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03 February, 2020

25 Min Read

Paper Topics Subject
GS-II National Seed Fund
Data Centre Parks
GS-III Anti-dumping duty Economic Issues
Commission for Agricultural Costs and Price (CACP) Economic Issues
Kerala islands under CRZ regime
Foreign Portfolio Investors ( FPIs) Economic Issues
National Logistics Policy Economic Issues
Infrastructure Investment Trusts (InvITs) Economic Issues
GS-II :
National Seed Fund

Syllabus subtopic: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

 

Prelims and Mains focus: about the national seed fund and its benefits; about ESOP

 

News: The Department for Promotion of Industry and Internal Trade (DPIIT) is working on guidelines for a National Seed Fund that was announced in the Budget for 2020-21 to help start-ups and budding entrepreneurs.

 

Why the reform?

  • When it comes to early-stage seed funding, the Indian startup ecosystem is going through a slowdown. In 2019, the seed stage funding continued to fall. With $252 Mn in funding, the seed-stage deal value fell by 44% (compared to 2018) as only 306 seed funding deals were recorded.

 

  • In their interactions with the department, start-ups have time and again demanded formulation of a national seed fund scheme.

 

  • Most of the start-ups actually face problem in raising finance or funds in the ideation to the proof of concept stage.

 

  • Some states and central government departments like Biotechnology Industry Research Assistance Council have their own seed fund scheme but they are small and are not pan-India.

 

  • The budget aims to provide early life funding, including a seed fund to support ideation and development of early stage start-ups.

 

Significance of the move

  • With this, the government joins the industry in its efforts to support early-stage startup ecosystem with funding.

 

  • It will help encourage and empower more individuals to become entrepreneurs. This is a celebration of entrepreneurship, promoting the ease of doing business, boosting the creation of jobs and furthering the development of the ecosystem.

 

Employee Stock Option Plan (ESOP)

  • It is an employee benefit scheme under which the company encourages its employees to acquire ownership in the form of shares. These shares are allotted to the employees at a rate considerably lesser than the prevailing market rate.

 

  • Apart from the employee-benefit motive, ESOPs are also meant to align the interests of the employees with that of the shareholders.

 

  • It is believed that the employees, who are also the shareholders, will focus better on company performance and growth so that the value of their shares appreciates.

 

  • ESOP is a significant component of compensation for employees. Currently, it is taxable.

 

 

What did the budget propose?

  • Budget 2020 has proposed to defer tax deducted at source (TDS) or tax payment on shares alloted by the startups to their employees under the Employee Stock Option Plans (ESOPs) by five years or till they leave the company or when they sell, whichever is earliest.

 

  • This means that employees of start-ups who are exercising their ESOPs may have to pay tax at a later date.

 

  • It will help start-ups in further strengthening startup ecosystem in the country.

Source: Indian Express

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GS-II :
Data Centre Parks

Syllabus subtopic: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

 

Prelims and Mains focus: about the move: Challenges and benefits; about Personal Data Protection (PDP) Bill 2019

 

News: The Union budget proposal to enable private firms to build data centre parks could help India become a major global data centre, but only with a supportive policy and infrastructure framework.

 

Background

The budget proposal follows the requirement for data localization for most companies under the Personal Data Protection (PDP) Bill 2019, which is expected to be made into law soon. However, data localization won’t be the only driving principle for the data centre policy, as such parks can generate business worth billions of dollars each year.

 

Current scenario

Currently there is no large-scale foreign investment in data centres in the country. There is no policy or framework right now on how these global data centres hubs can be created in India. If the government has a clear cut policy around it, India could essentially become a data centre hub for global enterprises.

 

 

Data Centre Market: Key figures

  • The global data centre market is expected to grow by $284.44 billion during 2019-23, according to market researcher Technavio.

 

  • According to Research and Markets, US data centre market is expected to reach revenue of $69 billion by 2024. Meanwhile, India data centre market is expected to reach values of approximately $4 billion by 2024.

 

Challenges in setting up data centres in India

  1. costly real estate,
  2. high power consumption
  3. heavy expenses on improving wide area network connectivity.

 

 

Benefits of the new policy

  • It will build an environment where more and more capacity is available for data centre providers and hyperscalers in India.

 

  • The new policy on data centre parks is expected to incentivize setting up data centres, similar to some US states that have relaxed taxation on data centre providers. Illinois, one of the largest data centre markets in US, announced a data centre tax incentive in June 2019 exempting data centres from state and local sales taxes on fulfilling certain provisions required by the state.

 

  • Data centres are capital intensive businesses so it still makes sense to operate from major cities where overhead costs are distributed across a larger facility while smaller markets may not attract enough customer base.

Source: Livemint

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GS-III : Economic Issues
Anti-dumping duty

Syllabus subtopic: Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

 

Prelims and Mains focus: about the move to abolish duties and its significance; about dumping

 

News: The government’s decision to abolish anti-dumping duties on Purified Terephthalic Acid (PTA) will bring down manufacturing cost and potentially boost exports.

 

Background

  • The anti-dumping duties, first imposed around July 2014, levied additional charges between $27 to $160 per metric tonne for those wishing to import PTA.

 

  • Data from the Commerce Ministry shows exports of some products made with PTA like polyester staple fibres (used to make synthetic yarn) dropped over 35 per cent to $197 million in 2015-16 from $309 million in 2013-14.

 

  • In 2018-19, India exported $320 million worth of this product. Exports of textured yarn of polyesters dropped 19 per cent to around $680 million in 2015-16 from around $842 million 2013-14, before growing to around $832 million last financial year.

 

About the move

  • The move, announced in the Budget, does away with a previous NDA government decision to block countries like China, Taiwan, Malaysia, Indonesia, Iran, Korea and Thailand from substantially exporting the material — purified terephthalic acid (PTA) — to India.

 

Reason for abolishing anti-dumping duty

  • As PTA is a raw material for many industries, there has been a persistent demand that they should be allowed to source it at an affordable rate, even if it means importing it.

 

  • The duties had led to downstream manufacturers of synthetic fabrics operating at only 70 per cent of their actual capacity.

 

  • While India has a few domestic PTA producers like Reliance Industries and the Indian Oil Corporation, synthetic fabric makers have faced shortages of PTA on several occasions.

 

What is PTA used for?

  • It is a raw material for synthetic fibre-based clothing and certain plastic-based products.

 

  • It also follows “persistent” demand “for quite some time” from several industries to allow them to source the product at a more affordable rate.

 

Significance of the move

  • Easy availability of PTA at competitive prices was desirable to unlock immense potential in the textile sector, seen as a significant employment generator.

 

  • This removal of the anti-dumpting duty would greatly help the country to enhance global competitiveness, boost exports and enable domestic manufacturers to compete with cheaper imports.

 

What is dumping?

  • Dumping is a term used in the context of international trade. It's when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter's domestic market.

 

  • Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product's manufacturers or producers in the importing nation.

 

What Is an Anti-Dumping Duty?

An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. For protection, many countries impose stiff duties on products they believe are being dumped in their national market, undercutting local businesses and markets.

Source: Indian Express

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GS-III : Economic Issues
Commission for Agricultural Costs and Price (CACP)

Syllabus subtopic: Issues related to Direct and Indirect Farm Subsidies and Minimum Support Prices

 

Prelims and Mains focus: about the open-ended procurement policy and the need to review it; about CACP and its mandate

 

News: As the debate surrounding the review of open-ended procurement policy has started gaining momentum, following a recommendation by the Commission for Agricultural Costs and Price (CACP) to the Centre government, several farmers and farmers’ bodies in Punjab and Haryana have hinted that any move to stop or limit it would be opposed and resisted.

 

Background

According to CACP, the policy of open-ended procurement has led to mounting food stocks and adversely affected crop diversification. Consequently, it asked for a review of the open-ended policy.

 

 

What is the open-ended procurement policy?

  • Under it, government agencies buy whatever quantity of wheat and rice is brought by farmers into the mandis (wholesale markets), within the stipulated time and which conforms to fixed quality parameters for Central pool.

 

  • The open-ended procurement policy is an integral part of the agricultural price support policy for the two most important cereals: rice and wheat. A review of it will constitute an examination of its basic structure.

 

 

About Commission for Agricultural Costs and Price (CACP)

  • It is an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India.

 

  • It came into existence in January 1965.

 

Composition

Currently, the Commission comprises a Chairman, Member Secretary, one Member (Official) and two Members (Non-Official). The non-official members are representatives of the farming community and usually have an active association with the farming community.

 

Mandate

  • To recommend minimum support prices (MSPs) to incentivize the cultivators to adopt modern technology, and raise productivity and overall grain production in line with the emerging demand patterns in the country. Assurance of a remunerative and stable price environment is considered very important for increasing agricultural production and productivity since the market place for agricultural produce tends to be inherently unstable, which often inflict undue losses on the growers, even when they adopt the best available technology package and produce efficiently. Towards this end, MSP for major agricultural products are fixed by the government, each year, after taking into account the recommendations of the Commission.

 

  • As of now, CACP recommends MSPs of 23 commodities, which comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra, sugarcane, cotton and raw jute).

 

How is MSP decided by the government?

  • CACP submits its recommendations to the government in the form of Price Policy Reports every year, separately for five groups of commodities namely Kharif crops, Rabi crops, Sugarcane, Raw Jute and Copra.

 

  • Before preparing aforesaid five pricing policy reports, the Commission draws a comprehensive questionnaire, and sends it to all the state governments and concerned National organizations and Ministries to seek their views. Subsequently, separate meetings are also held with farmers from different states, state governments, National organizations like FCI, NAFED, Cotton Corporation of India (CCI), Jute Corporation of India (JCI), trader's organizations, processing organizations, and key central Ministries.

 

  • The Commission also makes visits to states for on-the-spot assessment of the various constraints that farmers face in marketing their produce, or even raising the productivity levels of their crops.

 

  • Based on all these inputs, the Commission then finalizes its recommendations/reports, which are then submitted to the government.

 

  •  The government, in turn, circulates the CACP reports to state governments and concerned central Ministries for their comments. After receiving the feed-back from them, the Cabinet Committee on Economic Affairs (CCEA) of the Union government takes a final decision on the level of MSPs and other recommendations made by CACP.

 

  • Once this decision is taken, CACP puts all its reports on the web site for various stakeholders to see the rationale behind CACP's price and non-price recommendations.

Source: The Hindu

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GS-III :
Kerala islands under CRZ regime

Syllabus subtopic: Conservation, Environmental Pollution and Degradation, Environmental Impact Assessment.

 

Prelims and Mains focus: about the CRZ regime and its significance

 

News: As many as 2,130 backwater islands of Kerala, including Maradu, have been brought under the Coastal Regulation Zone (CRZ) regime thereby imposing curbs on development activities.

 

Background

The provisions of the CRZ 2011 notification made special provisions for Kerala considering the unique coastal systems of backwaters and backwaters islands along with the space limitation in the coastal stretches of the State of Kerala.

 

CRZ 2011 notification

  • Within the 50 metre CRZ area of these islands, only the repair and reconstruction of existing dwelling units of local communities will be permitted.

 

  • Beyond the 50 metre limit, the local communities could construct new dwelling units with the permission of the local body.

 

Changes made by CRZ 2019 notification

  • The CRZ area of these islands has been reduced to 20 metres in the subsequent CRZ notification issued in 2019, allowing more land for construction towards the water body. One may have to wait for some more time for availing of the benefits of the CRZ 2019 notification, as it is yet to come into force.

 

  • Till the 2019 notification comes into effect, the 2011 notification will hold good.

 

What is the CRZ area?

  • No new development activity will be permitted in these islands in an area between High Tide Line (HTL) and 50 metres towards the landward side, which is the CRZ area of these islands.

 

  • The HTL is the line on the land up to which the highest water line reaches during the spring tide.

 

 

Islands on the CRZ list

  • The islands of Mulavukad, Chendamangalam, Kothad, Pizhala and Kadamakudy of Ernakulam where some major CRZ violations have been reported are there in the list of 1,068 islands of the district.

 

  • The 474 islands of Alappuzha and the 184 of Kollam are also in the list. Thiruvananthapuram has the least number of islands, 43.

 

  • This is for the first time that the list of the Kerala islands is being drawn up.

 

  • The list of the islands was prepared by the National Centre for Earth Science Studies, Thiruvananthapruam, for the Kerala Coastal Zone Management Authority (KCZMA).

Source: The Hindu

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GS-III : Economic Issues
Foreign Portfolio Investors ( FPIs)

Syllabus subtopic:

  • Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.
  • Government Budgeting.

 

Prelims and Mains focus: About steps taken to boost private investment; associated terms and their meaning

 

News: Finance minister took several measures to woo foreign portfolio investors (FPIs) after the misstep last year on imposing a surcharge on investors which were registered as a trust.

 

What are steps to be taken?

  1. withholding tax rate of 5% for FPIs investing in the bond market
  2. eliminating the dividend distribution tax (DDT)
  3. letting FPIs claim credit in home jurisdiction
  4. Full tax exemption for sovereign wealth funds if they invest in infrastructure and other notified priority sectors. The sectors include roads, highway projects, ports and water supply projects.

 

Significance of the move

  • The steps showcase how the government is seeking to tap private capital, especially foreign funds, to revive economic growth at a time when the government’s balance sheet is stretched.

 

  • The Centre tried to pull all stops in reaching out to foreign investors in the budget.

 

About Withholding tax

  • Withholding tax is deducted at source, and is levied by some countries on interest or dividends paid to a person residing outside that country. The withholding tax was so far allowed only until July 2020, which has been extended to July 2023. The amendments are effective from the next fiscal.

 

  • For investments made by FPIs in bond market instruments such as government securities, corporate bonds, municipal bonds, the government has set the withholding tax rate at 5%. In its absence, the tax would have depended on double taxation avoidance agreement or tax treaties so could go up to 15%. Under the treaty, the tax outgo is capped at 15% for the US.

 

About Sovereign wealth fund

  • A sovereign wealth fund is a state-owned investment fund that is used to benefit the country's economy and citizens.

 

  • Funding comes from central bank reserves, currency operations, privatizations, transfer payments, and revenue from exporting natural resources.

 

  • Funds tend to prefer returns over liquidity and are therefore more risk-tolerant than traditional foreign exchange reserves.

 

  • Acceptable investments in each SWF vary from country to country.

 

  • Sovereign wealth funds such as Abu Dhabi Investment Authority and Singapore’s GIC have invested billions of dollars in India, especially in infrastructure and energy sectors. They are considered as patient investors with extremely deep pockets and very long-term investment horizons.

 

About Dividend Distribution Tax (DDT)

  • DDT is a tax levied on dividends that a company pays to its shareholders out of its profits.

 

  • It is taxable at source, and is deducted at the time of the company distributing dividends.

 

  • The dividend is the part of profits that the company shares with its shareholders.

 

  • The law provides for the DDT to be levied at the hands of the company, and not at the hands of the receiving shareholder. However, an additional tax is imposed on the shareholder, who receives over Rs. 10 lakh in dividend income in a financial year.

 

  • The biggest beneficiary of eliminating DDT are foreign funds, as they won’t just pay tax as per rates negotiated under various treaties but can also claim credit in their home jurisdictions on tax outgo in India.

 

What Is Foreign Portfolio Investment (FPI)?

  • FPI consists of securities and other financial assets held by investors in another country.

 

  • It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market.

 

  • Along with foreign direct investment (FDI), FPI is one of the common ways to invest in an overseas economy. FDI and FPI are both important sources of funding for most economies.

 

Pros

Cons

Feasible for retail investors

No direct control/management of investments

Quicker return on investment

Volatile

Highly liquid

Cause of economic disruption (if withdrawn)

 

Source: Livemint

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GS-III : Economic Issues
National Logistics Policy

Syllabus subtopic: Food Processing and Related Industries in India- Scope’ and Significance, Location, Upstream and Downstream Requirements, Supply Chain Management.

 

Prelims and Mains focus: about the draft national logistics policy: benefits and challenges in implementation

 

News: In her Union budget speech, the finance minister said the government will release the policy soon.

 

Background

  • India’s logistics sector has remained fragmented and unregulated, despite its centrality to economic growth. According to a logistics policy draft released by the commerce ministry in February 2019, the government will create a single point of reference for all logistics and trade facilitation matters, reducing logistics costs, which are now estimated at 13-14% of GDP, to 10%.

 

  • The draft policy has sought to optimize the modal mix (road-60%, rail-31%, water-9%) to global benchmarks (road - 25-30%, rail - 50-55%, water - 20-25%) and promote the development of multi-modal infrastructure.

 

  • The policy also recommends setting up a Logistics Wing that will be “the nodal agency tasked to identify key projects for driving first mile and last mile connectivity and to optimize the modal mix to identify commodity and the corridor for the most cost-effective mode of transport."

 

  • Almost 25-30% of fruits and vegetables produced in India are wasted due to lack of cold chain infrastructure. According to the draft policy, the Logistics Wing will “work with the ministries of food processing industries, consumer affairs, food & public distribution and the department of horticulture in respective states to identify key policy interventions and infrastructure enhancement to promote penetration of cold chain facilities and adoption of reefer (refrigerator) trucks in strategic locations."

 

Benefits of the policy

  • The upcoming national logistics policy is expected to streamline rules and address supply-side constraints, leading to lower logistics costs and greater competitiveness for Indian products worldwide.

 

  • The national logistics policy will clarify the roles of the Union government, state governments and key regulators.

 

  • It will create a single-window e-logistics market and focus on the generation of employment, skills and making medium and small enterprises competitive.

 

  •  Many countries, including South Korea and Singapore, came up with this kind of policy in the early 2000s. It covers the different types of logistics service providers. For example, some are just in freight forwarding, others in trucking, some act as full third-party logistics providers. Typically, a policy will categorise each of these services and give minimum threshold requirements for entering the market. For a truck fleet operator, this could be about minimum fleet size, specifications of trucks, axle load and carrying capacity etc.

 

  • The policy will allow seamless multi-modal freight transfer and make freight movement for key commodities cost-efficient. The proposed policy also aims to standardise the key elements of a warehouse which will lead to new demand and capacity creation of Grade A warehouses.

 

 

Challenges in implementation

The main challenge is while some of the subjects covered under the policy come under the Centre, the rest are controlled by states. The development of multi-modal logistics parks, or rules to do with motor vehicle movement, come under states. So, unless there is alignment between the Centre and the states, this policy will be hard to implement.

Source: Livemint

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GS-III : Economic Issues
Infrastructure Investment Trusts (InvITs)

 

Syllabus subtopic:

  • Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
  • Government Budgeting

 

Prelims and Mains focus: about the move to boost private InviTs and its benefits

 

News: Union budget proposals are set to boost investments in the infrastructure space with tax exemptions for private infrastructure investment trusts (InvITs), which have emerged as an investment route of choice for large institutional investors.

 

Background

  • The Income Tax (I-T) Act provides for a taxation regime for business trusts. Definition of a business trust means a trust registered as an InvIT or a REIT under markets regulator Sebi and these units need to be listed on a recognised stock exchange.

 

  • The private unlisted InvIT regime was introduced by Sebi in 2019 but did not get the same tax treatment as the listed ones.

 

  • Against this backdrop, the Finance Bill 2020 said representations have been received stating that private unlisted InvITs should be given the same status as public listed InvITs with regards to tax treatments provided under the Act.

 

What did the budget propose?

  • The budget has now accorded tax pass through status to private unlisted InvITs, which were till now available only to publicly listed InvITs or those InvITs that were sold to a small group of investors and subsequently listed on exchanges.

 

  • Clause(13A) of Section 2 of the IT Act defines “business trust" to mean a trust registered as an Infrastructure Investment Trust under the Securities Exchange Board of India (Infrastructure Investment Trusts) Regulation, 2014 or a Real Estate Investment Trust under the Securities Exchange Board of India (Real Estate Investment Trusts) Regulation, 2014 made under the Securities and Exchange Board of India Act, 1992, whose units are required to be listed on a recognized stock exchange in accordance with the aforesaid regulations.

 

  • It is proposed to amend clause (13A) of Section 2 of the IT Act so as to omit the long line relating to the requirement of listing of the business trust from recognised stock exchange in accordance with the regulations made by the Securities Exchange Board of India.

 

  • This amendment will take effect from April 1, 2021 and will, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years

 

Benefits to the move

  • The private InvIT structure, now with the tax pass through, will not just be attractive to investors but also for the sponsors who are looking to divest their infrastructure assets.

 

  • Even for a sponsor, this is a good move, because when you transfer the assets to a listed InvIT, you get a tax deferral, which was not available in the private InvIT structure. This is just a transfer of assets, they are not being sold, so to pay tax on such a transfer was an issue for sponsors.

 

  • It is expected to see a lot of demand in the next 3-6 months. Even those who were looking at listed InvITs might end up going down the private path. It’s a good structure and a win-win for both investors and sponsors.

 

  • The private InvIT will become an attractive structure for large investors such as pensions and sovereigns.

 

 

About Infrastructure Investment Trusts (InvITs)

  • Infrastructure and real estate are the two most critical sectors in any developing economy. A well-developed infrastructural set-up propels the overall development of a country. It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.

 

  • Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

 

  • An Infrastructure Investment Trust (InvITs) is Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.

 

  • The InvIT is designed as a tiered structure with Sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).

 

  • The InvITs are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

Source: Livemint

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