Categories
Economics

MSMEs have not been defined well—and micro firms suffer the price for this

  • 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/
Categories
Economics

Regulatory Challenges for Alternative Investment Funds (AIFs)

  • 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
Categories
Economics

Declining Poverty Ratio: A Continuous Trend

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.
Categories
Economics

Investment lessons from the India-EFTA trade agreement

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.
Categories
Economics Ethics

The number of children has a greater impact on development than religion

The Muslim population has once again been a topic of controversy. Last month, Prime Minister Narendra Modi referred to Muslims in India, implying they have a higher birth rate. 

Trends of Muslim Population according per Data Point (NFHS-5 2019-21), published on April 23:

  • Population trends: The Economic Advisory Council to the Prime Minister observed that Muslims’ percentage of the overall population rose by 43.15% between 1950 and 2015, while Hindus’ share declined by 7.82% between 1950 and 2015.
  • In 2019-21, Muslims had a fertility rate of 2.36, which was significantly closer to replacement. The fertility rate is the average number of children a woman is likely to have during her lifetime. A rate of 2.1 (the’replacement level’) indicates that the population is constant. 

Factors contributing to Muslims’ rapid population growth:

  • Socioeconomic Factors: Fertility rates are influenced more by socioeconomic reasons than by religion. Educating females, delaying marriage, raising family planning knowledge, and enabling access to family planning methods are critical to lowering fertility rates.
  • Fertility rates among Muslim women vary by location, which is impacted by state social and economic development.
  • Early Marriage and Literacy: Higher fertility rates are associated with earlier marriage among women aged 20 to 24. Conversely, there is a negative link between women’s literacy rates and fertility rates. 
  • Lack of Awareness: A large majority of women report never hearing or seeing family planning messages, highlighting the need for increased awareness.
  • Unmet Demand for Family Planning: Many women, particularly Muslims in some states, have unmet family planning needs owing to a variety of issues, including a lack of access to contraception.
  • Government Intervention: Raising knowledge about contraception, expanding access to family planning services, educating girls, and avoiding child marriages are all critical government tasks for lowering fertility rates among religious groups. 

Need for coercive measures:

  • Comprehensive Education and knowledge Programmes: Launch educational programmes in communities around the country to promote family planning, gender equality, and reproductive health knowledge among men and women.
  • Access to Family Planning Services: Provide simple access to a variety of family planning techniques and contraceptions, even in distant and underserved regions, through government health institutions and community outreach programmes. 
Source: https://www.sciencedaily.com/releases/2019/02/190207123220.htm
Categories
Economics

An inheritance tax can help alleviate inequality

  • Sam Pitroda, Chairman of the Indian Overseas Congress, made a comment on imposing an inheritance tax as a measure for wealth redistribution, sparking much debate.

The Negative Effects of Inequality:

  • Growth impacted: Inequality stifles growth in the medium to long term by lowering company productivity, cutting labour income, and diverting resources away from vital rights such as education.
  • Inequal Opportunity: In unequal nations such as India, where one is born has a significant impact on lifetime results, accounting for over one-third of consumption variance.
  • Wealth Concentration: The fact that the top 1% owns 40% of India’s wealth highlights the massive wealth inequalities that fuel inequality.
  • Research shows that the advantages from India’s growth over the previous two decades have disproportionately benefited high-income urban inhabitants, worsening inequality.

How may an inheritance tax help reduce inequality?

The Constitution demands equal status and opportunity, requiring the government to take action to alleviate gaps caused by birth accidents. 

  • Reduction of Wealth Concentration: By taxing large inheritances, a bequest tax serves to transfer wealth from the richest people and families to the rest of society.
  • Inheritance taxes might encourage affluent people to invest their fortune in productive enterprises rather than merely handing it along to their descendants.
  • Critics may claim that inheritance taxes discourage innovation by lowering the motivation to acquire wealth for future generations.
  • Funding for Public Expenditure: The proceeds from inheritance taxes can be used to support critical public services and social programmes such as education, healthcare, infrastructure, and poverty alleviation projects.
  • Historical Effectiveness: Examples include the estate duty in India from 1953 to 1985. It cut the top 1%’s personal wealth share from 16% to 6% between 1966 and 1985. 
Source: https://www.thehindu.com/opinion/op-ed/an-inheritance-tax-will-help-reduce-inequality/article68149271.ece#:~:text=This%20can%20be%20used%20to,if%20there%20is%20political%20will.
Categories
Economics

CBDC pilot initiatives for CPs and CDs are anticipated to RBI

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 PapersCertificates of Deposits
Type of InstrumentUnsecured promissory noteFixed-income financial instrument
IssuerLarge corporations, primary dealers, financial institutionsScheduled Commercial Banks, All-India Financial Institutions
Maturity Period1 to 364 days3 months to 1 year (for SCBs), 1 to 3 years (for financial institutions)
Minimum InvestmentRs. 5 lakh or multiples thereofRs. 1 lakh or multiples thereof
Credit Rating RequirementThe minimum credit rating necessary (e.g., A-2) from recognised rating agenciesTypically issued by high-rated banks and financial firms.
CollateralUnsecuredNot applicable
PurposeShort-term funding for corporationsIndividuals and institutions make short- to mid-term investments.
Interest RateTypically higher than bonds, varies according to market circumstances.Typically fixed, greater than savings accounts, varies with market circumstances.
Investment EligibilityIndividuals, 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
TradingActively 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 HoldingCan 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.
Categories
Economics

SEBI board adopts amendments to mutual fund regulations

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
Categories
Economics

The Constitution and the Redistribution of Wealth

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.
Categories
Economics

RBI Issues New Guidelines for Asset Reconstruction Companies (ARCs)

The RBI has issued amended criteria for Asset Reconstruction Companies (ARCs) through a master directive, starting April 24, 2024. 

What is an Asset Reconstruction Company (ARC)?

Description
AboutARC is a type of financial entity that buys debtors from banks at a mutually agreed-upon price and seeks to recover the debts or linked securities.
RegulationARCs are registered with the RBI.The SARFAESI Act of 2002 governs the securitization and reconstruction of financial assets, as well as the enforcement of security interests.
ObjectiveARCs acquire a share of the bank’s non-performing assets (NPAs) and engage in asset rehabilitation or securitization to recover the debts.
FunctionsAsset Reconstruction: The acquisition of bank loans or other credit facilities for realisation.Securitization refers to the acquisition of financial assets through the issuance of security receipts. 
Foreign InvestmentARCs allow 100% FDI via the automated approach.
LimitiationsARCs are restricted from lending.They can only carry out securitization and rebuilding activities. 
WorkingThe bank with NPA agrees to sell it to ARC for a mutually agreed-upon price.ARC transfers assets to trusts under the SARFAESI Act.The initial payment was made to the bank, and the remaining balance was paid by Security Receipts.Recovery funds are split between ARC and the bank. 
Security ReceiptsIssued to Qualified Institutional Buyers (QIBs) to raise financing for the acquisition of financial assets.
SignificanceBanks may improve their balance sheets and focus on core banking activities.Provides a framework for resolving non-performing assets and recovering debt. 

What are the new guidelines laid out by the RBI?

Enhanced Capital Requirements:

  • Minimum Capital Requirement rise: ARCs must now maintain a minimum capital requirement of Rs 300 crore, a major rise from the previous Rs 100 crore criterion imposed on October 11, 2022.
  • Existing ARCs are provided a transition period to meet the new Net Owned Fund (NOF) level of Rs 300 crore by March 31, 2026.
  • Interim Requirement: However, by March 31, 2024, ARCs must have a minimum capital of Rs 200 crore to meet the new requirements. 

Supervisory Actions for Non-Compliance:

  • ARCs that fail to satisfy the specified capital requirements will face regulatory action, which may include limits on conducting future operations until compliance is achieved.

Expanded Role for Well-Capitalized ARCs:

  • Empowerment of Well-Capitalized ARCs: ARCs having a minimum NOF of Rs 1000 crore can serve as resolution applicants in distressed asset situations.
  • Investment Opportunities: These ARCs are authorised to invest in government securities, scheduled commercial bank deposits, and institutions such as SIDBI and NABARD, subject to RBI guidelines. They can also invest in short-term assets including money market mutual funds, certificates of deposit, and corporate bond commercial papers.
  • Investment Cap: To reduce risk exposure, short-term investments are limited to 10% of the total NOF.
Source: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12669
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