On this page, we will provide you with the news and aspects related to International Trade of India
Updates on issues and concepts related to International Trade of India for 2020/21:
India needs to be cautious before joining Global Minimum Tax rate
Synopsis: A Global minimum tax rate is beneficial for the US. But India need to rethink before joining such international tax proposals
The US Treasury’s call for a global minimum tax rate is gaining a global endorsement. But the goal of a global minimum tax is not only to end the race to the corporate tax but also to end the right to the tax of developing countries.
Base Erosion and Profit Shifting (BEPS) Programme:
- Big tech companies are able to conduct economic activities in countries without their physical presence. Further, they also move profits to low-tax jurisdictions.
- The Base Erosion and Profit Shifting (BEPS) programme were initiated in 2013. It aims to curb practices that allowed companies to reduce their tax liabilities by exploiting loopholes in the tax law. But to tax Big tech companies the countries have to sign a BEPS agreement among themselves.
- So the OECD also asked the countries in the BEPS framework to adopt a consensus-based outcome instead of the country’s individual moves.
Challenges to BEPS Programme:
But there are few countries that are not ready to sign BEPS agreements.
- Over the past decades, there are many countries that enacted tax policies specifically aimed at attracting multinational business. These countries attract investment by lowering corporate tax rates. This, in turn, has pushed other countries to lower their rates as well to remain competitive.
- Also, there are few Developing countries as well that are not sure if they will receive the right to tax the mobile incomes of Big tech companies
The OECD policy to solve BEPS issues:
Addressing this concern, the OECD published a policy note. In that, it bifurcated the challenge of BEPS into two pillars.
- Pillar 1: It addresses the issue of reallocation of taxing rights to all the countries
- Pillar 2: This pillar aims to address all the remaining issues in the BEPS program.
Concerns with the OECD policy proposal:
The blueprints of this policy proposal were released in October 2020. But, the experts mention few concerns with the OECD policy note. Such as,
- Complexity in taxing Big techs: The experts found the policy of OECD as a more complex one to implement.
- Profit allocation: This is the most contentious provision of the policy. As the policy allocated only a fraction of the profits of Big Techs to the markets(Operating country of Big techs). The policy also allocated more profits to the source country.
Intermediate Taxation of Big Tech:
- With the blueprints are under consideration, the Big techs gained profits. On the other hand, the tax base of countries, including India, remains exposed to the risk of under or non-taxation.
- To fix this situation, countries implemented digital services tax on revenues of Big tech companies.
- But the US on the other hand launched inquiries on these countries under their Trade Act 1974.
The path to global minimum tax rate:
After the Biden administration came into force in the US, it agreed to work on a consensus-based solution.
- Further, the US Treasury suggested that it will apply the pillar 1 proposal to the top 100 companies. This includes showing a non-discriminatory policy to the US companies in the top 100. Further, the US also working on simplification of the proposal.
- With regard to pillar 2 proposals, the US decided to raise the corporate tax rate to 28 percent. This is decided along with the harmonisation of rates across countries. This includes,
- Defining minimum tax rate for the world, after the global consensus on the effective tax rate for companies. (So, the minimum tax rate is not yet decided)
- After fixing the minimum tax rate, the countries will compare the multinational enterprise’s effective tax rate in each jurisdiction. Especially in places where the low tax rate is paid.
- A top-up tax will apply for the remaining profits. But there is an ambiguity on who will tax these remaining profits?
- In general, the country, where the ultimate parent entity resides, is where the tax is first applicable. Applying that concept, then 30 percent of the Forbes 2000 companies are located in the US. So, the implementation of this proposal best serves the needs of the US.
Can India join the minimum tax rate proposal?
- India needs to assess the situation carefully. Because the proposal will apply to companies with global revenues above Euro 750 million. So, committing wrongly will lose India’s taxing rights.
- Moreover, India also witnessed a consistent rise in the effective tax rate, which is now close to 26 percent.
- Further, committing such a minimum tax rate also need India to reform its tax systems accordingly. Especially allowing foreign countries to tax the incomes that are perceived to be under-taxed in India.
For the past few years, India adopted legal measures to tax incomes of companies that avoid physical presence in India. But if global consensus is there for a minimum tax rate, then it is necessary for India to reflect the two pillars of international tax reform.
Source: The Indian Express
DGFT launches “Trade Facilitation Mobile App” to promote exports
What is the News?
Union Minister of Commerce and Industry has launched the Directorate General of Foreign Trade’s(DGFT) Trade Facilitation Mobile Application.
About Trade Facilitation Mobile Application:
- Tata Consultancy Services(TCS) developed the Trade Facilitation Mobile Application. It is as per the directions of the Directorate General of Foreign Trade (DGFT).
- Aim: The aim is to promote ease of doing business by providing quick access to information to importers/exporters.
- Features: The application will provide the following facilities:
- Real-time trade policy updates and event notifications.
- It provides options to explore Export-Import policies and statistics.
- Virtual Assistance to trade-related queries.
- It provides access to all the services provided by DGFT.
- Raise and track help requests in real-time.
- Tech-enabled governance will play a major role in determining India’s competitiveness, in the post-Covid world.
- Thus, Initiatives like this, will significantly contribute to the achievement of India’s export target of $1 trillion by 2025 and GDP target of $5 trillion.
About the Directorate General of Foreign Trade(DGFT).
- Directorate General of Foreign Trade(DGFT) established in 1991. It is an attached office of the Ministry of Commerce and Industry.
- Functions: It is responsible for formulating and implementing the Foreign Trade Policy with the main objective of promoting India’s exports.
- Headquarters: New Delhi
Source: Hindu Businessline
Government Releases Data on “FDI Inflows in India 2020-21”
What is the News?
The Government releases data regarding the Foreign Direct Investment – FDI inflows in India from April to January 2021.
FDI inflows in India from April 2020 to January 2021:
- India attracted a total FDI inflow of US$ 72.12 billion from April to January 2021.
- Significance: It is the highest ever for the first ten months of a financial year. Further, it is 15% higher than the similar FDI inflow of 2019-20 (US$ 62.72 billion).
- Top Investor Countries: Singapore is the top FDI investor. It is followed by the USA and UAE.
- Sectors: Computer Software & Hardware emerges as the top sector with 45.81% of the total FDI equity inflow. This is followed by Construction (Infrastructure) Activities (13.37%) and Services Sector (7.80%) respectively.
- FDI is the category of international investment. It reflects the objective of obtaining a lasting interest from a resident entity in one economy to an enterprise in another economy.
- Further, the lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise. This has a significant degree of influence on the management of the enterprise.
Components: FDI consists of three components:
- Firstly, Equity capital: It is the FDI purchase of shares of an enterprise in a country other than its own.
- Secondly, Reinvested earnings: It comprises the direct investors’ share (in proportion to direct equity participation) of earnings not distributed. Such retained profits by affiliates are reinvested.
Note: The earnings of the share are distributed to the investor in the form of dividends by affiliates, or earnings not remitted.
- Thirdly, Intra-company loans or intra-company debt transactions: It refers to short- or long-term borrowing and lending of funds between direct investors (or enterprises) and affiliate enterprises.
India’s potential as a Global investment hub
Synopsis: India has the potential to become a Global Investment Hub. Its unique advantages attract global companies to invest in the country.
- In 2020, despite the sharp economic contraction, India witnessed the fastest growth in Foreign Direct Investment (FDI) inflows among all the major economies. (>60 billion)
- Big firms like Google, Facebook, Walmart, Samsung, Foxconn, and Silver Lake made FDI contributions in India.
- However, India’s latest FDI totals still lag behind other market economies such as China, and Brazil.
Why India still lags behind China and Brazil in attracting FDI?
Even after three decades of liberalization (1991), India remains a complex and challenging place to do business because:
- One, frequent shifts in the policy landscape. For example, Retrospective taxation. India lost the Vodafone case and cairn energy case at the Permanent Court of Arbitration.
- Two, persistent market access barriers. For example, anti-dumping duty, negative list, mandatory localized procurement, etc.,
- Three, the government’s push towards “self-reliant” India also created distrust among the investors.
Then, why multinational companies are investing in India?
- First, India’s huge market with growing purchasing power makes India an attractive destination for investments. For example, India has a market of 1.4 billion people and a rising middle class of 600 million.
- Second, shift in contemporary geopolitics due to rising U.S.-China competition. It has forced multinationals to reimagine their supply chain and production hubs. For example, Samsung has invested billions in the Indian market.
- Additionally, manufacturers such as Cisco, Nokia, Ericsson, and Flex are planning to invest in India to take advantage of India’s incentives in the manufacturing sector.
- Third, the rise of the ‘next-gen netizens’ is one of the key reasons why leading global tech companies are investing in India. For example, India has 700 million Internet users.
- Fourth, a showcase of India’s resilience during adversities. For example, India has managed the pandemic better than many of its western peers and restored economic activity.
What is the way forward?
Increasing FDI investment should not result in a drain of wealth from India. MNC’s should be made to demonstrate their commitment towards India. It can be done through,
- Placing shared value creation at the heart of their business strategy.
- Tying corporate success to India’s growth and development.
- Increasing Investments in Indian talent.
- Aligning products with Indian tastes.
- Helping to tackle the problems faced by society at large.
Thus, to make India a Global Investment Hub, all the issues in the way of FDI shall be removed.
Source: The Hindu
What is FDI or Foreign Direct Investment?
What is the News?
The Rajya Sabha has passed the Insurance (Amendment) Bill, 2021. The Bill seeks to raise the FDI in the insurance sector to 74% from the current 49%.
About Foreign Direct Investment(FDI):
- Foreign Direct Investment(FDI) is the medium for acquiring ownership of assets in one country (the home country) by residents of other countries. FDI may result in control of the production, distribution, and other activities in a firm in the host country.
- FDI is considered a major source of non-debt financial resources for economic development.
- However, FDI is distinguished from Foreign Portfolio Investors(FPI) in which a Foreign investor merely purchases equities of companies.
Routes through which India gets FDI:
- Automatic Route: In this, the foreign entity does not require the prior approval of the government or the RBI.
- Government route: In this, the foreign entity has to take the approval of the government.
Sector Specific Conditions for FDI:
- Firstly, Mining and Exploration of metal and non-metal ore – 100% FDI through Automatic Route
- Secondly, Coal & Lignite — 100% FDI through Automatic Route
- Thirdly, Defence Industry — 100%. However, Automatic is only up to 74%. Beyond 74%, it is a Government route wherever it is likely to result in access to modern technology or for other reasons to be recorded.
- Fourthly, Print Media and Digital Media — 26% through Government Route
- Fifthly, Intermediaries or Insurance Intermediaries — 100% FDI through Automatic Route
- Sixthly, E-commerce activities — 100% FDI through Automatic Route
- Seventhly, Single Brand Product Retail Trading — 100% Automatic
- Eighthly, Multi Brand Retail Trading — 51% through Government route
- Lastly, Railways Infrastructure —100% FDI through Automatic Route in the construction, operation and maintenance of the railway transport sector: Suburban corridor projects through PPP model and High-speed train projects.
Prohibited Sectors: FDI is prohibited in:
- Lottery Business including Government/private lottery, online lotteries, etc.
- Gambling and Betting including casinos etc.
- Chit funds
- Nidhi company
- Trading in Transferable Development Rights (TDRs)
- Manufacturing of cigars, cheroots, cigarettes, tobacco, or of tobacco substitutes
- Activities/sectors not open to private sector investment e.g.(I) Atomic Energy and (II) Railway operations (other than permitted activities).
- Real Estate Business or Construction of Farm Houses
- ‘Real estate business’ shall not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts(REITs) registered and regulated under the SEBI(REITs) Regulations 2014.
Source: Indian Express
Measures to Strengthen India US economic partnership
Synopsis: Strengthening India-U. S economic partnership will help India to become a $5 trillion economy.
- India and the US have committed to the goal of increasing the bilateral trade in goods and services to $500 billion. Currently, the bilateral trade stands at $146 billion (2019).
- To achieve this, the Compound annual growth rate (CAGR) needs to be increased to 11.9%. The current CAGR is 7.7% per year.
- A closer economic partnership will benefit both sides in terms of GDP, employment, and productivity.
- Confederation of Indian Industries (CII) identifies the following key areas for collaboration to boost India-U. S bilateral trade.
What are the key areas of collaboration as suggested by CII?
- First, the need to elevate partnership in Healthcare.
- India has emerged as the hub of global vaccine distribution. This has led to the establishment of a robust health care supply chain with global countries including the US.
- Along with this development, India needs to take the following steps:
- build confidence in the Indian IPR regime,
- revive the U.S.-India Health Dialogue, and
- work on mutually recognizing standards and
- approvals to further co-operation in healthcare.
- Second, the need to strengthen existing trade agreements. It can be done by;
- Reviving the U.S.-India Trade Policy Forum meetings along with a cross-sector track-2 group to look at convergence on issues such as market access.
- Restoring the Generalised System of Preferences. It will help in increasing Indian exports as a result of lower duties for certain Indian products.
- Working on Free trade agreement that mutually benefits both.
- Third, the need to address concerns related to the mobility of professional labour. It requires the following measures,
- Strict US immigration rules have impacted labor mobility from India. India needs to push for reforming the US immigration system.
- The MoU on labour cooperation signed in 2011 needs to be updated in line with India’s recent labour regulatory changes.
- Both countries should strive to finalize a totalization agreement on social security.
- Fourth, strengthening cooperation in defense.
- Both countries complement each other in defense. India is dependent on the U.S. for technology whereas the US can be benefitted from Indian manufacturing.
- Initiating a defense dialogue along with the private sectors of both sides will help in co-production and co-development in the defense and aerospace sectors.
- Fifth, improving ties between SMEs.
- A U.S.-India SME CEOs Forum to facilitate engagement of small and medium enterprises (SMEs). It will help US SMEs to find new opportunities for investments and sourcing from India.
- Sixth, deepening collaboration in clean energy and climate change.
- The U.S.-India Strategic Energy Partnership should be channelized to promote joint investments in clean energy. (industrial decarbonization, carbon dioxide removal, and green hydrogen).
- Further, initiatives such as, Advance Clean Energy Research, Advance Clean Energy Deployment, and Promoting Energy Access through Clean Energy need to be relaunched.
- Seventh, Partnership in Digital economy.
- India needs to take measures to strengthen its IPR regime. It will also enable India to come out of the U.S. Trade Representative IPR priority watchlist.
- Strengthening IPR will allow India to gain from the US knowledge industry in the fields of robotics, space, AI and electric vehicles etc.
Source: The Hindu
Need of Specific Law for National Security Screening of Inward FDI
Synopsis – There is no clear law for national security screening of inward FDI in India. It is a major
- As per some media reports, India may ease restrictions on FDI by Chinese companies. They will be allowed to invest up to 25 percent in a company through an automatic route.
- Last year India tightened its FDI policy. It was aimed at preventing an opportunistic takeover of Indian firms, hit by COVID-19 pandemic induced lockdown.
- India made all Chinese FDIs subject to mandatory government screening.
- Whereas, US, Australia, Canada, and Germany used specific laws to protect their companies against such takeover.
However, India does not have specific law which can block such attempts. Thus, India fails to differentiate between genuine National Security concerns and legitimate FDI.
How India regulates foreign investments?
India primarily uses FEMA to regulate Foreign Investments. RBI governs the Foreign Exchange Management Act (FEMA).
Objectives of FEMA
- Facilitating external trade and payments.
- Promoting the orderly development and maintenance of foreign exchange markets in India.
Shortcoming of FEMA
National security is unrelated to FEMA. Therefore, India needs a separate law for national security screening of inward FDI just like many other western countries.
What are the different types of legitimate threats from foreign acquisitions?
All countries face the difficulty of screening foreign investment in a way that separates genuine national security threats from bogus claims. In this regard, Theodore H. Moran identifies three types of legitimate threats from foreign acquisitions.
- Dependency on a foreign supplier – The proposed acquisition would make the country dependent upon a foreign-controlled supplier of goods or services. These goods or services shall be crucial to the functioning of that economy.
- Transfer of technology – The proposed acquisition allows the transfer of technology or other expertise to a foreign-controlled entity. There is a possibility that It might be deployed by the entity or its government in a manner harmful to the country’s national interests.
- Infiltration and sabotage – The proposed acquisition would allow some potential capability for infiltration, surveillance, or sabotage into the provision of goods or services, which are crucial to the functioning of that countries’ economy.
Unlike FEMA, the new FDI control law would specifically state legal criteria for FDI in an Indian corporation. Also, it would be able to check the genuine national security danger.
What are the provisions required under the new FDI control law?
- Only the finance minister should have the right to reject strategic foreign acquisitions on national security grounds.
- For example- the Australian Foreign Acquisitions and Takeovers Act, 1975 empowers the treasurer to block certain foreign acquisitions on national security grounds.
- Both the power and accountability mechanisms should be part of the law.
National security and capital control are separate and independent policy objectives. Separate legislation for national security screening of inward FDI will be prudent.
Source- Indian Express
Cabinet clears “74% FDI in Insurance Sector”
What is the news?
The Union Cabinet has approved a proposal to amend the Insurance Act, 1938. It will increase the foreign direct investment (FDI) limit in the insurance sector to 74% from 49%.
Conditions: The increase in the foreign direct investment(FDI) limit in the insurance sector comes with safeguards such as:
- The majority of directors on the Board and key management persons in health and general insurance companies would be resident Indians. At least 50% of directors will be independent directors.
- The government will also specify a particular percentage of profits to be retained as a general reserve.
Significance of this move: Raising the foreign investment limit(FDI) in the insurance sector may provide the following benefits:
- Improve capital availability in the insurance sector.
- Help in developing the insurance industry as a channel for generating durable funds for the creation of long-term assets.
- An increase in competition in the sector will help in lowering the cost of insurance products.
- It would benefit small insurance players or the ones where the sponsors don’t have the ability to infuse more capital.
- Improve Insurance Penetration in the country.
About Insurance Penetration:
- Insurance penetration is an indicator of insurance sector development within a country. It is the ratio of total insurance premiums to the GDP in a given year.
- Currently, Insurance penetration stands at just 3.71% of the GDP in the country.
Source: Indian Express
“Index of Economic Freedom” 2021 released
What is the News?
The Heritage Foundation releases The Index of Economic Freedom 2021.
Key Findings of Index of Economic Freedom 2021
- India ranked 121st in the index with a score of 56.5 points under the category of ‘mostly unfree’.
- In Asia-Pacific, India ranked 26th among the 40 countries.
Other Key Findings
- Singapore tops the index followed by New Zealand, Australia, Switzerland, and Ireland.
- Hong Kong was left out of the 2021 index calculation for the first time. It is because of China’s increasing control over the city’s economic policies. Hong Kong topped the index for 25 out of 26 years except for 2020.
About Index of Economic Freedom
- It is an annual index. This index created in 1995 by think-tank The Heritage Foundation and The Wall Street Journal.
- Purpose: It measures the degree of economic freedom in countries across the world.
- Coverage: The Index covered economic freedoms in 184 countries.
Parameters: The index measures 12 indicators grouped into four broad categories of economic freedom:
- Rule of Law (property rights, government integrity, judicial effectiveness)
- Government Size (government spending, tax burden, fiscal health)
- Regulatory Efficiency (business freedom, labour freedom, monetary freedom)
- Open Markets (trade freedom, investment freedom, financial freedom).
Each of these twelve economic freedoms within these categories is graded on a scale of 0 to 100. Score 0 is the least economic freedom and score 100 is the highest economic freedom.
Source: Business Standard
Issue of Digital Services Tax between India and US – Explained
Table of contents
Recently the U.S. determined India’s Digital Services Tax (DST) as discriminatory. It concluded that the DST is causing an adverse impact on American commerce and hence, an action needs to be taken under trade act. Meanwhile, The USTR also said, “DST by its structure and operation discriminates against U.S. digital companies”. But the USTR in its special 301 report missed few important aspects and also completely neglected the global need to tax digital services.
In 2016 India introduced a 6% equalisation levy. But the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). In simple terms, the levy applied on the payments made to a non-resident by the Indians for advertising on their platform.
The government in 2020 introduced an amendment to the equalisation levy in the Finance Bill 2020-21. The important amendments include,
- A 2% Digital Service Tax (DST) was imposed on non-resident, digital service providers. With this amendment, the foreign digital service providers have to pay their fair share of tax on revenues generated in the Indian digital market.
- The amendment widens the tax to include a range of digital services. These services include digital platform services, software as a service, data-related services, and several other categories including e-commerce operations.
- Companies with a turnover of more than Rs. 2 crores, will pay this tax.
First, the nature of digital service companies. These companies don’t have any physical presence in the markets. Instead, they use intangibles to provide services. For example, one can pay for the Amazon Prime membership in India. But the services of prime membership like watching movies, listening to songs are intangible.
Determining the value of these intangibles is tough. So the government introduced the Digital Service Tax of 2% on non-resident service provider’s revenue in India.
Second, the failure of international consensus. In 2013, the OECD (Organisation for Economic Co-operation and Development) launched the Base Erosion and Profit Shifting (BEPS) programme. It was launched primarily to find a way to tax digital companies. But no consensus has been achieved yet. So, in 2016 India became the first country to implement the equalisation levy as a temporary way of taxation. This is then followed by countries like France, UK, etc.
Third, India’s right to tax digital service providers. If a company has users in India and also has an economic connection with India then, India has the right to tax its economic operation. India being a developing country provides large markets for digital corporations. So taxing them is a matter of right.
Fourth, These DST create a level playing field between online and regular (brick and mortar businesses). In 2016, the Akhilesh Ranjan Committee Report had also suggested to tax the digital companies as they enjoy a sustainable economic presence.
The first accusation, DST is inconsistent with the principles of international taxation. International taxation laws apply to the revenue of companies (not on income), extraterritorial application of DST (Digital service companies present outside India), etc.
- Indian reply: Several global tax measures like royalty, technical fees are not levied on revenue. Similarly, all US states have laws on remote sellers, and they tax non-US resident entities.
The second accusation, DST does not extend to identical services provided by non-digital service providers. This is a violation of trade practices.
- Indian reply: When the company is non-digital (i.e., brick and mortar) then that company is subject to Indian income tax. Further, this DST has been introduced to provide a level-playing field.
The third accusation, DST is discriminatory because it targets US companies.
- Indian reply: The DST is applicable to all digital service providers having an annual turnover of more than ₹2 crores in India-based digital services. As per USTR’s own analysis, only 119 companies in the world would likely be subject to the DST, of which 86 are U.S. companies. So the criteria do not target anyone. It is the result of the asymmetric digital power of US companies.
First, the DST as a tax policy targets a single sector (digital services). Economic experts argue that framing a tax policy to target a particular sector is unfair and have disastrous consequences for the growth of that sector.
Second, digital service providers might pass on the tax to consumers. Ultimately, burdening consumers. Just like service tax passed on to consumers, DST can also pass on to consumers if the service provider wishes.
Third, not feasible to separate the digital economy and the global economy. The growing digitization has blurred the line between them. This is one of the prime reasons due to which OECD is unable to arrive at a consensus.
Fourth, the DST might attract Retaliatory Tariffs. The USTR investigations pose a threat of retaliatory tariffs and might trigger the trade war between India and the US. Even the slightest retaliatory tariff will affect the Indian ICT industry’s growth.
First, India can follow the U.K. model of DST. The major advantages of the U.K. model are,
- The U.K. allows companies to not pay any tax if their net operating margin is negative. By including this, India can avoid criticisms like India’s equalization levy is on revenue and shift towards the profit of the company.
- India can consider taxing only 50% of the revenues from the transactions involving three jurisdictions. For example, an Australian user located in India receiving services from a U.S. company. This will make Indian DST more inclusive and also garners international support.
Second, India has to remain committed to the OECD process. Apart from that, India can mention the ways to tweak DST design or try to achieve consensus. This will make India move ahead and phase out DST and roll out the new agreed tax policy of OECD.
Third, the U.S. government has to realize the challenges in taxing digital service providers and also have to participate in these global talks. This will not be only beneficial for other countries but also a way to make these digital giants accountable.
More than 24 countries have either adopted or are considering adopting, a DST or a DAT after the concept got introduced in India. So the tax challenges posed by the digital economy is not a problem between India and the US. It is a global problem and the US has to accept this and act accordingly.
Delhi HC stays Future-Reliance deal
What is the News?
Delhi High Court has provided interim relief to e-commerce major Amazon. It directed Future Retail Limited(FRL) to maintain the status quo with regard to the transfer of its retail assets to Reliance Retail.
What are the issues in the Future-Reliance deal?
- What is the Future-Reliance deal? In 2020, Biyani’s Future Group has entered into an agreement with Reliance Retail. Under this deal, Future was to sell its retail, wholesale, logistics and warehousing to Reliance.
- Why has Amazon objected to the deal? In 2019, Amazon had acquired a stake in Future Coupons in an agreement. As per Amazon, under this agreement, it has the first right of refusal in any stake sale in future retail.
- Why did Amazon approach Singapore International Arbitration Centre(SIAC)? Amazon and Future Group have under their agreement agreed to refer their disputes to SIAC. Hence, Amazon approached SIAC to appoint an emergency arbitrator to get urgent interim relief.
- SIAC ruling: SIAC emergency arbitrator had ruled in Amazon’s favour. It put the Future-Reliance deal on hold.
What is the issue now?
- Enforcement of Ruling: Currently under Indian law, there is no mechanism for the enforcement of the orders of the Emergency Arbitrator. However, a party can move the Indian High Court under Arbitration & Conciliation Act,1996 to get similar reliefs as granted by the Emergency Arbitrator.
- What has the Delhi High Court said? It ruled that the order of the SIAC was enforceable in India the same manner as an order of this court. This provision is covered under Section 17(2) of Arbitration and Conciliation Act.
Source: The Hindu
Trade with China shrank in 2020, deficit at five-year low
News: According to the data from China’s General Administration of Customs (GAC), India’s trade with China declined in 2020 to the lowest level since 2017, with the trade deficit narrowing to a five-year low as India imported far fewer goods from China.
Source: The Hindu
Data Related to Trade between India and China:
- Bilateral Trade: The bilateral trade between India and China has decreased by 5.6% to $87.6 billion in 2020.
- Imports and Exports: India’s imports from China shrank by 10.8% to $66.7 billion marking the lowest level of inbound shipments since 2016. However, India’s exports to China have jumped 16% crossing the $20 billion mark for the first time to a record high of $20.86 billion.
- Trade Deficit: The trade deficit which shows the difference between exports and imports shrank to $45.8 billion, the lowest level since 2015.
- What were the goods traded between India and China? There was no immediate break-up of the data for 2020. India’s biggest import in 2019 was electrical machinery and equipment worth $20.17 billion. Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion) while India’s top exports were iron ore, organic chemicals, cotton, and unfinished diamonds.
- Significance: The drop in India’s imports from China was largely due to a slowdown in the domestic demand in the wake of the pandemic. Hence, this makes it difficult to determine whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China.
Data Related to China’s Trade with Other Countries
- Positive foreign Trade growth: China was the world’s only major economy to have registered positive growth in foreign trade in goods.
- ASEAN and EU: Exports to the ASEAN bloc, China’s largest trading partner in 2020 with bilateral trade amounting to $684 billion rose 6.7% while exports to the EU, China’s second-largest trading partner also rose 6.7% as total trade reached $649 billion.
- US: In 2020, the trade between China and US was up 8.3% to $586 billion with China’s exports rising 7.9% to reach a record $451 billion.
- The trade surplus with the U.S expanded to $317 billion in 2020, compared with the $288 billion at the end of 2017 underlining the limited impact of the tariff measures, trade war and pandemic.
After rice, India’s wheat exports register highest ever export in six years: US Department of Agriculture.
News: US Department of Agriculture(USDA) has released its forecast of Indian wheat exports for 2020-21(July-June). USDA has estimated India’s Wheat Exports for 2020-21 (July-June) to be around 1.8 million tonnes (mt), as against its earlier estimate of one mt. That would be the highest ever in the last six years.
India’s Wheat Exports:
Source: Indian Express
- Wheat: It is the second most important cereal crop. It is the main food crop, in the north and north-western part of the country.
- Climate: This rabi crop requires a cool growing season and bright sunshine at the time of ripening. It requires 50 to 75 cm of annual rainfall evenly- distributed over the growing season.
- Wheat Growing Regions: There are two important wheat-growing zones in the country – the Ganga-Satluj plains in the northwest and the black soil region of the Deccan. The major wheat-producing states are Punjab, Haryana, Uttar Pradesh, Bihar, Rajasthan and parts of Madhya Pradesh.
- Reason for India’s higher wheat exports: Due to surging international prices from Chinese stockpiling and ultra-low interest rate money increasingly finding its way into agri-commodity markets.
- Concerns: Indian wheat is still not competitive at the government’s minimum support price(MSP) of Rs 19,750 per tonne. The export price of wheat bought in Gujarat is around Rs 20,950 per tonne. That works out to $286 per tonne or $290-plus after adding exporter margins. The above price is higher than the $275-280 that major exporters such as Australia, France, the US, Russia and Canada quoted.
- Suggestions: This disadvantage can be overcome if wheat is sourced at below MSP from Uttar Pradesh, Bihar, Gujarat and Maharashtra where not much government procurement happens.
- The new crop arriving in these markets would be available at Rs 17,000-18,000/tonne. This wheat can be exported by rail rakes to Bangladesh or shipped to the Middle East (UAE, Oman and Bahrain) and Southeast Asia (Indonesia, Vietnam and Malaysia).
India’s Rice Exports:
- Rice: It is the staple food crop of a majority of the people in India. Our country is the second-largest producer of rice in the world after China.
- Climate: It is a Kharif crop that requires high temperature, (above 25°C) and high humidity with annual rainfall above 100 cm. In the areas of less rainfall, it grows with the help of irrigation.
- Rice Growing Regions: Rice is grown in the plains of north and north-eastern India, coastal areas and the deltaic regions. The development of a dense network of canal irrigation and tube wells have made it possible to grow rice in areas of less rainfall such as Punjab, Haryana and western Uttar Pradesh and parts of Rajasthan.
- India’s Rice Exports: USDA has estimated that India’s rice imports have hit a record 14.4 mt in 2020 up from 9.79 mt and 11.791 mt of the preceding two years. The country’s closest competitors – Thailand and Vietnam – have seen their exports during this period.
USTR slams India’s Equalisation levy
News: US Trade Representative (USTR) has released the findings of the Section 301 report.
Source: The Hindu
The report has said that India’s 2% equalisation levy is unreasonable or discriminatory potentially attracting withdrawal of US trade concessions or duties on Indian exports.
What is Equalisation Levy?
- When was 2% Equalisation Levy introduced? In the Finance Bill 2020-21 a 2% digital service tax (DST) was imposed on non-resident e-commerce operator in India.
- Eligibility: Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.
- Purpose: The purpose of the levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations
Why USTR is concerned?
- USTR is mainly concerned as 72% companies that will face the levy are American.
- Aggregate tax bill for US companies will exceed US $ 30 Million.
What does the Special 301 Report say on Equalization levy?
The USTR report has said that the Equalisation Levy is a violation of international tax principles:
- Firstly, it is discriminatory as the law explicitly exempts Indian companies while targeting non-Indian firms.
- Secondly, levy is contravening the international tax principle that companies absent a territorial connection to a country should not be subject to that country’s corporate tax regime.
- The third issue is of taxing revenue instead of income. This is inconsistent with the international tax principle that income—not revenue—is the appropriate basis for corporate taxation.
- Fourth, levy is discriminating against US companies. As shown above, majority of the affected companies will be American.
What are the justifications by the Indian Government?
- India has said that levy does not discriminate against US companies as it applies equally to all non-resident e-commerce operators irrespective of their country of residence.
- The levy does not have extraterritorial application as it applies only on the income generated from India.
- Government is in its rights to tax digital transactions as the levy is recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence.
- In addition, Equalisation levy was one of the methods suggested by the 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.
- Equalisation levy is a way to tax foreign digital companies and seen as a temporary alternative to the GAFA (Google, Apple, Facebook and Amazon) tax until such measure is well defined in India.
|Additional Facts: |
UK-India Free Trade relations and Cairn Energy PLC issue
Synopsis: With the conclusion of UK-EU trade agreement, now there is an opportunity to work towards UK-India Free Trade Agreement but resolving Cairn Energy issue must be a priority for that.
Present developments provide an opportunity for both India and UK to move the bilateral economic plan forward.
- Both countries have common interest in the issues, such as climate change and the green economy, economic recovery of both the countries from COVID-19.
- After the conclusion of UK-EU trade agreement, UK can now focus on concluding trade agreements with key partners like India.
- The Oxford/AstraZeneca vaccine which has been approved in the UK was developed in collaboration between the Pune-based Serum Institute of India and the Wockhardt factory in the UK.
Importance of resolving Cairn Energy PLC issue
The recent ruling of arbitration court in the favour of Cairn Energy PLC marks an end to the long-running dispute between Cairn Energy PLC and the Indian government over a retrospective $1.2 billion tax demand imposed in 2015.
For India-UK trade to move forward and save the cost of arbitration, this issue need to end here.
- Cairn Energy PLC was one such global investor whose belongings in India were held in an Indian company in which Indians sat on the board, which had Indian senior management, where many of the engineers were Indian.
- The Cairn India got success from a significant calculated risk. The resources which Cairn Energy PLC bought from an international major had failed to find hydrocarbons on the land.
- The purchase came with a major capital risk to drill several wells to totally explore the fields in Rajasthan.
- After the oil discovery, Cairn Energy PLC then developed these fields and installed new technology to extract the oil and transport it to refineries.
- During this entire period Cairn Energy PLC paid all taxes and dues on time and also invested in the local community, creating valuable infrastructure and jobs.
Thus, there is no reason for dragging this matter any further.
Why resolving cairns India issues will be beneficial for India?
The Indian government has publicly stated in the past that the decision of the court would be honoured, so the decision of the court should end the matter.
- Firstly, timely and logical settlement of this dispute would lead to an instant validation of the desirability of India as an investment destination and also to India’s status in the international and domestic debt and equity markets.
- Secondly, a practical solution to the Vodafone and Cairn Energy judgments would improve India’s position at the top table of global economic powers.
- Third, as stated above, it was one of the thorny issues in the India-UK relations and good relations with UK will open many opportunities for India in the EU region.
Current account surplus moderates to $15.5 bn in Q2
Source: The Indian Express
News: The current account surplus moderated to $15.5 billion (2.4% of GDP) in the quarter ended September of 2020-21 from $19.2 billion (3.8% of GDP) in the first quarter this fiscal.The current account saw a deficit of $7.6 billion(1.1%) in the year-ago quarter.
- Why has current account surplus narrowed? The narrowing of the current account surplus in Q2 of FY21 was on account of a rise in the merchandise trade deficit to $14.8 billion from $10.8 billion in the preceding quarter.
Read Also : Current affairs for upsc
- What is the Current Account? Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
- This account goes into a deficit when money sent outward exceeds that coming inward.
- What does Current account constitute? The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.
Current Account = Trade gap + Net current transfers + Net income. abroad
- Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
- A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
- A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
Importance of creating Resilient supply chains
Synopsis: The Covid-19 pandemic once again proved the importance of creating resilient supply chains that can survive the tough times.
Creating supply chains that can withstand the disruptions is extremely important. Disruptions through the times is something inevitable as it can be manmade or natural. For example, The Tahoka Earthquake of 2011, followed by the Tsunami, led to a nuclear disaster caused a sharp drop in Japanese automobile exports to the United States.
State some examples of supply chain disruptions around the world
To avoid global disruption in the supply chain system, the robust framework is required. Causes of Supply Chain Disruption can be natural or man-made.
- Saudi Arabia’s oil refineries were attacked by terrorist drones resulting in a drop of 5.7 million barrels of oil per day. This caused a sudden fall in Saudi Arabia’s stock market and a rise in global oil prices.
- China cut off exports of rare earth to Japan after the arrest of their fishing trawler captain in 2010 near the disputed Senkakuislands by the Japanese officials.
- Coronavirus had an immediate effect on supply chains emanating from China.
- The United States government-imposed restrictions on the export of microchips to China’s biggest semiconductor manufacturer. The US felt that there was an unacceptable risk that equipment supplied to it could be used for military purposes.
How vulnerable is India to this disruption?
China has weaponised its trade and investment. Indias’ dependency on china for the following makes it vulnerable to supply chain disruption for many imp. Goods and services in the near future;
- India’s pharma sector depends on China’s Active Pharmaceutical Ingredients (APIs). It creates vulnerabilities in the value chain.
- India imports 27% of its requirement of automotive parts from China and after the pandemic it faced a huge difficulty given the sudden shortage of braking components, electrical components, interiors and lighting fixtures.
- India has an import dependency of 80%even after becoming the 4th largest market in Asia for medical devices. Among the biggest exporters to India in this field are China, the U.S., Germany, Singapore and Japan.
What are the steps taken by India and other countries to ensure SCR?
- The Supply Chain Resilience Initiative (SCRI) was started by India, japan and Australia which tends to focus on automobiles and parts, petroleum, steel, textiles, financial services and IT sectors.
- Japan aimed at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India and Bangladesh.
- 89 Japanese companies availed subsidies to diversify out of China. Of these, 57 companies relocated to Japan, 30 to Southeast Asia and two to India.
- The Indian government is providing a big boost to defence manufacturing under the ‘Make in India’ programme. It has identified a negative import list of 101 items.
- Australia has demonstrated strong political will in countering uninformed Chinese sanctions imposed on its key exports of grain, beef, wine, coal and much else.
- Australia has demanded an inquiry into the origins of the coronavirus and advocated a strong Indo-Pacific vision.
India has the capacity and the potential to become one of the world’s largest destinations for investments after the pandemic gets over.
- There is a terrific opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.
- ‘AtmanirbharBharat’ is aimed at strengthening India’s capacities to participate more robustly without being prey to supply chain disruptions.
SCRI can get strengthened in the future after the involvement of France, though this might depend on the European Union’s position and the United Kingdom has also shown interest in the SCRI.
WTO rules on domestic support and food security
This article on WTO Rules on domestic support has been developed based on the Indian Express Editorial “The food security bargain”.
Context: Present World Trade Organization WTO rules are not in to support food security and rural livelihoods in India and around the world.
With the initial results of National Family Health Survey (NFHS-5) between 2015 and 2019, it has become apparent that nutrition level in India is deteriorating. In these circumstances it has become a necessity for India to further strengthen its food delivery mechanism for the poor and vulnerable sections of the society.
Read more about NFHS survey – Implications of NFHS-5 survey results
But WTO rules and their discussion are creating hurdles in furthering food security programs in India and other developing nations. Farm subsidy notification
There is widespread consensus that the World Trade Organisation (WTO) rules should provide a necessary support for food security and rural livelihoods.
Read – WTO Agreement on Agriculture
What are the issues in WTO’s rules?
WTO rules on domestic support to agriculture, at present looks tilted in favour of developed countries. In 2018, during global trade war escalation US claimed India’s market price support (MPS) was above the permitted 10 per cent limit as per ‘de minimis provision’. US Economist Franck Galtier also pointed out 3 biases in the WTO rules;
- Firstly, using external reference price” (ERP) instead of present data. WTOs External Reference Price or ERP, for calculation of market price support (MPS) limit is set at 1986-88 level, even after global price hikes of 2007-08 and 2010-11.
- Secondly, using procurement (administered) price, instead of domestic market price for calculation of support received by farmers.
|Market price support for a product = (administered price at the farm gate – fixed external reference price) x eligible production|
- Third, using total production instead of actual procurement. There is no clarity on whether to country’s food grain production or the amount that has been procured by government. While India uses just the amount of grains procured by the government, US using total production of rice and wheat to raise its objections.
Other than above biases, there are other concerns of India as well.
- Fourth, US computes the MPS using the rupee as the currency while India calculates the value in dollar terms.
- Fifth, Majority of the agri. Subsidies by developed countries have been listed in the green box, as non-distorting. For Ex, 88% of farm subsidies by US has been listed in green box, resulting into increase in its farm subsidies from around $61 billion in 1995 to $139 billion in 2015.
Biswajit Dhar, professor at JNU, has rightly pointed out, “US has been subsidising its corporate agriculture to capture global markets while it targets the subsidies India gives to an overwhelmingly large share of small and marginal farmers.”
If domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD), India’s support, turns out to be negative for the years since 2000-01.
Thus, there is a need for updating the rules so that it becomes more relevant considering the present global realities and requirements by incorporating following suggestions;
- Firstly, the reference period for price calculation should be updated to an average of 2014-16 or 2016-18 price levels.
- Secondly, support consumed by subsistence farmers themselves, instead of selling in the market MSP, should be excluded from the calculations.
- Third, India has recently pitched for a new criterions based on the “support per farmer”, instead of Aggregate Measurement of Support (AMS).
- Fourth, a differential criterion should be developed for the countries having deteriorated social and health conditions so that they do not have to choose between the health of their people and export ban on them.
With the regime change in US, there are possibilities of increasing US involvement in WTO. Thus, to make it more meaningful, its rules should be updated so that it becomes more appealing and inclusive for the countries participating in it.
Context: WTO rulebook must evolve to support food security and rural livelihoods in developing countries.
What are the existing issues related to India?
- Whether the current farm subsidy rules provide enough room for developing countries to buy food at government-set minimum support prices as part of their public stockholding programmes.
- To negotiate a permanent solution.
- India’s farm subsidy notification this year to the WTO’s committee on agriculture brought the topic of procurement under public stockholding programmes.
- It indicated that India had breached its agreed ceiling on product-specific support to rice during marketing year 2018-19.
- For example, India’s wheat support was close to breaching product-specific support ceilings, with administered prices at $263.15/tonne.
What are the underlying issues with WTO?
- Delays: many countries pursuing improved market access and closer economic integration through bilateral and regional talks.
- Paralysed dispute settlement function: Donald Trump administration’s decision to veto new appointments to the WTO’s appellate body leaving many to question the future of the rules-based multilateral trading system.
- Method of calculation: Market price support levels are calculated by taking the gap between applied administered prices and an external reference price or ERP, set at 1986-88 levels, and multiplying this by the volume of eligible production.
- Divergent views on benchmark: WTO members could usefully consider whether the fixed ERP of 1986-88 is still a relevant benchmark, especially in the wake of the global price hikes of 2007-08 and 2010-11.
- Current scenario: food security disruption caused by US-China trade tensions and the inconclusive outcome of the WTO’s 2018 ministerial conference in Buenos Aires.
How does Indian subsidies doesn’t distort market?
- India’s support turns out to be negative for the years since 2000-01, if domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD).
- Even after accounting for input subsidies, which represent a significant share of India’s non-product-specific support using the WTO system for calculating farm support.
- Updating the reference prices to average 2014-16 or 2016-18 levels or using a rolling average instead flattening out volatility by excluding the highest and lowest years from a five-year period.
- Exempt support from counting towards maximum limits when administered prices are set below international market price levels.
- Members could also discount support consumed by subsistence farmers themselves from the calculation of the volume of eligible production or exempting procurement that only equates to a small share of domestic output.
- WTO members need to agree on a shared framework for action on farm subsidy reform and set a clear direction and a timeframe for reaching a rational conclusion.
- Minimise disruption in food supply chain.
- The December meeting of the General Council that is mulling over WFP food aid issues offers India (with G-20) an opportunity to demonstrate its commitment to WFP food aid and help rebuild confidence in WTO’s ability.
An agreement under WTO could also lay the groundwork for long-overdue progress on the wider trade and food security agenda at the WTO.
Why antitrust lawsuits are being filed repeatedly against tech giants like Facebook?
The issue of anti-competitive practices by Tech giants has come into the light again as recently, an antitrust lawsuit was filed by the Federal Trade Commission (FTC) and governments of 48 US states against the tech giant Facebook, accusing it of crushing smaller competitors by abusing its dominant market position. Specific instances of acquisitions of WhatsApp and Instagram by it have been cited.
In October 2020, an antitrust lawsuit was filed against Google for misusing its dominant position as a search engine for favouring its own content in search results and entering into agreements with other companies like Apple, to make it the default search engine on devices.
What are the anti-competitive activities of tech giants?
A report from top Democratic congressional lawmakers about the dominance of the four biggest tech giants-Amazon, Apple, Facebook, and Google- talks about antitrust activities by them.
Tech giants are involved in the wrong means (Like the acquisition or suppression of competition) in order to make additional profits by gaining too much power over similar businesses resulting in an unequal playing field for other business entities.
For example, Facebook recently tried to take a competitive edge over Twitter by shutting down its API access for Twitter’s short video app, Vine, and restricting its ability to grow. Tech giants resort to antitrust activities like depriving access to their platform, discriminatory advertisement policies, breaching privacy, and unlawful acquisitions.
What are the impacts of anti-competitive activities by tech Giants?
Antitrust activities are in a way anti-competitive practices that have widespread negative impacts not only on competitors but also on the users:
- For users, antitrust activities may result in the availability of fewer options and weaker privacy controls.
- After gaining a dominant position in the market, WhatsApp and Facebook eroded privacy protection by changing the terms of service. It may result in the collection of all the private data and its hoarding that is becoming the biggest source of revenues and profits. Cambridge Analytica case is one such example in which Facebook data of Indian users was ‘stolen’ to allegedly influence the elections.
- It also results in fewer choices left with the consumers for services.
- Anti-competitive practices discourage innovation in the market as it incurs additional costs in surpassing the level of giants and competing with them.
- It discourages ethical means by other tech firms as those who are sidelining it are having a competitive edge over them, in absence of proper regulations.
- A dominant position in the market may create a monopoly, leading to higher prices and low-quality services in the absence of a challenge from any other firm.
Do Anti-competitive practices exist in India?
The antitrust lawsuits filed against Tech giants are very relevant for India as well, which is the base of 400 million users of WhatsApp and the largest single market for Facebook. Amazon has around one-third of the share of online retail in India. Most smartphones in India are Android-based, dominated by Google.
India as a country with a rising industrial base is not untouched by Anti-competitive practices which got amplified after the liberalization of the Indian economy in 1991. It resulted in the formation of the Competition Commission of India in 2003. Since its inception, till 31 March 2019, the CCI has noted 1008 instances of ‘antitrust’ matters. It has imposed penalties amounting to ₹13,381 crores Over the past 10 years.
Reports suggest that anti-competitive activities have resulted in unhealthy monopolies in the Indian economy. An analysis of 2035 listed companies across 298 industry groups shows that in 33% of all industry groups, there is one single company that controls over 50% of the net sales in the sector. For example;
- Bajaj Auto dominates the scooters and three-wheeler industry.
- Tata Motors has the most significant presence in light and heavy commercial vehicles.
- Oil and Natural Gas Corp. is the country’s largest firm engaged in oil exploration.
- Facebook and Google together mop up 68%of India’s digital ad market revenues, while Amazon and Flipkart serviced 90% of all e-commerce orders during the 2019 festive season.
Thus, business activities plagued by anti-trust activities not only in developed countries like the U.S but also in developing countries like India. Ensuring fair balance, data regulation, and fair digital taxation are ways forwards for the regulating agencies to deal with these activities.
In India there is a need to give more power and capacity to the largely ineffective Competition Commission of India by enacting the Draft Competition (Amendment) Bill, 2020, to deal with such activities in Indian industries.
Rise of corporate nationalism
Context: The Rise of ‘corporate nationalism’ empowers Indian companies at expense of consumers.
Instances where the Sentiments of corporate nationalism has been raised against foreign corporates?
- Amazon-Reliance Dispute: The counsel for Future Retail accused Amazon of behaving like “the East India Company of the 21st century” and calling it “Big Brother in America.”
- Whatsapp pay still pending for approval before the Supreme Court: Even though Whatsapp has obtained all requisite approvals. Multiple oppositions claim that permitting foreign entities to launch payment apps would endanger the country’s financial data. This is despite the National Payments Corporation of India’s approval of WhatsApp’s data localisation practices.
- Severe restrictions on Chinese investments: By mandating prior approval for Chinese FDI, banning several Chinese apps and restricting Chinese bidders from participating in public procurement contracts.
Why shifting the focus to the foreignness of a company for regulatory assessment is problematic?
- Foreign investors hold majority stakes in most of these “Indian” startups which make complaints of losing market share to foreign companies. For example, while complaining Amazon as a foreign company, Reliance, too, doesn’t shy away from receiving investments from Google.
- It alters the legal jurisprudence by placing the foreign identity of a party at the centre of regulatory assessments, ultimately subverting the objective of commercial laws.
- It increases the risk associated with doing business in India by creating cause uncertainty in an already chaotic legal environment.
There is no doubt that the practices of many foreign companies are suspect. Not only foreign companies, many domestic conglomerates too have equally deep pockets and more political sway than their foreign counterparts, and a questionable track record of regulatory compliance.
Indians needs to be protected from its domestic corporate giants as much as any foreign company. This can be guaranteed only if regulators and courts consciously stay true to the statutorily mandated objectives of their respective regimes.
Diversity requirements to Indian companies
Source: Click here
What are the diversity requirements that Indian companies need to meet?
News: NASDAQ stock exchange in the US may soon require all companies listed to include at least one female board member as well as one member from a racial minority group or from the LGBTQ community on their board of directors.
- Diversity requirements Indian companies need to meet? All public companies which are listed on stock exchanges and companies with either a paid-up capital of Rs 100 crore or annual turnover over Rs 300 crore are required to have at least one woman board member under the Companies Act.
- The Securities and Exchange Board of India(SEBI) further requires, from April 1, 2020, that the top 1000 listed companies by market capitalization have a woman board member who is also an independent director.
- Level of Compliance: According to the data compiled by Institutional Investor Advisory Services(IiAS), 17% of directors in the Nifty 500 companies were women as of the end of the last fiscal with the exception of several public sector enterprises(PSEs).
Impact of the COVID-19 Pandemic on Trade and Development Report: UNCTAD
Source: Click here
News: United Nations Conference on Trade and Development(UNCTAD) has released a report titled “Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to a New Normal”.
- Aim: The report provides a comprehensive assessment of the impact of COVID-19 Pandemic on Trade and Development.
- The global economy would contract 4.3% this year due to the pandemic. This could send an additional 130 million people into extreme poverty.
- The United Nations’ Sustainable Development Agenda 2030 will be derailed unless immediate policy actions are taken especially in favour of the poorest.
- Global poverty is also on the rise for the first time since the 1998 Asian financial crisis.In 1990, the global poverty rate was 35.9%.By 2018 it had been curtailed to 8.6% but has already inched up to 8.8% this year and will likely rise throughout 2021.
- Increase the international assistance which would include offering debt relief to many poorer nations so they have the fiscal space needed to address the pandemic’s economic impacts on their populations.
- To reshape global production networks to be more green, inclusive, and sustainable while simultaneously resetting the multilateral system to support the most vulnerable and deliver on climate action.
Push for Exports
Context: India needs to shed its exaggerated fears of trade agreements to create new jobs.
What are the challenges facing by Indian economy?
- Contracting Economic growth: India is in an economic recession for the first time in its independent history.
- Rising Unemployment: Thousands of people lost their jobs due to the slowing economy in 2018-19 and 2019-20. Unemployment had reached a 45-year high. Added to this worry, more than 2 crore people lost their jobs during the lockdown.
- Rising demand for right to work: During the seven-month lockdown period, there were 11 crore people who asked for work under MGNREGA.
- Stagnating Merchandise Exports: Merchandise goods exports were $314 billion in 2013-14 and remained stagnant for the next five years touching $313 billion in 2018-19.
What are the reasons for stagnating Merchandise exports?
- Reversal in the direction of India’s foreign trade policy with higher tariffs, non-tariff barriers, quantitative limits.
- The return of licensing.
- Border country restrictions.
- The appreciating value of the rupee.
How to boost exports and produce jobs for Indian workforce?
- Investing in labour intensive sectors: Good quality jobs can be created only in sectors that are labour intensive, and where India has a comparative advantage, such as apparel, leather goods, value-added agriculture etc.
- Find more export markets: The job-creating sectors depend not only on the domestic market but, significantly, on export markets. For example, more than one-half of the leather goods and one-third of the apparel produced in India are exported to other countries.
- Encourage and Incentivise exports: Merchandise exports helps to create supporting jobs in warehousing, transport, stevedoring, container stations, shipping, ship chandling, ports and export financing.
Why India cannot persist with protectionism policy?
- Trade is reciprocal: India cannot ‘protect’ its domestic industry with high trade barriers while aspiring for bilateral trade treaties to promote exports. Also, no country will allow import of Indian goods and services unless that country is able to export its goods and services to India on reasonable and fair terms.
- FTA has Benefited its members: More winners than losers because of bilateral and multilateral trade agreements in the recent past witnessed through proliferation of FTA’s such as ASEAN, NAFTA, MERCOSUR, RCEP recently.
- To promote exports: Most manufacturing today has a long supply chain that cuts across many countries. To be able to export goods, India must import raw materials or equipment or technology from other countries in the supply chain.
What are the issues in signing FTA’s?
- FTA provisions were misused by some countries to question the foreign investment policies and tax policies of other countries.
- Purely trade and commercial disputes were dragged to international arbitral tribunals on the pretext of violating FTA provisions.
Exports are one of the main engines to revive economic growth and create many new jobs. India has the immediate opportunity to export goods worth $60 billion in labour intensive sectors which can then create lakhs of new jobs. To revive exports, India needs greater access to global markets. Hence, we must re-learn to engage with other countries and negotiate favorable trade agreements through the bilateral and multilateral routes.
Time for an Asian Century
Context: In a phase, where the west is adapting to Asian rules, RCEP will have immediate geopolitical and economic implications. India’s challenge will be in securing an ‘Atmanirbhar Bharat’ in this phase.
What is Asian centrality?
- ‘ASEAN centrality’ rejects the current frame of the West setting the agenda while allowing the West to adapt Asian rules and marking the end of the colonial phase of global history.
How Asian-led world order is emerging?
- Economic integration:
- The mega trade deal is led by ASEAN, not by China, and includes Japan and Australia, military allies of the U.S.
- The new frame goes beyond transfer of goods and services, focuses on integration and facilitating supply chains for sharing prosperity, requiring a very different calculus for assessment.
- Rise of China and India:
- Both China and India are breaking the monopoly of the West in wireless telecommunications, AI and other emerging technologies.
- India has also, in the UN, questioned Western domination calling for a “reformed multilateralism”.
- RCEP’s new rules on electronic commerce could offset losses in declining trade in goods. ‘Atmanirbhar Bharat’ will leverage indigineous technological strength, data and population.
- Declining power of west:
- Despite its military ‘pivot’ to Asia, the U.S. needs India in the Quad, to counterbalance the spread of China’s influence through land-based trade links.
- With the ASEAN ‘code of conduct’ in the South China Sea, both the security and prosperity pillars of the U.S.-led Indo-Pacific construct will be adversely impacted.
- The U.S. Congressional Research Service report identifies four key elements to strengthen its global governance:
- Global leadership.
- Defence and promotion of the liberal international order.
- Defence and promotion of freedom, democracy, and human rights; and
- Prevention of the emergence of regional hegemons in Eurasia.
What India needs to do?
- Reduce dependence: India needs a new strategic doctrine and mindset.
- Focus on technology transfer: With the Rafale aircraft purchase, India has recognised that there will be no technology transfer for capital equipment.
- Modernisation: Military Theatre Commands should be tasked with border defence giving the offensive role to cyber, missile and special forces based on endogenous capacity, effectively linking economic and military strength.
- Infrastructure development: The overriding priority should be infrastructure including electricity and fibre optic connectivity; self-reliance in semiconductors, electric batteries and solar panels; and skill development.
- Counter china: Leveraging proven digital prowess to complement the infrastructure of China’s Belt and Road Initiative will win friends as countries value multi-polarity.
- Joining RCEP: The RCEP already includes India’s priorities such as rules of origin, services and e-commerce also RCEP members have expressed their “strong will” to re-engage India, essentially to balance China.
There are compelling geopolitical and economic reasons for India in shaping the Asia-led order, which is not yet China-led, to secure an ‘Atmanirbhar Bharat.
Trade openness and globalization
Context- India’s External Affairs Minister believes that the economic growth that has accrued from globalization is not a good enough outcome for India.
What are the views of External Affairs Minister on globalization and trade pacts?
- Trade pacts and globalization have allowed other countries ‘unfair’ trade and manufacturing advantages “in the name of openness”.
- The effect of past trade agreements has been to de-industrialize some sectors.
- The consequences of future ones would lock us into global commitments, many of them not to our advantage.
- Employment challenge was created by trade.
- Trade agreements have made India over-dependent on imports.
Views of critics-
- Between 1995-2018- India’s overall export growth averaged 13.4 percent per year.
- India’s manufacturing exports (in dollars) grew on average by 12.1%, nearly twice the world average.
What are the proposed reasons for India’s slowed down exports?
- Strong rupee approach – The current government “strong rupee” approach is among the chief causes that have been shown to have slowed down exports. The real effective exchange rate has appreciated by about 20% since 2014.
- Low export competitiveness– India’s own supply side constraints and bottlenecks, i.e., its difficult regulatory environment, poor logistics quality, inadequate and inefficient trade infrastructure, and high transactions costs, among others, all of which hurt export competitiveness.
- This low ease of doing business relative to other exporting countries has further eroded the competitiveness of Indian exports.
- Policy errors– India’s share in industrial production and manufactured exports in the world economy has declined steadily in last six years, coinciding with the phase of corruption scandals, a severe banking crisis, demonetization and a badly designed GST.
How trade openness and globalization can solve these problems?
- Generating employment– Openness to trade is important to India for generating employment in the post-COVID-19 world.
- Globalization and India
- India has been one of the major beneficiaries of economic globalization — a fact attested by IMF.
- Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
- Poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
- To denounce trade openness and globalization at this point is also poor timing.
- Strong rupee policy– led to the surge in imports of goods and services preferred by non-rich Indians, and a measurable loss of competitiveness in labor-intensive exports. On the flip side, the disadvantages Indian exporters have long struggled against the substantially higher logistics remain as burdensome.
FTA’s and its significance
Context: India’s External Affairs Minister recently disapproved of free trade and globalisation.
- On November 15,15 countries of the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement while India refused not to sign RCEP.
What were the rational arguments given by the government to walk away from RCEP?
- In the name of openness India has allowed subsidised products and unfair production advantages from abroad to prevail.
- An economy as attractive as India allowed the framework to be set by others.
- The effect of past free trade agreements has brought de-industrialisation in some sectors.
How good is India in emphasising trade openness?
- India is much more open economy than it was three decades ago, yet, India continues to remain relatively closed when compared to other major economies.
- According to the WTO, India’s applied most favoured nation import tariffs are 13.8%, which is the highest for any major economy.
- According to the United Nations Conference on Trade and Development, on the import restrictiveness index, India figures in the ‘very restrictive’ category.
- From 1995-2019, India has initiated anti-dumping measures 972 times (the highest in the world), to protect domestic industry.
Why FTAs are significant for Indian economy?
- Economic recovery: With trade multilateralism at the World Trade Organisation (WTO) remaining sluggish, FTAs are the gateways for international trade.
- Attract FDI: To be part of the global value chains, to enhance competitiveness, it is important to join FTAs.For example, India’s competitors such as the East Asian nations who have signed mega-FTAs are in a far superior position to be part of global value chains and attract foreign investment.
- To reproduce the past success: Economic survey 2020 concluded that India has benefitted overall from FTAs signed so far. Blaming FTAs for deindustrialisation means being ignorant to the real problem of the Indian industry which is the lack of competitiveness and absence of structural reforms.
- Globalisation not protectionism has benefitted India:
- India has been one of the major beneficiaries of economic globalisation as per International Monetary Fund (IMF).
- Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
- According to the economist and professor, Arvind Panagariya, poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
The Prime Minister’s desire to make India a global destination for foreign investment while following trade protectionism as the government’s official policy will not be realistic.
Lessons from Vietnam and Bangladesh
Context: Learning through the success stories of Vietnam and Bangladesh
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- Bangladesh has become the second largest apparel exporter after China.
- Vietnam’s exports in apparel sector has grown by about 240% in the past eight years.
Vietnam’s success stories
- Duty free exports: Signing of Free Trade Agreements (FTAs) with important trading partners like the U.S., the EU, China, Japan, South Korea and India makes their product competitive.
- Incentives to foreign firms: Mending domestic laws to allow Foreign firms to compete for local businesses. For example, EU firms can open shops, enter the retail trade, and bid for both government and private sector tenders. They can take part in electricity, real estate, hospital, defence, and railways projects etc.
- Cheap labour: over the year’s large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have shifted to Vietnam to manufacture their products owing to reduced costs.
Bangladesh Success story
- Duty free exports: Large export of apparels to the EU and the U.S. make the most of the country’s export. The EU allows the duty-free import of apparel and other products from least developed countries (LDCs) like Bangladesh.
- Supporting large firms: Because large firms are better positioned to invest in brand building, meeting quality requirements, and marketing. Whereas Small firms begin as suppliers to large firms and eventually grow.
What are the challenges for Vietnam and Bangladesh?
- Lacks diversification: For example, Most of Vietnam’s exports happen in five sectors.
- Limited Investment sourcing: Due to Lack of developed domestic and capital market.
- Duty free markets: Bangladesh may lose its LDC status in four to seven years as its per capita income rises.
- Small gains: For example, most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere. In such cases, national exports look large, but the net dollar gain is small.
- Vulnerability: high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty.
What are the lessons for India?
- Promote manufacturing and investment by setting up sectoral industrial zones with pre-approved factory spaces.
- Following an open trade policy, signing balanced FTAs, restricting unfair imports, and supporting a healthy mix of domestic champions and MNCs.
- While export remains a priority the focus is should be on organic economic growth through innovation and competitiveness.
- Reforms to promote innovation and lowering the cost of doing business.
Virtual Global Investor Roundtable (VGIR) for Foreign Investment in India
Context- Prime Minister has chaired the Virtual Global Investor Roundtable (VGIR), with an aim to attract investment.
What Virtual Global Investor Roundtable (VGIR) 2020 conference?
It is an exclusive dialogue between leading global institutional investors, Indian business leaders and the highest decision-makers from the Government of India and Financial Market Regulators.
- Organized by– Ministry of Finance and the National Investment and Infrastructure Fund (NIIF).
- Focus for 2020– Discussions around India’s economic and investment outlook, structural reforms and the government’s vision for the path to a USD 5 trillion economy by 2024-25.
Key highlights of the conference-
- National Infrastructure Pipeline– Under it, India has an ambitious plan to invest USD 1.5 trillion in various social and economic infrastructure projects, aimed for faster economic growth and alleviation of poverty in the country.
- India as safest investment hub– Prime minister in this conference pitched India as the ideal destination and the country offered returns with reliability, demand with democracy, stability with sustainability and growth with a green approach.
What are the challenges for revival of investment?
- Low FDI inflow in India –Contraction in investment since July-September quarter in 2019 and then the Pandemic has caused a further shock.
- Fixed investment has continues to face an uncertain outlook given the weak consumption because of the Demand shock caused by pandemic.
- Lack of funds– the government’s ability to apportion more funds for growth-spurring capital projects is hamstrung by a widening fiscal deficit amid border stand-off, the health crisis and revenue shortfall.
- The three-fourths of FDI equity inflows in 2019-20 fiscal-year being accounted by single large telecom company, a bulk of this investment is unlikely to manifest as new job-creating factories or businesses.
- Lack of policy stability – Bureaucratic procedures and corruption continue to make India less attractive to foreign investors.
- Infrastructure is also one of the issues that need to be addressed.
- Assurance of stability– India needs to ensure that assurance of stability is buttressed by actions that dispel investors’ concerns over unstable policy.
How the US economy and its policy choices likely to affect India
Context: How a Biden presidency likely to benefit India’s economy
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- “In a democracy, someone who fails to get elected to office can always console himself with the thought that there was something not quite fair about it”-Thucydides 431 BC.
What is the Significance of U.S to India’s Economy?
- India enjoys a trade surplus with the U.S over the past 20 years. The trade surplus has widened from $5.2 billion in 2001-02 to $17.3 billion in 2019-20.
- Also, India accounts for nearly 5 per cent of USA’s global services import. In 2019, US imports of services from India were around $29.7 billion.
- The US is the fifth-biggest source for Foreign Direct Investment (FDI) into India after Mauritius, Singapore, Netherlands, and Japan.
- The US also accounts for one-third of all Foreign Portfolio Investments (that is, investment in financial assets) into India. US accounted for Rs 11.21 lakh crore of FPI as of September 2020.
How the US economy and its policy choices likely to affect India?
On Trade aspects
- Biden’s administration is expected to support a strong rule-based order as well as a move away from the protectionist approach.
- Biden understands the need to control the Covid pandemic before any sustainable economic recovery. With the control of Covid infections and the economic recovery, the US could provide a growth impulse to the global economy that has benefits to countries like India to boost their exports.
- Under a Biden administration, the view that trade is a zero-sum game is likely to change.
- Also, under Biden there are chances of reconsidering the India’s exclusion from the US’ Generalized System of Preference.
- All these changes are likely to help India to get a renewed push in trade from the dip since 2017-18.
On H1B Visa
- H1-B visa issue, affects Indian youth far more than the youth of any other country.
- Visa regime was severely curtailed under Trump’s administration that favoured “America first policy”
- This could change under Biden, who is unlikely to view immigrants and workers from India with suspicion.
Better resolution on existing issues
- Data localisation, capping prices of medicines and medical devices have remained as a contentious issue between India and US.
- With Biden, moving away from radical approach to Pragmatism all these issues stand a better chance of getting towards a resolution.
Normalisation of US-Iran relationship
- US sanctions on Iran severely limited India’s sourcing of cheap crude oil.
- normalisation of US-Iran relationship leading to lifting of sanctions would benefit Indian economy which needs a regular supply of cheap oil to grow fast.
- The US under Biden is expected to rejoin the Paris Climate Accord. This will help countries like India in dealing with, both technical and financial challenges related to climate change mitigation.
- Civil liberties and democratic rights in India will be monitored closely an aspect to which the Trump administration largely ignored.