9 PM Daily Brief – September 1st, 2020

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9 PM for Mains examination

GS-2

  1. Internationalism or Nationalism- India’s Present choices in Foreign Policy
  2. India’s muddle over GST compensation
  3. GST – Grand Bargain 2.0

GS-3

  1. Environmental challenge

9 PM for Preliminary examination

FACTLy


1. Internationalism or Nationalism- India’s Present choices in Foreign Policy

Source- The Indian Express

Syllabus- GS 2- Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

Context – The first international conference “Congress of the peoples of the East” held in 1920, offers insights into the tensions between globalism and localism of 2020.

Recent instances of conflict between Internationalism and Nationalism

  1. Impeding Eurasian unity- India’s decision to pull out of this month’s military exercise of the Shanghai Cooperation Organisation, which was to announce a new era of Eurasian unity has been impeded by the tensions between India and China.
  2. Leadership of the Muslim world- The Turkish President Recep Tayyip Erdogan’s claim of leadership of the Muslim world has been resisted by a number of Arab rulers.
  3. Tension between ‘Globalism’ and ‘America First’ foreign policy of U.S.-Democratic presidential nominee Joe Biden’s promise to restore America’s “global leadership” is struggling to overcome Donald Trump’s “America First” argument that the US must rather take care of itself.

India’s own dilemma

  1. During cold –war – India turned its back on Asianism during cold war to claim the leadership of the broader Non-Aligned Movement, that never acquired the needed strategic coherence.
  2. 1990’s – After the Cold War, India re-embraced Asianism in the 1990s when it unveiled the Look East Policy and joined the Asian regional institutions led by the Association of South East Asian Nations.
  3. 21st century – Delhi didn’t participate in ASEAN- (RCEP) summit that sought Asia- wide economic integration as it believed that it contradicts its domestic commercial interests and China will have more control over bilateral trade. Thus it went against internationalism or regionalism and promoted nationalism.

Issues with India’s regionalism approach

  1. Chinese rise was underestimated – India’s pursuit of economic regionalism in East Asia and a multi-polar world in partnership with China and Russia had severely underestimated the economic and political consequences of China’s rapid rise.
  2. Instances – India took a benign view of Chinese power and has been shocked to discover otherwise in 1962 and as well as in 2020.

Way Forward

India today needs more internationalism, than less, in dealing with the Chinese power. But it must be an internationalism that is rooted in realism and tethered to India’s economic and national security priorities.

2.India’s muddle over GST compensation

Source: LiveMint

Syllabus: GS2: Powers, Functions and Responsibilities of various Constitutional Bodies.

Context: Recently in GST council meeting the Finance Minister made a statement that the financial crisis facing the States is a result of an “act of God”.

Background:

  • Compensation issue: As per the estimates, the States’ GST revenue gap in 2020-21 will amount to about ₹3 lakh crore, while cess collections are only projected to reach ₹65,000 crore, leaving a shortfall of ₹2.35 lakh crore.
  • As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022).

Issues associated:

  • Centre’s responsibility: States contend that the shortfall in revenue is not just due to GST implementation and pandemic, but it is due to an economic slowdown for which the Centre is responsible.
  • Slowdown of economy: Economic growth slowed sharply in 2019-20. Nominal gross domestic product (GDP) growth dropped to 7.2% in the year ending 31 March 2020, and real GDP to 4.2%, from 11.0% and 6.1% respectively in 2018-19.
  • Global slowdown: Brazil and Indonesia have suffered far worse export slowdowns than India in the last few years. Real GDP growth has slowed sharply in all of the emerging economies. So, blaming Union government for slowdown and fall in GST collection is not correct.
  • Stressed finances of states: Growth slowdown has led to shortfall in the GST collections of states. GST accounts for almost 42% of states’ own tax revenues, and tax revenues account for around 60% of states’ total revenues.
  • Less taxation power with states: Using cesses on agriculture such as Krishi Kalyan cess and Swachh Bharat cess, the Union is entering domains that are a part of the state list.
  • Role of agencies in slowdown: Monetary policy was too tight in 2017 and 2018. However, the GDP estimation methodology showed higher growth than what actually obtained in 2016-17 and 2017-18. This played a role in dulling responses both from the Centre, in terms of structural reforms, and from the central bank by way of monetary policy.
  • Question of Moral obligation to compensate states from the Consolidated Fund of India: All states agreed that the higher GST revenues would compensate for loss of revenue autonomy. For instance, Tamil Nadu’s GST collections rose faster than its pre-GST sales tax revenues did. Therfor, putting the entire moral obligation on the centre is misguided.

Analysis of the two options presented by Centre for borrowing by States to meet the shortfall:

  • Option 1: In this case, states will be allowed to borrow for compensation requirement through a deal with the RBI, facilitated by the Centre.
    • Implication: If states opted for the first option given by the Centre, they would get ₹2.62 trillion, including the compensation cess. That is only 87% of the shortfall.
  • Option 2: The second option is that the entire gap of ₹2.35 lakh crore can be met by the borrowing by the States by an RBI arrangement

Under both the options, whatever is not borrowed by states will still be paid to them even after 2022, through an extension of the cess. This means that taxpayers will have to bear the cost.

Way forward:

  • Facilitating borrowing by the states without affecting their debt ratios.
  • Rescue the country’s long-term fiscal health from political arbitrage.
  • Make arrangements to clear any arrear of compensation through future compensation cess collections.

3.GST – Grand Bargain 2.0

Source– The Hindu

Syllabus- GS 2- Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.

Context– A Grand Bargain 2.0 between the center and the states is needed in longer run to tackle the issues related to GST compensation to the States.

Value added tax [VAT] – An indirect value added tax which was introduced into Indian taxation system on April 1, 2005. VAT was introduced to make India a single integrated market. On June 2, 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.

Disadvantages of VAT

  1. Cascading effect of taxes – Cascading effect is when there is tax on tax levied on a product at every step of the sale. The tax is levied on a value which includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax.”
  2. It was not possible to claim Input Tax Credit (ITC) on service under VAT.
  3. Different VAT rates and laws in different states.

The need for one country one tax was envisaged by GST which is a single comprehensive destination-based tax.

GST [Compensation to States] Act, 2017

  • States are guaranteed the compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
  • The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.

Issues raised by States in current GST model

  1. Limited option for States to raise money -States does not have recourse to multiple options that the Centre has, such as issue of a sovereign bond in dollars or rupees.
  2. Rate of market borrowing -Centre can anyway command much lower rates of borrowing from the markets as compared to the States.
  3. Rate of public sector borrowing-In terms of aggregate public sector borrowing, it does not matter for the debt markets, or the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
  4. Fiscal Stimulus– Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilization, which is the Centre’s domain thus states can’t overcome the impact of fall in revenue which is more or less lockdown induced.
  5. Trust issue -Breaking this important promise, using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.

Possible solutions

  1. Low GST rate -A low moderate single rate of 12% encourages better compliance, reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection.

Example- Australia, for the past two decades their GST rate has been constant at 10%.

  1. Importance of 3rd tier government -Of the 12% GST, 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them. The actual distribution across panchayats, districts and cities would be given by respective State Finance Commissions.
  2. Low transaction cost – The current system is too complex and burdensome. An overhaul of the interstate GST and the administration of the e-way bill to reduce the transection cost and also need to zero rate exports.

Way forward

GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.

4.Environmental challenge

Source: The Hindu

Syllabus: GS-3- Environment

Context:  Environment protection should be considered a national issue and not be viewed through an ideological or political lens.

India’s environmental ranking

  • In the environmental performance index ranking shows India at 118 in 2006, 123 in 2010, 155 in 2014 and 177 in 2018. Thus, the index shows a consistent drop for several years.
  • The Environmental Performance Index has been developed by two U.S. universities (Yale and Columbia) in collaboration with the World Economic Forum and European Commission.

Political record

  • The link between the great winter smog and pollution in North India, and the present EIA draft is not reasonable, since winter pollution in North India did not begin in 2014.
  • The winter smog and pollution in North India demonstrate the irregularities of federalism, where the rules of the Centre and States differ.
  • There are problems of environmental laws which are effective in principle against point sources like industries but not against agriculture related pollution such as stubble burning or public usage pollution relating to vehicular and household sources (which are predominantly non-point in nature).
  • The UPA governments were unable to frame subordinate legislation and implement the Forest Rights Act effectively for eight long years.
  • ‘Forests’ was a State subject until transferred to the Concurrent list by the 42nd Amendment Act. However, the powers of the State governments continue, which is why, regardless of political affiliation, State governments hesitate to fully implement the Forest Rights Act.

Focus on deforestation

  • Deforestation has to be a primary concern for any government. Forest clearances for mining and industries are a major cause, but not the only causes of deforestation. Other causes include the following:
    • the slash-and-burn (or jhoom cycle) due to population pressure;
    • conversion of forest to cultivated land;
    • increasing use of timber for household and industry purposes.
  • While diversion of forests for mining and industry is regulated by law and challenged in courts, the other major drivers are not even discussed.

Crucial dimensions

  • The vital dimensions of environment preservation are as follows:
  • The balance of requirements between the environment and poverty eradication.
  • The critical need to harmonise the working of the central, State, and local governments as also intelligence, monitoring and compliance with law.

Way forward

  • The environment is a national issue which requires the unwavering participation of all governments, and all citizens, regardless of political affiliation and it should not be looked from an ideological or political viewpoint.

9 PM for Preliminary examination

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