9 PM Daily Brief &#8211; 11 April 2016

Government’s move to rationalise subsidies in education

a new fee structure for IITs, starting from the next academic session.
The fee for the general category has been hiked by 122 per cent to Rs 2 lakh per year, while the SC/ ST students, the disabled and those from economically weaker sections will attend for free.

It is clarified that students from families earning less than Rs 1 lakh per year will also pay no fees.
Those from families with an annual income of Rs 1-5 lakh will be waived two-thirds of the fee, and will pay less than Rs 70,000 per year. Besides, they can apply for scholarships and student loans.

Why?

The government spends about Rs 6 lakh on every IIT student every year. This would create budgetary surpluses which can be channelled into schools.
Besides, a price tag of Rs 2 lakh is not unreasonable at a time when education is being commodified and a section of the market threatens to turn into a certification business.
While private institutes charge exorbitant rates, the committee of IIT directors charged with rationalising the fee structure had recommended a rate of Rs 3 lakh per year, with a view to making the IITs self-sustaining.
In the phasing out of subsidies, exclusion on the basis of the ability to pay is a reasonable way to go.
The general category in IITs is precisely that — children of families which are financially capable and favoured by history.
The rationalisation would not affect the prospects of students who make the grade academically but may require financial assistance.
For instance, it would in no way discomfit the alumni of Super 30, the legendary programme which groom’s 30 economically backward students every year for the IIT entrance examination.

[3] Their separate ways

The prime minister has suggested that elections to the national and state legislatures, panchayats and urban local bodies should be held simultaneously.

Every time a state heads for polls, the model code of conduct is enforced by the Election Commission.
impacts administrative processes at the national level, as decisions have to be kept in abeyance, for even if they do not directly impact a state going to polls.
which in turn impacts development.

However, does this plan square with the Indian federal construct?

Federalism, after all, is one of the basic features of the Constitution.
Article 83(2) of the Constitution requires that the Lok Sabha be in existence for five years from the date of its first meeting, unless dissolved earlier, and, thereafter, a fresh election would have to be conducted.
Article 172 of the Constitution requires that the state legislatures continue for five years, unless dissolved earlier.
The design for simultaneous elections seems to be in utter ignorance of the phrase, “unless dissolved earlier”, found in the text of these two articles as they stand today.

Most palpable practical difficulty:

What, pray, would happen if the national or state government loses legislative majority midterm, that is, before the expiry of five years?
Would the legislature then be constitutionally duty-bound to explore an alternative government within the framework of the same Parliament or assembly for the remaining period of time?
Would that be constitutionally viable, let alone politically moral?
Would that reflect the will of the sovereign?
Would the mish-mash of an ideologically disparate arrangement be able to deliver governance?
Would this not lead to further misuse of the whip-driven tyranny of the Tenth Schedule that has stifled democracy in the legislatures by not allowing an individual member to vote according to her commonsense, constituency or conscience on issues that may be germane to the interests of the people who elected her or even her personal convictions?
For if even two-thirds of the legislators splitting or expressing no confidence in their political party is no guarantee of a reference back to the people, then how ethical or even democratic would such an arrangement be?

Federalism as a concept rests on the principle of uniting separate states into a union without sacrificing the fundamental political integrity of the states.

Although our Constitution gives wider power to the Union over the states, the states are supreme within the spheres allotted to them. The federal state is a political compact that weaves different regions, religions, languages and impulses into a nation-state.

A staggered electoral cycle also acts as a check against demagoguery, fascism and oligarchy, in that order.
It ensures that the mood of the nation at a particular moment does not hand over political power across a three-tiered democratic structure to one dispensation or individual.
It gives people a chance to distinguish between the national, state and local interests, rather than being swept away in a “wave”, often manufactured by corporate media and the economic muscle of commercial carpetbaggers.

GS PAPER 3

[1] Centre plans anti-terror cyber-push

News

Recruiting Indian nationals in the IS through online propaganda has to be stopped

How the IS recruits Indian nationals

Online share or like of an article or a video through internet by a possible candidate
Encouraging them to share more radical content
Route and logistics are shared to reach IS
The most preferred route for Indians is to travel to Dubai, Saudi Arabia or Bahrain on a tourist visa and from there to Turkey. Once in Turkey, it was easier to cross over to Syria

What the government is planning

Positive content is pushed through social media and there is effective monitoring
Collaborate with the online community to strengthen reporting mechanisms and complaint procedures
Take deterrent action in specific cases against producers and circulators of radical content under penal law
Government has been working closely with intelligence agencies in UAE, Syria and Turkey to try and cut off the routes for Indian nationals

National social media policy

The Union government will come up with “national social media policy” to counter the cyber-threat, because alarming number of people are being radicalised by the Islamic State (IS) through online videos and social media groups
The policy, which follows a “blueprint” circulated by the Home Ministry to State agencies that deal with de-radicalisation, will focus on countering social media propaganda that follows any communally polarising incident in the country.

Indians

During countrywide raids in January-February this year, the National Investigation Agency (NIA) had arrested 25 men for links with the Islamic State.
Turkey has tightened vigil along its border and deported at least 6Indians in the past when they were trying to cross over to Syria

48 Indians have been arrested in the past two years for IS links and 25 Indians have already travelled to Syria to fight alongside the radical outfit

[2] Centre to draw up strategy for kharif season

What happened?

The Government has decided to formulate a crop production strategy for the coming summer (kharif) season.

Why this strategy?

The south-west monsoon during the previous kharif season was weak leading to a rain deficit of 14 per cent.
The rabi 2015-16 season had experienced less post-monsoon and winter rains.
The government has realised the gravity of the agrarian situation after two back-to-back droughts and recent crop damage on account of moisture stress due to deficit, and uneven and untimely rains, hailstorm and other natural calamities across various States.
The strategy will also ensure that the plan to double farmers’ income in the next six years gains momentum.

[3]The wages of negligence

Issue

Tragedy in the Puttingal Devi temple in Kerala’s Kollam district

The fire was triggered by a display of fireworks and it caused explosions in a storehouse.It shows

Gross negligence,
Appalling carelessness
A reckless disregard for the safety of others.

Ignorance of law

Organisers displayed the fireworks despite permission having been refused by the District Collector.
The police failed to implement the decision of the district administration and stop the show.
The police and the organisers were in breach of the law on another count as well — that of bursting firecrackers after 10 p.m.

Course of Action

A quick and impartial police investigation should be conducted and the guilty should be brought to book.
Collaboration between the Centre and States during such emergencies is a welcome step.
Zero tolerance for violations, and a strong commitment to safety even in the remotest of locations, should be non-negotiable if human lives are not to be put in harm’s way.

[4] The problem of secretive tax havens

Threats posed by tax havens

Panama fits the bill perfectly.
In Panama, there are firms that can help set up a company within 48 hours and provide nominee directors/shareholders.
Many international banks operate from Panama, and banking confidentiality is guaranteed.
Panama follows a strict territorial system of taxation. Consequently, all foreign incomes of non-residents are not taxable. Further, Panama has no official central bank and no exchange control.

Conclusion from the Panama papers is that

those in charge of designing the rules in the fight against such tax havens also took advantage of the same for diverse motives, whether for tax avoidance/evasion, masking conflict of interest, or for corrupt practices and money laundering.
It is not as if the threats posed by tax havens are not known to regulatory authorities.

Inviolability of corporate structure

The Panama papers prove the ease with which companies can be formed in jurisdictions which make a mockery of the concept of separate corporate existence.
For example, the papers show how banks registered nearly 15,600 shell companies with only one law firm, and how difficult it is for the tax administration to get meaningful information.
There are some apologists who believe that tax havens serve some important functions. Mauritius is often mentioned in this connection as being one of the largest foreign investors for India. Any action against the tiny nation is stonewalled.
The Panama papers show that tax havens are used overwhelmingly for secrecy and dissimulation, putting distance between assets and owners thereof. Corporate structures help such dissimulation.
Therefore, countries and jurisdictions that help in such efforts of tax planners, avoiders and evaders need to be put on alert.
There are many Mossack Fonsecas that specialise in offering their services for setting up such structures, including supply of directors and shareholders for routing investments through Mauritus (and others) and for availing of its treaty benefits.

Panama is a tax haven, but Mauritius is a tax haven with which we have a comprehensive double tax treaty.

What is double taxation treaty?

Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). This double liability is often mitigated by tax treaties between countries.
That complicates the matter even more by allowing rampant ‘treaty shopping’, double non-taxation, and erosion of India’s tax base.

Treaty shopping?

“Treaty shopping” generally refers to a situation where a person, who is resident in one country (say the “home” country) and who earns income or capital gains from another country (say the “source” country), is able to benefit from a tax treaty between the source country and yet another country (say the “third” country). This situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country.
we have a provision in the Income Tax Act in Section 94A to deal with jurisdictions that do not effectively exchange information.
So far, only Cyprus has been notified.
There are reports that perhaps Panama will also be put on that list.
But considering that in almost all collusive international deals at least one tax haven is involved, there needs to be a review of all tax havens and the provision used effectively. Otherwise, the promise of bringing back black money stashed abroad will remain a chimera.

[5] India-EU free trade impasse may end : CII

(Click here for earlier article)

Indian industry is ready to grant greater market access to European Union firms

In automobiles, wines and spirits in return for gains in garments, automobiles, automobile components and services sector
India is not looking for reciprocal access or equal gains necessarily in the same sector, but it should be an FTA with an overall win-win outcome for European and Indian firms.
India is open to giving greater market access to EU firms by lowering duties for automobiles, wines and spirits under the FTA provided it gets in return what it wants in other sectors

While India looks into reducing or eliminating tariffs in sectors such as auto and liquor, the EU should do away with their non-tariff barriers that seem to have been erected mainly to protect some of their local firms but not as much for better safety or quality

The EU is learnt to have asked India to substantially bring down the “high” duties on automobiles as a pre-condition for resumption of the FTA negotiations. India’s import duty on cars are between 60 and 120 per cent as against the EU’s 10 per cent.

Mr. Forbes said.

“An objective of the tariffs is protection of an infant industry till they can compete with experienced players in that industry. The problem is when it leads to permanent infancy where you have companies that never grow up. Therefore tariff measures are credible only if they are temporary. When a sector reaches a certain level of competitiveness, free trade should be encouraged, where if you are competitive you will survive and thrive, and if you are not, you will disappear.”

GIVE AND TAKE

If the EU persists with its demand on the automobile sector and seeks to keep it separate of the overall give-and-take involved in the FTA negotiations, India too would raise concerns regarding restrictions on temporary movement of skilled professionals to the EU. These curbs include the recent move by the UK to increase minimum salary threshold for intra-company transfers.

India has also sought agricultural market access in the EU as well as disciplining of Sanitary and Phyto-sanitary (norms related with plants and animals) and Technical Barriers to Trade to ensure that the concessions in the FTA that would be given by the EU result in effective market access.

India is keen that the FTA outcome is balanced.

[6] Inflation tests ahead, stimulus in question

News

With the world economy entering a more uncertain phase and the top central banks sounding ever more cautious, attention may turn in the coming week to signs of whether years of aggressive stimulus have yielded any significant rise in inflation.

U.S. Federal Reserve, the Bank of England and the European Central Bank

All have been disappointed to varying degrees about how little inflation has picked up, or indeed how it has spent too much time going the opposite way.

Bank of Japan

Which has been trying to ward off deflation going on two decades, has now been hit with a counterproductive surge in the yen after a contested decision last month to adopt a tiny negative interest rate.

China

Where it is difficult to fathom the sheer magnitude of fiscal and monetary stimulus Beijing has piled on since the financial crisis, consumer price inflation is remarkably tame and likely to remain so.

What is Inflation

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. The value of a dollar does not stay constant when there is inflation.

What is consumer price Index

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

[7] Farm error

Context

NDA government’s decision to get “healthy” PSUs to invest and revive three fertiliser units also in the public sector

There are three broad problems with the decision

Without the deregulation of fertiliser prices, the latest step cannot address the longstanding crisis in the fertiliser industry.

Tt does nothing to resolve the problem of grossly imbalanced use of fertilisers in Indian agriculture, which, in turn, is responsible for worsening soil health and stagnant yields.
The decision undermines Prime Minister Narendra Modi’s inspirational call for “minimum government, maximum governance”.

Problem with India’s fertiliser sector

Imbalanced use of fertilisers by farmers and the unviability of fertiliser production.
The two problems are interrelated.
As against an ideal ratio — 4:2:1 — for the use of nitrogen (N), phosphorus (P) and potassium (K) fertilisers, Indian farmers use twice the amount of nitrogen in the form of urea.
The only reason for doing so is that, traditionally, governments have subsidised urea prices by about 70 per cent as against 30-35 per cent for other nutrients like phosphorus, potassium and sulphur.

From the producer’s perspective

No incentive to improve efficiency or increase production
Each year, anywhere between Rs 30,000-45,000 crore is stuck in subsidy payments and they are forced to take loans even for working capital.

Solution

The government should free fertiliser pricing and let private players produce a variety of customised products with differentiated prices and serve the vast market that exists in India.
This will also allow farmers to choose the right fertilizers, improve soil health and productivity.

[8] Wake up, smell the leakage

Issue

Interest subvention scheme is being ‘misused’ and the funds are being diverted and not used for agricultural purposes.

What is Interest Subvention Scheme?

The interest subvention scheme was introduced in 2006-07 to help farmers with cheaper credit for crop loans.
It provided interest subvention at 2 per cent to banks for making crop loans available to farmers at 7 per cent.
Further, an additional subvention of 1 per cent was introduced for farmers who repaid their loans on or before the due date; this was increased to 3 per cent in 2011-12.
Thus, farmers who pay their dues on time receive a subvention of 5 per cent and are charged an effective interest rate of 4 per cent.

Not healthy for banks

The banks are required to first credit the subvention amount to the farmer’s account and then seek reimbursement from Nabard/ the RBI.
Therefore, any delay in settlement of claims of the banks and/ or insufficient budgetary allocations towards this scheme could have severe implications for the financial health of the banking sector.

Loophole in the scheme

A farmer who receives loans at a concessional rate of 4 per cent has the incentive to borrow as much as possible and
Then divert at least part of it to fixed deposits earning around 7-8 per cent interest or even become a money lender and
Extend loans at 15-20 per cent interest to those who don’t have access to formal institutional sources of finance.
It leads to diversion of funds away from agriculture.

How to plug these “leakages”

The RBI Committee on Medium-Term Path on Financial Inclusion (2015) has already recommended phasing out the interest subvention scheme and moving towards universal crop insurance.
It is better to use an income policy and directly transfer money to farmers’ accounts linked to Aadhaar for all input subsidies like fertilisers, seeds, farm machinery and agri credit, and give them freedom to choose the right mix of inputs at market prices.
We need to change the policy instrument — from price policy (subsidising inputs) to income policy (direct transfer to farmers’ accounts).

If this leakages are plugged, it will be win win situation for all, as it will

Help reduce efficiency losses in the system and promote efficiency
Will be more equitous as a subsidy income package can be designed on a per-hectare basis, with smaller landholders getting a higher per-hectare rate.
Put money into farmers’ accounts and let the markets do the rest.

[9] National Life and economic destiny

Issue

Economic and political consequences of exit of UK from the European Union.

Debate between super-states and city-states

If the Brexit happens, it could lead to a break-up of the EU, and set back the global move towards greater political integration.
It is being argued that the local governing units—city-states, are the best system as it essentially—offered different packages of taxes and public services.
People would vote with their feet, going to the place that suited them the most. And local governments know more about their people’s needs than distant central governments.
Various economic and historical arguments are in favour of fragmentation. These imply that a Brexit would be good not just for the UK, but for all of Europe.

But various commentators argue that a patchwork of little city-states doesn’t always lead to a well-functioning system.

It might be very hard to coordinate between city-states—for example, one little local government, concerned about preserving open space, might be able to veto a cross-continental highway that would boost almost everyone’s income.
Also, there’s the possibility that some city-states might just decide to conquer their neighbours, returning us to a world of empires.
In fact, this is exactly what happened in Europe, China and elsewhere every time those regions fragment.
And the only way to defend yourself against a neighbouring empire, many cities have found, is to band together into a nation. Since peace is good for growth, security considerations like this are also economically important.

Conclusion

So, the answer to the question of fragmentation is that there’s no ideal size.
Sometimes city-states are the best, but sometimes super-states are better.
The UK might be on the verge of an interesting experiment. If it abandons the EU, only history will tell us whether it was a good idea.

[10] Lessons from the nuclear security summits

Context

Last of the Nuclear Security Summit concluded on 1 April—the aim(to secure all vulnerable nuclear material in four years) has not been reached, despite substantial progress being made

What is the Nuclear Security Summit(NSS)

The Nuclear Security Summit (NSS) is a world summit, aimed at preventing nuclear terrorism around the globe.

History of NSS

President Barack Obama announced his initiative to convene serial Nuclear Security Summits in his much acclaimed Prague speech in 2009.
But his key declaration in the speech was the re-commitment of the US to the goal of a world free of nuclear weapons
Nuclear disarmament and nuclear security were integrally linked
Obama also pledged that the US would, in negotiations with Russia, further reduce its nuclear arsenal and would not develop any new nuclear weapons.
While the limited nuclear security initiative has gone ahead, the pursuit of nuclear disarmament has been reduced to a mere proforma pledge
The US has not ratified the Comprehensive Test Ban Treaty (CTBT).
The first summit was held in Washington, D.C., United States, on April 12–13, 2010. The second summit was held in Seoul, South Korea, in 2012. The third summit was held in The Hague, Netherlands, on March 24–25, 2014. The fourth summit was held in Washington, D.C. on March 31-April 1, 2016

Achievements since NSS process began

175 tonnes of highly enriched uranium (HEU)—enough for nearly 7,000 nuclear weapons—has been removed or down-blended (mostly from Russia)
30 countries have eliminated all HEU from their territory
Radiation detection equipment has been installed at 329 international border crossings
Airports and seaports to prevent, detect and respond to trafficking in nuclear and other radioactive material

What has not being achieved

Estimated 1,400 tonnes of HEU and nearly 500 tonnes of plutonium—enough for about 200,000 simple fission-type nuclear bombs—is still held by more than 30 countries

Absence of Russian President Vladimir Putin (over strategic differences with the US) indicates that progress towards this cause is susceptible to the overall state of bilateral relations.
Similarly, the failure to invite Iran (despite the nuclear deal) was a missed opportunity to engage Tehran on a crucial issue of global importance.

Some points of concern

Absence of Putin and the inability of the process in securing all nuclear material in four years reflect, there are limits to even what the US leadership can achieve.
Some experts argue that the NSS process only deals with nuclear material in civilian facilities and not the military nuclear facilities, which account for about 83% of all nuclear material
The danger posed by forward-deployed tactical nuclear weapons, particularly by Pakistan, Russia and the US, has not been addressed and needs to be remedied.
The relative success of the NSS process also underlines the failure of the international community to address similar dangers emanating from biological weapons.

For India

While its contribution to the success of the NSS process is useful to highlight its credentials as a responsible nuclear state, any initiative on similar threats from biological weapons and its ability to rally others to the cause would enhance its credibility as a global leader.

[11]Cross-currency trading: taking the next steps forward

What

RBI and the Securities and Exchange Board of India (Sebi) are set to launch cross-currency derivatives trading in three of the most liquid pairs in the world—US dollar versus euro, British pound and Japanese yen.

What is a ‘Cross Currency’ trading

A pair of currencies traded in forex that does not include the U.S. dollar. One foreign currency is traded for another without having to first exchange the currencies into American dollars.
Historically, an individual who wished to exchange a sum of money into a different currency would be required to first convert that money into U.S dollars, and then convert it into the desired currency; cross currencies help individuals and traders bypass this step

What is a derivative

Derivatives are one of the three main categories of financial instruments, the other two being stocks (i.e., equities or shares) and debt (i.e., bonds and mortgages).
An arrangement or product whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security.
Some of the more common derivatives include forwards, futures, options, swaps

How will it facilitate trading in the markets

The cross-currency derivatives markets will be open from 9 am to 7:30 pm, so as to cover Japanese and European market timings and the first hour of the US markets.

Benefits

For clients, it is a new trading opportunity. It also allows full price linkage between asset classes. For example, the price of gold in US dollars primarily depends on the strength of the currency versus the euro.
It also reduces one leg of the transaction for traders who, till now, had to synthesise two currency pairs to create the dollar-euro pair. With abundant real-time information available online in these pairs, and market timings designed to capture overseas news flows, this is an ideal product for traders in pursuit of profit.

Challenge

Currency is traded 24 hours every day, starting Monday morning in Japan to Friday evening in New York. Trading continues on holidays as well. If there is a holiday in, say, the US, trading will still take place in the rest of the world.

[12] Time for a global currency