E-commerce rules do not allow foreign investment in multi-brand retail: DIPP

The FDI rules for e-commerce have not allowed foreign investment in the inventory-based model or multi-brand retailing, the Department of Industrial Policy and Promotion (DIPP) .

It also stressed that the provisions are also not against the interest of consumers, noting that only fair, competitive and transparent business practices would be beneficial for buyers.

These clarifications have come against the backdrop of new provisions announced by the DIPP related to FDI in e-commerce sector last month.

Background:

E-commerce companies can operate under two different models in India.

The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. FDI is allowed in e-commerce companies in this model.

The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.

What has been happening is that large e-commerce companies such as Amazon and Flipkart, while not owning inventory themselves, have been providing a platform for their group companies such as CloudTail and WS Retail respectively.

Some see this as skewing the playing field, especially if these vendors enjoyed special incentives from the e-commerce firm, over others. These controlled or owned vendors may then be able to offer discounts to customers that competitors may not be able to match.

The thrust of the DIPP policy is directed at protecting small vendors on e-commerce websites. It seeks to ensure small players selling on the portals are not discriminated against in favor of vendors in which e-commerce companies have a stake.

The new set up will ensure a level playing field for all vendors looking to sell on the e-commerce portals. Smaller marketplaces that do not have a stake in any vendors will also be able to now compete with the big daddies.

The small traders were complaining that deep discounts offered by the likes of Amazon and Flipkart are driving them out of business. The new norms aim to tackle the anti-competitive behavior by e-commerce entities and to ensure that there is no wrong subsidization and the marketplace remains neutral to all vendors.

The main players to be affected will be group companies and affiliates of the biggest e-commerce platforms, Amazon and Flipkart.

The provision that bars companies — in which e-commerce firms have a stake — from selling on their portals will hurt start-ups as well since many of these will be barred from selling due to minor equity stakes being held by the e-commerce companies.

Small vendors will not be as affected because most of them do not purchase more than 25% of their inventory from a single source and so they will be allowed to sell their items on the e-commerce platforms.

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New Manufacturing Policy to Create 100 Million Jobs in India

The Government of India has announced a national manufacturing policy with the objective of enhancing the share of manufacturing in GDP to 25% within a decade and creating 100 million jobs.  It also seeks to empower rural youth by imparting necessary skill sets to make them employable.  Sustainable development is integral to the spirit of the policy and technological value addition in manufacturing has received special focus.

NIMZs are envisaged as large areas of developed land with the requisite eco-system for promoting world-class manufacturing activity.

The objective of Special Economic Zones –

To promote exports, while NIMZs are based on the principle of industrial growth in partnership with States and focuses on manufacturing growth and employment generation.

NIMZs are different from SEZs in terms of size, level of infrastructure planning, governance structures related to regulatory procedures, and exit policies.

For the Financial Year 2016 – 2017, Rs. 3.35 crores has been earmarked under the ‘Scheme for Implementation of National Manufacturing Policy’ for ‘Master Planning of NIMZs’ and Technology Acquisition and Development Fund (TADF).

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Bimal Jalan to head expert panel on Economic Capital Framework

More than a month after its board decided to constitute an expert panel to decide on the appropriate size of RBI’s reserves, the central bank Wednesday constituted a six-member committee headed by former Governor Bimal Jalan with former secretary Rakesh Mohan as the vice chair.

The panel will include Economic Affairs Secretary Subhash Chandra Garg and RBI Deputy Governor N S Vishwanathan, the RBI said in a statement.

The government has been insisting that the central bank hand over its surplus reserves amid a shortfall in revenue collections. Access to the funds will allow the government to meet deficit targets, infuse capital into weak banks to boost lending and fund welfare programmes.

The panel will decide whether RBI is holding provisions, reserves, and buffers in the surplus of the required levels.

It would propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding fewer provisions than required.

The ECF committee will also suggest an adequate level of risk provisioning that the RBI needs to maintain. That apart, any other related matter, including treatment of surplus reserves created out of realized gains, will also come within the ambit of this committee.

What is an economic capital framework?  

Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The economic capital framework reflects the capital that an institution requires or needs to hold as a counter against unforeseen risks or events or losses in the future.

Existing economic capital framework which governs the RBI’s capital requirements and terms for the transfer of its surplus to the government is based on a conservative assessment of risk by the central bank and that a review of the framework would result in excess capital being freed, which the RBI can then share with the government.

The government believes that RBI is sitting on much higher reserves than it actually needs to tide over financial emergencies that India may face. Some central banks around the world (like US and UK) keep 13% to 14% of their assets as a reserve compared to RBI’s 27% and some (like Russia) more than that.

Economists in the past have argued for RBI releasing ‘extra’ capital that can be put to productive use by the government. The Malegam Committee estimated the excess (in 2013) at Rs 1.49 lakh crore.

What is the nature of the arrangement between the government and RBI on the transfer of surplus or profits?

Although RBI was promoted as a private shareholders’ bank in 1935 with a paid up capital of Rs 5 crore, the government nationalized it in January 1949, making the sovereign its “owner”. What the central bank does, therefore, is transfer the “surplus” — that is, the excess of income over expenditure — to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.

Does the RBI pay tax on these earnings or profits?

No. Its statute provides the exemption from paying income tax or any other tax, including wealth tax.

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MoMSME’s Strategy Action Plan on Unlocking the Potential of MSME exports proposes formulation of Governing Council

Despite a reasonable growth story and substantial share in overall exports, MSMEs are often faced with these challenges that restrict their entry into the foreign market, the Ministry of Micro, Small and Medium Enterprises (MoMSME) said in its Strategy Action Plan on Unlocking the potential of MSME exports.

Despite a reasonable growth story and substantial share in overall exports, MSMEs are often faced with challenges that restrict their entry into the foreign market. Not only do these challenges need to be studied in detail but, an eco-system needs to be created in such a way that these enterprises shall be able to participate in the global value chain on its own and generate enough economies of scale.

Highlights of the strategic action plan proposed:

The strategy action plan prepared by the Ministry aims to create a sustainable ecosystem for entire  MSME  development.

The action plan aims to achieve the objectives of – Finance; Access to affordable trade finance; Target of USD 100 billion of exports from India by 2020; Evaluate readiness of MSMEs to export their products and services; Recognize areas where improvements are  required  in  order  to  be  able  to  export  effectively and efficiently; Integration of MSMEs into Global Value Chain.

To ensure efficient and effective delivery of all MSME export-related interventions,  the Strategy Action Plan proposed to formulate a governing council that shall be chaired by Secretary,  M/o  MSME  and Co-chaired by DC,  M/o  MSME.

The council shall comprise of senior officials and members from M/o   MSME,   Commerce,   MSME Export   Promotion   Councils,   Export  Development Authorities, Commodity Boards, and other bodies.

Problems and challenges faced by the sector:

Limited information about products & services.

Working of the foreign markets, and in particular difficulties in accessing export distribution channels and in connecting with overseas customers.

Lack of awareness on export promotion and assistance programmes offered by the government and unfamiliarity with legal and regulatory frameworks of the exporting and importing countries are other issues identified in the Strategy Action Plan.

No or zero awareness of IPR  issues and various  International  Trade  Agreements  (ITAs).

Access to affordable trade finance; Costly product standards and certification procedures; Logistics cost –airport and shipping costs etc;

Technology; Lack of innovation, low-value addition and poor packaging due to the low level of technology adoption are some other problems identified.

The need of the hour is to study challenges in detail and create an eco-system in such a way that these enterprises shall be able to participate in the global value chain on their own and generate enough economies of scale.

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DIPP Announces State-Wise Startup Rankings: Gujarat Named Best Performer

The Department of Industrial Policy & Promotion (DIPP), released the much-awaited State Startup Rankings on basis of the startup policy framework that it had announced earlier this year.

According to the State Startup Ranking Report, while Gujarat is rated the ‘best-performing state’, Karnataka, Rajasthan, Odisha and Kerala come in a notch below as ‘top-performing states.’

The state startup ranking framework measures and compares the efforts and results of the startup initiatives and exercises undertaken by different state governments. The results, which were announced at an event in New Delhi, today, saw participation from top officials from different state governments and departments responsible for growing and managing the startup ecosystems in their respective states.

At the event, DIPP said that the states have been graded according to six categories, which are: Beginners, Emerging States, Aspiring Leaders, Leaders, Top Performers and Best Performers.

In the beginning of Startup India Action Plan, only 18 states had implemented startup policy. Now that number has grown to 27 states and 3 Union Territories (UT). The agency has said that in total India has 14K startups are spread across 484 districts in 29 states and 7 UTs.

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Govt seeks Rs. 41,000 crore more for bank recapitalization

The government sought Parliament’s approval for supplementary grants worth ₹41,000 crore to infuse fresh capital into ailing state-run banks in the current fiscal.

The additional capital could help as many as five such state-run banks exit the prompt corrective action (PCA) framework that mandates them to pare lending to companies and cut concentration of loans to certain sectors.

The additional capital could help as many as five such state-run banks exit the prompt corrective action (PCA) framework that mandates them to pare lending to companies and cut concentration of loans to certain sectors. Eleven banks were put under the PCA framework by the Reserve Bank of India between February 2014 and January 2018.

The government had budgeted ₹65,000 crore for infusion into public sector banks (PSBs) through recapitalization bonds this fiscal, of which ₹42,000 crore is still to be allotted. With the additional ₹41,000 crore of capital infusion by 31 March, the government will be infusing a total ₹83,000 crore into public sector banks this year.

The capital infusion will be utilized to ensure that the better-performing banks under the PCA framework meet their regulatory capital norms and non-PCA banks do not breach the threshold.

Concerns associated with the recapitalization of banks:

The government as the major owner is free to recapitalise but the issue is, at what cost, for how long, and whether recapitalisation alone is enough.

The government is finding it increasingly difficult to recapitalize public sector banks due to the compulsion to adhere to the stringent budgetary deficit benchmarks.

Bankers become lackadaisical toward debt recovery and tend to escalate provisions and contingencies to be adjusted against the fresh capital.

In different-banks-same-pay situations, employees in the loss-making, but recapitalized, banks become unenthusiastic while those in profit-making, but not recapitalized are demotivated.

It also implies cross-subsidization: dividend-paying PSU banks subsidizing the non-dividend paying. Ultimately, systemic efficiency suffers.

PSBs are in very real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity. Hence, policymakers and bankers need to put their heads together and come up with a smart option to resolve an issue that can no longer be put on the backburner.

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NITI Aayog targets $4 trillion economy by 2022-23

Federal policy think tank NITI Aayog has suggested several economic reforms with an aim to accelerate growth and boost the size of India’s economy to $4 trillion in the next five years.

The blueprint, called the “Strategy for New India@75”, released in the city by finance minister Arun Jaitley and NITI Aayog vice-chairman Rajiv Kumar, proposes increasing the share of taxes in national income to 22% from 17%, inclusion of fuel and electricity within the goods and services tax (GST) and privatizing airports, as well as key railway assets such as freight terminals, engines and rolling stock.

The idea is to take steps that will keep India’s $2.7 trillion economies steadily expanding by about 8%, which could quicken to 9-10% by 2022-23, making India a $4 trillion economy. “It is also necessary to ensure that growth is inclusive, sustained, clean and formalized,” the blueprint said.

The document, which captures the National Democratic Alliance administration’s prescription for future reforms and growth milestones, comes just months ahead of national elections due by May.

Explaining the need for the blueprint, Jaitley said sound policy measures would put the economy on track, lift people out of poverty and improve the quality of life.

The strategy paper lays emphasis on completing major infrastructure projects such as the first phase of Bharatmala Pariyojana, laying roads in the north-eastern region and digitally connecting 250,000-gram panchayats through the Bharat Net programme by 2019. It aims to deliver all government services up to the gram panchayat level digitally by 2022-23. It also proposes using idle land available with state-owned companies for productive use, giving every family a pucca house and ensuring power for all. Production of minerals is another priority for which the blueprint proposes a revamped exploration policy and a regulator.

One key area of reform proposed by NITI Aayog is privatization of key government assets. The document advises that the government exit non-strategic sectors by divesting its stake, which will add to the exchequer. Liberalizing foreign ownership limits across industries, encouraging foreign investments in government securities and easing rupee bond limits are among the key suggestions.

NITI Aayog has suggested that the investment rate is boosted from 29% of GDP in FY18 to 36% by FY23.

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Power sector distortions dented GDP by 4% in FY’15-16: World Bank

Distortions in the power sector had imposed a total economic cost of around $ 86.1 billion or 4.13 per cent of India’s Gross Domestic Product (GDP) in the financial year 2015-2016 according to a World Bank report.

The fiscal cost, consisting of subsidies to distribution utilities, was $ 8.8 billion (or 0.42 per cent of GDP) in the financial year 2015-2016 according to the ‘In the dark’ report by Fan Zhang, Senior Economist, South Asia Region, World Bank.

Commenting on the immediate interventions the government can take, Zhang told BusinessLine, “It is very important to rapidly increase efficiency by addressing institutional distortions and this should be a top priority. Some of the tools to address this institutional distortion include promoting competition and providing non-discriminatory access to fuel.”

According to the report, the impact of power shortages on downstream rural households and firms is the second-largest source of economic cost, estimated at 1.42 per cent of GDP a year. “It includes the potential income losses of unelectrified households and the income losses of households and firms that are already connected to the grid but affected by power outages,” the report added.

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Capital First merges with IDFC Bank to create IDFC First Bank. 5 things to know

IDFC Bank and non-banking financial company (NBFC) Capital First has announced the completion of their merger, creating a combined loan asset book of Rs 1.03 lakh crore for the merged entity IDFC First Bank. “IDFC Bank and Capital First merged effective 18th December 2018. The merged entity to be called IDFC First Bank, subject to shareholders’ approval,” the firms said in a joint statement.

Following the merger, the board of IDFC Bank approved the appointment of V Vaidyanathan, founder and chairman of Capital First Ltd, as Managing Director and Chief Executive Officer of the merged entity, said the statement. His appointment awaits shareholders’ approval. The boards of IDFC Bank and Capital First met yesterday to take note of all requisite approvals and the order from National Company Law Tribunal; and approved the scheme of amalgamation.

5 things to know about Capital First’s merger with IDFC Bank:

  1. “IDFC First Bank will now offer a wider array of retail and wholesale banking products, services and digital innovations, to a greater number of customer segments,” the statement said. The bank will serve 7.2 million customers through its 203 bank branches, 129 ATMs, 454 rural business correspondent centres across the country’s urban and rural geographies.
  2. The merger between the two entities was announced on January 13, 2018. As part of the merger agreement, shareholders will receive 139 shares of IDFC Bank for every 10 shares held of Warburg Pincus-backed Capital First. On a combined basis, IDFC First Bank has on-book loan assets of Rs 1,02,683 crore. The retail loan book will now contribute 32.46 per cent to the overall loan book, said the statement.
  3. “The merger presents an incredible opportunity to strengthen our banking capabilities, operate as a larger universal bank and bring immense benefits to our customers,” said V Vaidyanathan, MD & CEO of IDFC First Bank. Infrastructure lender IDFC, which entered the banking space in 2015, has been on the lookout to grow its retail portfolio.
  4. In July 2017, IDFC Bank had entered into an agreement with Piramal Group-backed financial services major Shriram Group for a merger. However, the deal was later called off in October (2017) as both the entities could not reach a common ground on the share swap ratio.
  5. The board of IDFC Bank also approved the appointment of Rajiv Lall, Founder MD & CEO of IDFC Bank, as part-time non-executive chairman of IDFC First Bank, subject to approval from the RBI. The reconstituted board of the merged entity now stands expanded with the induction of five new directors.
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Need to cut uncompensated government mandates imposed on PSBs: Raghuram Rajan

Stating that farm loan waivers inhibit investment down the line, former Reserve Bank of India (RBI) Governor Raghuram Rajan on Friday said he has written to the Election Commission against the farm loan waivers as poll promises. Rajan also said that uncompensated government mandates have been imposed on public sector banks (PSBs) for a long time, but said privatisation of public sector banks may not be a panacea.

According to Rajan, loan waivers not only inhibit investment in the farm sector but put pressure on the fiscal of states which undertake farm loan waiver. In every state election during the last five years, loan waiver promise made by one political party or other. The recently concluded assembly election in five states, agriculture loan waiver and increasing minimum support price (MSP) of cereals was again part of the manifesto of some of the political parties.

Also, loan waivers, as the RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government.

According to a 2017 report by the RBI, farm loan waiver amounting to Rs 88,000 crore likely to be released in 2017-18 by seven states, including Uttar Pradesh and Maharashtra, may push inflation on a permanent basis by 0.2%.

Agriculture currently contributes just about 15% to the national output and about 50% of the population directly or indirectly depends on it for employment.

Farmer distress is a real and pressing problem, as evidenced by the protests currently taking place in various parts of the country.  In the recent past, widespread demands have been heard for farm loan waivers amid continuing agrarian distress.

Drawbacks of loan waivers:

Firstly, it covers only a tiny fraction of farmers. The loan waiver as a concept excludes most of the farm households in dire need of relief and includes some who do not deserve such relief on economic grounds.

Second, it provides only partial relief to the indebted farmers as about half of the institutional borrowing of a cultivator is for non-farm purposes.

Third, in many cases, one household has multiple loans either from different sources or in the name of different family members, which entitles it to multiple loan waiving.

Fourth, loan waiving excludes agricultural labourers who are even weaker than cultivators in bearing the consequences of economic distress.

Fifth, it severely erodes the credit culture, with dire long-run consequences to the banking business.

Sixth, the scheme is prone to serious exclusion and inclusion errors, as evidenced by the Comptroller and Auditor General’s (CAG) findings in the Agricultural Debt Waiver and Debt Relief Scheme, 2008.

Lastly, schemes have serious implications for other developmental expenditure, having a much larger multiplier effect on the economy.

What needs to be done?

For providing immediate relief to the needy farmers, a more inclusive alternative approach is to identify the vulnerable farmers based on certain criteria and give an equal amount as financial relief to the vulnerable and distressed families.

The sustainable solution to indebtedness and agrarian distress is to raise income from agricultural activities and enhance access to non-farm sources of income. The low scale of farms necessitates that some cultivators move from agriculture to non-farm jobs.

Improved technology, expansion of irrigation coverage, and crop diversification towards high-value crops are appropriate measures for raising productivity and farmers’ income. All these require more public funding and support.

The magic wand of a waiver can offer temporary relief, but long-term solutions are needed to solve farmer woes. There are many dimensions of the present agrarian crisis in India. The search for a solution, therefore, needs to be comprehensive by taking into consideration all the factors that contribute to the crisis. Furthermore, both short- and long-term measures are required to address the numerous problems associated with the agrarian crisis.

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