Daily News Simplified -

DNS
01 09 20
Notes
SL. THE HINDU
TOPICS
NO. PAGE NO.

(i) GDP falls 23.9% in first quarter 01

1
Title (ii) RBI moves to ease liquidity further 17
1. (i) GDP falls 23.9% in first quarter (The Hindu - Pg 1)
(i) PLA aggression blocked at Pangong Tso 01
2 (ii) RBI moves to ease liquidity further (The Hindu - Pg 17)
Syllabus Prelims:
(ii) China Economy sq. km in Ladakh
controls1,000 01
Mains: GS Paper III – Economy
3
Theme GST reform needs
Falling GDP a new
– Steps grand
taken bybargain
RBI 08

Highlights
4 Context: Pranab Mukherjee passes away
Ex-President 01
 The lockdown imposed due to COVID-19 has led to both demand and supply side
disruption to the Indian Economy. According to a recent report published by
National Statistical Office (NSO), the GDP has contracted by 24% in the first quarter
(April-June) of 2020-21 as compared to 5% growth registered in Q1 2019-20.
 It is for the first time that India has recorded contraction in the quarterly GDP data
since it started publishing GDP data on a quarterly basis since 1996. Further, India
has seen contraction in GDP for the first time in the last 41 years since 1979.
 
Highlights of the GDP Estimates
The GDP at Constant (2011-12) Prices in Q1 of 2020-21 is estimated at Rs 27 lakh crore, as
against Rs 35 lakh crore in Q1 of 2019-20. As seen in the figure below, barring Indian
agriculture, all other sectors have seen contraction, with the largest decline in the labour-
Intensive construction sector.
Further, the major drivers of
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India's GDP, Consumption Expenditure and Investment have both seen a decline. The only
saving grace was the increase in the Government's expenditure to provide stimulus. In the
absence of increase in Government's expenditure, the GDP contraction would have been
far higher.

 
Economic Recession in India

Recession is defined as a fall in the overall economic activity for two consecutive quarters
(six months) accompanied by a decline in income, sales and employment. In independent
India's history, four such years of negative GDP growth were registered. They saw
contraction of -1.2% (FY58), -3.66% (FY66), -0.32% (FY73) and -5.2% (FY80). The economic
contraction in the next quarter of 2020-21 could see India entering into its 5th Recession in
its economic history.
 
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Reasons for present Economic Slowdown

The Economic survey 2018-19 had recommended for sustaining virtuous economic cycle of
higher investment-higher GDP growth- higher consumption in order to realise the vision of
$5 trillion economy. The increase in Investment rates leads to greater employment
creation, increase in production and exports leading to higher GDP growth rates. The
higher GDP growth rates leads to increase in disposable income levels of the people
leading to increase in consumption expenditure. The higher demand for goods and
services, in turn incentivises greater amount of private sector Investment leading to
virtuous economic cycle.

Two important points:

1. Increase or decrease in Investment does not immediately impact the Economic
growth. Usually, the impact of either increase or decrease in Investment on the GDP
growth is seen after a period of 4 years. This is known as lagged effect of Investment
on GDP Growth rates.
2. Similar to lagged effect of Investment on GDP growth, there is a lagged effect of
economic growth on Consumption. The impact of increase or decrease in the GDP
growth on the consumption is usually seen after a period of 2-3 years.
 
Important Observations:
The Investment rate within Indian Economy started declining from 2012-13. However, in
spite of decline in Investment, the Indian economy continued on higher GDP growth
trajectory for the next 4 years. Ultimately, the decline in Investment led to decline in GDP
growth rates from 2016-17 i.e. after a period of 4 years due to lagged effect.
The decline in the GDP growth rate from 2016-17 did not immediately impact the
consumption. The Consumption expenditure started declining only in first quarter of 2019-
20 due to lagged effect of 2-3 years. The decline in consumption expenditure has in turn
led to decrease in Investment rates.
Hence, the present economic slowdown can be traced to 2012-13 when the Investment
rate started declining. Thus, India is facing economic slowdown because of its inability to
sustain virtuous economic cycle.
 
Decoding Investment Slowdown
Trends in Investment Rates
The Total Investment rate within Indian Economy has declined from 34% in 2011-12 to
28.5% in 2017-18. The Household sector is one of the dominant sources of Investment.
However, the share of household Investment has reduced from 16% in 2011-12 to 10.5% in
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2017-18. The share of Private corporate sector and Public sector has remained stagnant at
11% and 7% respectively.

 
Reasons for decline in Investment:
Household sector: Maximum Investment in Real estate sector. The poor financial position
of Banks and NBFCs has led to decline in household Investment in Real estate sector. (Drag
of Financial sector on Real Estate Sector)
Private Corporate Sector: Stagnant Private corporate Investment due to higher NPAs of
Banks (Drag of Financial sector on Corporate Investment)

These two factors highlight that the Investment cycle within Economy would kick in only
when the financial position of Banks and NBFCs improve. This is quite critical to sustain the
virtuous economic cycle.

Personal
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Notes

Title 2. (i) PLA aggression blocked at Pangong Tso (The Hindu - Pg 1)

(ii) China controls1,000 sq. km in Ladakh  (The Hindu - Pg 1)

Syllabus Prelims: Current events of international importance
Mains: GS Paper II – International Relations, GS Paper III - Security
Theme China’s aggression on Pangong Tso
Highlights Context: PLA troops violated the previous consensus arrived at during military and
diplomatic engagements during the ongoing standoff in Eastern Ladakh and carried out
provocative military movements to change the status quo.

 In an escalation of the ongoing standoff on the disputed boundary in Ladakh, Chi-

nese troops carried out aggressive moves on the night of August 29 to change the
status quo on the south bank of Pangong Tso and those attempts were thwarted.
 China accused the Indian Army of “illegally crossing the line” on August 31 at two
points — at the south bank of Pangong lake and near the Reqin mountain pass (near
Rezang La) — and “blatantly provoked and caused tension on the border”.
 A Brigade Commander-level flag meeting was held at Chushul to resolve the issues.
It looks clear that PLA action is now moving to South Bank as North bank of Pangong
has been secured, a source with knowledge of the matter said, adding it could also
be a diversion from Depsang Plains where construction by PLA is on in full swing and
their excavators continue to build roads.

‘China controls 1,000 sq. km in Ladakh’ – Pg 01

About 1,000 square kilometres of area in Ladakh along the Line of Actual Control (LAC) is
now under Chinese control, intelligence inputs provided to the Centre suggest.
China has been amassing troops and fortifying its presence along the LAC since April-May.
Twenty soldiers were killed on June 15 in the Galwan Valley in eastern Ladakh in violent
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clashes with China’s People’s Liberation Army (PLA) troops.

A senior government official has revealed that in -

• Depsang Plains, from patrolling point 10-13, the scale of Chinese control of India’s
perception of the LAC stood at about 900 sq. km.
• About 20 sq. km in Galwan Valley
• 12 sq. km in Hot Springs area is said to be under Chinese occupation
• In Pangong Tso, the area under Chinese control is 65 sq. km,
• whereas in Chushul it is 20 sq. km.

The standoff at the China border continues even after several rounds of diplomatic and
military level talks.
A partial disengagement commenced after Special Representatives (SRs) Ajit Doval and
Wang Yi, tasked to hammer out a solution to the boundary dispute, spoke on July 5.
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Personal
Notes

Title 3. GST reform needs a new grand bargain (The Hindu Page 08)
Syllabus Prelims: Economy
Mains: GS Paper III – Economy
Theme GST Reform

Highlights Context:
 As the impacts of Covid-19 pandemic are increasingly becoming clearer, the acute
shortages of revenues have made it difficult for the states to run the government.
 One of the reasons behind that is centres going back on promise to compensate
the states for revenue losses due to GST implementation.
 In this regard, this article suggests new measures.

So if you want to understand the GST in simple words:

 The Centre and the States of the Union of India entered into an agreement which
resulted in the launch of the unified Goods and Services Tax (GST).
 States gave up their right to collect sales tax and various other taxes, and the
Centre gave up excise and services tax.
 So why did we do that?
o GST enabled frictionless commerce across State borders,
o It made the taxes buoyant and leakproof tax compliance,
o It removed inefficiencies like the cascade of “tax on tax”.

Now it was expected that the revenues of the states will decline and in return, centre
promised to reimburse the losses.
So what was the deal?
 Central government made a promise of reimbursing any shortfall in tax revenues
for a period of five years.
 This reimbursement was to be funded by a special cess called the GST
compensation cess.
 The promised reimbursement was to fill the gap for an assured14% year on year
tax growth for five years, and it was generous to a fault.
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Then why is the trouble?

 The 14 % Year on Year growth on tax revenues had not been seen in the past
o Neither the national aggregate nor any of the major States had this record
for the previous five years.
 The government failed to learn from the experience of implementation of
VAT
o So the first stage of reforms in indirect taxes was implementation of VAT.
o SO the harmonisation of Value Added Tax (VAT) rates across the nation
was implemented a decade ago.
o That design too had an inbuilt reimbursement formula. But that tapered
over the years, making room for incentives for tax effort from the States,
sort of “skin in the game”.

Now Covid pandemic has worsened that situation

 The tax collection has dropped significantly,
 expenditure needs are sharply higher, especially at the frontline of the battle, at
the State level.

But it seems that the States have been told that they are on their own to meet the shortfall
in revenues.
The Centre is giving up its responsibility of making up for the shortfall in 14% growth in
GST revenues to the states.

Why centre is on a wrong footing while denying to stick to its promise?

 The States do not have access to multiple options that the Centre has, such as
issue of a sovereign bond (in dollars or rupees) or a loan against public sector unit
shares from the Reserve Bank of India.
 The Centre can anyway command much lower rates of borrowing from the
markets as compared to the States.
 In terms of aggregate public sector borrowing, it does not matter for the debt
markets, nor the rating agencies, whether it is the States or the Centre that is
increasing their indebtedness.
 Fighting this recession through increased fiscal stimulus is basically the job of
macroeconomic stabilisation, which is the Centre’s domain.

Kautilya too would have advised the sovereign against going back on the promised bailout,
as fulfilling the obligation helps build trust with sub-sovereigns.
So what can be done?
 A low, moderate and Uniform Tax rate is the need of hour:
o We all know that GST is a destination-based consumption tax, which must
include all goods and services with very few exceptions, such as food and
medicine.
o That widening of the tax base itself will allow us to go back to the original
recommendation of a standard rate of 12%, to be fixed for at least a five-
year period.
o For example: A comparison with Australia which also coincidentally shares
its GST anniversary with India, is apt. For the past two decades their GST
rate has been constant at 10%.
o A low moderate single rate of 12% encourages better compliance, reduces
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the need to do arbitrary classification and discretion, reduces litigation and

will lead to buoyancy in collection.
 Third tier of government
o Its time that we recognized the increasing importance of the third tier of
government. Even after 28 years of the 73rd and 74th Amendments, the
local governments do not have the promised transfer of funds, functions
and functionaries.
o These local bodies face increased responsibility of providing government
services especially in view of increased urbanisation and decentralisation.
o Of the 12% GST, 10% should be equally shared between the States and the
Centre, and 2% must be earmarked exclusively for the urban and rural
local bodies, which ensures some basic revenue autonomy to them.
o The actual distribution across panchayats, districts and cities would be
given by respective State Finance Commissions. GST consumption tax paid
by every citizen establishes a tighter link between the governed and the
government. The quality of governance improves as also, the tax base is
better aligned with responsibilities of various tiers of government.

GST is a crucial and long-term structural reform which can address the fiscal needs of the
future, strike the right and desired balance to achieve co-operative federalism and also
lead to enhanced economic growth. The current design and implementation has failed to
deliver on that promise. A new grand bargain is needed.

Personal
Notes

Title 4. Ex-President Pranab Mukherjee passes away (The Hindu Page 01)
Syllabus Prelims: Current event of national Importance

Theme Contributions of Pranab Mukherjee

Highlights
Context: Former President Bharat Ratna Pranab Mukherjee passed away at the age of 84
and has been cremated with state honours at the Lodhi Road crematorium in New Delhi.
Pranab Mukherjee had a long political career where he served as Member of Parliament
seven times and helmed important post during the Prime Ministership of Indira Gandhi
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and Dr. Manmohan Singh.

Dr. Mukherjee was described by India’s present PM as scholar par excellence, a towering
statesman and a person who was admired across the political spectrum & by all sections
of society. So, let us remember our former President by going through some of the
important decisions taken by him during his long political tenure.
As 13th President of India (2012-17)
 Doing away with the term “His Excellency” - The Rashtrapati Bhavan, on the
first anniversary of Pranab Mukherjee's term, made a number of announcements
in a bid to democratise the institution of presidency. It did away with the honorific
'His Excellency' used to address the president. Governors of states were also
encouraged to follow the practice.
 Mercy Petitions - Pranab Mukherjee commuted four mercy petitions and rejected
30, second only to R. Venkatraman, who rejected 45 mercy pleas.
 Teaching School Children - President Pranab Mukherjee became the first head of
state to teach school children. During the last two years of his presidency, he held
classes at a school within the premises of the Rashtrapati Bhavan. He taught
students of classes 11 and 12 history of Indian politics at the Rajendra Prasad
Sarvodaya Vidyalaya in the President's Estate.
 A new museum in a heritage building - the Carriage Halls and the Stables -
earlier used for horses and to house buggies, has been converted into a state-of-
the-art museum. It highlights landmark events starting from Delhi Durbar of 1911
to the oath taking by first President Rajendra Prasad. The museum also displays a
part of the collection of arms, some furniture fashioned by Lutyens, activities of
the President's Body Guard and a rich collection of gifts offered to the President by
Indian and foreign dignitaries. 
 Smartgram' Initiative – The SMARTGRAM initiative of Rashtrapati Bhavan was
inaugurated for five villages of Haryana i.e. Tajnagar, Dhaula, Alipur, Harchandpur
and Rojka Meo by the President of India, Shri Pranab Mukherjee on July 2, 2016.
On May 1, 2017, it was approved that the initiative be extended to 100 villages in
the vicinity of the initially selected five village of Haryana.  The aim of the meeting
was to sensitize them on the initiative and discuss plans for implementation of
various programmes in these villages. A large number of projects have been
undertaken in the initially selected five villages of Haryana under the SMARTGRAM
initiative in the fields of agriculture, skill development, energy, education, heath,
employment generation, developing entrepreneurship etc. The initiative is based
on a convergence model with the support of the Centre, Haryana government,
public and private sector organisations, NGOs and individuals.

As Finance Minister
 Dr. Mukherjee served two terms as finance minister: first in the pre-liberalisation
era under Indira Gandhi as PM and later in a post-liberalised Indian economy in
Manmohan Singh regime. Mukherjee served his first innings as FM from January
1982 to December 1984 and then again from January 2009 till June 2012.
 Dr. Mukherjee introduced the famous legislation in 2012 – General Anti
Avoidance Rules (GAAR) – which was an anti-tax avoidance law. GAAR was
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originally proposed in the Direct Tax Code 2009 and was targeted at arrangements
or transactions made specifically to avoid taxes.
 However, after much criticism from corporates, GAAR was sent to the Standing
Committee.  A common criticism of GAAR was that it provided discretion and
authority to the tax administration which could be misused. GAAR was initially
delayed for 1 year and then for another three years.

Personal
Notes
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