Daily Current Affairs for UPSC IAS | 14th January 2022

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1.  Free Trade Agreements (FTAs): Need, Benefits, Challenges and Way Forward

UPSC Syllabus: Mains: GS Paper 3: Indian Economy

Sub Theme:  Free Trade Agreements (FTAs): Need, Benefits, Challenges and Way Forward | UPSC

The Government is currently negotiating FTAs with around 20 countries, out of which it seeks to fast track FTAs with 6 partners. These include countries such as UK, EU, Australia, New Zealand etc.

However, India’s experience with the FTAs has so far been a mixed bag. The FTAs have been held responsible for increase in trade deficit and adversely impacting our domestic Industry. It was behind such negative outlook about the FTAs, the Indian government recently decided to withdraw from the RCEP negotiations.

According to experts, Government’s rethinking on FTAs is a welcome move that would ensure India’s integration into global economy and provide a fillip to Aatma Nirbhar Bharat. But, questions remain as to what should be done to optimally utilise the FTAs.

Understanding the Basics of Trade Integration

Trade integration refers to free movement of goods, services, investment and people across the countries. Such trade integration may take place through multiple phases:

  1. Preferential Trade Agreement (PTA): Countries decide to reduce the customs duty on commonly agreed goods. Usually, the list of goods on which the customs duty is to be reduced is part of Positive List. In general PTAs do not cover substantially all goods. Example: India- Afghanistan PTA (2003)
  2. Free Trade Agreement (FTA): Countries decide to reduce or eliminate the customs duty on commonly agreed goods. Usually, the list of goods on which the customs duty would not be reduced is part of Negative list and on all other goods the customs duty is either reduced or eliminated. Normally, the FTAs cover trade in goods or trade in services. Example: India-ASEAN FTA in Goods
  3. Comprehensive Economic Cooperation Agreement (CECA)/Comprehensive Economic Partnership Agreement (CEPA): Integrated package on goods, services and investment along with other areas including IPR, competition etc. Example: India Japan CEPA
  4. Custom Union: Member countries may decide to trade at zero duty among themselves, however they maintain common customs duty against rest of the world. Example: Southern African Customs Union (SACU)
  5. Common Market: A common market is a Customs Union with provisions to facilitate free movements of labor and capital.
  6. Economic Union: Economic Union is a Common Market extended through harmonization of fiscal/monetary policies and shared executive, judicial and legislative institutions among the member countries. Example: European Union

Need for FTAs

India’s Experience during 1947-91: The protectionist policies followed by India prior to 1991 LPG reforms adversely affected the economy in terms of lower exports, lower foreign investment, poor competitiveness of industries and overall reduced GDP growth rate. Need to learn from the past mistakes.

Empirical Evidence: Countries such as Japan, South Korea, Singapore etc. have been able to sustain higher economic growth by integrating with the global economy. In the recent times, such a export-led strategy has benefitted both bigger economies such as China as well as smaller economies such as Vietnam. In particular, FTAs signed by Vietnam with other countries has made it possible to attract foreign companies exiting from China.

Shift from Consumption-led to Investment and Export driven ModelConsumption expenditure accounting for 60% of India’s GDP is the major driver. To ensure $ 5 trillion economy, we cannot rely only on domestic demand. Like China, we need to cater to global demand by boosting our exports.

Conducive environment in terms of US-China Trade war, rising Labour costs in China, growing anti-china sentiment etc. India needs to fill up the vacuum which is slowly left by China.

Boost Make in India and Assemble in India:  By integrating “Assemble in India for the world” into Make in India, India can raise its export market share to about 3.5 percent by 2025 and 6 per cent by 2030. India would create about 4 crore well-paid jobs by 2025 and about 8 crore by 2030.

Innovation and Efficiency: The FTAs would force domestic Industries to innovate, adapt and Exporters would be required to innovate and adopt new technologies to boost exports.

Trade Liberalisation with Flexibility:  The FTAs help reduce tariffs with a chosen trade partner in a calibrated manner with tariff reductions spread over time. Further, the partner country would also be required to reciprocate by reducing the tariffs.

India’s Experience with FTAs

India’s FTA experience has been a mixed bag. India has gained significantly from the FTAs that it has signed with the South Asian neighbours such as Sri Lanka, Bhutan, Nepal etc. However, the FTAs signed by India with the East Asian Economies and ASEAN have led to huge trade deficits leading to an adverse impact on our domestic manufacturing.

Positive Impacts:

India’s Trade with FTA partners: India’s total trade has increased with each FTA partner in post-FTA phase.

Structure of Imports and ExportsIndia’s imports are primarily accounted for by non-consumer goods with respect to each FTA partner. This shows that the FTA partners have been able to provide for high quality raw materials to our domestic Industries leading to a push to “Make in India”. Further, India’s exports are primarily accounted for by non-raw materials with respect to each FTA partner.

Trade in ServicesIndia’s trade in services has increased with some of the FTA partners such as Japan, South Korea, Malaysia etc. Some of the sectors that have been benefitted include technology (Computer Software), telecommunication, finance, tourism etc.

FDI in FTA PartnersIndian companies have been established in most of the major FTA partner countries of India. This Indian FDI outflow to major FTA partner countries not only generates employment opportunities in the partner countries but also lead to greater exports from India.

Adverse Impacts:

Structure of Trade: FTAs have led to increased imports and exports. However, imports are much higher than exports.  For example, import of tea for re-exports has led adverse impact on domestic growers.

Widening Trade Deficit: India’s trade deficit with ASEAN, Korea and Japan has widened post-FTAs.

Inverted Duty Structure : 

Sector-Wise Impact of FTAs: Apart from the widening trade deficit, the quality of trade has also deteriorated after signing of FTAs. Out of 21 important sectors, 13 sectors have been adversely affected by higher imports as compared to exports. Some of these affected sectors are minerals, leather, textiles, gems and jewellery, metals, vehicles etc.

Under-Utilised FTAs: Utilisation rate of FTAs by exporters in India is very low (between 5 and 25%).

Strategies

The Surjit Bhalla Committee has given the following recommendations for effective utilization of FTAs:

Renegotiate Existing FTAs to ensure that India’s interests and concerns are adequately addressed.

Improve Trade Competitiveness by improving access to factors of production (Land, Labour, Capital), Reduce Logistics costs (14% of GDP) to global benchmarks (8% of GDP), improving Ease of Doing Business etc.

Protect the domestic Market from the import of cheap quality foreign goods through (a) strong and effective technical regulations (b) trade safeguards such as Anti-dumping duties and safeguard duties.

Approach towards Services: With respect to FTA in Services, India has so far excessively focussed on the movement of Natural persons which would enable Indian professionals (such as IT, Educators, doctors etc) to render their services in the FTA partner countries. However, going forward, we need to go beyond and negotiate with the FTA partners to allow Indian service based companies to set up their bases in their country. This would give huge boost to the Indian companies and enable them to gain global stature.

Better Inter-Ministerial Coordination: The ministry of Commerce and Industry must hold regular Inter-ministerial meetings so as to improve the coordination between various ministries. Further, regular Interactions with the State Governments is also crucial so that trade facilitation takes place under cooperative federalism.

Launch FTA Utilisation Mission: The MSMEs are often unable to take advantage of the FTAs due to lack of Information about the FTAs. Hence, there is a need to launch nation-wide sensitisation scheme whereby the MSMEs can be explained about the potential of FTAs.

Reorient SEZs (Baba Kalyani Committee): The SEZs should be renamed as  3 E’s- Employment and Economic Enclaves. Focus should not only be on boosting exports, but also on employment creation and GDP growth rate. Incentives given to companies in SEZs should depend upon factors such as Value addition, Technology adoption etc. This would encourage the companies to innovate and compete at the global level.

Integrate Government initiatives such as One-District One Product, RoDTEP Scheme etc. into FTAs to push for exports.

 

State of Forests Report 2021: Highlights

UPSC Syllabus: Prelims: Environment & Biodiversity
Sub Theme: State of Forests Report 2021: Highlights | UPSC

Context:

The Minister for Environment, Forest and Climate Change has released the ‘India State of Forest Report 2021’ prepared by the Forest Survey of India (FSI) which has been mandated to assess the forest and tree resources of the country. It provides information on forest cover, tree cover, mangrove cover and carbon stock in India’s forests

Highlights

Forest and Tree Cover: 

Total area under Forests: 80.9 million hectare (24.62%)

Trends: Increase in area by around 2,261 Sq. km in comparison to SFR, 2019

Types of Forest Cover:

Very Dense Forest: Tree Canopy density more than 70%

Moderately Dense Forest: Tree Canopy density between 40% to 70%

Open Forest: Tree Canopy density of more than 10%

Largest Forest Cover: 

Area Wise: Madhya Pradesh, Arunachal Pradesh, Chhattisgarh, Odisha and Maharashtra.

Percentage Wise: Mizoram (84.53%), Arunachal Pradesh (79.33%), Meghalaya (76.00%), Manipur (74.34%) and Nagaland (73.90%).

States/UTs with forest cover above 75%:  Lakshadweep, Mizoram, Andaman & Nicobar Islands, Arunachal Pradesh and Meghalaya

Loss of Forest Cover: The north- eastern states of India Arunachal Pradesh, Assam, Manipur, Nagaland, Tripura, Mizoram, Meghalaya and Sikkim have lost 1,020 square kilometres of forest during 2019-2021. The eight states account for 23.75 per cent of the country’s total forest cover.

Manipur recorded the largest loss in forest cover (249 sq kms), followed by Nagaland (235 sq kms) and Mizoram (186 sq kms). The report attributes this loss in forest cover to shifting cultivation, which is practiced in many north-eastern states.

Mangrove Cover: 

Total Area and Trends: 4,992 sq km. An increase of 17 sq Km in mangrove cover has been observed as compared to the previous assessment of 2019.

Top three states showing mangrove cover increase are Odisha (8 sq km) followed by Maharashtra (4 sq km) and Karnataka (3 sq km).

Forest Cover in 52 Tiger Reserves and Lion Conservation Area:

General Trends: Overall decadal decline in forest cover across India’s 52 tiger reserves as well as its sole Lion Conservation Area (LCA) of Gir in Gujarat. Some 20 of the 52 tiger reserves have shown an increasing trend.

Highest Increase: Buxa in West Bengal, Anamalai in Tamil Nadu  and Indravati in Chhattisgarh (64.48 sq km).

Highest Decrease: Bhadra (Karnataka) and Sundarbans in West Bengal.

 

3.  Model Code of Conduct (MCC)

UPSC Syllabus: Prelims: Polity & Governance
Sub Theme:  About Model Code of Conduct (MCC) | UPSC

MODEL CODE OF CONDUCT (MCC)

  • MCC is the set of guidelines issued by the Election Commission of India (EC) for the conduct of political parties and candidates during elections.
  • The Model Code of Conduct is enforced from the date of announcement of election schedule by the Election Commission and is operational till the process of elections is completed.
  • The MCC is not enforceable by law.  However, certain provisions of the MCC may be enforced through invoking corresponding provisions in other statutes such as the Indian Penal Code, 1860, Code of Criminal Procedure, 1973, and Representation of the People Act, 1951.
  • Kerala was the first state to adopt a code of conduct for elections in 1960 assembly elections.

KEY PROVISIONS OF THE MODEL CODE OF CONDUCT

  • MCC prohibits the central and state government ministers from using official machinery for election work and combining official visits with electioneering.
  • During the time the code is in force Ad hoc appointments cannot be made in government or public undertaking.
  • Ministers can’t enter any polling station or counting centre except in their capacity as a voter or a candidate.
  • MCC prohibits the government or incumbent party leaders from launching new welfare programmes.
  • But the code does not stand in the way of on-going schemes of development work or welfare, relief and rehabilitation measures meant for people suffering from drought, floods, and other natural calamities. EC forbids the use of these works for election propaganda.
  • It prohibits the issue of advertisement at the cost of public exchequer in newspapers during the election period.
  • Code instructs that public spaces like meeting grounds, helipads, government guest houses, and bungalows should be equally shared among the contesting candidates. These public spaces should not be monopolised by a few candidates.

HAS THE MCC BEEN RECENTLY AMENDED?

  • EC has amended the MCC prohibiting political parties from releasing their manifestos in the last 48 hours leading up to voting in each phase of the coming Lok Sabha elections.
  • This change has been made in Part 8 of the MCC, which deals with poll manifestos. The EC’s decision stems from the recommendation of a 14-member panel to set up to revisit the MCC.
Part of MCC Subject for guidance of political candidates & candidates
Part 1 General Conduct
Part 2 Meetings
Part 3 Procession
Part 4 Polling Day
Part 5 Polling Booth
Part 6 Observers
Part 7 Party in Power
Part 8 Guidelines on Election Manifestos

 

4.  SBI Issues Formosa Bonds

UPSC Syllabus: Prelims: Indian Economy
Sub Theme:  Types of Bonds issued in Capital Markets across Globe | UPSC

Context:

The SBI has issued Formosa Bonds in Taiwan. The Formosa bonds are issued by foreign companies in Taiwan. These Bonds are denominated in a currency other than the New Taiwan Dollar.

Panda Bonds: Yuan-denominated bond issued in the Chinese mainland market by an overseas entity.  Usually issued by foreign companies and Chinese companies operating overseas to raise capital. International Finance Corporation and Asian Development Bank have issued Panda Bonds in 2005. Besides countries like Philippines and most recently Pakistan have issued Panda bonds.

Similar Bonds:

  • Dim Sum Bonds: Yuan denominated bonds issued in Hong Kong.
  • Samurai Bonds: Yen-denominated bonds issued in Japan by a foreign company.
  • Yankee Bonds: Dollar denominated bonds issued in the U.S. by a foreign entity.

Masala Bonds:  Rupee-denominated bonds issued by Indian entities (both public and private) in overseas market.

Thus the investor is shielded from exchange rate fluctuations because interest and principal are paid at the rates prevailing at the time of buying the bonds

Uridashi Masala Bonds: Special type of Masala Bonds issued in Japan bought by the Japanese retail investors. Offer higher interest rates to Japanese investors compared to low interest rates due to negative interest rate policy in Japanese economy.

► Maharaja Bonds: Rupee-denominated bonds issued by International Finance Corporation (IFC)  in India’s domestic market.

 

UPSC Current Affairs: Electoral Bonds| Page No. 04

UPSC Syllabus: Prelims: Polity & Governance

Sub Theme:  About Electoral Bonds | UPSC

What are Electoral Bonds?

  • Electoral Bonds are bearer instrument in the nature of a Promissory Note and are an interest free banking instrument.
  • Electoral Bond shall be issued for any value, in multiples of Rs 1000, Rs 10,000, Rs 1 lakh, Rs 10 lakh and Rs 1 crore from the Specified Branches of the State Bank of India (SBI).
  • The purchaser would be allowed to buy Electoral Bonds only on due fulfillment of all the extant KYC norms and by making payment from a bank account. It will not carry the name of payee.
  • The Electoral Bonds would have a life of only 15 days during which it can be used for making donation only to political parties which has secured not less than one per cent of the votes polled in the last general election to the House of the People or to Legislative Assembly.
  • Every political party in its returns will have to disclose the amount of donations it has received through electoral bonds to the Election Commission.

Demerits of Electoral Bonds

Identity of Donor Unknown – The electoral bonds will likely be bearer bonds but the identity of the donor will not be known to the receiver. Thus, through the disguised process of electoral bonds, the identity of the person will never be known. While the identity of the donor is captured, it is not revealed to the party or public. So transparency regarding electoral funding is not enhanced for the voter.

No Upper Limit for Donation – Any individual or company can make any amount of donations as there is no upper limit on donations. This will increase corruption as any money can be raised anonymously even by registering a fictitious or  through shell companies.

Strengthen Corrupt Nexus – This process of redeeming money through bonds without disclosure of name will penetrate and strengthen the nexus between corporate houses and political parties. Political parties may also start taking care of the highest bidder in such scenario and may grant them unreasonable favours which may affect our economy and business environment in the long run.

Aid Corruption & Red Tapism – Business houses will expect favourable policies from the future government and the political party shall be obliged to obey when it comes to power. This nexus shall further increase corruption and red tapism in the society.

Frivolous Donations – There are loopholes to electoral bonds too. If identity of persons donating cash to political parties is not revealed, then it may lead to frivolous donations from unaccounted source.

Formation of Shell Companies to route funds – Persons also includes companies and organisations. Hence shell companies can be formed just to route funds to buy electoral bonds without revealing the identity of such companies. Companies are also included as person as per Income Tax Act, 1961.

Restrictions on Company Removed – Similarly, earlier only those companies which were in existence for at least 3 years were allowed to make contributions. Such a restriction was basically laid down in order to prevent the shell companies from influencing the political parties. Even this restriction has now been removed and hence concerns have been raised that the shell companies would end up influencing the policies of the Government.

Corporate Funding of Elections:  Earlier, the companies were prohibited from donating more than 7.5% of their average net profit over the previous 3 years to the Political parties. However, this restriction has now been removed. Going forward, even the loss-making companies could also make contributions through the Electoral Bonds.

Lack of Transparency: In a democratic country, voters need to be aware of how the political parties are funded in order to ensure greater transparency in the elections. However, by keeping the political donations anonymous, the electoral bonds violate the right of the citizens to know the information related to political funding.

Foreign Influence:  The Election Commission cannot monitor the funding through Electoral Bonds as there is secrecy of donor, therefore it becomes difficult to know what is coming in is black money or not. Electoral Bonds can be misused for routing foreign money and thereby increase ability of other countries to influence Indian elections.

FCRA Amendment – Further, the amended Foreign Contribution Regulation (FCRA) rules enable the political parties to accept donations from foreign companies. This leaves a scope for the foreign companies in influencing Indian Politics.

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