.

Foreign development finance institutions may also be encouraged to participate with local asset management companies to set up fund-of-funds structures.

The companies and Limited Liability Partnerships (LLPs) should be allowed to invest in start-ups without being classified as Non-banking Financial Companies (NBFCs) by the Reserve Bank of India (RBI) to expand capital sources for start-ups.

Abolition of Long-Term Capital Gains (LTCG) tax on Collective Investment Vehicles (CIVs) for at least the next two years to encourage investment in start-ups and to drive a sharp post-pandemic revival.

At present, LTCG earned by foreign investors in private companies attracts taxation at a rate of 10%, in comparison to the domestic venture capital investments which are taxed at 20% (for LTCG) with an enhanced surcharge of 37%.

After a two-year period, the Securities Transaction Tax (STT) may be applied to CIVs so that revenue neutrality is maintained.

A CIV is any entity that allows investors to pool their money and invest the pooled funds, rather than buying securities directly as individuals. It is usually managed by a fund management company which is paid a fee for doing so.

Examples of CIV: angel funds, alternate investment funds and investment LLP.
Scheme for Integrated Textile Parks
Union Minister of Textiles provided information on implementation of Scheme for Integrated Textile Park (SITP), in Rajya Sabha.

Key Points
SITP was launched in 2005.

Objectives: To provide the industry with world-class state of the art infrastructure facilities for setting up their textile units.

To attract foreign investors to the domestic textile sector.

Under the SITP, infrastructure facilities for setting up of textile units are developed in a Public-Private-Partnership (PPP) model.

The Government of India grants upto 40% of the project cost.

However, it grants upto 90% of the project cost for the first two projects (each) in the North Eastern States, Himachal Pradesh, Uttarakhand and Union Territory of Jammu & Kashmir and Union Territory of Ladakh.

The government's support is limited to Rs. 40 crores for each textile park.

Each Integrated Textile Park (ITP) under the scheme would normally have 50 units. The number of entrepreneurs and the resultant investments in each ITP could vary from project to project.
GDP falls by a record 23.9% in first quarter
According to data released by the National Statistical Office, the Gross Domestic Product (GDP) of India has shrunk by a record 23.9% in the April to June 2020 quarter in comparison to the same period in 2019.

Details:
The contraction reflects the severe impact of the COVID-19 lock down, as well as the slowdown trend of the economy even pre-COVID-19.

Agriculture was the only sector which recorded a modest growth of 3.4% in year-on-year terms.

All other sectors saw a contraction, with the steepest fall of 50% in construction, and the trade, hotels, transport and communication services category shrinking 47%.

On the expenditure side, private consumption fell 26.7%, while investments, as reflected by gross fixed capital formation plunged 47%, and exports contracted almost 20%.

Government final consumption expenditure grew 16.4%.

Concerns:
A member of the Advisory Council to the 15th Finance Commission opined that the Indian economy is in a deeply vicious cycle, where demand is contracting so heavily, while the capacity to neutralize this contraction has also contracted equally because of the tax revenue contraction.

Economists expect this to contribute to a contraction in annual GDP in 2020-21.

The last contraction of the economy occurred in 1979-80, when GDP shrank 5.2%.

There have been four other instances of minor contraction between 1965-68, and 1972-73.

However, it is opined that 2020-21 could see the worst contraction in the history of independent India.

Economists opine that the government needs to step up its own expenditure suggesting that the government can borrow from the market or the RBI (Reserve Bank of India).
Special Open Market Operations by RBI
Reserve Bank of India (RBI) has announced several measures to ensure orderly market conditions and smooth financial conditions.

These measures include two more tranches of special Open Market Operations (OMOs) in bonds and a hike in the Held-To-Maturity (HTM) limit under the Statutory Liquidity Ratio (SLR) for banks.

Key Points
The move has been termed as ‘Operation Twist’.

Operation Twist is the name given to a USA Federal Reserve monetary policy operation, which involves the purchase and sale of government securities to boost the economy by bringing down long-term interest rates. It is now being used for similar measures taken by RBI in Indian context as well.

RBI will conduct additional special open market operations for an aggregate amount of Rs. 20,000 crore.

RBI will also conduct term repo operations for an aggregate amount of Rs. 1,00,000crore at the prevailing repo rate in the middle of September to ease liquidity pressures on the market.

In order to reduce the cost of funds, banks that had availed of funds under Long-Term Repo Operations (LTROs) may exercise an option of reversing these transactions before maturity.

LTRO is a tool that lets banks borrow one to three-year funds from the RBI at the repo rate, by providing government securities with similar or higher tenure as collateral.

Thus, the banks may reduce their interest liability by returning funds taken at the repo rate prevailing at that time (5.15%) and availing funds at the current repo rate of 4%.

Increase in HTM limit: RBI raised the limit on bonds held-to-maturity (HTM) to 22% from 19.5% of Net Demand and Time Liabilities (NDTL). This means banks will have room to buy more bonds without bothering about short-term fluctuations in yields.

HTM securities are the debt securities acquired with the intent to keep it until maturity.
Adjusted Gross Revenue to be paid in 10 Years
Supreme Court of India allowed telecom companies (telcos) 10 years’ time to pay their Adjusted Gross Revenue (AGR) dues to the government.

Key Points
The telecom sector was liberalised under the National Telecom Policy, 1994 after which licenses were issued to companies in return for a fixed license fee.

To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.

Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC).

License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter.

The definition of AGR has been under litigation for 14 years. In 2005, Cellular Operators Association of India (COAI) challenged the government’s definition for AGR calculation.

However, DoT argued that AGR includes all revenues from both telecom and non-telecom services.

The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on the sale of any investment or fixed assets.

In 2015, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) stayed the case in favour of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.

However, setting aside TDSAT’s order, the Supreme Court upheld the definition of AGR as stipulated by the DoT in October 2019.

As per the government definition, AGR includes rental receipts, dividend income and income from any other-activity arising out of the telecom licence the company has.

Later on, the Court rejected a 20-year payment timeline proposed by the central government and supported by telecom companies. Instead it has given 10 years’ time to repay the AGR dues.
JK govt. set up a 10-member council for the conservation of biological diversity
The Council will be headed by the Principal Chief Conservator of Forests as chairman of the 10-member panel.

The Jammu & Kashmir government has set up a 10-member council for conservation of biological diversity and sustainable use of its components in the Union territory, officials said.

As per an order issued by the General Administrative Department (GAD), sanction has been accorded to constitute the Jammu and Kashmir Biodiversity Council.

Highlight:
The Council will be headed by the Principal Chief Conservator of Forests as chairman of the 10-member panel.

The council will include five non-official members.

The director of the Forest Research Institute, J&K, will serve as the member secretary of the council.

Other members are the chief wildlife warden, a representative of the Department of Forest, and others. Non-official members include former IFS officers Dr C M Seth, Dr Om Prakash Sharma, professorGeetaSumbli, Dr AnzarKhuroo and Dr.SushiVerma.

The term of office of the non-official members of the council will be for a period of three years.

The council will constitute a fund known as "Jammu and Kashmir Biodiversity Council Fund".

All the charges, fees, and benefit sharing amount that are received by the council will be credited to the fund.

The council will perform the functions within the jurisdiction of the Union Territory of Jammu & Kashmir.

The council will function upon the consultation with the National Biodiversity Authority, notify the format and procedures for seeking approvals with regard to biodiversity issues.
Capping of MEIS Scheme Benefits
The government has taken a decision to cap export incentives under Merchandise Exports from India Scheme (MEIS) at Rs. 2 crore per exporter on outbound shipments made during September-December, 2020.

Key Points
The ceiling would be subject to a downward revision to ensure that the total claim doesn’t exceed the allocated Rs. 5,000 crore for the period.

The new Import Export Code (IEC) obtained on or after 1st September will be ineligible to submit any MEIS claim for exports.

Import Export Code: It is issued by the DGFT (Director General of Foreign Trade - Ministry of Commerce and Industry). IEC is a 10-digit code which has a lifetime validity. Predominantly importers cannot import goods without the Import Export Code and similarly, the exporter merchant cannot avail benefits from DGFT for the export scheme, etc. without IEC.

Reasons for Government Decision: MEIS is not World Trade Organisation (WTO) compliant and rolling back of the MEIS scheme will pave the way for a new scheme in place. The Indian government has announced a new WTO-compliant scheme called Remission of Duties or Taxes On Export Product (RoDTEP) which will replace MEIS starting 1st January 2021.