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Front Page / NATIONAL
- Centre to finance digital discounts
- Urjit Patel to appear before House panel on Finance
- Venezuela warns about cybercrime
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Editorial/OPINION
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ECONOMY
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Indian Express
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Live Mint
- The perils of the cashless economy narrative
- A level playing field for debtors and creditors
- Spare a thought for Big Pharma
Click here to Download 9 PM Daily Brief PDF (14th. Dec. 2016)
Front Page / NATIONAL
[1] Centre to finance digital discounts
Context
Public sector insurers, oil-marketing firms and others not to take a hit for cashless push.
What has happened?
The Centre has decided to bear the burden imposed on public sector firms on account of the many discounts and incentives offered to promote digital payments.
- The plan is to create a new expenditure head in the exchequer’s accounts that will absorb the costs of such measures
Backdrop
The government has offered many discounts on transaction charges and merchant discount rates that accompany payments using cards or online
Enabling a cashless ecosystem
- in: A non-tax receipt portal, bharakosh.gov.in, has been developed to enable users to make non-tax payments to the government for 237 categories including spectrum charges, RTI application fees, and purchase forms online, without going to either a bank or a government office.
- Mobile banking through interoperable automatic teller machines (ATM) has been launched, 81,000 ATMs or 12 banks are already live and another 15,000 machines are expected to go live shortly
- Deployment of PoS machines: A jump of 1.1 million in the deployment of PoS/mobile PoS machines (from 14 lakh to 25 lakh) is expected to take place by March 2017.
- All 5.5 lakh fair price shops run by the government are being equipped with micro ATMs/PoS terminals, which will enable them to undertake digital payment transactions or even be banking correspondents
- National Mobility Card: A standardized, interoperable multi-purpose, multimodal National Common Mobility card is being developed for smart cities and is ready for testing on a pilot basis.
[3] Venezuela warns about cybercrime:
The Hindu
Context
Venezuela, which like India has withdrawn its highest currency note from the market, has cautioned New Delhi about cybercrimes that target the digital economy.
Why Venezuela is sticking to cash based economy?
Venezuela has the highest per-head Web connectivity in Latin America and they could have gone for digital economy. But several cyberattacks have shown them that the digital economy is, in fact, far more vulnerable to cyberattacks than real currency transactions.
- Venezuela’s telecom and banking sectors suffered a series of cyberattacks in 2016, which has prompted the government to stick to a currency-based economy
Not a sudden recall
This recall of 100 Bolivar notes was not a sudden move, as Venezuelans were prepared through newspaper advertisements about the arrival of new currency notes which will reach the market from December 15
Read More: Venezuela’s 100 Bolivar recall
Editorial/OPINION
[1] Why ‘cashless’ may be the new normal:
Context
The demonetisation drive is not so much about curbing black money. Consider the likely outcomes of a cashless society, and read back from them the intent behind such a move.
Narrative transforms
The narrative around the November 8 demonetization move of the government has transformed from a surgical strike against black money, terror funding to a radical move to transform India into a cashless economy
Informal sector: Key for a cashless economy
India is an economy where 90 per cent of all transactions are in cash. This is due to the large informal sector, which employs 90 per cent of the workforce. The overwhelming majority of them are not hoarders of black money. And yet, India cannot become a cashless society unless its mammoth informal sector transitions to digital payments.
Why there is a resistance to a cashless society?
Author states that, with cash is associated a freedom to spend it wherever, whenever and in whatever quantity one wants to, without being tracked by anyone.
- These are basic freedoms and rights that we take for granted. It is because these freedoms matter that there is resistance to their loss
Why a cashless society?
Author states that we need to delve into the likely outcomes of the cashless society in order to understand the urgent need for it
Outcome 1
- Sharp rise in indirect tax compliance: Traders, small businesses, shopkeepers, and consumers routinely use cash as a means to avoid paying service tax, sales tax, VAT, and any number of indirect taxes and fees. By taking out 86 per cent of the cash from the economy, government has tried to speed up the process towards a more tax compliant system complementing the GST regime
Beneficiaries
- Finance capital: So far global financial market has been unable to access the enormous amount of capital locked in the debt and savings of the low-income households in India. Opening of Jan dhan accounts and schemes like Atal Pension Yojana & Pradhan Mantri Suraksha Bima Yojana, apart from achieving financial inclusions, is also a move to make this source of liquidity available for financial institutions
- Digital sector:Digital payment apps and e-wallet companies have enjoyed record downloads and deposits post-November 8. Their massive ad spends were possible courtesy the financial institutions that have invested in these finance technology (fintech) businesses
No return
Author points out that there might not be a return back to the pre-ban era because the intended purpose of the demonetization move is not to fight black money as it is to fight cash i.e. to move towards a cashless economy. Hence, the restrictions on the ATM withdrawals may not go anytime soon and the hardship will continue
Conclusion
Author concludes by stating that after demonetization it perfectly makes sense to transition towards a cashless economy.
Read More: Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana, Fintech
[2] More than a BIT of protectionism:
Context
Article talks about India’s stand on BITs wherein notices to around 50 countries have been sent to terminate the treaties
What is Bilateral Investment treaty (BIT)?
A BIT is an agreement between two countries that sets up rules for foreign investment in each other’s countries
What has happened?
- India’s BIT with Netherlands expired on 30th November due to India unilaterally terminating the treaty meaning any new Dutch investment in India will not enjoy treaty protection
- India has also issued notices to around 50 countries to terminate BITs, which includes about 20 European Union (EU) member countries. These will come into force soon
Significance of BITs
- Protecting foreign investments: These treaties play a critical role in protecting foreign investment by holding host states accountable for the exercise of their regulatory power through an independent international arbitration mechanism, thus furthering international rule of law
BITs in India: Shifting from one extreme to another
- Earlier situation: From 1994 to 2011, India signed 70-odd BITs tilted heavily in favour of investment protection against the host state’s regulatory power
- Present situation: The recently adopted Indian model BIT tilts the balance towards the host state’s regulatory power by severely limiting the substantive and procedural protection to foreign investment.
Author states that the present model BIT is due to
- India’s BIT loss to White Industries, an Australian investor, in 2011 and a slew of BIT cases slapped by many foreign corporations
- Devas deal: The recent loss in the Devas multimedia case under the India-Mauritius BIT, which arose on account of the cancellation of the Antrix-Devas deal
No Impact of termination of BITs on,
- Existing foreign investment in India because most Indian BITs contain survival clauses ensuring availability of treaty protection for existing investment even after the expiration of the treaty for the next 10 to 15 years
- 15-odd ongoing BIT disputes against India including Vodafone’s challenge of retrospective taxation under the India-Netherlands BIT
Significance of termination of BITs
- Reluctance towards accountability: Authors state that termination of BITs by India signals that India does not want to be held accountable for its regulation under international law, thus forcing foreign investors to rely entirely on domestic laws and domestic courts to safeguard their interest
Reluctance towards accountability: Not an attractive proposition
Authors point out that such reluctance is not attractive for foreign investors due to following two reasons,
- No remedy: If domestic laws are changed suddenly to the detriment of foreign investors, like it happened in the case of Vodafone where Parliament retrospectively amended the Income Tax Act to overrule the Supreme Court’s decision in favour of Vodafone, it would leave the foreign investor without any remedy
- Over-burdened Judicial system: The overstretched Indian judicial system does not inspire much confidence in foreign investors as a forum for speedy resolution of disputes
Moving forward with new BIT model: Problems ahead
Authors state that India is going to renegotiate BITs with 50 countries on the basis of new 2015 model BIT
- Problems in India-EU BITA: Author points out that India hopes to replace the cluster of European BITs with the India-EU Bilateral Trade and Investment Agreement (BTIA). However, international treaty negotiations take time. The India-EU BTIA, despite 16 rounds of negotiations since 2007, has not been signed due to major differences. Unilateral termination of BITs by India has not gone down well with the EU, which means even further delay in BTIA obligations
Impact of Termination of BITs
- Ease of doing business ranking: Too much state interference in businesses in India make the country a difficult place to do business. India’s rank in World Bank’s ease of doing business is abysmal at 130 out of 190 nations. When it comes to specific factors that are critical for foreign investors, such as enforcing contracts, India’s rank is even worse at 172. So, a protectionist narrative is not going to translate into any improvements in this area
- Protection of Indian investments abroad: BITs are reciprocal in nature meaning they provide same degree of protection to Indian investments too in the foreign countries. Their termination followed by replacement with a protectionist treaty will also reduce the protection available to Indian companies abroad.
Significance of BITs for Indian companies
Authors state that significance of BITs for Indian companies can be gauged from the following 3 instances,
- Few months back, an Indian investor, FlemingoDutyfree Shop Private Limited (FDF) successfully sued Poland under the India-Poland BIT, winning damages of €17.9 million. The tribunal found that Poland, by illegally terminating a series of lease agreements enjoyed by FDF’s indirect Polish subsidiary, had expropriated FDF’s investment and denied fair and equitable treatment to it under the India-Poland BIT
- An Indian mining company, Indian Metals & Ferro Alloys Ltd. (IMFA), has sued Indonesia under the India-Indonesia BIT at the Permanent Court of Arbitration, The Hague, claiming $599 million in damages, for regulatory problems pertaining to the claimant’s coal mining permits
- In a newly surfaced challenge, an Indian investor has sued Macedonia under the India-Macedonia BIT for the alleged expropriation of mining concessions awarded to the Indian investor
Way forward
Authors state that Indian model BIT should be such that it balances state’s regulatory power with the protection granted to foreign investments. For this India needs to do 3 things,
- Amend the protectionist 2015 model BIT so as to strike a balance between interests of investors and that of the host state
- Negotiate with existing BIT partners based on this balanced model
- Withdraw the termination notices till the newly negotiated text is finalised for replacing the existing BIT
These steps would help India resurrect its image globally of a market economy based on rule of law, not arbitrariness and cronyism.
Read More: India’s new model BIT
[3] Free flow of wheat
The Hindu
Context
The Centre’s decision to waive import duty on wheat has predictably attracted flak.
Issue: Scrapping of import duty on wheat
Dumping worries
Farmer unions have warned of dumping of wheat stock in India at a time when the minimum support price (Rs.1625 a quintal) is higher than international prices.
Government’s rationale
- Warm winter: Centre has taken into account concerns about warmer winter forecast, which could affect wheat output and trigger inflation.
- Record global production:A record global harvest has lowered wheat prices internationally
- Higher MSP & speculated low wheat domestic production:With a higher MSP, and speculation about a less-than-adequate harvest domestically, the government is obviously keen on avoiding a surge in inflation following the demonetisation process
- Move against hoarding: Government’s move is a strong signal to illegal hoarders that may have been looking forward to illegally stockpile wheat in the wake of reduced wheat production domestically.
Way forward
Author states that a long term action plan is needed to increase India’s wheat yields which in most States are lower than in China and Bangladesh.
Read More: Decision to scrap import duty on wheat, MSP
ECONOMY
[1] Centre to review IT Act to bolster cybersecurity:
Context
The government is mulling a review of the more than 15-year-old Information Technology (IT), Act to strengthen cyber security infrastructure, following the push for digital payments post-demonetisation.
Need for review
In the light of increased incidence of cyberattacks in India, government wants to review the present IT act to make it more in line with the changing time and include deterrents for cyber criminals
Digital payments division
The Ministry of Electronics and IT (MeitY), will soon issue advisories to all digital payment agencies including banks and e-wallets providers “to harden security walls”.
- It has also set up a separate ‘digital payments’ division under Indian Computer Emergency Response Team (CERT-In) — its cyber security arm — to monitor and strengthen cashless transactions. The division was set up after November 8th
Strengthening cyber security
To strengthen cyber security, the IT ministry had recently approved 26 new posts in CERT-In and five State CERTs
[2] IBSA meet may see pact to boost trade:
The Hindu
Context
The proposal for a Comprehensive Economic Partnership Agreement (CEPA) between India and the two separate customs unions involving Brazil and South Africa – MERCOSUR and SACUrespectively – to boost trade and investment ties, is set to get a leg up with New Delhi likely to accord it priority at the forthcoming IBSA Summit.
What is IBSA?
IBSA is a unique Forum which brings together India, Brazil and South Africa, three large democracies and major economies from three different continents, facing similar challenges.
Formation of IBSA
The idea of establishing IBSA was discussed at a meeting between the then Prime Minister of India and the then Presidents of Brazil and South Africa in Evian on 2 June 2003 on the margins of the G-8 Summit. The grouping was formalized and named the IBSA Dialogue Forum when the Foreign Ministers of the three countries met in Brasilia on 6 June 2003 and issued the Brasilia Declaration.
Cooperation in IBSA is on three fronts
- As a forum for consultation and coordination on global and regional political issues, such as, the reform of the global institutions of political and economic governance, WTO/Doha Development Agenda, climate change, terrorism etc.
- Trilateral collaboration on concrete areas/projects, through fourteen working groups and six People-to-People Forums, for the common benefit of three countries
- Assisting other developing countries by taking up projects in the latter through IBSA Fund
What is MERCOSUR?
Mercosur is an economic and political bloc comprising Argentina, Brazil, Paraguay, Uruguay, and Venezuela.
- Mercosur was created in 1991 when Argentina, Brazil, Paraguay, and Uruguay signed the Treaty of Asunción (PDF). The accord called for the “free movement of goods, services, and factors of production between countries.” It signatories agreed to eliminate customs duties, implement a common external tariff (CET) of 35 percent on certain imports from outside the bloc, and adopt a common trade policy toward outside countries and blocs. Mercosur residents may live and work anywhere within the bloc.
What is SACU?
Southern African Customs Union (SACU) is the world’s oldest customs union which dates back to 1889
- It consists of five countries of Southern Africa: Botswana, Lesotho, Namibia, South Africaand Swaziland
- Its headquarters is in the Namibian capital Windhoek
- Its aim is to maintain the free interchange of goods between member countries. It provides for a common external tariff and a common excise tariff to this common customs area. All customs and excise collected in the common customs area are paid into South Africa’s National Revenue Fund. The revenue is shared among members according to a revenue-sharing formula as described in the agreement. South Africa is the custodian of this pool.
In this article author discusses the possible points of engagement during the sixth IBSA summit due to be held in New Delhi in mid-2017
- First is the proposal for a Comprehensive Economic Partnership Agreement (CEPA) between India and the two separate customs unions involving Brazil and South Africa – MERCOSUR and SACU respectively – to boost trade and investment ties
- Second would be the matter of enhancing contribution to the IBSA fund by its three members i.e. India, South Africa and Brazil. Though operational from 2006, the Fund had received contributions of only about $18 million. The aim was to enhance it soon to $40 million to assist 25 projects every year, especially in least developed countries.
- The Fund is managed by the UN office for South-South cooperation in the UN Development Programme (UNDP)
- Projects supported by IBSA fund: The projects completed by the IBSA Fund include
- those in Burundi (combating HIV/AIDS)
- Palestine (sports promotion and rehabilitation of cultural/hospital centre),
- Sierra Leone (human development and poverty reduction),
- Cape Verde (health care infrastructure, drinking water),
- Guinea-Bissau (agriculture development),
- Haiti (solid waste collection),
- Cambodia (empowering people with special needs)
- Vietnam (rice production)
- The IBSA Fund also supported Laos in the formulation of projects and Timor-Leste through a technical exchange.
- Third, there could be a possible push by the three major emerging market economies towards strengthening trilateral cooperation on renewable energy projects,
PTA with MERCOSUR
On trade, India has a Preferential Trade Agreement (PTA) with MERCOSUR and both the sides are looking to expand its coverage
PTA with SACU
India is also negotiating a PTA with Southern African Customs Union (SACU) that includes South Africa — though only five rounds of negotiations had been held so far, with the fifth round having been held back in October 2010
India-MERCOSUR-SACU CEPA
Author states that in the light of existing PTAs, India-MERCOSUR-SACU CEPA is to expand the scope of the PTAs from just trade in goods and then convert them into a comprehensive agreement that will also cover investments, trade in services and areas including intellectual property rights and competition laws among others.
Read More: What is PTA?,What is CEPA?
Indian Express
[1] No proof required: Demonetisation dispassionately demystified
Indian Express
Context
Politicians shouting shrill about demonetisationaugur well for the prospects of a new demonetized India. It indicates that the initiative is working.
Article talks about some of the burning questions related to the prospects of the success of demonetization
Give it a go through once.
Live Mint
[1] The perils of the cashless economy narrative:
Context
Digitization alone will not justify the political and economic risk attached to the currency swap.
Author states that moving towards a more cashless society is a medium-to-long term goal&the government would be well-advised to not depict the transition to a more cashless economy as the main objective behind the currency reform because,
- Public support for the demonetization move was against the black money and corruption and not for making transactions cashless
- Problems: There are practical problems too like a vast majority of Indians either don’t have bank accounts or the technological wherewithal to make or receive digital payments.
Also, author points out that, currency swap cannot be solely justified on the basis of going towards a cashless economy. It has associated political and economic costs.
- Economic cost: The latest high-frequency economic indicators such as auto sales and Purchasing Managers’ Index for both services and manufacturing shows that economic activity has been affected
- Political cost: The entire winter session has been washed out because of the friction generated by the demonetization move between opposition and the government and it now appears that meeting the 1 April deadline for the implementation of the goods and services tax will be extremely difficult.
Conclusion
Author concludes by stating that changing the narrative of the currency swap could affect the government’s credibility and make it more difficult to take tough decisions in the future.
[2] A level playing field for debtors and creditors:
Context
Article talks about the Insolvency and Bankruptcy Code (IBC), 2016 which has the ability to make credit cheaper, its sources wider and engender corporate accountability.
Backdrop
IBC was passed by the parliament on 11th may 2016 and received Presidential assent on 28 May 2016
In-depth info on IBC: Read it here
Strengthening the rights of creditors (even perhaps at the expense of debtors) can reduce the cost of credit and increase access to credit for the entire economy
Situation before IBC
- Unclear&unpredicatble laws: Until the enactment of IBC, the rights of creditors were unclear and their application was unpredictable. India had a patchwork of laws that dealt with insolvency and resolution, which applied inconsistently to different categories of creditors.
For instance, international creditors do not have the right to enforce their collateral under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI Act), 2002. Similarly, the Joint Lender’s Forum (JLF) mechanism created by the Reserve Bank of India doesn’t apply to international creditors. Operational and trade creditors had no right to initiate resolution proceedings.
Insolvency: A collective action problem
Author states that insolvency is basically a collective action problem wherein all creditors act individually rather than in a coordinated manner. Here is what different categories of creditors do to recover their share,
What secured creditors do?
Secured creditors tend to enforce their security which can destroy value for all creditors.
What do unsecured creditors do?
Unsecured creditors such as bond-holders or trade creditors may file for liquidation, neither of which yields the value that decisive, coordinated action would.
What types of creditors are there?
- There are three main types of creditors:
(1) Unsecured creditor
(2) Secured creditor
(3) Preferred creditor
- What is an “unsecured creditor”?
A creditor who comes forward but has not taken measures to guarantee that he or she will be repaid.
- What is a “secured creditor”?
A person holding an instrument, such as a mortgage against the whole or part of a debtor’s property, as security for a debt that the debtor owes him or her. This type of creditor is usually not affected by bankruptcy or proposals.
- What is a “preferred creditor”?
A creditor who has been given priority under the Bankruptcy and Insolvency Act over other creditors in the distribution of dividends. Preferred claims include unpaid wages, commissions or other remuneration of any employee of a debtor and, under certain conditions, any debt or obligation of support to a spouse, common-law partner or child living separate from a debtor.
So, how does IBC resolves this problem?
As per IMF’s principles similarly placed creditors must be treated alike. IBC addresses this by creating a level-playing field for all types of creditors. How?
- Anyone can initiate process: Upon default, any creditor, whether secured or unsecured, domestic or foreign, financial or operational may initiate a resolution process
- No one can initiate liquidation: Conversely, no creditor may trigger direct liquidation
- The initiation of a resolution process results in an automatic moratorium (stop), which prevents secured creditors from enforcing collateral
Impetus to corporate bond market
So,all financial creditors have a seat at the table to negotiate the restructuring of the debt and the resolution plan. Giving unsecured creditors the right to participate and vote in such decision-making could also give an impetus to the corporate bond market.
Incentivizing quick decision making process
IBC incentivizes quick decision-making by having an outer limit of 180 days for the resolution to be completed
Approval mechanism
Approval of 75% of all creditors voting by value is required to pass any resolution plan.
- In line with international law: Dissenting creditors will be protected by a requirement that they are paid at least as much as they would have, had the company been liquidated. This brings Indian law in line with international best practice. One of the World Bank’s Ease of Doing Business criteria for Resolving Insolvency (on which India ranks 136 of 185 countries) is that dissenting creditors must be repaid at least liquidation value.
What is liquidation?
Liquidation is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations as and when they come due. The company’s operations are brought to an end, and its assets are divvied up among creditors and shareholders, according to the priority of their claims
Inculcation of responsible behavior
Author states that IBC could also help in inculcating responsible behavior by corporate borrowers.
- Usual situation: Even if promoters and management know that a default is imminent they conceal it from the creditors and companies continue to take on more debt.
How IBC addresses this?
- Criminalizing fraudulent trading: IBC introduces criminal penalties for such behaviour. An offence of “fraudulent trading” has been introduced for the first time. The promoters and management of the company may be made personally liable if it can be demonstrated that they were aware that the company was in a precarious financial situation and yet took on more debt.
- Criminalizing the concealment of assets: IBC also has provisions criminalizing the concealment of assets, falsification of accounts and defrauding creditors. Based on investigation ordered by creditors, if it is discovered that assets or property was fraudulently transferred from the company as far back as two years prior to the insolvency proceedings, these transactions may be reversed.
Way forward
Author suggests that following reforms should be realised in order to take insolvency resolution procedure to its rightful end,
- The implementation of the liquidation process (the logical next step following a failed resolution)
- The set-up of institutional infrastructure (tribunals, trained professionals and information repositories) to support the speedy resolution envisaged in the IBC
Conclusion
Author concludes by stating that instead of demonetization wiping out Non-performing Asset problem, the full implementation of the resolution and liquidation provisions of the IBC aided by robust institutions is a far better bet for that.
[3] Spare a thought for Big Pharma
Context
Big Pharma, even if it is driven by greed rather than public good, is our best punter to make the kind of bets needed to fight diseases like Alzheimer’s.
What is Big Pharma?
Big Pharma is the contemptuous nickname given to the pharmaceutical industry. Critics of the industry often use this nickname when discussing abuses by the industry, including:
- Trying to suck every penny out of the pockets of the sick, injured, dying, and hypochondriacs
- Inventing new maladies so people will buy more drugs (as opposed to inventing better drugs);
- Censoring alternative treatments that would be cheaper or more effective, rather than patenting and industrializing them (much as proponents of free energy claim censorship by energy companies, without basis)
- Renaming old maladies so people will think their conditions are more serious, making them more willing to pay higher prices for prescriptions
Failure of solanezumab
In the first few paragraphs, author mentions the failure of the Alzheimer drug solanezumab in the phase 3 drug trial stage. The drug was being developed by US-based Eli Lily Co
Significance of the development
- Alzheimer affects India on a large scale as it has around 3.7 Million people with this ailment. Moreover, it has no remedy as of now so failure of solanezumab means the disease still remains untreatable.
- Expensive loss: The failure is an expensive loss as drug development costs money and a successful drug would have meant revenues which could then have been invested in development of more new vaccines.
Other set backs
- Rociletinib: Clovis Oncology stopped all development work on Rociletinib, a drug which was expected to treat lung cancer, following its failure to get US Food and Drug Authority (FDA) approval
- Rintega: Celldex Therapeutics, the Texas-based biotech firm, abandoned further development work on its brain cancer drug rintega after it failed Phase 3 trials. Data from the FDA shows that only about 7% of the drugs that enter Phase 1 clinical trials go all the way to the market.
Big Pharma best placed to develop new vaccines
Author states that although Big Pharma act in a voluntary manner sometimes when they increase prices of essential medicines but despite that they are best placed to develop new drugs and medicines owing to their large scale research and development expertise.
- The best that governments across the world do is to provide grants and loans for research and facilities at various institutions and universities.
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