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Gold Imports in India (UPSC Notes)

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Last Update: Jan 2025 (Gold Imports in India (UPSC Notes))

Gold Imports in India (UPSC Notes)

This article deals with ‘Gold Imports in India (UPSC Notes).’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

India is the 2nd largest gold importer in the world (1st = China). India imports gold from the following destinations.
1. Switzerland
2. UAE
3. South Africa
Due to cultural factors, Indians have a high obsession with gold.
As India imports most of its gold, it leads to a significant current account deficit and a weakening of ₹ against $.
Along with that, high usage of gold results in following vicious cycle.

Why is high gold demand in India?

Cultural Factors: Indians have a great love for gold ornaments.
Intrinsic Value: Gold preserves its value in the long run and generates an above-inflation return, making investors gravitate towards gold in times of high inflation.

Steps taken by the government to reduce gold imports

To control imports of gold, the Government has taken various measures.

Inflation Indexed Bonds: During the period of high inflation, people invest in Gold because other investments have a negative real interest rate. Interest Rates of Inflation Index Bonds are pegged to inflation.
Custom Duty on Gold was hiked (Budget 2023).
80:20 Rule: 20% of imported Gold must be exported after adding value to it.
Various Schemes like Gold Monetisation Scheme, Sovereign Gold Bond Scheme and Indian Gold Coin have been started by the Government (dealt in detail below).

Detail of Gold Schemes

#1 Gold Monetisation Scheme (GMS)

GMS offers an option to resident Indians to deposit their precious metal and earn interest on it (up to 2.5%).
But that Gold will be melted into Gold Coins and Bars for valuation.
All residents can invest in this scheme but are subject to Know Your Customer (KYC) Norms & have to disclose the source of the Gold.
Deposit limit: Minimum deposit at any one time is 30 grams with 995 fineness. There is no maximum limit for the deposit.
Tenure and interest rate:
1. Short Term (1-3 years): 2.25% interest
2. Medium (5-7 years): 2.5% interest
3. Long (12-15 years): 2.5 % interest
Upon maturity, one can redeem a deposit in gold or cash equivalent.

#2 Sovereign Gold Bond Scheme

The scheme seeks to shift part of the demand for physical gold for investment into Demat (Dematerialised) gold bonds to reduce the demand for physical gold. Additionally, the government use it to finance its fiscal deficit.
These gold bonds are interest-giving (up to 2.75% interest paid semi-annually). On the redemption date, one gets the principal equivalent of the latest price of gold in grams. So, if the gold price increases, then investors get more profit.
Investment Limits:
1. Minimum Investment: 2 grams of physical gold
2. Maximum Investment: 500 grams
Tenure of Gold Bonds: There is a lock-in period of 5 years. 8 years is the maximum tenure. But there is an exit option from the 5th year.
These Bonds are tradable and exchangeable.
2024 Update: The government of India is planning to discontinue this scheme due to the high cost of financing this scheme.

#3 Indian Gold Coin

It is India’s first ever Indian gold coin and bullion to be officially issued by Union Government.
Denominations: The coins will be available in 5 and 10 grams and 20-gram bullion denominations.
These coins and bullion can be easily liquidated.

Special Economic Zones

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Last Updated: Jan 2025 (Special Economic Zones)

Special Economic Zones

This article deals with ‘SEZs (Special Economic Zones) .’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

SEZs are geographical areas with economic laws different from a country’s general economic laws. Accordingly, they are delineated duty-free enclaves and shall be deemed foreign territories for trade, duties and tariffs.

India enacted the Special Economic Zones 2005 Act, which provided for establishing, developing and managing the SEZs. The SEZ law also provides for establishing the International Financial Services Centre (GIFT Center) and Free Trade and Warehousing Zones.

Timeline

1965	Export Processing Zone (EPZ) opened in Kandla —> India was the first in Asia to do so
2000	First SEZ announced to attract larger foreign investment.
2005	Parliament passed SEZ Act
2018	Baba Kalyani Report on SEZs published
Present	The Government has approved over 400 SEZs, and over 230 have been operational.

Salient Features

Duty-free enclaves, i.e. treated as foreign territories for the purpose of trade as far as duties & tariffs are concerned.
No requirement for a license for imports
Units must become net foreign exchange earners within 3 years.
They are subjected to full customs duty & import policy when they sell their products to the domestic market.
FDI = 100% FDI allowed through Automatic Route.
Examples: DLF Cybercity (Haryana), Kandla (Gujarat) and Vishakhapatnam (Andhra Pradesh)

Main Objectives of SEZ

Generate additional economic activity
Promote exports of goods & services
Promote investment from foreign and domestic sources
Create employment opportunities
Develop Infrastructure facilities

Failed SEZ policy & reasons

1. Lack of Clarity in Policy

A number of changes are done at frequent intervals. Hence, there is a lack of stability in policy.

2. Virtually no Income tax benefits now

The income tax benefits were neutralized by introducing the 20% Minimum Alternate Tax (MAT) and the 20% dividend distribution tax (DDT) in 2011-12

3. Wrong Location

India chose the wrong locations for SEZ.

In China, most of the SEZs are located in coastal areas. E.g., Shenzhen.
On the other hand, in India, many SEZs are located in the interior parts, such as Haryana. Even in some coastal states such as Tamil Nadu, SEZs are not located on the coasts.

4. Free Trade Agreements

SEZs have access to duty-free imports of manufacturing inputs because, technically, they are considered outside the country’s domestic tariff area. But, with India signing Free Trade Agreements with countries where duties on many products are eliminated or reduced substantially, the advantage accruing to SEZs was negated.

5. Absence of complementary Infrastructure

Absence of complementary infrastructure like port connectivity via roads or railway lines

6. WTO – Countervailing Duty

Tax incentives provided inside SEZs are considered against WTO principles by other nations, and they impose Countervailing Duties on products from Indian SEZs.

7. Custom duty on sending products to the Domestic Market

Today, it is better for you to manufacture in Thailand and get duty-free access to India than to manufacture in an Indian SEZ and face an import duty barrier. It is a considerable deterrent to Make in India. India should be signing an FTA with all the Indian SEZs first.

8. Land Acquisitions

500 Acre for Multisector and 50 Acre for Single Sector is difficult to acquire. Hence, land acquisition is one of the significant hurdles.

9. Labour Laws

Labour laws inside SEZs are equally harsh as the mainland. They can’t fire workers easily, and the Industrial Disputes Act (IDA) applies if the company employs more than 100 workers.

Case Study: Why are SEZs in China doing better than Indian SEZs?

The SEZ Model in India was inspired by China’s SEZs which were critical instruments of its export-led growth. Reasons for better functioning of SEZs in China are

Location: Located close to ports from where it can export easily
Size: China’s zones are few but huge in size. E.g. Hainan, a province in China, is one complete SEZ covering an area of 33,000 sq. km. Indian SEZs are barely 500 -1000 ha in size.
Laws: China has amazingly business-friendly laws. Corporates must give an employee only one month’s notice before firing him. Contrast that to India, where businessmen must follow a lengthy procedure to fire an employee.
In China, the thrust of SEZs has been to attract foreign investments and modern technology; in India, the emphasis has been on exports.

Way forward to improve them

SEZs should be allowed to sell within the country without payment of customs duty on the product.
Abolition of MAT and DDT (Dividend Distribution Tax).
Provide relaxed labour laws there.
Fiscal incentives need to be carefully designed so that it doesn’t violate WTO rules.

Baba Kalyani Report on SEZ (2018)

Instead of giving them blanket general tax holidays, SEZ units should be given tax benefits linked to how many jobs have been created, how much FDI investment attracted, how many goods/ services have been exported etc.
SEZs should be converted into Employment and Economic Enclaves (3E).
Encourage Domestic Electronics Companies in 3Es so that India can end the Chinese monopoly in the Indian electronics market.
Synergise SEZs with CEZs, DMIC, NIMZ , Mega Food Parks etc .
Improve connectivity to SEZs.

Privatisation of Banks

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Last Update: September 2024 (Privatisation of Banks)

Privatisation of Banks

This article deals with the ‘Privatisation of Banks.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

The government is also reducing its shareholding to less than 50% in Public Sector Banks. This is known as the Privatization of Public Sector Banks.
E.g.:
- Government-owned UTI Mutual Fund applied for UTI Bank License in the 1990s. Later, after the scam, UTI Bank was privatized into Axis Bank.
- 2018: IDBI Bank was privatized.

2021 Budget: The government announced to privatize two Public Sector Banks (PSBs).

Case for Privatisation of Banks

Improve the overall efficiency of the Banking Sector: Even though the PSBs and New Private Banks are operating in the same domestic market, the PSBs are considered less efficient, thus leading to the loss of taxpayers’ money.
Government’s Monopoly: The Government ownership in the PSBs, which account for almost 70% of the Banking assets, has led to a kind of virtual monopoly of government that reduces the competition, breeds inefficiency and thus hurts the overall growth of the Banking Sector.
Better Human Resource Management: Privatisation will help in introducing a high degree of professional management. On the account of huge human capital deficit, PSBs are seriously handicapped vis-à-vis their competitors.
Reduce the burden on the government by doing away with the need for undertaking their recapitalization to comply with the higher BASEL III requirements

Arguments against Privatisation

Improve the Governance Framework of PSBs: The main reason for the lower efficiency of the PSBs is actually the government’s political intervention in the functioning of the PSBs, which is in turn leading to a lack of autonomy and freedom to the PSBs and thus hurting their revenues.
Financial exclusion of weaker sections: It can lead to financial exclusion of weaker sections as the private sector cares about profits.
Job Loss: Public Sector Banks employ a large number of people who can lose their jobs in case of privatisation of banks as one of the first things banks do after privatisation is employee retrenchment and branch closures.
Depriving SC/ST/OBCs of benefiting from reservation: Since private banks are not mandated to provide reservations to SC/ST/OBCs in jobs, it hurts the social empowerment of weaker sections of society.
Concerns regarding bank failures and safety of deposits: Private sector banks are prone to failures due to the absence of sovereign guarantees. Bank failures have a large contagion effect on the economy as the savings of the households get locked.
The macroeconomic effects of bank failures can cause tremendous contagion effect and derail the economy. E.g. From 1935 to 1947, there were 900 bank failures in our country. From 1947 to 1969, 665 banks failed. It became the driving factor for bank nationalisation in 1969.

Reserve Bank of India

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Reserve Bank of India

This article deals with ‘The Reserve Bank of India .’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

RBI is India’s Central Bank of India, i.e. apex monetary institution.
It was established in 1935 with a share capital of ₹ 5 crores under the provisions of the RBI Act, 1934, on the recommendations of the Hilton Young Commission.
- Initially, the share capital was owned by private shareholders.
- Government ownership in RBI was just 4.4%.
- The First Governor of RBI was Sir Osborne Smith.
RBI was Nationalized in 1949
- It was done using the RBI (transfer of ownership) Act 1948.
- Now RBI is 100% owned by the Government.
- Hence, RBI’s Governor is answerable to Parliament and pays a dividend to the Government from their profit.
Other important points about RBI
- It was initially headquartered in Kolkata and later shifted to Mumbai in 1937.
- The financial year of RBI is from 1 July to 30 June.

Functions

RBI is the Controller of the Money Supply in India.
RBI is the currency authority of India and has the sole power to print currency.
RBI is the controller of Foreign Exchange through the FEMA Act of 1999.
RBI act as Banker to Governments & Public Debt Manager.
RBI is Banker’s Bank as the Lender of Last resort to the banks. It also advises banks in monetary matters.
RBI is the Regulator of all “BANKS”. RBI gets these powers through Banking Regulation Act.
RBI is the Regulator of All India Financial Institutions and Non-Banking Financial Companies (Deposit Taking).
RBI represents India in financial organizations such as IMF, World Bank etc.
RBI perform some Promotional Roles like
- Customer protection through Ombudsman,
- Financial Inclusion etc
RBI is responsible for Data Publications like the Report on Currency and Finance, Financial Stability Report etc.
RBI is responsible for economic development by promoting financial inclusion and controlling inflation.

Structure of RBI

RBI Act provides for Governor & NOT MORE than 4 Deputy Governors. By convention, two are outsiders, and two are career officers of RBI. Their tenure usually is of 3 years. Re-appointment is also possible. Apart from that, there are 16 Non-Official Directors.

RBI has 4 regions:

Northern: Delhi
Eastern: Kolkata
Southern: Chennai
Western: Mumbai

RBI has 23 departments for looking after Banks, NBFCs, Payment Systems, Foreign Exchange Management etc. The latest department is the Enforcement Department, formed in 2017 to act against the violators of RBI directives.

Issue: RBI’s Autonomy

Why RBI’s Autonomy is important?

Enable RBI to take decisions based on economic rationale uninfluenced by political considerations.
It ensures Sustainable Economic Growth.
It helps in attracting more Foreign Investment as RBI’s independence acts as an assurance to foreign investors that decisions willn’t be taken keeping the vote bank in mind.

RBI versus Government impacting RBI’s autonomy

Tight Money Policy: The Government always pressurizes the RBI to follow the Easy Money Policy to give cheap loans to spur growth, while RBI is mandated to follow such a monetary policy that can maintain inflation between the 2-6% range.
Diluting Prompt Corrective Action framework (PCA): PCA of RBI restricted the lending of 11 state-owned banks, which irked the Government. Also, due to this, Government was not getting a dividend from these banks, impacting the finances of the Government. It led to a direct face-off between RBI and the Government.
Section 7 of the RBI Act: It has never been invoked since independence. It allows the Government to instruct the RBI governor in the public interest. Governor can’t refuse the instructions given to him under Section 7 of RBI.
Issue of higher dividend: Recently, the Government demanded higher dividends from RBI to recapitalize Public Sector Banks and reduce the fiscal deficit. However, Governor Urjit Patel felt RBI’s higher reserves are necessary to check any financial crisis. It led to RBI’s Governor versus Government type of situation.

Due to such issues, RBI Governor Urijit Patel resigned from his post. Although that was not the first time when RBI Governor resigned before his tenure ended like

First Governor, Sir Osborne Smith, left the office before completing his three and a half years term, apparently following differences with the Government’s Member of Finance.
Sir Benegal Rama Rau, who served as Governor from 1949 to 1957, resigned before the end of his second extended term following serious differences with Finance Minister TT Krishnamachari.

Issue: Public Debt Management Agency (PDMA)

RBI is the Government’s Debt manager, but this has led to a conflict of interests.

1. As a Debt Manager

RBI borrows money from the market by issuing Government-securities (G-sec). These G-Secs are, in reality, issued by RBI on Government’s behalf.
As Debt Manager, RBI will always want to sell at the lowest interest rate (cheaper credit).

2. To control inflation

RBI uses the same G-sec to control money supply via OMO (Hence, depending upon the situation, RBI, in this case, has to sell it at a high rate or low rate).

If the central bank acts as a debt manager, too, it would be caught in a conflicting dilemma of keeping the interest rates low to raise the loan at the lowest price possible for the Government while controlling inflation.

Most central banks focus on controlling inflation in the developed world, and government debt management has been shifted to separate agencies.

Timeline: PDMA

2000	– RBI proposed amendments to RBI Act to end its role as Public Debt Manager and hand it over to an independent agency. – But the issue of the high fiscal deficit came up. Hence, in 2002 Bimal Jalan said that debt management couldn’t be transferred to other agencies until the government controlled the fiscal deficit
2007	Finance Minister announced in the budget to set up the statutory body for public debt management.
2011	PDMA bill introduced
2012	Bill not passed
Modi Regime	Modi government is keen on making PDMA. (Reason = They can ask PDMA to borrow as much as they want \| RBI is an independent agency, and it cant be pressurized above a specific limit)

Debate

Against RBI working as Debt Manager

Conflict Of Interest: Discussed Above
Relieve RBI so that it can focus on Monetary Policy and Regulatory work.
Globally Accepted practice: All OECD countries follow this practice.
Various Committees like Percy Mistry Committee (2007), Raghuram Rajan Committee (2008), and FSLRC (2011) have accepted this

Continue as Debt Manager

Conflict of Interest Argument Questioned: There is no evidence in India that RBI has compromised either debt management or monetary management.
Pragmatic Fiscal and Monetary Coordination: In the interest of pragmatic monetary and fiscal coordination, it is prudent to leave debt management to the RBI.
The Indian situation is unlike OECD countries due to high Fiscal Deficit and Current Account Deficit levels.
Separation Challenged Globally: The conventional view on separation has been challenged after the financial crisis. Denmark and Iceland have shifted debt management back to the central bank.
Various scholars, notably Bimal Jalan, have spoken against separate PDMA in Indian conditions.

Governance & Administrative Reforms in Banking Sector

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Governance & Administrative Reforms in Banking Sector

This article deals with ‘Governance & Administrative Reforms in Banking Sector – UPSC Notes .’ This is part of our series on ‘Economics’, which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

The government is trying to recapitalize the Public Sector Banks and helping them to cleanse their stressed Balance Sheets. But, if nothing much is done regarding the Governance & Administration of the Public Banks, then Banks nothing will change, and banks will carry on their operations as usual. Hence, the government has brought various Governance & Administrative reforms along with the recapitalization of banks.

1. Gyan-Sangam-I, 2015

Finance Ministry organized a workshop for financial regulators, Public Sector Bank, Insurance Companies etc., called Gyan Sangam.
It resulted in the following outcomes.
1. PSBs’ CMD post is bifurcated into a separate 1) chairman and 2) separate MD (CEO) to ensure Separation of Power and make them more accountable and transparent.
2. An autonomous body called Bank Board Bureau (BBB) will be set up to select the MD, Chairman, Directors and other top officials of PSBs (Earlier, the Government was selecting top officials of Banks, leading to the politicization of posts.)

2. Mission Indradhanush

Governmental reforms in Banking Governance under 7 Pillars (ABCDEGA)

Mission Indradhanush
civils edia.com
(A)
Appointments
in transparent
way
(B) Bank
Board
Bureau to
be setup
(C)Capitalisa
stressing by
tion of PSBs
reducing
with Rs
provisioning
70,000 cr
for NPAs
(E)
Empowerm
ent
(G)
Governance :
Little
government
interference
in day to day
operation of
banks
(A)
Accountability
to be ensured
using key
performance
indicators

(as such, it has become an old topic, and just an infographic will suffice)

Side Topic: Bank Board Bureau (BBB)

Earlier Government was selecting top officials of Banks, leading to the politicization of the posts. To deal with this issue, BBB was set up on the recommendations of the PJ Nayak Committee.
BBB’s primary function is to select top officials for PSBs, LIC and other public sector financial institutions.
BBB also helps the banks in governance reforms, raising capital for BASEL-III etc.
BBB has 1 Part-Time Chairman, 3 Part-Time Members, and 3 Ex-officio Members (from Govt & RBI side)
In 2018, Bhanu Pratap Sharma (retd. IAS) replaced Vinod Rai (ex-CAG) as the new chairman of BBB.

3. EASE Agenda

When Government announced ₹2.11 lakh crore package for the recapitalization of PSBs, at the same time, it started EASE Agenda so that employees don’t become lazy thinking that all their problems have been solved. Additionally, PSBs will have to change their arrogant and carefree attitude and focus on the 6 pillars listed below.

4. Other Steps

RBI has laid down instructions for Private Sector Banks that the same person can’t hold the post of MD, CEO and Whole-time Director for more than 15 years to improve Corporate Bank Governance and reduce the concentration of power.

Further Suggestions

Employee Stock Option Plans (ESOPs)
- ESOP is a type of benefit plan wherein employees are given some shares of the company apart from regular salary (companies like Facebook, Google, and many other Startups already use ESOPs).
- Existing salary-based compensation mechanism encourages employees to prefer safety and conservatism over risk-taking and innovation. But giving them some shares via ESOP may encourage risk-taking and a possible change of mindset from an employee to an owner.
Allow lateral entry into higher management.
Allow campus recruitment of some specialists from institutions like IITs, IIMs etc.

BASEL Norms and India – UPSC Notes

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BASEL Norms and India – UPSC Notes

This article deals with ‘BASEL Norms and India – UPSC Notes .’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

BASEL and BASEL Norms

Bank of International Settlement (BIS) is owned by 60 Central Banks & has Committee on Banking Supervision at Basel (Switzerland), which made Basel Norms.

BASEL I -1988
BASEL II – 2004
BASEL III – 2011

The rationale of BASEL Norms or Capital Adequacy Ratio

Central Banks around the world have been making provisions to act as shock absorbers in case of a bank run (bank bankruptcy). Providing shock absorbers to banks has seen three major developments.

Provision of Cash Reserve Ratio, i.e. keeping a cash ratio of total deposits mobilized by the banks (already studied).
Provision of Statutory Liquidity Ratio (SLR), i.e. maintaining some assets of the deposits mobilized by the banks with the banks themselves in non-cash form (already studied).
Provision of the Capital Adequacy Ratio (CAR) norm (BASEL Norms that we will study in this article).

BASEL III norms explained

When a bank opens after getting a license from RBI, it will initially gather capital in the form of Debt & Equity.

After that, when operations of the Bank start, it will receive money in the form of cash deposited by the depositors, which it will further lend in loans after keeping aside CRR & SLR Obligations. But these loans also carry RISK, which measures the probability that the loan will not return.

Note: What Bank is getting in deposits is not capital but raw material. The capital of the Bank is what Bank will get via issuing bonds or shares.

Hence, BASEL developed the concept of Risk Weighted Assets to tackle the risk that loans carry.

Some loans are riskier than others. Hence, more risky loans will carry more Risk Weight.
E.g., Home Loans are riskier than G-Secs. Hence they will be assigned more Risk Weight
Then total Risk Weighted Asset of the Bank is calculated using the following formula

Risk Weighted Asset = (Total Loan in Particular Category) X (Risk associated with that category)

BASEL III norms say that the Ratio of Capital of a Bank to its Risk Weighed Asset must be 9% (i.e. Capital to Risk Weighted Asset Ratio (CRAR), aka Capital Adequacy Ratio (CAR), should be 9%).

& in the capital, there are two types of capital – Tier I (Shares) & Tier II (Debt) so that there is a balance between debt and equity of the Bank.

Domestic Systematic Important Banks (DSIB)

The Financial Stability Board has advised countries to identify their Systemically Important Financial Institutions and put a framework to reduce risk.
In pursuance of the directive, RBI has started identifying the banks that are ‘too big to fail’ and labelled them as Domestic Systematic Important Banks (DSIB). These banks are called so because of their size, cross-jurisdictional activities, complexity and interconnection. If these banks fail, they can have a disruptive effect on the whole economy.
Since 2015, annually, RBI has identified banks that are ‘too big to fail’ (=if they fail, it’ll severely hurt the economy)’ and labelled them as Domestic Systematic Important Banks (D-SIB), & ordered them to keep additional capital & technical norms.
In India, DSIBs include banks whose assets cross 2% of the GDP are considered DSIBs—the list of DSIBs includes SBI, ICICI, and HDFC.

What do they have to do?

D-SIBs are categorized under five buckets.
According to these buckets, the banks must keep additional CAR under the Tier 1 Category (Equity).
Three Banks: HDFC (latest entry in 2017), ICICI & SBI are D-SIBs
- HDFC & ICICI = Bucket 1 (additional 0.15% CAR, i.e. they have to keep 9.15 % CAR)
- SBI = Bucket 3 (additional 0.45% as CAR)

But, the additional capital D-SIBs need to keep aside is much lower than in other nations. Therefore, RBI should develop more stringent measures.

Recapitalization of PSBs

For state-run banks to achieve capital adequacy standards, they require a capital infusion, known as the Recapitalization of the Bank.
To comply with BASEL 3 Norms, Public Sector Banks (PSBs) require additional capital. But issue is
- Due to the weak situation of Banks, it is difficult for Banks to raise capital via the Equity route as their shares are not fetching a good amount.
- Interest rate to raise capital via Debt is also high due to the weak position of Banks.
Along with that, there are Tier 1 and Tier 2 requirements, and Tier 1, i.e. Equity (7%) requirement, is more compared to Debt (2%).
Hence, Banks have stopped giving loans to decrease their Risk Weighted Assets (RWA) and, consequently, the capital required to meet the CAR target. But it negatively affects the economy as businesses and households are not getting loans.

To solve this issue, the government decided to Recapitalize the PSBs

2015	Government to infuse ₹70,000 crores in PSBs as part of Mission Indradhanush.
2017	₹ 70,000 crores were found to be insufficient. So the government decided to infuse ₹ 2.11 lakh crore. The plan was to raise this via Bank Recapitalization Bonds.
2018	Even this ₹2.11 lakh crore package was found insufficient. So, the Govt. sought supplementary grants from Parliament to infuse an additional ₹41,000 crores in PSBs.

Other benefits of Recapitalization of Banks

It will help create a ‘virtuous cycle of investment and jobs’ through Credit Growth.
Tackling Non-Performing Assets (NPAs) by strengthening the capital base.
Provide stimulus to the economy by pulling down lending rates.
Help to save large and systemically important banks from failing.

But there are concerns associated with the Recapitalization of Banks as well.

Increased Fiscal Deficit of government or cuts in welfare and capital expenditures
Use of Public Funds or taxpayer money without any intrinsic changes in the PSBs governance
Impact working culture as PSBs might not take adequate precautions in future while lending when they know that the government will step in to help if the loans turn sour.
No Accountability from PSBs as bank recapitalization is an ad-hoc measure with no linkage to the banks’ performance or efficiency.

High-Quality Liquid Assets (HQLA)

BASEL-III norms have also mandated that banks must keep enough amount in High-Quality Liquid Assets (HQLA) so that Bank can survive a 30-day stress-test scenario. HQLA-eligible assets include:
- Cash beyond CRR
- G-Sec beyond SLR
- High rated Marketable securities (e.g., backed by PSE, Multilateral development banks, and Foreign Governments)
RBI Order: From 1/1/2019, banks have to maintain HQLA for 30 days stress scenario

Cryptocurrency – Issues and Regulation

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Last Update: September 2024 (Cryptocurrency – Issues and Regulation)

Cryptocurrency – Issues and Regulation

This article deals with ‘Cryptocurrency – Issues and Regulation.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-2 syllabus. For more articles, you can click here.

The genesis of Cryptocurrency

During the Subprime Crisis, the Central Bank of the US & other developed countries adopted Easy Money Policy & as a result, the purchasing power of $ decreased. The leading cause of the Subprime Crisis was the loans given by banks to subprime borrowers. Hence, anarchists argued that banks earned by charging interest and fees. But when loans turned bad due to their mistake, governments made common people suffer by following Easy Money Policy and reducing the purchasing power of their hard-earned money.
Cyber Anarchists decided to withdraw from Banking System and start a currency that would not depend on any country’s Central Bank.
Hence, bitcoin can be considered a political movement rather than a technological movement.

Timeline

2008: Satoshi Nakamoto (the name of the online user, but nobody knows who he is) issued an online paper.
2009: The operation of Bitcoins started.
2015: Ethereum, the second most popular cryptocurrency after Bitcoin, was launched.
2020: The price of Cryptocurrencies started to rise amidst the Corona crisis due to fear that governments would print money in excessive amounts to cover the fall in tax collections and cover unemployment benefits.
2021: In the private sector, the acceptability of Bitcoins started increasing. E.g., Elon Musk and Jack Dorsey (founder of Twitter) are investing in Bitcoin.

What is Cryptocurrency?

Cryptocurrency is a digital currency created, stored and transacted using blockchain technology.
Examples of Cryptocurrencies: Bitcoin, Dogecoin, Litecoin, Ethereum etc.
Bitcoin, invented by Satoshi Nakamoto (anonymous), is the most popular.

How Bitcoins Work?

Technically Incorrect Example

Suppose there is a gold mine, and a person starts to mine it with tools. All the mined gold is converted to coins with a serial number on it by the person sitting at the exit of the mine and registered in Ledger.
The coin that is produced can be broken into smaller coins to pay for smaller transactions. But each time the bigger coin is broken into smaller coins, a separate Registration number is given to it, and it is registered in Ledger again.

Working of Bitcoin

Instead of Gold Mine, Satoshi Nakamoto has created a Cryptographic’ Data Cube’. This Cube can be mined using a computer. When the whole of ‘Data Cube’ is mined, 21 million bitcoins will be generated.
The primary condition is the same here as well. Every coin that is generated has to be registered in Public Ledger (called Blockchain).
Bitcoin is divisible up to 10^8 Satoshi. But each time Bitcoin is divided, it has to be registered in Public Ledger. Hence, every transaction is registered in Public Ledger (Blockchain) (more on this later).

How are Cryptocurrencies bought?

There are two ways

Mining: One can mine cryptocurrency coins using computers.
Buy from Someone: One can also buy cryptocurrency. This buying can also happen in two ways
- Peer-to-Peer Transactions: Buying directly from someone who owns that cryptocurrency.
- Exchange facilitated transactions through exchanges such as Kuber, WazirX etc.

Bitcoin Wallet

Bitcoin Wallet looks like other Wallets (like Paytm Wallet). One can send money to any person using his Bitcoin wallet’s Address and Password (Wallet address is random alpha-numeric)
But there is no requirement for Name, Mobile Number and KYC Norms. One can send Bitcoins to another person without knowing the identity of the other. Hence, it is very anonymous.

Benefits of Cryptocurrency

Cost-effectiveness in International Use: Electronic transactions to other countries are expensive due to currency conversion & processing fees levied by banks. Cryptocurrencies solve this problem, as they have a single valuation globally.
Privacy Protection: Using pseudonyms conceals the parties’ identities, information, and transaction details.
They are difficult to counterfeit compared to physical currency because they use Blockchain Technology.
Immunity from Government’s Financial Retribution: For citizens in repressive countries, where governments can easily freeze or seize bank accounts, cryptocurrencies are immune to any such seizure by the state.

Problem with Cryptocurrencies

Used in carrying out Illegal Activities because of anonymity, it offers
- Various sites selling Drugs and other banned substances through Bitcoins, like Silk Road, have came up.

Criminals use Bitcoins in case of cyberattacks—E.g. Wannacry episode.

Crypto-Exchanges are prone to Scams: The Crypto-Exchanges used by ordinary people to buy, sell and store cryptocurrencies are also prone to scams. For example, FTX Exchange, based in Bahama, indulged in the scam, and more than Rs. 10 lakh crore of investors was stuck due to the fraud (c. 2022).
Money Laundering: The cryptocurrency market isn’t universally protected or regulated like Banks. Thus, it is increasingly used to launder money. In 2019, criminal entities laundered approximately $2.8 billion through crypto asset exchanges.
The government is deprived of its taxes. E.g., On selling gold, government charges Capital Gains Tax, but Bitcoin transactions are difficult to trace.
Climate Change: Experts estimate that cryptocurrency mining-related electricity consumption generates 38 megatons of CO2 annually (equal to that of Mumbai and more than Austria and Bangladesh).
Countries like Iran and North Korea are using cryptocurrencies to bypass economic sanctions.
Uncertainty over Consumer Protection and Dispute Settlement Mechanisms: as Cryptocurrencies are decentralized.
Highly Volatile: Explained below.
No intrinsic value: Explained below.

Bitcoin Bubble / High Volatility?

The crypto asset market has been very volatile, with its total valuation swinging from almost US$ 3 trillion in November 2021 to less than US$ 1 trillion in Jan 2023.

high degree of volatility in Crypto Currency Market

Whether this is Bubble or not?

Cryptocurrencies like Bitcoin, according to its advocates, are quickly becoming accepted forms of payment that will pose a severe threat to the national currencies issued by central banks. They, therefore, consider the increase in Bitcoin’s acceptability only a reflection of its promising future as a stateless currency.
Sceptics have cited the 17th-century Tulip bubble and the late-1990s Internet stocks as cautionary tales. Bitcoins lack inherent value, and emotion rather than value drives their exponential growth.

India and Cryptocurrencies

Budget 2022: Budget 2022 placed the transactions in the Virtual Digital Assets (i.e. Cryptocurrency, NFT etc.) under tax provisions
- 30% tax has been placed on the income earned from the transactions in the Cryptocurrency.
- The losses can’t be offset by the profits.
- Gifting the cryptocurrency will also be taxed.
- 1% TDS will be deducted for payment made above a certain threshold in relation to the trade of Virtual Digital Assets.

2023: Cryptocurrencies and Virtual Assets have been placed under the ambit of Prevention of Money Laundering Act (PMLA). This would require all entities dealing with crypto to implement mandatory KYC processes, report suspicious activities, and require financial entities/crypto companies to maintain client details for five years.

Virtual Currencies & World

Some countries have restricted and prohibited Virtual Currencies (India, China, Bolivia etc.), while others allow their use in regulated forms (Japan, the US, Australia, South Africa etc.).

Virtual currencies and Blockchain-based things started by various countries

1. European Union (EU)

European Union has issued regulations called Markets in Crypto Assets (MiCA) in 2023 to protect people from scams and frauds in crypto-currency and combat the use of crypto-assets in money laundering..

2. El – Salvador

El-Salvador has become the first country to accept Bitcoin as legal tender in 2021.

3. Albania

It has legalized Crypto-assets for investment purposes.

4. Petro

In 2018, President Nicolas Maduro announced the following:

The government of Venezuela decided to issue 100 million Petro coins – a type of cryptocurrency.
Price of 1 Petro coin = market price of one oil barrel from Venezuela.

5. UNICEF and Bitcoins

In October 2019, UNICEF announced that they would accept donations through Bitcoins and all the other sovereign currencies of the world.

6. Libra

Cryptocurrency announced by Facebook.
Unlike other Cryptocurrencies, Mark Zuckerberg has announced that it will be backed by assets in reserve.
But countries like France have openly rejected Libra as it will set a precedent of currencies of MNCs and challenge the sovereignty of nation-states.

Infrastructure

by admin

Last Updated: December 2024 (Infrastructure)

Infrastructure

This article deals with ‘Infrastructure – upsc.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Infrastructure?

According to the Department of Economic Affairs, Infrastructure is the set of basic facilities that help an economy to function & grow. This includes transport and logistics, energy, water and sanitation, communication and social and commercial infrastructure (like hospitals, schools, sports infrastructure, industrial parks etc.)

Since infrastructure benefits the whole economy, economists often argue that the government should fund the sector by means of taxation, partly, if not wholly. India needs to invest massive amounts to build infrastructure vouched by following data

Additionally, Sustainable Development Goals (SDG) also talk about building resilient infrastructure.

Why India should Invest in Infrastructure?

To achieve the vision of $5 Trillion Economy: To sustain the growth and achieve 5 Trillion economy, India needs to improve and invest in the infrastructure sector.
To create Employment: Construction activities creates large number of jobs.
To Support the increased Urbanization: India is urbanizing at a massive pace. Hence, the investment in infrastructure should be increased commensurately to make the process of urbanization sustainable.
Climate and Disaster Resilient Infrastructure: India will have to invest massively to make the existent infrastructure climate resilient in view of climate change and increased number of disasters.

Infrastructure Bottlenecks: Reasons due to which projects get stalled

Infrastructure is the lifeline of an economy. One of the biggest problems hampering the growth of the Indian Economy is infra bottlenecks. These bottlenecks include

1. Large Number of Clearances

There is no ease of doing business & a large number of clearances are required for building infrastructure projects.
E.g., In Airport Construction, clearances are needed from DGCA, the Ministry of Defence etc.

2. Systemic Bottlenecks

Land acquisition, environmental clearances, delays in procurement etc., have added to project delays.

3. Over-Leveraging

Aggressive bidding during the high growth phase and subsequently slowing down has made the balance sheets of companies highly debt-ridden.

4. Issues with Dispute Redressal

The dispute redressal process is painfully long in India. It takes 3.8 to 4.3 years on average to settle commercial disputes.

5. Credit Crunch

Projects have long gestation periods, and banks can’t fund such long-term projects. Moreover, Banks are suffering from high NPAs, and the corporate bond market has not developed sufficiently. Hence, many projects at various stages of completion are facing Credit Crunch and are not able to complete.

Measures to address these problems

Form a specialized body to make better contracts for PPP projects so that they don’t face legal hurdles in future (E.g., 3P India).
Addressing Systemic Delays
- Swifter Environmental Clearances should be given to linear infra projects.
- Plug-and-Play Mode: Government agencies should ensure regulatory clearances before awarding infra projects so that the winning bidder can get to implementation straightaway.
Overhauling Dispute Redressal: The BK Chaturvedi Committee was constituted in this regard. Additionally, Commercial Courts have been formed, and Arbitration and Conciliation Act has been passed.
Expanding the Corporate Bond Market: Since long-term financing is required, bank lending has limited capacity. Thus, the corporate bond market must be deepened & expanded. Bankruptcy Code will help in this regard by developing Corporate Bond Market.
Infrastructure companies can use REITs & InvITs to attract funds for infrastructure projects.
The government is now emphasizing EPC (Engineering- Procurement- Construction) & Hybrid Annuity Model rather than BOT (Build-Operate-Transfer) Model.

Side Topic: Pragati Program

Aim: Timely implementation of government programs (especially in infrastructure, worth trillions of rupees.)
PM has launched PRAGATI— Pro-Active Governance and Timely Implementation to monitor the progress made wrt these projects himself.
PM holds monthly meetings with Secretaries of the Union government and Chief Secretaries of all state governments to review the progress of projects under implementation. Meetings are held through video conference.

Side Topic: Type of Projects

Infrastructure Financing

The central government is one of the major financers of infrastructure in India. In recent times, the amount of the government’s capital expenditure on infrastructure has increased sharply.

But the government can’t fund all the infrastructure projects given the FRBM targets. Hence, the following routes can be adopted to finance infrastructure projects.

1. National Monetization Pipeline

Monetization means transferring the revenue rights to a private party for a specified transaction period in return for upfront money, a revenue share and a commitment to investment in the assets.
Under the Scheme, the government will first identify the already created assets, such as National Highways, Railway Lines, Power Transmission Lines, Pipelines etc. These brownfield assets will then be leased to the private sector for a certain period. The money thus raised will be used for the creation of new assets. Hence, it is a limited period transfer of Brownfield Infrastructure Assets (where investment is already being made, but assets are either languishing or not fully monetized or under-utilized) to unlock “idle” capital.
The aim of the initiative is to monetize government assets through limited private participation. The target is to raise Rs. 6 Lakh Crores in the next 5 years.
It will promote Public-Private Partnerships, each excelling in their core competencies like the government’s ability to deliver socio-economic growth and the private sector’s ability to provide quality service.

2. National Bank for Financing Infrastructure and Development (NaBFID)

NaBFID was set up in 2022 as a statutory Development Financial Institution for financing infrastructure.
It will provide ₹5 lakh crore long-term infrastructure funding in the next 3 years.

3. National Infrastructure Pipeline

In 2019, Finance Minister created National Infrastructure Pipeline (NIP) to mobilize ₹111 lakh crore for building infrastructure in the next five years (2019-20 to 2024-25). It aims to develop a comprehensive view of infrastructure development in the country, monitoring its progress at the highest levels in the government for timely completion and enabling a pipeline view for investors to plan infrastructure investments.
Funds collected under NIP will be used to fund projects spread across Energy (24%), Roads (19%), Urban (16%), Railways, Irrigation etc.

4. Masala Bonds

Masala Bonds are offshore ₹ denominated bonds.
These are already used by Railways, NHAI etc., to gather funds for building infrastructure.

5. Infrastructure Investment Trust (InvITs)

For more details, CLICK HERE.

6. National Investment and Infrastructure Fund (NIIF)

NIIF is a Sovereign Wealth Fund of India (i.e. it has the guarantee of the government of India.)
It has a corpus of ₹ 40,000 crores.
Ownership of NIIF is as follows.

7. Bank Loans

Bank Loans can also be taken to fund infrastructure projects. But due to high NPA levels and the long gestation period of such projects, it is not considered a good option for financing infrastructure projects.

8. PPP

The private sector is roped in the infrastructure projects via Public Private Partnerships.

9. Pension Funds

Pension Funds are very stable and long-term in nature.

10. Value Capture Financing

It is an innovative type of infrastructure financing in which the value of public infrastructure (like road building, sewage etc.) is recovered from the landowners who stand to gain from the construction of that infrastructure due to appreciation in the value of that land.

Side Topic: Harmonized List of Infrastructure Sector

Finance Ministry notifies the list of sectors included in Harmonized List of Infrastructure. Presently, there are 5 Main Sectors and 34 Sub-Sectors included in the list

Transport and Logistics: Roads, Railways, Waterways, Airports, Pipelines and Multi-Modal Logistic Parks
Energy: Generation, Transmission, Distribution, Storage of Oil or Gas or LNG
Water and Sanitation: Solid Waste Management, Irrigation, Water Treatment Plants
Communication: Telecommunication Towers and Services
Social and Commercial: Educational Institutions, Sports, Hospitals, Tourism Infrastructure, Cold Chain Infrastructure, Affordable Housing, Affordable Rental Complex, Exhibition and Convention Centres.

Benefits of Inclusion in Harmonized List of Infrastructure

Access to long-term credit at concessional rates from banks and financial institutions
Easier access to overseas borrowings
The sector becomes eligible to borrow from development banks like India Infrastructure Financing Company (IIFCL)

Logistics

by admin

Last Updated: May 2023 (Logistics)

Logistics

This article deals with ‘Logistics – UPSC.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

What is Logistics?

Logistics means managing the flow of goods between the point of origin and the point of consumption.

It includes

Transportation
Inventory management
Warehousing
Packaging
Last-mile delivery

Importance of the Logistics Sector

Sunrise Sector: The Indian logistics sector is valued at $215 billion and is expected to grow at a CAGR of 10.5% between 2019 and 2025.
Employment: Logistics industry employs 4.5 crores and is growing at the rate of 15%.
The growth of the manufacturing sector depends upon it. E.g., getting raw material, taking final goods to markets etc.
Boosting Indian Exports: China is an export giant because of its highly efficient logistics.
Service Sector: Amazon, Flipkart etc., have become giants due to their efficient logistics.
Increasing Farmer’s Income: An efficient logistic supply chain network has the potential to increase farmers’ income manifold, which can lead to a domino effect on the overall economy.

Challenges

High Cost: India’s logistics costs are 4-5 times that of developed countries. It makes our products uncompetitive.
Inefficient: Logistics in India is inefficient compared to China. It takes more time to reach a product in the western market—days to send the product to the US – 14 days from China compared to 41 from Delhi.
Regulatory Issues: There are obstacles in land acquisition and consolidation, poor coordination among multiple regulatory agencies and a lack of transparency in compliances.
Warehouse Issues: The inadequate size of the warehouse, difficulty in getting land at the desired location, and the majority of warehouses are not leakproof.
Saturated Transport: Railways and roads have been saturated. The railway is operating at 120% of its capacity leading to delays.
Ports: Large vessels cant enter Indian ports. Hence, Indian cargo is first taken to Colombo or another port & transhipped from there.
Rural market: Logistics industry is least developed to cater to rural areas, which form a large chunk of the Indian market.
Lack of inter-ministerial coordination / Fragmented Policy: It hampers smooth multimodal transport in India.
Shortage of skilled workforce: Non-availability of skilled manpower is attributed to inadequate training and proper leadership and support. There are limited institutes for soft skills and operational and technical training. Also, due to poor working conditions and low pay scale (unorganized nature), it is not a preferred choice among skilled personnel.

Due to these challenges, India’s rank on World Bank’s Logistics Performance Index is low.

Steps taken by the Government to improve logistics

PM Gati Shakti

The growth experience of advanced economies has highlighted the importance of having a multimodal transport network approach. To introduce holistic planning in the case of infrastructure projects, the government launched PM Gati Shakti.

How will it work?

PM Gati Shakti is a digital platform which connects 22 ministries, such as Road, Shipping, Aviation, Railways, Petroleum, Telecom etc., to ensure holistic planning and execution of projects.
The platform has 200 layers of geospatial data, such as roads, railways, forests, rivers, state and district boundaries, etc., to aid in planning projects and obtaining rapid clearances.
The Gati Shakti portal will also help government agencies to track the real-time development of various infrastructural projects from a centralized place.
It has been developed by the Bhaskaracharya National Institute for Space Applications and Geo-informatics (BISAG-N) and hosted securely on the Meghraj cloud.

Benefits

Address the silos-based approach of infrastructure development by various ministries.
Reduce the logistics cost in India.

National Logistics Policy (NLP)

The NLP policy aims to increase employment opportunities, boost economic growth, and promote the competitiveness of Indian goods in global markets. It aims to bring global standards to warehousing, multimodal digital integration, ease of logistics services, human resources, and skill enhancement.
The targets of NLP are
- Reduce the cost of logistics: Target is to reduce the cost of logistics to global benchmarks by 2030.
- Improve India’s Logistics Performance Index ranking: Target will be in the top 25 ranks by 2030.
- Create a data-driven decision support mechanism for an efficient logistics ecosystem.
It will be achieved via a Comprehensive Logistics Action Plan (CLAP) consisting of
1. Unified Logistics Interface Platform: It will bring all digital services related to transportation to a single portal.
2. Standardisation of physical assets and benchmarking of service quality standards
1. Development of Logistics Human Resources
2. Facilitation of Logistics Parks
3. Development of Export-Import (EXIM) Logistics

Infrastructure Lending Status:

Logistics sector has been given Infrastructure Lending Status. Due to this, loans for logistics have become eligible for the following benefits.

Logistics projects can get long tenure loans.
Loans will be cheaper (at least 50 basis points)
Such projects will now be eligible to borrow from specialized lenders like IDFC, IIFCL etc., which fund only infrastructure projects.
Attracting investments from debt, pension funds and international lenders (ECBs) into recognized projects.

Other Steps

GST Tax Reforms: The taxation system has become simple and has created a single market.
Dedicated Freight corridors will smoothen the transportation and logistics.
Sagarmala and Bharatmala projects have been started to upgrade port and road infrastructure.
India has signed the Trade Facilitation Agreement of WTO and taken steps to make customs procedures smooth and paperless.
Creation of Logistics Division: The Logistics division in the Department of Commerce has been created. Further, the Logistics division has planned to create an IT backbone and develop a National Logistics Information Portal. This online Logistics marketplace will bring together the various stakeholders on a single platform.
Logistics Ease Across Different States (LEADS) Index: LEADS Index is an attempt to establish the baseline of performance in the logistics sector based on the perception of users and stakeholders at the state level.
Logistic Enhance Efficiency Program: It was launched to manage and develop logistic parks and reduce the cost of logistics.

What more can be done?

Formulation of National Integrated Logistics Policy to bring greater transparency and enhance efficiency
Faster clearances for setting up of logistics infrastructure like Multimodal logistic parks (MMLPs), Container Freight Station (CFS), Air Freight Station (AFS) & Inland Container Depot (ICD)
Promote the introduction of high-end technologies like high-tech scanning equipment, RFID, GPS, EDI, and online Track & Trace systems in the entire logistics network.

Multimodal Projects

Integrated Multimodal Transportation System (IMTS) serves to interconnect different modes of transport – road, rail, air, and water – seamlessly and therefore improve the efficiency and speed of goods and passengers movement.

In 2022, the Government awarded the contract for setting up India’s first multi-modal logistics park (MMLP) near Chennai to Reliance Industries (RIL). India is planning to build 35 MMLPs

Benefits

In difficult terrain, Multimodal Transport is better suited. E.g. Kaladan Multimodal Project uses Road, Inland Transportation and Sea.
Ease in the movement of goods => Embedded cost of transportation in goods can be cut down.
The multiplier effect on the economy: They lead to the development of ancillary industries like Steel, Shipbuilding, Railway building etc.
International Relations: Our trade in South East Asia can grow with the development of Multimodal Projects in those areas.
Provides faster transit of goods
Reduces the burden of documentation and formalities
Establishes only one agency to deal with.

Challenges

Coordination Issues: Different Ministries and agencies, both of Union and state, need to come on a single platform
Land acquisition issues
Maintenance of all the modes of transportation simultaneously is an issue.
Finance Issues: It requires huge investment.

Scheme: Multi-Modal Logistics Park (MMLP)

Multi-Modal Logistics Park (MMLP) is a modal freight handling establishment comprising warehouses, dedicated cold chain facilities, freight or container terminals and bulk cargo terminals, which eases and optimizes merchandise movement via road, rail, waterway and air, and consequently, rationalizes the cost of logistics and improves the competitiveness of logistics.
India is developing 35 MMLPs across India over the coming years. The first MMLP will be constructed in Assam at a cost of $407 million.

e-Commerce

by admin

e-Commerce

This article deals with ‘e-Commerce – UPSC.’ This is part of our series on ‘Economics’ which is an important pillar of the GS-3 syllabus. For more articles, you can click here.

Introduction

Selling and buying goods using ICT is known as e-Commerce.

E-Commerce Sector is growing at an incredible pace

The e-Commerce sector has generated a multiplier effect

Huge creation of jobs
Reduction of market prices for consumers
Huge investment in logistics and infrastructure
Help Artisans exploit new markets. E.g. Karigar ke Dwar (Flipkart)
Help in promoting tribal art. E.g., Amazon and Trifed signed a contract to sell Indian Tribal Products globally under the brand ‘TRIBES INDIA

Two Models of e-Commerce

There are two models of e-Commerce

1. Market-Based Model

Market-based Model is followed by Amazon & Flipkart, in which the company provides the IT platform to facilitate the transaction between buyer and seller and takes their fees for providing the platform.
FDI Norms: FDI is allowed

2. Inventory-Based Model

In this Model, the seller manufactures and sells its product online—for example, the online store of Samsung, where Samsung sells its phones and other accessories.
FDI Norms: FDI is not allowed

Other way to define

B2B	Business to Business
B2C	Business to Customer

e-Commerce Policy

Need for e-Commerce Policy

Taking Market Based License but then acting as an Inventory based company. E.g., WS Retail, the biggest seller on Flipkart, is owned by Flipkart, and Cloudtail and Appario, which are the biggest sellers on Amazon, are owned by Amazon. Apart from that, Amazon sells its in-house products like Kindle in its marketplace.
A large amount of customer data is under the control of e-commerce companies which can be misused.
Importance of sector due to its revenue and job-creating potential. Hence, it should be properly regulated as any mishap can result in a catastrophe.
Monopolistic market: e-Commerce giants such as Amazon are trying to set up a Monopolistic market by making the brick and mortar stores go out of the market through their policies such as making exclusive deals with mobile companies to sell their phones on their platform only and by giving large discounts.
Silo-based regulation: e-Commerce in India is regulated by the IT Act, Consumer Protection Act etc. The government needs to consolidate it via a comprehensive act.

Draft e-Commerce Policy

FDI: Clearly demarcate a marketplace model & an inventory-based model and encourage FDI in the ‘marketplace’ model alone. (Earlier issue: Companies like Amazon show that they follow Marketplace Model but sell their inhouse products (like Amazon Kindle etc.)
Data: Policy acknowledges data as a ‘national asset’/’societal common’ and seeks to establish a legal & technological framework to restrict the cross-border flow of data generated in India (Earlier issue – Companies take Indian data outside and mine it to target advertisements or sell data about their preferences).
Taxation Issues: The concept of ‘significant economic presence‘ should be adopted for the purpose of taxation. (Earlier issue – Companies like Amazon don’t pay tax, arguing that they are based in Luxemburg).
Infrastructure Development: ‘Infrastructure status’ will be given to digital infrastructure like data centres, server farms for data storage etc.
Small enterprises and start-ups attempting to enter the digital sector can be given ‘infant-industry’ status.

Q-Commerce

Supply chain disruptions triggered by the pandemic led to a new sub-vertical of the online grocery segment is — Quick Commerce, or q-commerce — where the promise of deliveries within 10-30 minutes of ordering is the unique selling proposition. The focus of most of these ventures is on setting up micro-warehouses located closer to the point of delivery and restricting the stocks at these ‘dark stores’ to a focussed set of under 2,000 high-demand items, as against the traditional formula of well-stocked large-format warehouses located on the outskirts of towns and cities.
Examples: Instamart, Zepto, Grofers etc.