CURRENT AFFAIRS ESSAY 7TH JULY 2018--- Using Tax Policy,Price Deficiency payment scheme,Farm sectors needs, etc.
CURRENT AFFAIRS :07/07/2018
1.RELIEVE
CHOKED METRO CITIES: HOW GOVERNMENT CAN USE TAX POLICY TO SPREAD WEALTH AND
JOBS AROUND INDIA
If you see where
Indian Fortune 500 companies are based, most have their corporate headquarters
in Delhi and Mumbai. A few are also based in other metros like Bengaluru,
Chennai and Hyderabad. Around half a dozen odd Indian cities house almost all
of our top companies. Ditto for the India offices of foreign companies as well.
On the other hand,
Fortune 500 companies in the USA are evenly spread out throughout the country.
Despite New York, Los Angeles, Seattle and San Francisco being the main cites,
headquarters of large global companies exist in several dozen US cities such as
Atlanta, Houston, Omaha, Rochester and Detroit, just to name a few. In
contrast, you will hardly find a large Indian company or foreign company having
their headquarters in Indore, Jaipur, Bhubaneshwar or Guwahati.
Corporate heads will
cite many reasons not to go to such cities. Lack of connectivity,
non-availability of talent (or reluctance of talented people to move there),
lack of good schools for children and a general feeling of being away from the
action. This desire to be where the action is, and the action being limited to
a handful of cities means our metros are choked.
Just last week, a
bridge collapsed in Andheri in Mumbai, bringing the city to a standstill. If
you visit Mumbai in the monsoons, it looks like a city where a world war just
ended. Traffic in Delhi and Mumbai is insane. Check Google Maps on any weekday
evening in our metros, and see the blood red traffic lines across the city.
Mumbai airport, a
relatively new one, is already jam packed. Getting admission in a good school
in metros is akin to scaling Everest. Pollution in Delhi can kill you. Real
estate prices in Mumbai are lethal. They all tell the same story – our cities
are choked.
It is time we actually
did something about it. And the only way this can be fixed is if 10, 20 or even
50 new cities pop up, each offering a real alternative to the bursting metros.
How will this happen?
The missing factors in these cities – connectivity, education options or not
being in the middle of action all eventually stem from one key factor, lack of a
vibrant job scene. Invariably, a city picks up when it offers a range of jobs –
from high end to low end – and people get money in their pockets. The 1990s
rise of sleepy Bengaluru came from the accidental start of a couple of IT
companies, which happened to grow fast and become large companies.
Of course, chance
happenings like Bengaluru won’t happen again and again. We need to actually
make large companies, which are employment generating giants, willingly move to
a smaller city. We need to incentivise major Indian companies to move their
headquarters elsewhere, and for new arrivals like startups or foreign companies
coming to India to try another Indian city as well.
One good way to do
this is to modify direct tax (income tax and corporate tax) and make them more
federal in nature. Right now the Centre collects income and corporate tax, a
portion of which is then allocated to individual states. If we could split the
income and corporate taxes into central and state portions (much like the
current CGST and SGST), and allow the states flexibility in setting their own
tax rates for the state portion, it can be a game changer for India.
Not only will this
relieve pressure on our big metros, it will also spread employment better
across the country. For instance, say the corporate tax rate is 30%. Let us
split it into central corporate tax of 15% and state corporate tax of 15%.
Then, say a Chhattisgarh or Odisha wants to invite companies to their state.
They can then offer a 5% state corporate tax rate, which makes the effective
tax rate for a company 20% (15% Centre + 5% state).
Hence, a company with
a Rs 10,000 crore profit, which paid Rs 3,000 crore in taxes every year, can
save Rs 1,000 crore of this money by shifting to the new location. Once the
company moves, thousands of jobs move there too. This then creates more jobs in
that new location to serve these new arrivals, such as in entertainment,
education, real estate and other services. The metro they moved from gets
relief. The new city’s economy gets a boost. Yes, the state does lose some tax
revenue, but the boom in the state’s economy will make the tax cut worth it.
In fact, for certain
locations, even the Centre can give a discount on its share of taxes. Imagine,
if companies could move to J&K and the north-east and pay only 5% total
taxes instead of 30%. Despite the initial hardships, companies will move as
their spreadsheets will show enormous savings over a decade. Won’t it give a
huge boost to these areas? Will it not improve the Kashmir situation when stone
pelters actually have good jobs in their region?
Apart from revenue
generation, tax policy is an important tool the government has to help fix a
lot of problems – choking of metros, taking employment to the interiors and
helping troubled regions. If we make our direct taxes more federal in nature,
and give states the power to reduce taxes to invite corporate activity, it can
go a long way in easing pressure on our metros and creating new vibrant cities.
2. CACP ASKS CENTRE TO
INTRODUCE PRICE DEFICIENCY PAYMENT SCHEME
In a bid to ensure farmers benefit from minimum support
prices (MSP), the Commission for Agricultural Costs and Prices (CACP) has
suggested that the Centre explore the possibility of implementing the price
deficiency payment (PDP) scheme across the country.
Madhya Pradesh had implemented such a scheme — the
Bhavantar Bhugtan Yojana (BBY) — on a pilot basis during last year’s kharif
season to safeguard farmers from price fluctuations.
Earlier this week, the Centre announced a 4-52 per cent
increase in MSP for kharif crops over last year.
In its non-price recommendations for Kharif 2018, the
CACP said a system should be brought in place to ensure MSP for farmers,
wherein the difference between the MSP and average market price in the APMC (Agricultural
Produce Market Committee) yards is directly paid to farmers’ bank accounts.
Minimising intervention
Such a move will minimise government intervention in
procurement. Besides, it will help curb foodgrain losses due to lack of
adequate storage, as farmers will be selling their produce directly to traders
under the scheme.
The CACP observed that the BBY scheme had helped the MP
government reduce its costs to about 17.85 per cent of what was incurred on
procurement at MSP in the previous year. Therefore, the Centre should look at
implementing the scheme pan India, the CACP said, adding that more crops should
be included under such schemes.
Further, to instil confidence among farmers on
procurement of their produce, a ‘right to sell at MSP’ legislation may be
introduced, the CACP suggested.
Counter-view
“The BBY scheme in MP could benefit only 23 per cent of
production, casting a shadow on how it will benefit the majority of farmers if
it is scaled up to an all-India level,” observed agriculture economist Ashok
Gulati and his colleagues in a working paper at the Indian Council for Research
on International Economic Relations (ICRIER).
They also said that the BBY was prone to manipulation by
traders and lower-level market functionaries and may end up helping them rather
than the farmers.
PTI adds: Meanwhile,
Gajendra Singh Shekhawat, Minister of State for Agriculture, said in Delhi that
the Centre would announce a new mechanism to ensure that farmers get the
benefit of MSP if market prices fall below the benchmark rate.
Senior officials of NITI Aayog had recently made a
presentation before the Prime Minister on the proposed procurement mechanism
and its financial implication.
The Aayog has proposed that States should be allowed to
choose from three models — Market Assurance Scheme, Price Deficiency
Procurement Scheme and Private Procurement and Stockists Scheme.
3. WHAT THE FARM SECTOR
NEEDS IS URGENT REFORM; LOAN WAIVERS CAUSE MORE HARM THAN GOOD
Loan waiver schemes are back with a bang, thanks to the elections
and the populist schemes they bring in their wake.
In the recent past, several States have waived
agricultural loans as part of their populist outreach to win over farmers in
distress. Political parties have also been crying themselves hoarse for a
Centre-sponsored nationwide loan waiver.
The Karnataka government, in its most recent budget,
announced a farm loan waiver of ₹34,000 crore
with an individual cap at ₹2 lakh. Last
year, the Uttar Pradesh and Maharashtra governments announced waivers of ₹7,500 crore and ₹35,000 crore
respectively.
Domino effect
According to RBI estimates, what began in Tamil Nadu in
2016 had a domino effect on several States in 2017. The total cost of loan
waivers announced to date amounts to ₹1,30,000 crore
(not counting the Karnataka waiver), which translates into 0.8 per cent of GDP.
While loan waivers are an easy way to win political
support, they are not without negative consequences.
For one, there is no certainty that the benefit of the
waivers will reach those who really need it. For another, it could
significantly impact a State’s finances.
A study by SBI economists last year said States that have
waived loans, or are set to do so, have a tough time borrowing from the
markets.
Also, according to the 14th Finance Commission, all
States are required to keep their fiscal deficit under 3 per cent of State GDP
from FY16 to FY20. Loan waivers can lead to more market borrowings, skewing the
deficit ratio.
For banks already beleaguered by stressed assets, any
talk of loan waiver could spell more trouble. Senior bankers say that as
elections draw near, even farmers who can repay their loans tend to sit back
and wait for a waiver. This ‘moral hazard’ trend is evident in some States.
Further, demands for similar waivers could spread to borrowers in other
segments such as self-help groups and microfinance institutions.
RBI’s stance
The central bank has been vocal in opposing loan waivers.
RBI Governor Urjit Patel recently said the “most vulnerable” is capital
expenditure by the government, which will take a major hit from loan waivers.
The diversion of funds to waivers will have an “adverse
impact on sectors such as irrigation works and cold storage chains”, the RBI
has said.
The RBI also thinks loan waivers may at best be a short-term
remedy for farmers’ distress but cannot be regarded as a long-term solution.
There is a need to move away from such populist schemes
and take up concerted and urgent reforms in capacity-building in agriculture by
addressing issues in marketing, pricing, credit and extension services.
4. DISRUPTING
BROADBAND
Without fibre optics, Digital India will not truly reach
the masses
When it comes to adopting digitisation and online
platforms Indian users are among the top consumers globally. The growth in consumption
of video and online content has been growing exponentially over the last two
years. The tectonic shift from an analogue world to a digital future is visible
across all aspects of life. At the centre of this transition to a digital world
is the availability of a reliable and affordable data network. But until
recently mobile operators were adopting a piecemeal approach in establishing a
high speed broadband infrastructure. The scenario changed in 2016 after
Reliance Jio launched its 4G services at price points that were drastically
lower than the prevailing tariffs. Since then data consumption has shot through
the roof to 1,945 MB per user per month in 2017 from just 123 MB in 2015.
However, with only 400 million users having access to broadband, we are still
scratching the surface when it comes to data usage. When one billion-plus
Indians get online and start consuming data, the existing wireless networks
will not be enough to support that demand.
In this context, Reliance Jio’s move to start offering
optical fibre-based broadband service is a disruptive move which is critical
for the future of India’s digital dream. Optical fibre networks have the
capability to carry much more data than a wireless network because the latter’s
capacity is dependent on the quantum of radio spectrum. Spectrum being a finite
resource can only be useful for carrying applications that do not require large
bandwidth. Mission critical applications such as healthcare and education can
proliferate only when there is a robust optical fibre broadband backbone.
Reliance Jio’s move is therefore a game changer as it positions India to become
one of the biggest digital market in the world. This will also further disrupt
consumer behaviour as bandwidth guzzling services will now become a reality.
While this augurs well for users, it will force existing players to either
change their business models or exit. The biggest disruption will be in the
telecom sector where hitherto incumbent players have been relying on wireless
technologies. The large incumbent operators, despite being in operation for
over two decades, have optical fibre network only across 100 cities compared to
Reliance’s blueprint of 1,100 cities and hopefully, radically lower price
points.
The days of making money by selling plain vanilla
bandwidth are over. The telecom market is shifting towards building and
monetising services on top of the broadband network. The other big disruption
will be for linear TV players as viewership shifts towards streaming platforms
for entertainment and sporting action, making cable TV and DTH players
irrelevant. Incumbent players would do well to start innovating and building
infrastructure for the new digital future if they want to survive this new
round of disruption.
5.
U.S., CHINA FIRE FIRST SHOTS IN TARIFF WAR
Beijing
hits backwith duties after Trump’s move
The U.S. and China on Friday launched tit-for-tat tariffs
on each other’s imports, the opening shots in what Beijing called “the largest
trade war in economic history.”
At the stroke of midnight Washington time, the U.S.
pulled the trigger on 25% duties on $34 billion in Chinese machinery,
electronics and hi-tech equipment, including autos, computer hard drives and
LEDs.
The Foreign Ministry in Beijing said retaliatory measures
“took effect immediately,” with state news agency Xinhua confirming they
involved 25% tariffs on an equal amount of goods.
Economists have warned that the escalating trade
frictions could throttle global growth. Friday’s tariffs could just be the
opening skirmishes in the trade war, as U.S. President Donald Trump has vowed
to hit $450 billion in Chinese goods, the vast majority of imports. Months of
dialogue between the two economic superpowers appeared to have failed, with Mr.
Trump warning just hours before the tariffs came into effect that Washington
was ready to target more Chinese goods. Mr. Trump has for years slammed, what
he describes as, Beijing’s underhand economic treatment of the U.S.
6. A
POLITICAL PLOY: ON THE HIKE IN MSPS
The
hefty hike in MSPs will not benefit all farmers — agri-reforms are essential
The Centre has cleared a hike in the minimum support prices
(MSPs) for the kharif summer crop,
ranging from a modest 3.7% increase for urad to as much as a 52.5% for the
cereal ragi over the previous season. The NDA government says this ‘redeems’
its promise of assuring farmers a price at least 150% of the cost of
production. The Commission for Agricultural Costs and Prices is said to have
gone by this cost-plus-50% principle, in line with the farm sector strategy
announced in this year’s Budget. While making calculations, it relied on
estimates of input costs actually paid by farmers and the imputed value of
unpaid family labour engaged in the field. Yet, the final hikes announced for
some crops are even higher – with the MSP for bajra pegged 97% over estimated
costs. On an average, the MSP hike notified for 17 kharif crops is about 25%
higher and constitutes the biggest hike since 2013-14. All in all, the announcement
is an olive branch to farmers who over the past year spearheaded widespread
protests over the rural distress. With less than a year to go for the general
election, the NDA government has clearly opted to reverse the abundant,
inflation-weary caution it had exercised while fixing MSPs. In fact, soon after
assuming office in 2014, it had even admonished State governments for granting
bonuses over and above the MSPs.
Given that the MSP mechanism is primarily enforced
through official procurement only for wheat and paddy, mere announcement
of prices for
other crops is unlikely to suffice in ensuring farmers get those returns.
Anticipating this, the Budget had promised that Niti Aayog would work with the
Centre and States to put a fool-proof mechanism in place so that farmers get
adequate remuneration if market prices slip below the MSP. This could be
through government purchases or a gap-funding mechanism whereby the difference
between MSPs and market prices is transferred to farmers. Little is known on
the status of this endeavour, or the Centre’s procurement strategy for this
year. As things stand, the impact of these hikes on consumer price inflation is
expected to vary between 0.5% and 1% by the end of 2018-19. On the other hand,
the Centre’s fiscal arithmetic may not be too adversely affected if its outlay
on procurement is around ₹15,000 crore, about 0.1% of GDP. But these costs
could mount based on the procurement strategy and the new mechanism for MSP
enforcement. While rural incomes may rise from this farm-friendly gesture,
concomitant reforms to free agricultural markets are vital to prevent a
distortionary effect on farmers’ choices on account of MSPs. Easing onerous
stockholding limits under the Essential Commodities Act and avoiding frequent
curbs on farm exports are key.
7.
THE NEW TRADE ORDER
There
is little sign that Donald Trump will be turned from his protectionist path by
appeals on the virtues of trade
Since the start of the year,
U.S. President Donald Trump has lashed out at allies and adversaries alike on
trade. Often, as with India, the U.S. has pushed for enhanced security
cooperation at the same time it declared trade relations a national security
threat. The belligerence has left many baffled.
Some pointers
A first question is why the Trump administration is
launching its trade wars. There are at least three possible explanations worth
considering: an actual casus belli, as with complaints about
Chinese practices; a phantom casus belli, as in the preoccupation
with meaningless bilateral trade deficits; or, finally, it might just be a
straightforward desire to block trade.
The evidence seems to point to the last possibility —
simple protectionism. While the U.S. has significant concerns about Chinese
economic practices, such as China’s aggressive approach to acquiring
intellectual property from American businesses, the administration has been
unable to focus its demands on these practices. When, a year ago, China offered
a deal to address its steel overcapacity, Mr. Trump reportedly rejected the
deal in favour of pursuing tariffs. Nor has the White House been able to
prioritise among its global trade concerns. The discord with trading partners
such as the European Union and Canada has undercut the possibility of
presenting a united front on China complaints.
Further, the Trump administration’s tariff justifications
can shift rapidly. In May-June, the Trump administration extended steel and
aluminium tariffs to Canada, among other countries. Ostensibly, the rationale
was a threat to U.S. national security. Yet, at the G7 meetings later that
month, Mr. Trump seemed to explain the aggressive U.S. stance by citing
Canada’s protective dairy regime.
There is ample evidence that Mr. Trump places a high
priority on bilateral trade deficits, which he seems to equate with profit and
loss statements. In May, hoping to assuage the President’s concerns, Chinese
Vice-Premier Liu. He came to Washington to offer increased Chinese purchases of
U.S. goods as a means of resolving the looming tariff threat. The Trump
administration initially struck a deal, then reversed it roughly a week later.
Countries with which the U.S. runs a trade surplus have also not been immune
from trade attacks; Canada is a prime example.
This then leaves the simpler explanation that Mr. Trump
is fond of tariffs and believes that American industry will do better behind a
wall of protection. He has been neither coy nor inconsistent about such
feelings. When he first announced his intention to apply steel and aluminium
tariffs in March, his press secretary was asked about the surprise policy move.
She replied, “This is something, frankly, the President has been talking about
for decades.”
Within the system
The U.S. prides itself, however, on its political system
of checks and balances. Even with a protectionist President, how can one
individual recraft a country’s long-standing trade position so dramatically?
The puzzle deepens when one looks at the U.S. Constitution, which assigns the
power to apply tariffs to Congress. And where are international protections
against capricious protectionism?
Domestically, Congress has tried to shift responsibility
for trade on to the Executive Branch ever since it engaged in an ill-fated bout
of protectionism in 1930. The underlying presumption was that individual
members of Congress were more likely to succumb to protectionist pressures from
their narrower constituencies, while the President was more likely to consider
the broader national interest. Most domestic legislative safeguards, therefore,
protected against a president being more liberal than Congress might desire;
there are relatively few protections against a President who is more
protectionist. Over the years, the legal authorisations for a President to
apply protection accumulated, largely unused. Thus, the steel and aluminium
tariffs were justified under an obscure provision of the Trade Expansion Act of
1962, a law granting national security powers from the midst of the Cold War.
The upshot is that a protectionist President has ample tools at hand.
Turning to the global trading system, the burgeoning
trade war demonstrates its limitations. The General Agreement on Tariffs and
Trade and World Trade Organization were never designed to block a major world
power from running amok. They relied, instead, on the principal players in
global trade respecting the system. Trade disputes were anticipated, of course,
but they were intended to be sincere cases of disagreement about rules and
acceptable practices. The WTO Dispute Settlement Mechanism cannot act quickly
enough to address the mounting spats about trade protectionism emanating from
the U.S., a major reason why countries around the world have not waited for
verdicts from their WTO complaints and have instead proceeded with retaliation.
What lies ahead
Finally, we can ask: what comes next for the global
trading system? In the near term, we are likely to see escalation. U.S. tariffs
on $34 billion of imports from China took effect on July 6. China has promised
equivalent retaliation. Mr. Trump has promised to retaliate against that
retaliation.
The Trump administration also announced its intention to
use its national security justification for tariffs on the auto sector. There
are reports that Mr. Trump wants such tariffs in place before the U.S. mid-term
elections in early November. While such a move would be qualitatively similar
to the action against steel and aluminium trade, it would be quantitatively
much more significant, given the magnitude of the autos trade. Europe has
threatened retaliatory tariffs worth $300 billion should the auto tariffs
proceed.
There is little sign that Mr. Trump will be turned from
his protectionist path by earnest explanations of the virtues of trade, though
there have been valiant attempts both from the private sector and from members
of Congress. If there is to be a change in the U.S. position, it is likely to
come from an active reassertion of congressional authority over trade policy. At the moment, that still appears unlikely, but the
pressures are mounting.
Even if the President has trumpeted his passion for
protection for years, many in the U.S. assumed he was exaggerating. It is only
in the last month or two that the effects of both protection and retaliation
have begun to be felt. While some businesses have been helped, many more have
been hurt. For example, while there are roughly 140,000 Americans who work in
steel production, there are about 2 million who work in industries that use
steel as a major input. Those latter industries are beginning to cry for help,
along with farmers who are seeing sales lost to retaliatory barriers. Stories
such as the relocation of production of Harley-Davidson motorcycles have called
into question the President’s claim that protection would revive American manufacturing.
All this has led to a deeply conflicted Republican Party,
which holds a majority in both houses of the legislature. Traditionally,
Republicans have been the more pro-business, pro-trade party and members of
Congress running for re-election this November were planning to mount a
campaign based on unity, tax cuts, and good stewardship of the economy.
Now those candidates need to decide whether or not to act
against their President’s trade measures. If they choose to, they have the
power to legislate and block the President’s trade belligerence, at the cost of
enraging him. If they choose not to, they will likely disappoint their
constituents. Their choice is likely to determine the next turn in Mr. Trump’s
trade war.
thanks EXCEL CAREER ACADEMY CHENNAI
thanks EXCEL CAREER ACADEMY CHENNAI
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