Answers: Mains Marathon – UPSC Mains Current Affairs Questions – September 28

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Q.1) What is GST? What are the challenges in its implementation? What are the possible solutions? GS 3

  • GST is an indirect tax reform which aims to remove the tax barriers between states and create a single market.
  • It is a single tax on the supply of goods and services, right from the manufacturer to the consumer.
  • The Government had introduced the 122nd Amendment Bill, 2014, in the Parliament to facilitate the introduction of GST in the country.
  • The Bill was finally passed by both the Houses in 2016
  • It is a consumption based tax/levy. It is based on the “Destination principle.”
  • GST is applied on goods and services at the place where final/actual consumption happens.
  • It came into force from 1 July, 2017.
  • It is levied at multiple rates ranging from 0% to 28%.

There are three components of GST:-

Central GST (CGST) – it will be Levied by Centre

State GST (SGST) – It will be levied by State

Integrated GST (IGST) – It will be levied and collected by Central Government on supply of goods and services

What are the various challenges in implementation of GST?

  • Financial challenges: GST is expected to cause a downfall in state revenue and the bill ensuring compensation from the union government has still not been passed.
  • Federal system: The states would lose their autonomy to levy indirect taxes and will be totally dependent on the centre government.
  • Administrative challenges: some states are demanding control over taxing all businesses. It is contentious issue as the central government also needs funds for its policies and for compensating the states.
  • GST Council: With one-third voting share in the hands of Union government, may states feel the share of the states should be more.
  • No parliamentary approval is needed for GST rates. The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament.
  • Lack of skilled manpower to effectively migrate from older system to GST
  • The requirement of e-way bills for inter-State movements has also been a cause of concern.

Effects on States

  • According to the Reserve Bank of India (RBI), even as the fiscal position at the Centre remains stable (Central budget deficit for 2017-18 pegged at 3.2% of gross domestic product), there has been a marked deterioration in the gross fiscal deficit of states.
  • The figure for 2016-17 is not finalized yet but could be as high as a deficit of 3.4%.
  • Revenue expenditure of the states has risen sharply in recent years with greater financial devolution and increased expenditure.
  • In aggregate, the states spend about 30% more than the Centre. This gap will further increase with GST.
  • The GST is a destination-based tax, and as such is viewed as being to the advantage of the consuming States and to the detriment of the producing States.
  • However the formula for compensating to states for such loss has been devised in GST.

What are the suggestions?

  • It may be worth reconsidering these rates and bringing them down to the 5 per cent slab for stronger linkages between farmers and the food processing industry and creating jobs in rural areas.
  • Since the raw material could be sourced directly from farmers instead of being entirely depending on middlemen in mandis, e-NAM provides this opportunity to graduate to a real pan-India market for agricultural products.
  • GST would ensure that farmers in India, who contribute the most to GDP, will be able to sell their produce for the best available price.
  • A smooth GST regime can break inter-state barriers on movement and facilitate direct linkages between processors and farmers. This can transform the operations of mandis too if other necessary reforms to free up agricultural markets are undertaken.

Q.2) What do you understand by strategic partnerships? What is its relevance in today’s world? What is the importance of strategic partnership with Japan for India? Discuss. GS 2

Importance of strategic partnership with Japan for India

  • The India-Japan “Special Strategic and Global Partnership” (a designation and status New Delhi accords to no other partner) has reached new heights.
  • Reason: the rise of China and questions about America’s commitment in Asia have drawn India and Japan into a deepening security-cum-economic relationship.

Relevance of strategic partnerships in today’s world

  • We live in a world today driven by “strategic partnerships”. States find themselves in an interdependent system where the traditional power politics doesn’t fit.
  • For example, every major relationship is characterized by strategic tension such as U.S.-China, Japan-China, India-China is simultaneously one of economic gain. The U.S. and China are each other’s chief trading partners, while China ranks at the top for Japan and India. Besides, India might confront China at Doklam but it also wants Chinese investment.
  • Strategic partnerships carry certain characteristic features falling short of alliances. Unlike alliances, they do not demand commitments to a partner’s disputes with other countries.
  • Strategic partnership means that both retain the flexibility to continue political engagement and economic cooperation with their common adversary. Second, they avoid “entrapment”, or being dragged into a partner’s disputes and potentially into conflict, which happened in the First World War. Third, regular high-level political and military interactions facilitate a collaborative approach to strategic policies over a range of economic and military activities.
  • The aim of major strategic partnerships is to strengthen defences against marginal conflict, convey a determination to stand up to a strategic adversary and, overall, generate a persuasive environment that discourages potential intimidation.
  • Occasionally, as between India and China, a “strategic partnership” is a way of opening a channel of communication and minimal cooperation intended to stabilise and develop the potential for a détente and conceivably something warmer.

Way forward

  • India’s two main strategic partnerships, with the U.S. and Japan, are dovetailing nicely.
  • For New Delhi, U.S. will remain its chief backer both to enhance India’s conventional defence capabilities and to draw political support in global political institutions, for example in components of the nuclear non-proliferation regime.
  • Japan, in the meantime, is becoming its primary collaborator in developing its economic sinews and for building a geostrategic network that offers Indian Ocean states an alternative to dependence on China.

Q.3) What are Private Equity (PE) funds? What does FDI inflow do for the economy? Examine. GS 3

About Private Equity (PE) funds

  • These funds are used to finance retail trade of mostly imported consumer goods to expand their market shares, in order to boost the firm’s market valuations.
  • Since PE investments are highly leveraged (high debt-equity ratios), rising markets valuations help them reap disproportionate gains when they make their exit.
  • PE firms do not commit to fresh capital formation or invest in technology, as expected of FDI.

Impact of FDI inflow on economy

  • FDI (as against foreign portfolio investment, which flows into the secondary capital market) brings in long-term fixed investments, technology and managerial expertise, together with foreign firms’ managerial control.
  • FDI in green field investment is for fresh capital formation, and in brown field investment for acquiring existing enterprises with the expectation of improving the firm’s productivity and profits.
  • Despite rising FDI inflows, domestic capital formation rate, or industrial capacity utilization, have declined.
  • Drawback: FDI does not come from leading global producers of goods and services, but from shadow banking entities such as private equity (PE) funds as discussed above.

Contribution of FDI in question

  • If the foregoing arguments and evidence are valid, then recent FDI flows have contributed little by augmenting domestic capabilities, output and employment growth.
  • Inward FDI, increasingly from PE funds, has largely financed e-commerce firms, driving import-led consumption boom.
  • Outward FDI, instead of enabling domestic enterprises to access external markets and technology, has instead helped international capital to take advantage of India’s tax treaties to optimize tax burden of global firms.
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