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Daily Current Affairs 13.10.2021 (Retail inflation falls to 4.35%; industrial output growth up, Taking the lid off illicit financial flows, Do not breathe easy on the silicosis prevention policy)

Daily Current Affairs 13.10.2021 (Retail inflation falls to 4.35%; industrial output growth up, Taking the lid off illicit financial flows, Do not breathe easy on the silicosis prevention policy)

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1.Retail inflation falls to 4.35%; industrial output growth up

Don’t read too much into the encouraging data: economists

India’s retail inflation cooled off to a five-month low of 4.35% in September, thanks to a sharp dip in food price inflation, while industrial output growth accelerated to 11.9% in August, driven largely by a statistical effect of a low base — August 2020 had recorded a 7.1% contraction.

Economists cautioned against reading too much into these encouraging official data prints yet, with adverse headwinds lurking on both fronts.

Food inflation based on the Consumer Food Price Index (CFPI) fell to just 0.68% in September after having declined to a seven-month low of 3.1% in August. While vegetables recorded a negative inflation of 22.5%, price rise in oils and fats remained sticky at 34.2% and in the range of 7%-8.75% for key protein sources such as pulses, eggs and meat.

However, core inflation, which doesn’t include food and fuel price trends, remained elevated at 5.8% for the third month in a row, and economists said the moderation in inflation rate could be transient, with rising energy, metals and logistics costs being risk factors.

“A high base is expected to temporarily dampen the consumer price inflation for October and November to below 4%, before an upturn resumes in the remainder of this fiscal,” ICRA chief economist Aditi Nayar said, emphasising that barring food and housing, most sectors recorded a flat or higher inflation reading in September.

Inflation

  • Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc.
  • Inflation measures the average price change in a basket of commodities and services over time.
  • Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This could ultimately lead to a deceleration in economic growth.
  • However, a moderate level of inflation is required in the economy to ensure that production is promoted.
  • In India, the NSO under the Ministry of Statistics and Programme Implementation measures inflation.
  • In India, inflation is primarily measured by two main indices — WPI (Wholesale Price Index) and CPI (Consumer Price Index) which measure wholesale and retail-level price changes, respectively.

Consumer Price Index

  • It measures price changes from the perspective of a retail buyer.
  • The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
  • The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.
  • Four types of CPI are as follows:
    • CPI for Industrial Workers (IW).
    • CPI for Agricultural Labourer (AL).
    • CPI for Rural Labourer (RL).
    • CPI (Rural/Urban/Combined).
    • Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.
  • Base Year for CPI is 2012.
  • The Monetary Policy Committee (MPC) uses CPI data to control inflation.

2.Taking the lid off illicit financial flows

The Pandora Papers have only highlighted the need for concerted steps to alter the global financial architecture

The Pandora Papers, published on October 3, once again expose the illegal activities of the rich and the mighty across the world. The Pandora Papers investigation is “the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”. The International Consortium of Investigative Journalists (ICIJ) has researched and analysed the approximately 12 million documents in order to unravel the functioning of the global financial architecture which helps illicit financial flows, in turn enabling the rich to throw a cloak over their incomes and activities.

Given the complexity of the tax laws and the loopholes available, some of the deft moves may be strictly legal, but not necessarily morally justified. The ICIJ says that while some of the files date to the 1970s, most of those it reviewed were created between 1996 and 2020. The ICIJ has also said that the “data trove covers more than 330 politicians and 130 Forbes billionaires, as well as celebrities… drug dealers, royal family members and leaders of religious groups around the world”.

History of leaked data

Since at least 2008, files indicating the manipulations by the rich have been stolen from financial institutions. In 2017, the Paradise Papers were leaked out mostly from the more than 100-year-old offshore law firm, Appleby, which operates globally. In 2016, the Panama Papers were obtained by hacking the server of the Panamanian financial firm, Mossack Fonseca. In these exposés, the British Virgin Island (BVI) figured prominently. The leaked documents from Luxembourg, the “Luxembourg Leaks”, appeared in 2014.

In 2008, a former employee of the LGT Bank of Liechtenstein offered information to tax authorities. There were Indian names also but the Indian government accepted the data only under pressure from the Supreme Court. The same year, Hervé Falciani obtained confidential data on HSBC bank accounts from remote servers and gave the data to then French Finance Minister Christine Lagarde (she later became chief of the International Monetary Fund to then move on as President of the European Central Bank) who passed it on to the various governments, including India.

In the United States, in the mid-2000s, UBS Bank and Bradley Birkenfeld, who was acting as a private banker on its behalf, were prosecuted for enabling U.S. citizens to spirit away their income and wealth.

A large extent of the illicit financial flows have a link to New York City and London, the biggest financial centres in the world that allow financial institutions such as big banks to operate with ease. The leaked data show that these entities move the funds of the rich and the powerful via tax havens; Delaware in the U.S. is a tax haven. The big financial entities operating from these cities have been prosecuted for committing illegalities. In 2012, an investigation into the London Interbank Offered Rate or LIBOR — crucial in calculating interest rates — led to the fining of leading banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland for manipulation. These banks also operate a large number of subsidiaries in tax havens to help illicit financial flows.

The modus operandi

The leaked papers now and even earlier have exposed the international financial architecture and illicit financial flows. For instance, Panama Papers highlighted the template used in other tax havens. The Pandora Papers once again confirm this pattern.

Tax havens enable the rich to hide the true ownership of assets by using: trusts, shell companies and the process of ‘layering’. Financial firms offer their services to work this out for the rich. They provide ready-made shell companies with directors, create trusts and ‘layer’ the movement of funds. Only the moneyed can afford these services.

The process of layering involves moving funds from one shell-company in one tax haven to another in another tax haven and liquidating the previous company. This way, money is moved through several tax havens to the ultimate destination. Since the trail is erased at each step, it becomes difficult for authorities to track the flow of funds.

It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned. The Panama Papers revealed the names globally of current and former leaders, politicians and public officials, billionaires, celebrities, sports stars, small and big businesses and professionals.

Is it that the rich move their funds to tax havens because of high tax rates? Not really. Even citizens of countries with low tax rates use tax havens. Over the three decades, tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital. This has led to the ‘race to the bottom’, resulting in a shortage of resources with governments to provide public goods, etc., in turn adversely impacting the poor.

The specificity of the Papers

The Pandora Papers, unlike the previous cases mentioned above, are not from any one tax haven; they are leaked records from 14 offshore services firms. The data pertains to an estimated 29,000 beneficiaries. The 2.94 terabytes of data have exposed the financial secrets of over 330 politicians and public officials, from more than 90 countries and territories. These include 35 current and former country leaders. Singer Shakira and former Indian cricket captain Sachin Tendulkar are among the celebrities and sport stars named in the investigation. Others include the King of Jordan, the Presidents of Ukraine, Kenya and Ecuador, the Prime Minister of the Czech Republic, former British Prime Minister Tony Blair and Russian President Vladimir Putin. Surprisingly there are few names from the United States, even though it has the largest number of billionaires.

The very powerful who need to be onboard to curb illicit financial flows (as the Organisation for Economic Co-operation and Development, or the OECD is trying) are the beneficiaries of the system and would not want a foolproof system to be put in place to check it. With the current global financial architecture, black income generation cannot be checked.

Revelations suggest that funds are moved out of national jurisdiction to spirit them away from the reach of creditors and not just governments. Many fraudsters are in jail but have not paid their creditors even though they have funds abroad.

Strictly speaking, not all the activity being exposed by the Pandora Papers may be illegal due to tax evasion or the hiding of proceeds of crime. The authorities will have to prove if the law of the land has been violated. Each country will have to conduct its investigations and prove what part of the activity broke any of their laws. In the United Kingdom, the laws regarding financial dealings are very favourable to the rich and their manipulations. It is no wonder, in the recent past, that several Indian fraudsters have thus fled to London to escape the Indian law. A large number of rich Indians have bought property in the U.K. Thousands of foreigners buy or rent property in the U.K. because no questions are asked about the sources of funds; this has enriched the U.K. by $100 billion.

India’s investigations

Many Indians have become non-resident Indians or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities. That is why prosecution has been difficult in the earlier cases of data leakage from tax havens. The Supreme Court of India-monitored Special Investigation Team (SIT) set up in 2014 has not been able to make a dent. The Government’s focus on the unorganised sector as the source of black income generation is also misplaced since data indicate that it is the organised sector that has been the real culprit and also spirits out a part of its black incomes.

An interesting recent development (October 8) has been the agreement among almost 140 countries to levy a 15% minimum tax rate on corporates. Though it is a long shot, this may dent the international financial architecture. Other steps needed to tackle the curse of illicit financial flows are ending banking secrecy and a Tobin tax on transactions; neither of which the OECD countries are likely to agree to.

Background

Recently, several prominent Indian names have been included in the Pandora Papers leak.

  • There are over 300 Indian names in the leak, including over 60 prominent ones.
  • Pandora Papers are 11.9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts.

Trust

  • About:
    • A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organisations that are to benefit from it.
    • A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’. At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.
  • Indian Law:
    • The Indian Trusts Act, 1882, gives legal basis to the concept of trusts. Indian laws recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’. India also recognises offshore trusts.

Off-the-Shelf Company

  • An ‘off-the-shelf’ company or ready-made company is a pre-registered limited company, however, it has never been traded. An ‘off-the-shelf’ company is ready for immediate use and can be purchased after paying a certain cost for it.

Key Points

  • About:
    • The Pandora Papers reveal how trusts are used as a vehicle in conjunction with offshore companies set up for the sole purpose of holding investments and other assets by business families and ultra-rich individuals.
      • The trusts can be set up in known tax havens which offer relative tax advantages.
      • For Example: Samoa, Belize, Panama, and the British Virgin Islands.
    • They reveal how the rich set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterised by air-tight secrecy laws.
    • Businesses have created a new normal after countries have been forced to tighten the laws on such offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.
      • The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporations respectively.
  • Reasons for Setting up Trusts Overseas:
    • Secrecy:
      • Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in.
    • Maintain a Degree of Separation:
      • Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.
    • Avoid Tax in the Guise of Planning:
      • Businesspersons avoid their Non-resident Indians (NRI) children being taxed on income from their assets by transferring all the assets to a trust.
    • Prepare for Estate Duty Eventuality:
      • There is a pervasive fear that estate duty, which was abolished back in 1985 will likely be re-introduced soon.
      • Setting up trusts in advance will protect the next generation from paying the death/inheritance tax, which was as high as 85% in the more than three decades after its enactment (The Estate Duty Act, 1953).
    • Flexibility in a Capital-Controlled Economy:
      • India is a capital-controlled economy. Individuals can invest only USD 2,50,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS).
      • To get over this, businesspersons have turned to NRI , and under Foreign Exchange Management Act, 1999, NRIs can remit USD 1 million a year in addition to their current annual income, outside India.
        • Further, the tax rates in overseas jurisdictions are much lower than the 30% personal Income-Tax rate in India
  • Grey Areas of Indian Taxation:
    • There are certain grey areas of taxation where the Income-Tax Department is in contest with offshore trusts.
    • After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians have to report their foreign financial interests and assets.
      • NRIs are not required to do so.
    • The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
    • In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then too the trust may be considered a resident of India for taxation purposes.
  • Government’s Initiatives:
    • Legislative Action:
      • The Fugitive Economic Offenders Act, 2018
      • The Central Goods and Services Tax Act, 2017
      • The Benami Transactions (Prohibition) Amendment Act, 2016
      • The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
      • Prevention of Money Laundering Act, 2002.
    • International Cooperation:
      • Double Taxation Avoidance Agreements (DTAAs):
        • India is proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions.
      • Automatic Exchange of Information:
        • India has been a leading force in the efforts to forge a multilateral regime for proactive sharing of financial information known as Automatic Exchange of Information which will greatly assist the global efforts to combat tax evasion.
      • Foreign Account Tax Compliance Act of USA:
        • India has entered into an information sharing agreement with the USA under the act.

3.Do not breathe easy on the silicosis prevention policy

The Government must make haste to prevent a killer disease that claims thousands of workers’ lives each year

Long before COVID-19 hit, countless workers engaged in mines, construction and factories in India were silently dying of exposure to dust, utmost exploitation and apathy. They continue to do so.

Rajasthan’s pioneering model

One State — Rajasthan — with the top-most share of over 17% in value of mineral production in the country and a long history of civil society activism, was the first to notify silicosis as an ‘epidemic’ in 2015, under the Rajasthan Epidemic Diseases Act, 1957. In 2019, it announced a formal Pneumoconiosis Policy, only next to Haryana.

Silicosis is part of the pneumoconiosis family of diseases, described by the policy as “occupational diseases due to dust exposure… are incurable, cause permanent disability and are ‘totally preventable by available control measures and technology’ (emphasis added)”. A ‘silicosis portal’ was hosted by the Department of Social Justice and Empowerment and a system of worker self-registration, diagnosis through district-level pneumoconiosis boards and compensation from the District Mineral Foundation Trust (DMFT) funds to which mine owners contribute, was put in place. In just two years, the State has officially certified and compensated over 25,000 patients of silicosis, of which 5,500 have already died of the disease.

Gaps in the system

But even this ‘pioneering model’ stops short of where it matters the most. In the mining sector alone, none of the silicosis cases diagnosed has been notified by mine owners or reported by the examining doctors to the Directorate General of Mines Safety (DGMS), Ministry of Labour and Employment. But this is what they are legally required to do, according to Section 25 of the erstwhile Mines Act, 1952 and Section 12 of the now-effective Occupational Safety, Health and Working Conditions (OSHWC) Code, 2020.

Why is notifying cases to the DGMS important? Only that would shift the paradigm from compensation to prevention, and fix the responsibility on mine owners, who now continue to slip away despite violating safety and preventive protocols. The DGMS, the sole enforcement authority for health and safety in mines, can take action against mine owners only if it knows who they are, and in turn, whom they employ. But only 10%-20% of the over 33,100 mining leases and quarry licences in Rajasthan are DGMS-registered.

So the present system is designed to ‘consume’ the worker and dispense with him with a small compensation while the mine owner sits back and continues to hire the next able worker — an inhuman cycle, which the Government is complicit in.

Labour Code dilutions

Persistent attempts to establish the employer-worker relationship on record have drawn a blank, given that the mine-owning community is a major revenue contributor to the State. That said, the immediate impetus for silicosis prevention could come from two related places in the OSHWC Code.

Section 6 of the Code makes it mandatory for all employers to provide annual health checks free of cost “to such employees of such age or such class of employees of establishments or such class of establishments, as may be prescribed by the appropriate Government”. Section 20 gives powers to the DGMS to conduct health and occupational surveys in mines.

Positive as they sound, these sections are severely diluted from the earlier Mines Act provisions, which in turn, were simply never implemented. The draft Central rule 6 corresponding to Section 6 of the Code fixes an age floor of 45 years for workers in all establishments (including mines) to be eligible for these health checks, though Rules 92 to 102 provide for initial and periodic examinations of all mine workers from their time of joining — which is an anomaly. Two, Section 20 places no obligation on the mine owner to provide any form of rehabilitation in terms of alternative employment in the mine, or payment of a disability allowance/lump sum compensation for a worker found medically unfit. These paragraphs in the earlier Mines Act linked to the Workmen’s Compensation Act (also subsumed), have been deleted.

A ‘medically unfit’ worker is thus expected to leave the job and fend for themselves or subsist on the compensation of ₹3 lakh provided in Rajasthan from the DMFT — and not even that, perhaps, in other States.

Steps for prevention

State governments need to be alive to these dreadful regressions and use their powers to contain the damage. Rajasthan could lead the way by establishing a robust system of preventive annual health checks as a real and regular feature of the silicosis prevention plan.

One, the related State departments, in close dialogue with the DGMS, must urgently draw up detailed guidelines for district-wise health surveys. The State rules under the OSHWC Code must take care to ensure the health checks are provided to all workers in all establishments, irrespective of age. The State Advisory Board (Section 17 of the Code), along with technical committees, must be quickly constituted, with workers and their representatives having a say in them.

Two, local manufacturers must be incentivised to innovate and develop low-cost dust-suppressant and wet-drilling mechanisms that could either be subsidised or provided free of cost to the mine owners. Existing prototypes must be tested and scaled up.

Three, the DMFT funds are both underutilised and spent in an entirely ad hoc manner. A Centre for Science and Environment report shows Rajasthan had ₹3,514 crore under DMFTs in 2020 of which only approximately ₹750 crore was spent. Their haphazard allocation for non-mineworker-related expenditure must be replaced by a streamlined and accountable system for the direct benefit of mineworkers under clearly defined budget heads such as prevention (including innovation fund and subsidy for wet drilling equipment), disability compensation, solatium, administrative expenses and others. But even this planning will be incomplete without bringing worker-employer identification on record. A systematic identification ultimately lies in the hands of the authorities and their will to enforce the law in this regard and a rising among the workers for their rights.

No more time must be lost in bringing prevention to the heart of the pneumoconiosis policy.

Info

  • The MMDR Act, 1957: The mines and minerals sector is governed by the Mines and Minerals Act of 1957. This act provides for:
    • The governance of mining leases within the country.
    • The purpose of why the lease is given.
    • How to ensure the well being of the people living in the areas where mines are auctioned.
  • Mineral Potential of India: India has the same mineral potential as South Africa and Australia. It produces 95 types of minerals but despite this huge mineral potential, the mining sector of India still remains underexplored.
    • The mining sector contributes around 7 to 7.5% of the GDP of countries like South Africa and Australia whereas it is only 1.75% in India.
  • High Imports of Minerals: India is importing around 2.5 lac crore rupees worth minerals.
  • Underexplored Mining Areas of India: India has explored only 10% of its Obvious Geological Potential (OGP) so far.
    • Only 5% of OGP is being used by India for mining.
    • In Australia and South Africa, 70-80% of OGP is mined.

MMDR Amendment Bill, 2021

Objectives:

  • Transparency in the Auction Process: The bill passed by a voice vote (vote given on a topic by responding orally), is aimed at bringing more transparency in the auction processes of the mines.
  • Enhancing Employment: The major objective of the amendment is to generate employment in the mining sector and enhance the contribution of the mining sector in the total GDP of the country.
    • The Ministry of Mines has claimed an increment of about 55 lakh direct and indirect employment to be generated due to the reforms.
  • Attracting Domestic as well as Foreign Investment: The government, through this amendment, is making an effort to attract domestic as well as foreign investment in the mining sector plus involvement of safe and effective technology in the sector.
    • Also, the government has permitted 100% FDI under automatic route for sale of coal, for coal mining activities including associated processing infrastructure.
  • Increasing the Contribution of Mining to GDP: The objective is to enhance the contribution of the mining sector in the GDP to up to at least 2.75% which at present is around 1.75%.

Proposed Amendments:

  • Removal of the distinction of Captive and Non-captive Mines: The MMDR Act, 1957 empowers the central government to reserve any mine as captive mine which is utilised for a specific purpose only.
    • The bill removes the distinction between captive and non-captive mines. The mines will not be limited to just a specific purpose/industry/sector.
  • Ores and Minerals Extracted from Captive Mines: Earlier, the ores extracted from captive mines were only used by captive industries.
    • The bill allows the leaseholders of captive mines to sell upto 50% of their ore into the open market.
      • There is one caveat; additional charges will have to be paid to the government by the lessee for selling minerals in the open market.
    • The 50% cap is flexible, the government can go above the cap if necessary.
  • Transfer of Statutory Permissions: The bill provides that all clearances and licences granted shall continue till the reserves have been mined and post the expiry or termination of the lease, will be transferred to the next successful bidder.
    • This will help attract investors as under the previous regime, the new lessee had pre-embedded clearances for only two years, making it difficult to get fresh clearances within this time period.
  • Involvement of Central Government: As per the bill, if the lease for a mine is expired and the state government is unable to auction a mine, then the central government can step in for auctions; the basic idea is to not leave a mine idle.
  • Removal of Non-Exclusive License Regime: In the act, companies have a non-exclusive license for the reconnaissance of the area to find out mineral potential.
    • The amendment removes the non exclusive license permit.
  • Extension of Mining Leases to Government Companies: There are also provisions in the bill which allow the government to extend mining leases to government companies for a period of ten years. The idea is to ensure the utilisation of mine is more efficient.
    • The state governments will be provided additional royalty payments for extending leases to the Central Public Sector Enterprises (CPSEs).
  • District Mineral Foundation: It is a trust set up as a non-profit body, in the districts affected by the mining works, to work for the benefit of affected people and areas. It is funded through the contributions from miners.
    • The bill provides that the central government can also direct how the money should be spent for the development of the area.

Challenges Associated

  • Environmental Concern: The reforms in the act unshackle the mining sector of India, as much it is beneficial for the development of the country. Mining is harmful from the environmental point of view.
  • Tribal Communities: Several tribal communities and Particularly Vulnerable Tribal Groups (PVTGs) fall into the mining zones. Their residence is also threatened by an increase in mining. Their rehabilitation & compensation is another major issue.
  • Intervention of Central Government in State Matters: Auction of a mine is a process where the power rests in the hands of state governments. There might exist ambiguity in the case where there are two different political parties in power at center & state.
    • The state governments may object to the fixing of the royalties for extensions of leases to the government companies as this may lead to lower revenues as compared to a transparent process of auction.
    • Moreover, the involvement of the central government in directing the expenditure of district mineral funds is also a matter of concern for the states.
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