Category: Economics

• Price changes and inflation patterns in recent markets highlight the need for targeted policy interventions and a thorough understanding of agricultural supply chains.

The Meaning of Vegetable Triumvirate (Trio):

• Tomato, onion, and potato (TOP) are more than simply statistical entities; they are vital components in Indian cuisine, serving as the foundation of numerous meals.
• These veggies are more than just a component of the CPI basket; they symbolise cultural and nutritional choices profoundly established in Indian culinary traditions.

Volatility and its role in shaping Inflation trends by TOP vegetables:

• Vegetable prices in India increased by almost 15% year on year, suggesting high inflation in this area.
• Vegetable prices were very volatile, with a sudden 0.7% reduction in June followed by a significant spike of 37.4% in July.
• Vegetables make up just 6% of the whole CPI basket, yet they account for around 30% of inflation in February/March 2024.
  • For example, despite having a weight of only 0.6% in the CPI basket, tomato prices increased by 202% in July 2023, accounting for 18.1% of overall headline inflation.
  • Vegetables contributed 31.9% to headline inflation, with TOP (tomato, onion, and potato) accounting for 17.2%, demonstrating their significant influence on inflation patterns. 

Navigating Culinary and Economic Reality (Challenges):

• Policy Challenges: The volatility of TOP prices highlights the need for effective policy initiatives, including as agricultural value chain reforms and enhanced storage facilities, to stabilise prices and assist farmers.
• Farmers’ Plight: Farmers, who are frequently net buyers of these products, bear the brunt of price swings, necessitating policies such as Minimum Support Prices to secure their livelihoods.
• Government Response: Despite farmer protests and demands, official responses have been uneven, depending on short-term measures such as export prohibitions rather than addressing fundamental structural challenges in agriculture. 

Source: https://www.thehindu.com/opinion/op-ed/a-vegetable-triumvirate-inflation-and-the-takeaway/article68204706.ece

• A legislative commission proposed splitting microenterprises from the larger MSME category and updating definitions every five years.
• A government decree requiring prompt MSME payments has revealed knowledge gaps and unintentionally marginalised smaller businesses, showing problems with understanding their structure and operations.

What are the different sorts of categories in micro-enterprises?

• Category 1: Micro. More than 98% of MSMEs fall into this group, reporting an annual revenue of Rs 50 lakh or less.
• Category 2 – Small: MSMEs with yearly revenues of Rs 50 lakh to Rs 5 crore. 

Present ambiguity and structural gap in defining MSMEs.

• Lack of Clarity and Consistency: In India, there are over 50 definitions of MSMEs spread throughout 70 countries, with substantial uncertainty in terminology. Even while some regard the definition of MSMEs as simple and obvious, it contains ambiguity and might spark debate.
• Changing definitions in India: In India, the MSMED Act of 2006 classified MSMEs based on plant and machinery investment, prompting firms to keep their operations small in order to preserve MSME benefits.
  • However, the MSMED Amendment Bill of 2018 proposes categorising MSMEs purely on the basis of annual turnover, which has been criticised for under-reporting of eligible businesses.
• Quantitative vs. Qualitative Approaches: MSMEs are often characterised quantitatively. Quantitative metrics like as personnel count, total assets, and annual income have limits because they differ by business and sector.
• Impact on Micro firms: The uncertainty in identifying MSMEs has a detrimental impact on micro firms, resulting in challenges such as delayed payments and limited access to benefits and support schemes.
  • Furthermore, the COVID-19 epidemic has disproportionately affected unregistered micro-enterprises, which represent for more than two-thirds of all MSMEs and have a greater degree of informality.

Way forward:

• Enhanced Data Collection: Conduct regular and extensive surveys to collect detailed data on MSMEs, with an emphasis on microenterprises.
• Further classification within micro-enterprises: Create sub-categories within the micro-enterprise category depending on revenue criteria (e.g., under Rs 10 lakh, Rs 10-25 lakh, Rs 25-50 lakh).
• Revenue Diversity: There is significant variety in revenue across micro-enterprises, necessitating additional segmentation.
• Targeted policies: Addressing categorization gaps can improve policy efficacy, hence promoting microenterprise development and sustainability. 

Source: https://indianexpress.com/article/opinion/columns/msme-micro-enterprises-pay-the-price-9339425/

• In response to tighter restrictions affecting operations, the RBI has proposed that investments of more than 50% of Alternative Investment Funds (AIFs) units by a person residing outside of India be classified as indirect foreign investment.

Current Regulatory Landscape:

• Regulatory Ambiguity: Recent regulatory remarks have generated uncertainty in the market, notably about Foreign Direct Investment (FDI) policies surrounding AIFs, causing investors to reassess fund deployment methods.
• Changing posture: The regulatory posture has shifted, with modifications in 2015-16 permitting AIFs to receive foreign money automatically, encouraging onshore management, and motivating Indian fund managers to move to India.

Offshore Alternatives: 

• Reasons for Offshoring: Offshore funds benefit from a more stable regulatory framework, however tax consequences necessitate careful structure.
• Gujarat International Finance Tec-City (GIFT City) has developed as an appealing option for managers owing to regulatory stability, tax breaks, and closeness to India. 

Source: https://www.sebi.gov.in/sebi_data/meetingfiles/apr-2024/1713324885850_1.pdf

The release of the NSSO’s 2022-23 Household Consumption Expenditure Survey encouraged academics to estimate poverty and inequality trends, exposing data comparability and measurement difficulties. 

Trends in poverty and inequality: 

1. Poverty declined based on various committees:

• Poverty ratios fell from 29.5% in 2011-12 to 10% in 2022-23 (1.77 percentage points per year) using the Rangarajan Committee’s poverty standards.
• Poverty ratios fell from 21.9% in 2011-12 to 3% in 2022-23 (1.72 percentage points per year) using the Tendulkar Committee’s poverty standards.
• Earlier estimates based on the Tendulkar Committee’s poverty lines showed a decrease from 37.2% in 2004-05 to 21.9% in 2011-12 (2.18 percentage points per year). 

2. Inequality declined :

• According to Subramanian’s estimations, the Gini coefficient fell from 0.278 to 0.269 for rural regions and 0.358 to 0.318 for urban areas between 2011-12 and 2022-23.
• Bansal et al. see similar trends: the Gini coefficient for rural regions fell from 0.284 to 0.266, and for urban areas from 0.363 to 0.315 throughout the same time.
• Between 2011-12 and 2022-23, urban inequality decreased significantly as compared to rural regions. 

Measurement problems for poverty lines and consumer expenditure:

• Moving Away from Calorie Norm-Based Poverty Line: The Tendulkar Committee recognised the limitations of a calorie-based poverty level. Instead, the Tendulkar Committee used calorie standards indirectly by adopting the urban poverty level from the Lakdawala Committee’s approach, which contained calorie norms.
• The Rangarajan Group emphasised the need for a new consumption basket that includes both appropriate sustenance and critical non-food products, as well as behaviorally influenced non-food expenditures.
• Estimating this new poverty basket necessitated a new technique rather than just updating an existing basket with new costs.
• Incomplete Capture of Public Expenditure: Despite efforts to impute values for public expenditure items, the imputation procedure only captured a small portion of overall public expenditure on subsidised or free products.
• Poverty measurement is complex since there is no globally accepted approach, resulting in heterogeneity in estimates. 

To enhance consumption reporting, the NSSO has gradually adjusted the reference or recall period of data collection.

Three consumption estimates are offered based on the memory duration of various categories of expenditure: 

• Uniform reference period (URP)
• Mixed reference period (MRP)
• Modified mixed reference period (MMRP).

Conclusion:

The Tendulkar Committee acknowledged the inadequacies of calorie-based poverty limits, highlighting the need for more comprehensive methods that take into account changing consumption patterns and critical non-food items.

Source: https://www.thehindu.com/opinion/op-ed/declining-poverty-ratio-a-continuing-trend/article68171094.ece#:~:text=Trends%20in%20poverty%2C%20inequality&text=The%20estimated%20poverty%20ratios%20declined,the%20Tendulkar%20Committee's%20poverty%20lines.

India need a clear free trade agreement strategy, particularly in relation to international trade and foreign investment laws.  

Why does India need to revamp its Free Trade Agreement policy?

• Regarding Comprehensive Economic Treaties: Combining trade and investment discussions gives India clear bargaining advantage to reach favourable agreements.
  • It enables India to leverage trade concessions for more investment, and vice versa. This method strengthens India’s negotiating position in FTA discussions.
• For Scope Expansion: India should broaden the scope of investment concerns by include rules for safeguarding foreign investors under international law, therefore restoring their trust in investing in India.
  • It will assist India in establishing an effective dispute settlement framework under international law to address investment issues effectively.
  • Providing effective legal protection to international investors is critical for improving their trust, especially as India’s foreign direct investment levels decline. 
• To counteract the downturn in FDI levels, the policy should encourage confidence in foreign investors through strong legal protection and dispute resolution systems.

Investment Lessons from the India-EFTA Trade Agreement:

• The India-EFTA FTA has a thorough investment component, which is absent from recent Indian FTAs with countries such as Australia, the UAE, and Mauritius.
• The agreement includes clauses for EFTA nations to make honest efforts to boost FDI to India and support job creation, codifying a requirement of behaviour rather than a result.
• Economic theory emphasises the strong relationship between commerce and investment. Previous Indian FTAs featured both binding trade regulations and investment protection, while more recent ones separated international trade law from international investment law.
• The India-EFTA FTA emphasises merging trade and investment discussions into a single complete economic pact, known as the ‘FTA 3.0 method’, which differs from the decoupling method used in prior FTAs. 

Goal: 

• Improve Indian negotiators and officials’ understanding of complex trade and investment problems, including legal frameworks, dispute resolution procedures, and international best practices.
• Integrated Negotiation strategy: Take an integrated strategy to FTA talks, negotiating trade and investment components concurrently inside a single agreement to ensure coherence and synergy between the two.

Source: https://www.thehindu.com/opinion/op-ed/investment-lessons-from-the-india-efta-trade-deal/article68168582.ece#:~:text=Providing%20enforceable%20legal%20protection%20to,a%20higher%20economic%20growth%20trajectory.

RBI Governor Shaktikanta Das announced plans for a pilot programme aimed at the wholesale market of Central Bank Digital Currency (CBDC), specifically commercial papers (CPs) and certificates of deposits (CDs). 

About Commercial Papers (CPs) and Certificates of Deposits (CDs)

	Commercial Papers	Certificates of Deposits
Type of Instrument	Unsecured promissory note	Fixed-income financial instrument
Issuer	Large corporations, primary dealers, financial institutions	Scheduled Commercial Banks, All-India Financial Institutions
Maturity Period	1 to 364 days	3 months to 1 year (for SCBs), 1 to 3 years (for financial institutions)
Minimum Investment	Rs. 5 lakh or multiples thereof	Rs. 1 lakh or multiples thereof
Credit Rating Requirement	The minimum credit rating necessary (e.g., A-2) from recognised rating agencies	Typically issued by high-rated banks and financial firms.
Collateral	Unsecured	Not applicable
Purpose	Short-term funding for corporations	Individuals and institutions make short- to mid-term investments.
Interest Rate	Typically higher than bonds, varies according to market circumstances.	Typically fixed, greater than savings accounts, varies with market circumstances.
Investment Eligibility	Individuals, banks, corporate organisations (registered or incorporated in India), non-resident Indians, foreign institutional investors, and so on.	Individuals, banks, other corporations, non-resident Indians, foreign institutional investors, and so on.
Issuing and Paying Agent (IPA)	Only scheduled banks serve as issuing and paying agents.	Not applicable
Trading	Actively traded in the Over-the-Counter (OTC) market; reported on the Fixed Income Money Market and Derivatives Association of India (FIMMDA) reporting platform.	Not publicly traded
Dematerialized Holding	Can be kept in dematerialized form through SEBI-approved depositories.	Can issue in dematerialized form through SEBI-approved depositories.

Source: https://www.moneycontrol.com/news/business/rbi-may-try-use-of-cbdcs-in-cps-cds-on-pilot-basis-going-forward-shaktikanta-das-12715791.html#:~:text=RBI%20Governor%20Shaktikanta%20Das&text=The%20RBI%20launched%20the%20wholesale,started%20on%20December%201%2C%202022.

The Securities and Exchange Board of India (SEBI) has adopted revisions to the SEBI (Mutual Funds) Regulations, 1996, to improve the regulatory environment for Asset Management Companies (AMCs). 

• These revisions require AMCs to implement institutional tools to discourage possible market abuse, such as front-running, in response to recent market regulator observations.

What are mutual funds?

• A mutual fund is a collection of assets managed by a professional fund manager.
• It is a trust that collects money from a group of individuals with similar financial goals and invests it in stocks, bonds, money market instruments, and/or other assets.
• And the income / profits created by this collective investment are dispersed equally among the participants after subtracting appropriate fees and levies, using a scheme’s “Net Asset Value” or NAV.
• SEBI controls mutual funds under the SEBI (Mutual Funds) Regulations 1996. 

Categories of mutual funds:

1. An actively managed fund is a mutual fund scheme in which the fund manager “actively” manages the portfolio and constantly analyses it, determining which stocks to buy/sell/hold and when, based on professional judgement and analytical study.
2. A passively managed fund, on the other hand, simply tracks a market index; that is, in a passive fund, the fund manager remains inactive or passive in the sense that he or she does not use his or her judgement or discretion to decide which stocks to buy/sell/hold, but instead replicates / tracks the scheme’s benchmark index in exactly the same proportion. 

Fund Structure

• Mutual funds in India operate under a three-tier structure, comprising the

1. Asset Management Company (AMC),
2. Trustees, and
3. Custodians.

• The AMC administers the fund’s investments, the Trustees supervise its administration, and the Custodians protect its assets.

Key highlights of the latest update:

• Institutional Mechanism: AMCs must adopt strengthened surveillance systems, internal controls, and escalation mechanisms to detect and handle certain forms of wrongdoing, such as front-running, insider trading, and the abuse of sensitive information. 
• Whistleblower Mechanism: To promote transparency, AMCs must include a whistleblower mechanism.
• SEBI has exempted face-to-face conversations during market hours from the obligation to record all communication by dealers and fund managers. This exception will be applicable after AMCs have implemented the institutional mechanism.
• Prudential standards for Passive Schemes: SEBI has simplified prudential standards for passive schemes, enabling equity passive funds to invest up to the weightage of constituents in the underlying index, with a 35% cap on participation in sponsor group firms. 

Source: https://www.thehindu.com/business/sebi-board-approves-amendment-to-mf-rules/article68125619.ece#:~:text=Considering%20the%20recent%20front%2Drunning,a%20structured%20institutional%20mechanism%20for

The argument about wealth redistribution has attracted interest during the current election campaign.

What does the Constitution provide?

• Preamble to the Constitution: It describes the Constitution’s aims, which include ensuring social and economic justice, liberty, and equality for all citizens. 
• Part III and IV: Part III of the Constitution enumerates the essential rights that ensure liberty and equality, whereas Part IV contains the DPSP. These are the ideals that our country’s central and state governments must adhere to in order to achieve social and economic fairness. Unlike the fundamental rights outlined in Part III, the DPSP is not enforceable in court.
• Articles 39(b) and 39(c): The DPSP focuses on principles that ensure economic fairness. Article 39(b) emphasises the distribution of ownership and control over material resources for the common benefit. Article 39(c) seeks to avoid the concentration of wealth that is damaging to the general good.

History of the Right to Property in the Indian Constitution:

• Original Guarantee: Article 19(1)(f) of the Constitution established the right to property as a basic right. It said that individuals had the right to acquire, keep, and dispose of property.
• Compensation Requirement: According to Article 31 of the Constitution, the state must offer compensation when acquiring private property for public purposes.
• Land reform and public welfare: The government, faced with issues such as land reforms and the necessity for public infrastructure development, deemed the initial requirements too restrictive owing to a lack of resources. This resulted in modifications aimed at increasing flexibility in purchasing property for public use. 
• Constitutional modifications: Notable modifications such as Articles 31A, 31B, and 31C were enacted to limit the right to property and make land acquisition easier for public welfare projects.
• Judicial Interpretation of Constitutional Amendment: The Supreme Court evaluated the link between basic rights and Directive Principles of State Policy (DPSP) in a number of decisions. In the Golak Nath case (1967), the Court ruled that basic rights cannot be violated in order to implement DPSP. However, in the case of Kesavananda Bharati (1973), the Court maintained the legality of Article 31C, subject to judicial review. 
• Harmonic Balance: In the Minerva Mills case (1980), the Supreme Court emphasised the need of maintaining a harmonic balance between basic rights and DPSP in the Constitution.
• The 44th Amendment Act The 44th Amendment Act of 1978 eliminated the right to property as a basic right, transforming it into a constitutional right protected by Article 300A. The goal was to prevent unnecessary litigation and safeguard public welfare programmes.

Current discussion in India about economic policy and inequality as the country transitions from a socialist to a market-driven economy:

• Impact of Economic Policies: The early decades after independence were characterised by socialistic policies that included land reforms, industry nationalisation, high taxation rates, and limitations on private activity. These programmes sought to alleviate inequality and redistribute wealth, but were criticised for limiting growth and creating inefficiencies. 
• Changes in Taxation: Taxation laws have changed significantly throughout the years, including the elimination of inheritance duty in 1985 and wealth tax in 2016. Income tax rates were also significantly decreased, indicating a move towards a more business-friendly atmosphere.
• Growing Inequality: Despite economic progress, there is an increasing worry over inequality. Reports, such as those from the World Inequality Lab, show the growing wealth and income disparity, with a large share of wealth concentrated among the top 10% of the population.
• The ruling party and its supporters have criticised the opposition, claiming that their planned policies, such as the reinstatement of inheritance tax, will burden even the poorest members of society.
• Legal Interpretation: The Supreme Court’s participation in the argument is underscored by its decision to form a nine-judge bench to determine whether Article 39(b) of the Constitution, which deals with the distribution of material resources for the general benefit, encompasses private resources.
• Central Question of the Debate: The present discussion centres on the balance between economic policies that encourage development and efficiency and those that seek to reduce inequality and ensure social fairness. 

Way forward:

• Inclusive Growth: When supporting innovation and growth, it is critical to ensure that the benefits are dispersed evenly across all sectors of society, particularly the marginalised. Policies should strive for inclusive growth, ensuring that the benefits reach those who need them most.
• Debate and Adaptation: Economic policies should be developed following thorough debate and consideration, taking into account current economic models and worldwide best practices. To handle growing difficulties and possibilities, an ongoing process of adaptation and refining is required.
• Marginalised populations should be empowered specifically through focused interventions such as education, skill development, access to resources, and chances for economic involvement. 

Source: https://www.thehindu.com/news/national/constitution-and-the-redistribution-of-wealth/article68126525.ece#:~:text=The%20Constitution%20originally%20guaranteed%20right,of%20acquisition%20of%20private%20property.