1 MTS GS Paper 3_1 Byju’s Classes: 9873643487

Q1) India’s partnership with OECD’s Automatic Exchange of Financial Information (AEFI) global treaty regime can be an important instrument in checking the flow of laundered money. But the AEFI regime itself is riddled with so many loopholes. Discuss.

(200 words/12.5 marks)

The recently passed Undisclosed Foreign Income

and Assets (Imposition of Tax) Act, 2015 is an attempt in that direction. The legislation states that those voluntarily declaring unaccounted income or assets would have to pay a flat 30 per cent tax and a similar penalty, while wilful tax evaders would be liable for 10-years rigorous imprisonment. However, for this law to encourage voluntary disclosure of secret offshore accounts, owners must come to believe that the government will discover their offshore holdings. At present, the best strategy for India to discover those accounts will be to enter into exchange agreements with other countries under the OECD’s Automatic Exchange of Financial Information (AEFI) global treaty regime.

A new Benami transaction bill to be introduced to tackle domestic black money; enforcement agencies empowered to attach assets held abroad illegally; Undisclosed income to be taxed at maximum marginal rate, deductions and exemptions for such income won't be allowed; 10 years rigorous imprisonment for concealing foreign assets.

It is said in the context of the government's new

black money bill which has opened a three-month window, or compliance period, to declare undisclosed foreign assets. Those who avail of the three-month window will pay a 60 per cent charge, but avoid prosecution. Those who don't risk a 120 per cent penalty, in addition to a maximum jail term of 10 years

Despite India’s support for it at the G-20, the OECD’s AEFI regime is riddled with loopholes that make its usefulness to the undisclosed foreign income act questionable. Under the current implementation timeline, the first exchange of information is at least two years away.

Additionally, information on beneficial, or actual,

ownership of deposit accounts worldwide is scanty, and these information gaps are unlikely to be filled quickly. India has, since 2009, required banks to collect information on beneficial ownership, but actual implementation has thus far been dismal.

Even though the Reserve Bank of India has issued a number of banking guidance circulars, most financial institutions have yet to comply. Moreover, subscription to the AEFI regime is voluntary, and the OECD cannot coerce countries to sign up. Tax havens are under pressure to join, but it is not clear when we could expect the major ones to do

so. The most important loophole is that the AEFI only requires exchange of information if a national has a 25 per cent or greater stake in that account.

If an account holder has less than 25 per cent

interest in the total funds in that account, the country or jurisdiction would not be required to share information on beneficial ownership with India. Therefore, holders of black money abroad could simply disperse their funds into smaller deposit accounts below the OECD threshold in multiple jurisdictions in order to avoid detection.

We can expect the world’s labyrinthine shadow financial system to help them to do so in relative anonymity. There has been scant progress against tax haven secrecy. Aided by little or no regulatory oversight, tax havens have been absorbing illicit funds from poor developing countries for decades.

Research at Global Financial Integrity shows that over the period 2005-11, the assets of private residents of developing countries grew twice as fast

as those of advanced countries. Major international banks are not far behind when it comes to opacity. A number of the world’s foremost banks have been in the news recently for their alleged role in one money-laundering scheme or another. Typically, since the bank’s top managers are not held personally responsible, they do not go to jail. The banks pay a fine that amounts to little more than a slap on the wrist and business continues as usual.

Another gambit by the Narendra Modi government to address the problem, incentives for e-payment of tax, is also a questionable effort to curtail the circulation of black money. At first glance, it would appear that such targeted measures could work, given that a large portion of business transactions in India is cash-based, making it difficult to detect black money. But since only a sliver of India’s labour force pays income taxes, the incentive to encourage payment by bank card can only have a limited impact on black money circulation.

Furthermore, illicit profits arising out of a cash

transaction may well exceed any tax incentive the government can provide through the use of bank cards. In such cases, the risk-reward equation would still work out in favour of those operating in cash. According to the World Bank, there are six dimensions to overall governance:

absence of violence, voice and accountability, strength of institutions, government effectiveness, control of corruption and The rule of law.

The specific measures to curtail black money announced recently need to be buttressed by systemic policies to strengthen each of the other aspects of governance. India will also need to

GENERAL STUDIES

PAPER- 3_1

INDIAN ECONOMY AND DEVELOPMENT

2 MTS GS Paper 3_1 Byju’s Classes: 9873643487

continue international efforts at appropriate forums to restrict the absorption of black money by foreign financial institutions and require the reporting of such accounts. Given the significant policy challenges on multiple fronts, the path to redemption has often been littered with the carcasses of good intentions. Q2) Stressed assets in the banking system in India are at an all-time high. What steps would be suggested to solve this crisis?

(200 words/12.5 marks) Stressed assets in the banking system in India are at an all-time high, with bad loans across the 40 listed banks increasing to Rs 5.8 trillion at the end March 2016 from Rs 4.38 trillion at the end of December 2015. Bankers indicate this number may rise over course of this year. Weighed down by NPAs, banks’ stability as well as their ability to lend is impacted. However, a lot more is at stake. If the assets are not revived, not just bank balance-sheets, India’s overall economic and industrial growth could be challenged. The loss of jobs and economic activity resulting from a large-scale liquidation of corporate assets, and its likely downstream effect on SMEs which are the lifeline of the economy, is something the country can ill-afford. Flow of credit to vital parts of the economy like infrastructure is already constricted. Jobs would come under risk, and with

it the government’s larger vision to lift millions out of poverty. The government and RBI have announced measures to address this. One of the central bank’s initiatives is the Scheme for Sustainable Structuring for Stressed Assets (S4A), aimed at easing the amount of troubled loans on bank balance sheets. The scheme allows banks to convert up to half the loans to corporate borrowers into equity. Other moves include the Bankruptcy code, that will allow time-bound settlement of insolvency and the CRILC (Central Repository of Information on Large Credits), a repository to collect and track data about large credit accounts to lenders. These measures are enablers to support resolution, yet actions that will nurse corporate assets back to health are yet to be attempted in most instances. The NPA problem requires tackling of industry-level problems as well as bank-level issues. So far stressed asset resolution has been constrained by several factors. Loan fragmentation is one problem—loans to stressed companies are often disaggregated across more than a dozen financial institutions, with up to 30 lenders in some cases. While the Joint Lender Forum provides a common platform for all debtors, in practice each lending bank has a different posture on a given asset. This inhibits any prompt action, and leads to deterioration in asset values. There is little sectoral co-ordination, with no standard process and pricing for the sale of assets to the Asset Reconstruction Companies (ARCs). Also, most ARCs currently lack the capital and capabilities to take over big-ticket bad loans from banks. Ownership of the asset is often split across multiple banks and ARCs. The absence of a decision maker, leads to significant operational

underperformance, making it tougher to chart a viable resolution plan and attract capital from the private sector. Untangling the knots Any effective resolution has to be tailored depending on the nature of the asset. Long-term quarantine for assets that are expected to regain value over time, corporate turnaround methods for assets that can be recovered and lastly, liquidation, only in cases where it is too late to try the other two. Liquidation leads to significant value destruction, and should be the last resort in a growing market like India. Delayed resolution often leads to a situation, where it is sadly the only outcome. Global experience of recent years, shows several approaches being used to deal with distressed assets. The first, and probably most high-profile way, is injecting long-term government capital to support the sector/ company. The US government’s TARP (Troubled Asset Relief Program) in 2008-09, through which GM received $50 billion in federal assistance, is the most discussed example. The US treasury acquired about 60.8% of the shares in the new company, which it offloaded in the markets over the next few years. Creating a national `bad bank’ to clean up bank balance sheets is the second approach, being examined by Indian policy-makers. A prominent

global example of this is SAREB, a bad bank created by the Spanish government in 2012, to manage impaired assets that were in trouble after over-exposure to real-estate. SAREB has 15 years to dispose of all assets and maximize profitability. A third approach, is to create one or more asset management companies (MCs) to nurse stressed companies back to health. All banks with exposure to the asset disaggregate their exposure into `sustainable’ and `unsustainable’ debt. The sustainable portion of the debt continues to be serviced by the borrower. While banks convert the unsustainable debt into equity (or some form of long term bonds) and transfer management control of the asset to a single MC, which will be responsible for asset turnaround. Multiple MCs exist in this model, each handling a different asset. A governance committee comprising representatives of 3-4 large banks may be set up to oversee the functioning of these MCs. The MC essentially operate like a PE investor, and could have private sector participants as general partners. They can be incentivised to turn the asset around like PE firms are—wherein they receive a fee, linked to the realised upside. The MC facilitates action around five levers—filling gaps in management, bringing in sector and functional expertise, driving performance management, ensuring time-bound decision making and facilitating milestone-linked infusion of capital (including private sources) into individual assets. The problem of toxic debt is a vexed one and has no silver bullet solutions; most developed countries have struggled to find answers. A longer term solution cannot be found without treating the problem at its genesis. At the individual bank level, a more effective credit process with digitised credit workflow could help, along with improved

3 MTS GS Paper 3_1 Byju’s Classes: 9873643487

early warning systems. At the industry level, a better and more consolidated industry structure, with fewer and more capable institutions for corporate lending, can help avoid some of today’s problems. Improving asset resolution in India requires improvements on all fronts listed here. It will also require some innovative approaches to build a consensus across debtors. The quicker this is done, the better it will be for the economy. Q3) “Skill Development in India is supply-driven but it should be demand-driven.” Analyse

(200 words/12.5 marks) India’s requirements for skilled workers are huge, but the current capacity to train has grown very slowly. On requirements, whether one believes the National Skill Development Mission 2015 number (400 million) or the more realistic number of 200 million (Mehrotra et al, 2013) by 2022, the fact remains that the country still trains only 5 million per annum in total. So, we have to scale up efforts. Yet, the funding for skill development remains limited in India, mainly to general tax revenue. There is very little by way of skill development from corporate social responsibility. In addition, enterprise-based training, confined to 39% of all firms, is conducted mainly by large firms. The ministry of skill development and

entrepreneurship is new, and although it has received a World Bank loan for developing skills, given the Union government’s ambition for Skill India, much larger funding has to be found. Financing for skill development in countries where it has been successful is mostly private-sector driven; it ensures industry ownership of the system. If not, skill development tends to remain supply-driven—as opposed to industry-led and demand-driven—which is a recipe for failure. Even the NSDC-funded private vocational training providers remain supply-driven. The result is poor quality training, as industry involvement, despite the Sector Skills Councils, remains limited. The government has to think of a new model of financing skill development. For example, a tax could be levied on companies, which goes into an earmarked fund meant exclusively for developing skills. Firms can be reimbursed the costs of training from such a fund. Today, as many as 62 countries have chosen this option—17 in Latin America (including Brazil), 17 in Sub-Saharan Africa (including South Africa), 14 in Europe, seven in Middle East and North Africa, and seven in Asia that have such funds. So, why create a national training fund in India now? First, as we noted, the current capacity for developing skills is limited. Second, although skill development became a priority sometime in the middle of the last decade, the expansion of capacity to provide technical vocational education and training (TVET) has grown very slowly. The growth in the number of private ITIs and NSDC-financed vocational training providers has brought the numbers being trained to 5 million per annum. However, at this rate, our goal of ‘Make in India’ will not be realised, youth

power will remain underutilised, and the country may miss the demographic dividend. Third, there is a limit to general tax revenues that can be mobilised for skill development, since the fiscal deficit should remain controlled, and the multiple other important drafts on resources from health, education and infrastructure investments must remain the primary responsibility of the state. Fourth, globally, the source of financing for skill development has been the private sector, since it is the direct beneficiary, even though the state may play a facilitating role. Clearly, the private sector needs to step up to the task. Hence, a national training fund is needed soon. However, what could be the possible design for such a fund? Collect levies from the organised sector and medium and large enterprises: The share of the unorganised sector in manufacturing output is 22%, but its share in employment is 85%. The levy in India should be, to start with, only on organised sector enterprises, and only on medium and large ones. It may be difficult to collect taxes from the smallest enterprises and may elicit much resistance from them. Beneficiaries should include both organised and unorganised enterprises: Most employees in the unorganised sector acquired their skills informally (on the job), hence at least some proportion of

funds must be reserved to train them. However, since large and medium organised enterprises will be the dominant contributors to the training fund, they should benefit significantly. The current apprenticeship programme (Act of 1961) could be incorporated into this mechanism. The exact allocation share of the organised and unorganised segments will need to be worked out through a process of consultation of stakeholders, so that organised sector enterprises have a stake in the system, while equity considerations also determine disbursement. This will also release general tax revenues for skill development for unorganised enterprises. Demand-side financing of training through payment of stipend: Training provision in India has been historically supply-driven, while the demand for skills has been neglected. There is a very strong case for using training levy funds for financing poor students who are unable to bear the opportunity cost of first undertaking training before entering the labour market. Poor students must earn in order to survive, and cannot ‘afford’ to be trained. If trainees are provided a stipend, it would partially offset the opportunity cost of not working and the financial cost of training itself. The current scale of Pradhan Mantri Kaushal Vikas Yojana’s one-time grant is on too small to be seen as effective. China has incentivised vocational education financially for students very effectively. Half of all children graduating from nine years of compulsory academic schooling enter senior secondary schools that offer vocational education. An important reason is that, since 2005, vocational education at that level has become free, and covers the entire country and all students—rural and urban. All poor rural children coming to urban senior

4 MTS GS Paper 3_1 Byju’s Classes: 9873643487

secondary vocational schools receive additional financial help to meet accommodation costs in urban areas (of nearly yuan 500). At the same time, there are counter-arguments against a new tax to finance the national training fund. The economy has slowed down and investment has declined in the last few years. Adding another tax would reduce the investible surplus with firms, and thus would be opposed by firms. There is already a cess for elementary education, and now a cess for higher education! Yet another cess would be opposed by industry. But these arguments ignore some realities. Companies have already been paying for shortage of skilled persons as salary rises for skilled persons have been much larger than justified by productivity increase, putting an upward pressure on prices of goods and services, thus contributing to inflation. But there is now a case, after 12 years, of a cess for elementary education to be removed altogether. Elementary education must be funded from general tax revenues in any case, rather than specialised earmarked funding. Government-controlled funds are poorly managed and the private sector does not find worthwhile the time and effort to access such funds meant for skill development. This is a very important concern. However, it can be addressed by the private sector being in

complete control of the allocation of funds from the national training fund. Sectoral national training funds (as in Brazil) would enable industry to completely manage the funding. Some government control can be maintained by having government specialists on the boards of such funds. Q4) How can Differentiated Licencing solve the problems of Public Sector banks? Analyse. (200 words/12.5 marks)

1. Easing of SLR requirements for commercial banks 2. Easing in Priority sector lending for commercial

banks 3. Provision of tradable system of Priority Sector

lending 4. Easing of norm related to opening bank branches

in unbanked areas. Q5) “Will a lower policy interest rate give more incentive to invest? Discuss (200 words/12.5 marks)

First, it cannot be believed that the primary factor holding back investment is high interest rate. Second, even if policy rates are cut, it cannot be said that banks, who are paying higher deposit rates, will cut their lending rates. The reason is that the depositor, given her high inflationary expectations, will not settle for less than the rates banks are paying her. So inflation is placing a floor on deposit rates, and thus on lending rates. The persuasive way is to claim that interest rates are hurting growth. The argument is hard to refute because there is always some sympathetic borrower who is paying seemingly excessive rates. The high prevailing borrowing rate of some small borrower-say 15% today- is held out as Exhibit A of the central bank’s inconsiderate policies, never

mind that the rate charged includes the policy rate of 6.5% (which is a little higher than elsewhere in the world) plus and additional spread of 8.5%, consisting of a default risk premium, a term premium, an inflation risk premium, and the commercial bank’s compensation for costs, none of which are directly affected by the policy rate. There are more complex issues which are holding up the investment decisions i.e. rigid labour laws, twin balance sheet problem, double financial repression, twin deficit, 3 Cs (Courts, CBI and CVC), stalled projects, ease of doing business, lack appropriate institutional and policy reforms, complex exit policy etc. Q6) In recent times; rate of Inflation has been declining and showing a trend of moderate settlement. Still Food prices are not coming down to that extent. Discuss the factors responsible for high food prices. (200 words/12.5 marks)

Why are Food Prices High? 1. Despite the decline in overall consumption share,

per capita food consumption in real terms has increased, particularly in rural areas.

2. There has also been a distinct shift in dietary patterns towards protein-rich items and other high value foods.

3. Minimum Support Price (MSP): MSPs also drive input costs, so increasing MSPs is like a dog chasing its tail-it can never catch it.

4. Since Rice and Wheat are the primary food commodities procured at the MSPs, production is distorted towards rice and wheat, leading to sub-optimal production mix by farmers-too much rice and wheat, and too little of other needed

commodities. 5. It is useful to look at the details of the cost

increases. Prices of agricultural inputs, including wages, have recorded a sharp increase during 2008-09 through 2012-13. The most significant increase has been in rural wages. Nominal rural wages have grown at a sharp pace during the last 5 years. So the casualty has flowed from wages to prices, underscoring the role of rural wages as a major determinant in food price increases.

6. So why has rural wage growth been so strong?

a. MAHATMA GANDHI NATIONAL RURAL EMPLOYMENT GUARANTEE ACT (MGNREGA)

b. RURAL LIQUIDITY AND CREDIT: There has been an increase in liquidity flowing to the agricultural sector, both from land sales, as well as from a rise in agricultural credit.

c. LABOUR SHIFTING TO CONSTRUCTION d. FEMALE PARTICIPATION: Reason for the rise in

rural wages is the changing female participation in rural markets. The female participation rate is down in all the age categories. Improved living standards could lead rural families to withdraw women from the labour force. Also, higher prosperity could lead to greater investment in educating girls (for the age group 10 to 24 years) again leading to lower participation in the workforce.

5 MTS GS Paper 3_1 Byju’s Classes: 9873643487

In sum, when we examine food inflation, a substantial portion stem from an increase in food production costs, primarily rural wage inflation. Some of that is an increase in real wages, needed to attract labour to agriculture, away from construction, education, household work, or MGNREGA. This is known as Wage spiral. And to control that we need to:

1. Contain the rise in wages elsewhere. 2. Contain any unwarranted rise in rural wages as

well as the rise in agricultural input costs. 3. Allow food prices to be determined by the market

and use minimum support prices to provide only a lower level of support.

4. Reduce the wedge between what the farmer gets and what is paid by the household by reducing the role, number, and, monopoly power of middlemen.

5. Improve farm productivity. Q7) Distinguish between Monetary Union and Economic Union. Do the proliferating trading blocs adversely affect the free trade in the world? Give reasons for your answer. (200 words/12.5 marks) Explanation in the Class Q8) “The estimates of increasing poverty in India have underlined the lesson that growing incomes do not necessarily trickle down to the bottom deciles. Even if they did, the process

would be so slow that it would be intolerable in the time it would take.” In the light of above statement highlight the major premises on which first five decades of planned development was founded. (200 words/12.5 marks) The structure of our economic policies in the last two decades of planned development was founded on six major premises:

1) The only sensible long-term way of eradicating poverty must be to create more jobs by investing and growing faster; hence, redistributive measures which would tend to use up investible resources in current consumption were undesirable.

2) In consequences, the government must direct its major effort at raising the domestic savings rate and securing external aid to supplement domestic savings until such time as the domestic savings rate had been raised to levels adequate to do away with foreign aid altogether and achieve rapid growth with self-reliance.

3) The industrial sector, which would grow with investment and income, had to be planned and controlled in depth: towards this end, very detailed targeting and regulatory licensing of industrial establishments was considered necessary, and resulted in the Industries (Development and Regulatory) Act of 1951.

4) The external accounts, i.e., the balance of payments, had also to be regulated, not via exchange rate adjustments and the use of protective tariffs, but by resort to comprehensive exchange control so that the use of imported raw materials, capital goods and other supplies could be regulated by an elaborate administrative mechanism.

5) Alongside these four basic premises of economic policy was the objective of an increasing role for

the public sector in the ownership of the country’s resources. As the succeeding Industrial Policy, Resolutions and the pronouncements of our Prime Ministers underlined, this was a political objective but also one which reflected certain economic axioms. Thus, we thought that the public sector would invest where the private sector would not invest (e.g. steel in the Second Plan); and, in particular, the public sector would generate surpluses for investment, obviating the need to raise savings exclusively via the politically-difficult budgetary process of taxation. These dual economic objectives in expanding the public sector went alongside the envisaged role of the expanding public sector in conjunction with the industrial licensing policy in controlling the concentration of private economic power. There was also the additional political objective of securing public control over the so-called ‘commanding heights of the economy’, the ‘basic’ or ‘key’ sectors.

6) Finally, while these policy instruments embraced directly the non-agricultural sector of our economy, though in turn influencing no doubt the agricultural sector, the Plan programmes repeatedly urged land reforms to transform the institutional structure in the rural economy and urged rural works programmes so that expanding production would go hand in hand with better income distribution.

Q9) “Statutory Liquidity Ratio (SLR) has traditionally been more a fiscal policy instrument than a monetary policy instrument in India.” Comment

(200 words/12.5 marks) 1. Statutory Liquidity Ratio- It is that ratio of

demand and time liability of a bank which it has to maintain with itself at any given point of time, in a liquid form, consisting primarily of government securities & cash in hand. SLR = C+B+S/L. C= securities with central bank, B= securities with other banks, L= total liabilities, S= government securities. It is under banking regulation of 1949. At present it is 19.5%. It enables the government to borrow from banks. It prevents an unforeseen run of the banks. In 2007 Banking Regulation Act 1949 was amended and now CRR can be raised from 3 to 5% and SLR can be raised from 25 to 40%. Note- SLR has been one of the most active instruments of monetary policy in India. But SLR has traditionally been more a fiscal policy instrument than a monetary policy instrument in India. The high SLR created a captive market for government securities and facilitated low-cost government borrowings. Unlike at present, the interest rates were administered and the rates were kept low, unrelated to market demand and supply conditions. SLR consists of:

a. Govt. securities b. Cash in hand c. Current balances on a day to day basis kept with

another bank d. Gold with the banks

6 MTS GS Paper 3_1 Byju’s Classes: 9873643487

Q10) It is understandable if inflation goes up in an environment of accelerating economic growth. There could be a situation when the real economy is growing above its potential growth that could trigger inflation what economists call an overheating situation. India’s current low growth-high inflation dynamics has been in contrast to this convention economic theory. Explain the causes for such dynamics in India.

(200 words/12.5 marks)

Indian Puzzle The deceleration of growth and emergence of a significant negative output gap has failed to contain inflation. It is understandable if inflation goes up in an environment of accelerating economic growth. There could be a situation when the real economy is growing above its potential growth that could trigger inflation what economists call an overheating situation. India’s current low growth-high inflation dynamics has been in contrast to this convention economic theory. Interest rate is a blunt instrument. It first slows growth and then inflation. But the growth slowdown has not been commensurate with inflation control. Inflation erodes the value of money. High inflation may lead to barter system. (Explain) High and persistent inflation imposes significant socio-economic costs. Given that the burden of inflation is disproportionately larger on the poor, and considering that India has a large informal sector, high inflation by itself can lead to distributional inequality. High inflation distorts economic incentives by

diverting resources away from productive investment to speculative activities.

Indian Puzzle Explained 1. Crude oil and other global commodity price trends

as well as exchange rate movements are

increasingly playing an important role in defining domestic prices.

2. Rupee depreciated from an average of 45.7 per US dollar in 2010 to 46.7 in 2011. The depreciation of the rupee was particularly sharp in 2012 as the rupee averaged 53.4 per US dollar. One percentage point change in the rupee-dollar exchange rate has 10 basis points impact on inflation. (Imports become very costly)

3. While the growth in domestic agricultural production has stagnated around 3% per annum, the demand for food has increased.

4. With the increase in income, real consumption expenditure has grown significantly.

5. The high food prices are supported by increase in wages. (Price-Wage spiral)

6. With the persistence of near double-digit inflation in 2010 and 2011, the medium- to long-term inflation expectations in the economy have risen, underscoring the role of higher food prices in expectations formation. If inflation is expected to be persistently high, workers bargain for higher nominal wages to protect their real income. This creates a pressure on firms’ costs and they may in turn increase prices to maintain their profits.

7. Higher fiscal expansion also impedes efficacy of monetary policy transmission. The moderation in private demand resulting from anti-inflationary monetary policy stance is partly offset by the fiscal expansion. Q11) What do you mean by ‘green accounting’? Discuss how this concept can be incorporated in national income accounting. (200 words/12.5 marks) Explanation in the Class Q12) Do you think that full convertibility of rupee on capital account will help in accelerating India’s economic growth? Give reasons.

(200 words/12.5 marks) Explanation in the Class

Q13) Direct taxes hit people more than indirect taxes. Analyse, citing state of Indian Economy as a case study.

(200 words/12.5 marks) Considering the dramatic changes that, the Indian tax system has witnessed or is likely to witness in the coming time ahead such as GST for encompassing goods and services, corporate tax to come down from 30% to 25% and phasing out of a wide range of exemptions and setting of new Tax Policy Council and Tax Research unit to improve

tax administration, the fundamental question that arises is that how can India move from its current situation to one of increasing taxes and government spending as part of the process of building state capacity?

Assessing India's Taxation Regime The findings are nuanced but striking.

1. A simple comparison of aggregates with other countries indicates that India undertaxes and under-spends.

2. The ratio of taxpayers to voters is only about 4%,

whereas it should be closer to 23%. Taxation is the key to long run political and economic development and helps in realising the promise of Indian democracy. The state's role is to create the conditions for prosperity for all by providing essential services and protecting the less well-off via redistribution. For this, it must be levied tax on its citizens to maintain accountability as taxation binds citizens in a necessary two-way relationship. Along with this, the challenge of moving to a better equilibrium needs focus as the tax and policy spending are related to actions by the state to increase its legitimacy.

Cross-Country Taxation and Expenditure Patterns

India taxes and spends less than (OECD) Organisation for Economic Co-operation & Development countries and its emerging market peers. In fact the spending and tax ratios are the lowest even among countries with comparable per-capita GDP e.g. Vietnam (28% and 22.2%), Bolivia (43.3% and 25.5%) and Uzbekistan (33.4% and 25.6%) respectively.

7 MTS GS Paper 3_1 Byju’s Classes: 9873643487

India's spending to GDP ratio (as well as spending in human capital i.e. health and education) is lowest among BRICS and lower than both the OECD and EME (Emerging Market Economy averages. India's tax to GDP ratio at 16.6 per cent also is well below the EME and OECD averages of about 21% and 34%, respectively.

Over time too, India's tax to GDP ratio has

increased by about 10% points over the past 6 decades from about 6% in 1950-51 to 16.6% in 2013-14 but it seems, India has made limited progress in increasing its tax and spending capacity.

However, assessing India's growth on cross-country comparisons does not hold much significance as there is a strong relationship between a country's fiscal capacity and level of economic development. So, the question is whether India's fiscal capacity is low given its level of economic development.

Analysis of Taxation and Expenditure Patterns

The taxation and expenditure pattern can be analysed by plotting the relationship between various indicators of fiscal capacity and per capita GDP and see where India stands. This can be done by using 5 indicators overall tax to GDP, direct tax

to GDP, individual income tax to GDP, overall expenditure to GDP, and human capital expenditure to GDP. Analysing these parameters, it can be concluded that India does not have a low fiscal capacity. It seems to do better than average.

India is a significant negative outlier when it comes to the tax to GDP ratio and significantly so with respect to expenditures on health and education. In other words, controlling for democracy, India taxes less and spends less (especially on human capital).

India's overall tax to GDP is about 5.4% points less than that of comparable countries. India spends on average about 3.4% points less vis-à-vis comparable countries on health and education.

The state's capacity to deliver services is essential

for the citizens to pay for them because if the state's role is predominantly redistribution, the middle class will seek to exit and escape from paying taxes.

Number of Taxpayers: Is India an outlier?

Direct taxes hit people more than indirect taxes. In other words, people are more affected when their income or assets are taxed. That is why, the accountability of citizens weaken if they do not pay for the services the state provides.

In India today, roughly 5.5% of earning individuals

are in the tax net. India needs to cover to the large gap to become a full tax-paying democracy. Based on recent tax data, it is estimated that about 15.5% of net national income excluding taxes (which is the national income accounts counterpart of the personal income accruing to households) has been reported as gross taxable income indicating nearly 85% of the economy to be outside the tax net.

Examining the number of taxpayers (as a ratio of voting age population) controlling for the level of economic development, India is not an outlier. However, controlling for the level of democracy, India's ratio of taxpayers to voting age population is significantly less than that of comparable countries. The present percentage of population paying taxes needs to be increased in number.

To bring more citizens into the individual income

tax net it is necessary to set a reasonable threshold for paying taxes and not changing it unduly by raising exemption thresholds frequently. India's tax-GDP would have increased by 0.32% just by not having raised the threshold so generously according to a report.

Conclusion: Moving To a Better Equilibrium on Taxation and Spending It is evident from the analysis that, India has not fully translated its democratic vigour into commensurately strong fiscal capacity. In the long run, if India is to stay "on the line" as its per capita income grows, it will need to build fiscal capacity. For this, it must refrain from raising exemption thresholds and allow natural growth in income to increase the number of taxpayers.

The following points can be considered in this regard:

First, the government's spending priorities must include essential services that all citizens consume: Public infrastructure, law and order, less pollution and congestion, etc.

Second, reducing corruption must be a high priority not just because of its economic costs but also because it undermines legitimacy when citizens feel that the government is not performing its role efficiently. In this sense, the government's efforts to improve transparency through

transparent and efficient auctioning of public assets will help create legitimacy and over time strengthen fiscal capacity.

Third, subsidies to the well-off need to be scaled back. The subsidies should be well targeted. The tax exemptions Raj which often amount to redistribution towards the richer private sector also need to be reviewed and phased out. And reasonable taxation of the better-off, regardless of where they get their income from-industry, services, real estate, or agriculture are also needed to help build legitimacy.

Fourth, property taxation needs to be developed. Property taxes are especially desirable because they are progressive, buoyant and difficult to evade, since they are imposed on a non-mobile good and can be relatively identified. Higher rates

(with values updated periodically) can be the foundation of local government's finances, which can thereby provide local public goods and strengthen democratic accountability and more effective decentralisation. Higher property tax rates would also put sand in the wheels of property speculation. Smart cities require smart public finance and a sound property taxation regime which is vital to India's urban future. (PTA) Preferential Trade Agreements has been increasing since the establishment of WTO in 1994. Since

8 MTS GS Paper 3_1 Byju’s Classes: 9873643487

mid 2000's India's FTA (Foreign Trade Agreement) has doubled up. Q14) What do you understand by Sovereign Wealth Funds? In how many categories these funds have been classified and under what principles do they operate? Should India also form such a fund? (200 Words / 12.5 Marks) The IMF (2007, 2008) classifies SWFs into five groups, depending on their stated objectives and source of funding which we reproduce here:

Stabilization funds designed to insulate the budget

and the economy against commodity price swings.

Savings funds for future generations to enable conversion of non-renewable assets into a more diversified portfolio of assets.

Contingent pension reserve particularly to finance social security and health expenditures for rapidly ageing populations.

Development funds (designed to help fund socio-

economic projects and infrastructure; these funds usually have large domestic component).

Reserve investment corporations (these assets are still counted as reserve assets and are established to increase the return on reserves. though at a higher risk). As foreign exchange reserves have grown many monetary authorities have concluded that these reserves are well in excess of their immediate needs and offer sufficient protection against sudden capital outflows. Thus, they have opted to 'ring-fence a portion of their foreign exchange reserves for other purposes. Allocating a significant share to sovereign wealth funds. New funds have been created and existing funds have been reformed, or split into multiple vehicles for a variety of purposes. At the heart of these changes is the desire to diversify the holdings of this growing capital base and to seek a higher risk return trade off. Indeed, the government is from Singapore, China, and Korea has been particularly aggressive in investing overseas. Should India follow suit? Some argue that the problem in India is the sustainability of reserves,

given that they are driven by capital account surpluses (which in turn are due to net short-term capital inflows) rather than the current account. Thus, there may be a need to maintain reserves in relatively more liquid and lower-yielding assets. However, what this really suggests is that, from a prudence perspective, India should maintain a relatively greater share of reserves in the form that can be liquidated easily, but not all of its reserves. And, no one is suggesting all of India's reserves be deployed in the SWF; only a small portion needs to be earmarked initially, Even China has only transferred about 15 per cent of its reserves to the CIC. The fact that India's reserves have been built up due to capital account surpluses does not automatically imply that they will dissipate quickly. Even if there is a sharp reversal in capital outflows (as happened in 2008), the only time that the reserves will decline sharply is if the RBI chooses to stubbornly defend the Indian rupee.

There are clearly a number of prickly issues surrounding the creation and operation of SWFs in India, including the initial set-up costs, the degree of independence of the agency and its investment managers from the RBI and the finance ministry (that is, governance), organizational structure, and investment objectives, time-horizon, and policies (for example, commercial versus strategic; diversified portfolio or concentrated bets), and the degree of transparency in the agency's holdings and policies. These issues are admittedly much harder to resolve in a democratic and open society like India, but that is no reason to shy away from debating the issue seriously

Reserves, SPVS and infrastructure There are many who argue that obtaining higher yields from international reserves via investing in higher-risk external assets (both from a financial sense as well as strategic sense, for example, securing energy needs) should not be the main objective. Rather the focus should be on channelling the hitherto low-yielding reserves assets on much-needed domestic investments (for domestic development), notably the upgrading of the country's poor infrastructural facilities. Perhaps an indication of India's shoddy infrastructure is to consider The Economist's (2005) view on Bangalore, which is called the ‘silicon-valley of India’ because it is home to many big software companies: The arriving businessman, anxious to get to grips with India's information-technology industry in its very capital, may need a little patience. He might meet his first traffic jam just outside Bangalore’s airport. He can examine the skeleton of the early stages of a planned flyover on the airport road. Construction started in February 2003 and was due to be completed in April 2004. Three-quarters of the work is still to be done, but the building site is idle ... Bangalore suffers the infrastructure shortcomings common to many Indian cities: a water shortage,

inadequate sewers, an erratic power supply, and pot-holed roads too narrow for the traffic they need to bear. Policymakers in India are clearly cognizant of these infrastructural bottlenecks. The Committee on Infrastructure was set up in 2004, under the chairmanship of the Prime Minister and the objectives of the committee were to: (a) initiate policies that ensure time-bound creation of world-class infrastructure delivering services matching international standards: (b) developing structures that maximize the role of public—private partnerships in the field of infrastructure; and(c) monitor progress of key infrastructure projects to ensure that established targets are realized. The committee has estimated that the funding requirement till 2012 for national highways (roads), airports, and ports is Rs 2,620 billion (roughly around US$ 60 billion). It has also estimated that Rs 10,200 billion (around US$ 230 billion) will have to be spent on power and urban infrastructure during the same period. This effectively means that the total spending on infrastructure by 2012 will amount to Rs 12,820 billion (roughly around US$ 290 billion).

9 MTS GS Paper 3_1 Byju’s Classes: 9873643487

Problems with the Reserves-funded SPV Approach While the proposal for the use of reserves is rather novel, there are a number of areas of concern regarding the plan to fund infrastructure using the SPV vehicle. First, as noted, the central government will counter-guarantee the SPV's borrowings. This effectively raises the government's contingent or off-budget liabilities. This 'hidden deficit is one of the main reasons why fiscal authorities in India and elsewhere generally seem to prefer using the indirect means of capital expenditure financing (via an SPV), rather than selling bonds directly to the central bank in return for reserves. However, while the SPV scheme is a clever accounting devise, the economic consequences are identical to running an actual fiscal deficit. India needs to be especially concerned about the size and consequences of its overall fiscal deficit, which currently stands at an uncomfortably high 10 per cent of Gross Domestic Product (GDP) (this excludes contingent liabilities); Fiscal consolidation is urgently needed, failing which future medium- and longer-term growth may be derailed. Second, there remains the nagging issue as to whether the SPV scheme will make much of a difference to India's infrastructure development. As noted, the government proposes to focus on 'financially viable' projects. The implicit assumption here is that there are potentially solvent projects that are not moving forward because of a dearth of private investments. Is this a reasonable assumption? Many infrastructure projects in developing countries like India may not be viewed as being financially viable to private investors because of perverse/ non-economic pricing policies, ineffective delivery system, and uncertain regulatory frameworks, and a slow moving bureaucracy, which hinders quick decision-making. Indeed, it may well be that these

pose far greater impediments to India's infrastructure development than just the quantum of financing, and as long as they are not sorted out and reformed, it is not clear how effective the SPV scheme will be in filling India's critical gaps in infrastructure. Third, while potential projects to be financed are to be appraised by an inter-institutional group of banks and financial institutions, along with members of the Planning Commission, there are also valid concerns as to whether the funds available to the SPV will be appropriately channelled. Will appraisals of projects be based on solely economic (rather than populist) considerations and, if so, how effectively will they be monitored (in view of the long-term characteristics of such funding and possible short-term tenures of members of the people and agents within the inter-institutional group)? Fourth, there is the question of who bears the risk of unhedged external borrowing by the SPV. Presumably the government will offer guarantees for exchange rate risks and thus compensate the SPV in the event of depreciation of the rupee (of course, this assumes that the Indian rupee will

depreciate over time). Because of such concerns, it has been suggested that a relatively greater share of funding for the SPV be drawn from available foreign exchange reserves, rather than external borrowing which will raise the country's overall indebtedness. As is often noted, it is like households leaving savings in low interest earning accounts, while simultaneously borrowing at high interest rates to finance their expenditures (Rodrik 2006). Why not just use the idle savings for the planned expenditures?

Macroeconomic Consequences of Using Reserves to Finance Infrastructure There are also some specific concerns about channelling reserves to fund infrastructure. The RBI has rightly been wary of the potentially inflationary consequences, as the proposal effectively implies that additional liquidity will be released into the economy. Of course, to the extent that improvements in infrastructure needs raise the supply capacity of the country, the inflationary consequences due to excess liquidity may be short-lived. However, the interim period can last for quite some time, given the long gestation lag of infrastructure projects. As is often noted, inflation is like toothpaste, 'easy to squeeze out but extremely difficult to push back in'. In view of this, it is understandable why there should be concerns about the inflationary effects of such a policy. One seemingly ingenious method of limiting of potential inflationary consequences is to require that most of the intermediate inputs needed for local infrastructure projects (steel, cement, machinery, technology etc.) be imported. The logic is that imports do not add to domestic demand and can thus temper the immediate inflationary pressures. In addition, the rise in imports will also reduce the size of the country's balance of payments surplus, hence moderating the pace of future reserve build-up. While there is strong economic merit to this argument, it has two obvious limitations. First, it is not clear exactly how import-intensive infrastructure development really is. Most infrastructure development projects have a high local or non-tradable component (labour and transport). Thus, there is obviously a limit beyond

which the inflationary impact can be offset. Therefore, these expenditures cannot possibly be entirely inflation-neutral. Second, even if the infrastructure projects are import-intensive, the fact that the country is importing intermediate goods at an undervalued exchange rate implies that it is relatively more costly for the country (compared to if the country maintained and imported at a fairly valued exchange rate). In effect, therefore, the country is choosing to pay more for its capital equipment and resource needs, while simultaneously subsidizing its exporters. Such a policy is hard to justify on economic terms, unless one is able to argue that exports offer significant positive externalities to the rest of society. In any event, this is just not a cost-effective means of funding infrastructure. One way to counteract the adverse macroeconomic consequences of maintaining an undervalued

10 MTS GS Paper 3_1 Byju’s Classes: 9873643487

currency and the additional liquidity from the release of reserves (given that the process will almost certainly not be inflation-neutral) is to concurrently reduce import tariffs. Indeed, India has continued to lower customs duties as it attempts to align its tariff structure to its East Asian neighbours and trading partners. While bringing down of protection levels should be welcomed as a means of enhancing competition and increasing economic welfare in and of itself, the immediate negative side-effects of this may beto compromise the country's budgetary position. In addition, the available reserves cannot and should not be viewed as a pot of gold that can soften the budget constraint.

Conclusion The following observation on the use of reserves for infrastructure by Singh (2005) should be paid heed to: The rising levels of FER (foreign exchange reserves) have succeeded in infusing necessary confidence, both to the markets and policy makers. However, neither the capital inflow to India nor the size of FER is disproportionately large when compared to some other countries in the region. The main sources of accretion to FER are exports of IT-related services and foreign portfolio investment—not foreign direct investment (which is more stable), as in the cases of China and Singapore. Therefore, India which is accumulating FER fin precautionary and safety motives, especially after the embarrassing experience of June 1991, should avoid utilizing reserves to finance infrastructure. Infrastructure projects in India yield low or negative returns due to difficulties—political and economic– especially in adjusting the tariff structure, Introducing labor reforms, and upgrading technology. The use of FER to finance infrastructure, may lead to more economic difficulties, including problems in monetary management.

The IMF has recently initiated a work agenda, primarily for fund surveillance for developing a draft of SWF principles and practices, which deals with disclosure, reporting, transparency, and governance (IMF 2008). The work agenda was endorsed by the IMF board on 21 March 2008. On 20 March 2008, the US Treasury reached an understanding with SWFs from Abu Dhabi and Singapore regarding some basic policy principles to guide SWF activities which to reproduce here:

1. SWF investment decisions should be based solely on commercial grounds, rather than to advance, directly or indirectly, the geopolitical goals of the controlling government. SWFs should make this statement formally as part of their basic investment management policies.

2. Greater information disclosure by SWFs, in areas such as purpose, investment objectives, institutional arrangements, and financial information—particularly asset allocation, benchmarks, and rates of return over appropriate historical periods—can help reduce uncertainty in financial markets and build trust in recipient countries.

3. SWFs should have in place strong governance structures, internal controls, and operational and risk management Systems.

4. SWFs and the private sector should compete fairly. 5. SWFs should respect host-country rules by

complying with all applicable regulatory and disclosure requirements of the countries in which they invest. India should actively participate in the ongoing—though nascent—international dialogue of establishing a code of best practical/behavioural guidelines for the creation, Management, and operation of SWFs. Q15) Is climate vulnerability increasing the rate of interest on sovereign debt? How far do you agree with the principles of market in this regard? Discus in the light of recent developments. (200 words/12.5 marks) Explanation in the Class Q16) “Liberalisation in India was shaped largely by the economic problems of the government rather than by the economic priorities of the people or by long-term development objectives.” Discuss (200 words/12.5 marks) Explanation in the Class

Q17) “Healthy competition is not just the best

way to grow but also the best way to include all citizens. Healthy growth-inducing inclusive competition does not, however, emerge on its own. Without intervention, we get the competition of the jungle, where the strong prey on the weak.” Discuss citing relevant examples of Indian context. (200 words/12.5 marks) Competition is the life force of a modern economy-it replaces dated and inefficient methods while preserving valuable traditions; it rewards the innovative and energetic and punishes the merely connected; it destroys the stability of the status quo while giving hope to the young and the outsider. True competition eliminates the need for planners, for as gravity guides water through the shortest path, competition naturally guides the economy to the most productive route. Healthy competition is not just the best way to grow but also the best way to include all citizens; what better way to get needed services to a poor housewife than to encourage providers to compete for her money. Healthy growth-inducing inclusive competition does not, however, emerge on its own. Without intervention, we get the competition of the jungle, where the strong prey on the weak. Such competition only encourages a certain kind of winner, one who is adapted to the jungle rather than the world we want to live in. In contrast, healthy competition needs the helping hand of the government; to ensure the playing field is level, that entry barriers are low, that there are reasonable rules of the game and clear enforcement of contracts, and that all participants have the basic capabilities such as education and skills to compete.

11 MTS GS Paper 3_1 Byju’s Classes: 9873643487

Governments have historically found it difficult to ensure such healthy competition because intervention has to be just right. Governments typically are tempted to go beyond intervening to create a fair competitive environment, and instead have turned to determining winners and losers themselves. This typically has not worked out well. The creation of a healthier, more competitive environment in India could be the government’s most important contribution to sustainable economic growth in India over the medium term. Q18) Discuss the challenges faced by Public Sector banks in India and also suggest measures to cope up with these challenges.

(200 words/12.5 marks) 1. To clean up their balance sheets 2. To improve their governance and management 3. To fill out the ranks of middle management 4. To attract talent from the market 5. To improve customer service in extremely

competitive scenario 6. Restructure their entire organisation

Q19) “Income tax is inherently biased against savings.” Comment. Should the provisions of Income Tax be abolished? (200 words/12.5 marks)

Income tax is inherently biased against savings; it

leads to double taxation in so far both the savings and the earnings are taxed. In general, the tax system provides for a mechanism to eliminate this bias and promote savings in the economy. This mechanism takes the form of a tax incentive by way of a deduction for contribution to specified savings instruments. In India, savings in several instruments are further incentivised by exempting fully, or partially, the earnings at the accumulation stage as well as the withdrawals from tax (both the contribution and the earnings). In effect, savings are subject to exempt-exempt-exempt (EEE) method of taxation i.e. they are exempt at all three stages of contribution, accumulation and withdrawal.

The case for concessional tax treatment of savings is built on the consideration that a tax concession for savings leads to higher post-tax return for the

investor. The higher returns, in turn, create a positive substitution effect whereby, in favour of savings rather than current consumption. However, what is missed out is the fact that it also creates a disincentive for savings (income effect), since the higher returns now require lower savings to meet the lifetime savings target.

There is some empirical evidence to suggest that the positive and the negative effects are neutralized at the economy level. Further, the tax incentives for savings, as designed in India, do not encourage net savings (contribution plus accumulation minus withdrawals) since withdrawals are also exempt from tax. In addition, national savings comprise of household savings, government savings and corporate savings. To the extent, tax incentives for savings lead to fiscal loss, government savings are adversely impacted, thereby partially neutralizing the increase in household savings.

Further, tax incentives for savings distort the interest structure and choice of saving instruments, and merely help mobilize funds to specified savings instruments. They also increase the interest rate at which households are willing to lend funds to banks (i.e., make deposits), thereby adversely affecting investment. They are also regressive in as much as they provide relatively higher tax benefits to investors in the higher tax bracket; in fact, the real “small savers”, who are largely outside the tax net, do not enjoy any form of tax subsidy on their savings.

Overall, tax incentives for savings, more so as designed in India, are economically inefficient, inequitable and do not serve the intended purpose. Hence, there is a strong case for review of the design of the tax incentives for savings schemes.

While there should be no tax incentive for savings, the question is what should be the tax treatment of savings so as to eliminate the inherent bias under income tax. The emerging wisdom is that savings should be taxed only at the point of contribution (TEE) or withdrawal (EET); the latter being the best international practice on several counts.

First, savings (contribution) reduce cash flow and

therefore, the ‘ability’ to pay. Therefore, taxation at the point of contribution would create hardship and act as a disincentive to save. However, taxation at the point of withdrawal (principal or earnings) occurs when the ability to pay is greater and therefore, justified on principles of taxation.

Second, under the TEE method, taxation at the point of contribution does not provide any immediate incentive to save nor does exemption of withdrawals discourage dissavings. However, under the EET method of taxation of savings, full deduction from income at the point of contribution and accumulation acts as an incentive for savings while taxation at the point of withdrawal penalizes dissavings. The combined effect is that it encourages the saver to build a self-financing old age social security system.

Third, under the TEE method, there is no incentive

for consumption smoothening since withdrawals are exempt irrespective of the amount. However, the EET method allows for consumption smoothening particularly in old age since taxation of withdrawals incentivizes postponement of consumption. Under a progressive personal income tax rate structure, there is an in-built incentive to restrict withdrawals to meet necessary consumption only since lower withdrawals imply taxation at lower marginal tax rate and hence, lower tax liability. Consequently, the potential for old-age poverty is minimized.

Fourth, the EET method provides discretion to the saver for tax smoothening and minimize the tax liability arising from any bunching of gains. Fifth, because taxation is at the last point in the savings process, there is no uncertainty about the potential tax liability unlike in the case of TEE

method where the saver is uncertain whether the Government would impose a tax at the point of accumulation or withdrawal to raise revenue to overcome the fiscal crisis.

12 MTS GS Paper 3_1 Byju’s Classes: 9873643487

Sixth, the EET method is extremely simple in terms of compliance and administration since it can be operationalized by opening an account with a designated fund which, in turn, can invest in a mix of a broad range of debt and equity instruments depending upon the risk appetite of the saver. All earnings are required to flow into the same account and withdrawals, if any, can be subject to withholding tax. It does not require any complex tracking mechanism to prevent leakage of revenue. It is not necessary for the saver to maintain details of savings and earnings to claim

tax benefit.

Finally, most developed countries and many developing countries are implementing the EET method of taxation of savings.

In view of the foregoing, India should move, in a phased manner, to the EET method of taxation of savings.

Interestingly, the New Pension Scheme (NPS) is

already being subjected to the EET method of taxation.

Therefore, deductions under Section 80C and 80CCD should be re-assessed to move toward a common EET principle for tax savings. Q20) Compare and Contrast Place of Effective Management (PoEM) with Controlled Foreign Corporations Law (CFCs). Which one would you prefer for India? (200 words/12.5 marks)

POEM: 1. It results in foreign company being

treated as an Indian taxpayer, 2. Even if the foreign company carries out active business, POEM could be triggered- eg. Owing to common directors, 3. A foreign company having POEM in India, is taxed on its entire overseas income and 4. It is an out-dated concept.

Whereas in CFC: 1. Foreign company is not treated as Indian taxpayer, 2. It covers companies set up in low-tax countries, which are not engaged in active business, 3. Only passive income of the foreign company, which is not repatriated to India, is taxed in the hands of the Indian shareholders and 4. It is internationally recognized. Several countries such as USA, UK and Germany have it.