Daily Prelims Notes 24 August 2022

August 24, 2022
Posted by: OptimizeIAS Team
Category: DPN

Daily Prelims Notes

24 August 2022

Table Of Contents

Subject: Economy

Section: External Sector

Context: Worried about India’s precarious external accounts and the weakening rupee, domestic importers are hedging a lot more of their currency exposures than they are required to.

Details:

Causes of currency depreciation- high oil import bill, high domestic inflation and the Federal Reserve’s aggressive interest rate rises leading to capital outflows.
Impact-India witnessed a record trade deficit of $30 billion in July, after exports contracted for the first time in almost one-and-a-half years.
- Economists expect the current account deficit to widen significantly, with little or no support from investment flows.
Normal policy is that 50% of the exposure should be hedged. But right now, importers are hedging imports near to 80%

Concept:

Currency Hedging is the act of entering into a financial contract in order to protect against unexpected, expected or anticipated changes in currency exchange rates. Hedging can be likened to an insurance policy that limits the impact of foreign exchange risk.

An importer or a foreign borrower has payables in foreign currency. Hence, they will be keen to ensure that the INR remains strong so that they can get more dollars for the same number of rupees when their foreign currency payable is due. An importer or a foreign currency borrower will have to hedge his business against a weakening of the rupee.

The exporter, on the other hand, has receivables in foreign currency at a future date. The exporter will have to ensure that the rupee stays weak as that will mean that he gets more INR for each dollar received. The exporter will be happy if the INR weakens but will need to protect himself against a strengthening of the rupee.

How does currency hedging work?

There are two main ways portfolio managers manage foreign currency risk :

Forward contracts – The portfolio manager can enter into an agreement to exchange a fixed amount of currency at a future date and specified rate. The value of this contract will fluctuate and essentially offset the currency exposure in the underlying assets. Keep in mind that the investment will not benefit if currency fluctuations work in its favour.
Options – For a fee, options give the holder the right, but not the obligation, to exchange one currency for another at a set rate for a certain period of time. This reduces the potential that a change in exchange rates will affect the return on the investment.

A call spread involves buying an option with the right to buy dollars, and offsetting its cost by selling another option. A seagull option reduces the cost further with the company making another option sale, alongside a call spread.

The risk can be hedged either using futures or using options. Let’s take the example of the US-Rupee pair:

How can an exporter use currency derivatives to hedge his currency risk?

Assume that Raghav Exports Ltd. has an export inward remittance that is receivable on 30th September for $50,000/-.Currently, the exchange rate is Rs.64/$. That means this will translate into a rupee inflow of INR 32 lakhs on September 30th.

Suppose due to heavy FDI inflow into India, the INR may actually appreciate to 62/$ by September 30th. That will mean that Raghav exports will receive only Rs.31 lakhs in rupee terms.

The company, therefore, needs to hedge its inward dollar risk.

Selling 50 lots (each lot is worth $1000) of the USD-INR pair at a price of Rs.64. On the inward date of 30th September, let us assume that the INR has actually appreciated to 62/$. When Raghav Exports receives its remittance of $50,000/- on September 30th, the converted value will be 31 lakhs. However, Raghav has also sold 50 lots of the USD-INR futures at Rs.64. Since the price is now down to 62, Raghav exports will make a profit of Rs.1 lakh on that position.
The counter question is what happens if the INR depreciates to Rs.68. In the normal course, Raghav Exports would have made a profit but due to the hedge it will be locked in at Rs.64/$. This will result in a notional loss of Rs.4, but the intent here is to protect your downside risk, not to make profits. There are two ways this can be overcome.
- Either, one can hold the USD-INR pair with a strict stop loss or
- The hedging can be done through put options instead of futures so that the maximum risk can be restrained to the extent of the option premium.
How can an importer use currency derivatives to hedge his currency risk?

An importer or a foreign currency borrower will have a dollar payable at a future date. Therefore, they need to ensure that the INR does not depreciate too much as it will mean that they will require more rupees to get the equivalent amount of dollars. The importer or the foreign currency borrower can hedge their risk by buying the USD-INR futures. When the rupee depreciates, the dollar will appreciate and therefore the value of the USD-INR futures will go up. Any loss on his dollar payable due to weaker INR will be compensated by the long futures on the USD-INR.

2. Foreign Exchange Management (Overseas Investment) Rules 2022

Subject: Economy

Section: External sector

Context: Indian corporate entities can make overseas investments beyond the prescribed limit in strategic sectors such as energy and natural resources after obtaining necessary permissions.

Concept:

Foreign Exchange Management (Overseas Investment) Rules 2022:

It has been notified under the Foreign Exchange Management Act, will be administered by the Reserve Bank of India (RBI), and shall subsume all existing norms pertaining to overseas investments as well as the acquisition and transfer of immovable property outside India.
It demarcates Overseas Direct Investment and Overseas Portfolio Investment.
An Indian entity can invest up to four times of its net worth in a foreign entity .
It is permitted to invest up to 50 per cent of its net worth in overseas portfolio investment.
- A person resident in India can make a contribution to an investment in the equity or OPI as per the limit under the liberalized Remittance Scheme of RBI.
Overseas Investment in excess of the limits is allowed in the strategic sectors-include energy, natural resources and such other sectors as may be decided by the Government
An Indian entity may make Overseas Direct Investment (ODI) by way of buying shares either through subscription, acquisition through bidding or tender procedure by way of rights issue or allotment of bonus, shares, capitalisation, swap of securities and through merger, demerger, amalgamation or any scheme of arrangement.
An Indian Financial institution may make ODI in a foreign entity, which is directly or indirectly engaged in financial services activity.
- Earlier Overseas Direct Investment by a non-financial sector Indian entity cant invest into a foreign firm engaged in financial services activity.
Non-financial sector entities can make a direct investment under the automatic route into a foreign entity engaged in financial services activity (except banking and insurance).
A resident individual can invest in non financial companies without any limit, to acquire foreign securities by way of inheritance, gift from a person residing in India and in case the gift giver is in abroad (as per th provisions of the Foreign Contribution (Regulation) Act 2010)
Employee or a director of an office in India or branch of an overseas entity or a subsidiary in India of an overseas entity, or of an Indian entity in which the overseas entity has direct or indirect equity holding allowed acquisition of shares or interest under Employee Stock Ownership Plan or Employee Benefits Scheme or sweat equity shares.
Indian entities or residents can make ODI in startups recognised under the law in the host country, but only from its internal accruals.
No Indian resident will be permitted to make investments in foreign entities that are engaged in real estate business, gambling in any form and dealing with financial products linked to the Indian rupee without the central bank’s specific approval.
The new regime has proposed that the approval route items would now be allowed under the automatic route:
- issuance of corporate guarantees to or on behalf of second or subsequent level step-down subsidiary (SDS) of an Indian entity earlier required the Reserve Bank’s approval.
- Any disinvestment involving write-off beyond the specified limits earlier required prior approval from the Reserve Bank.
- The acquisition of equity capital in a foreign entity on a deferred payment basis has been permitted under the automatic route that was earlier under the approval route.
An Indian entity that is not engaged in financial services activity in India, may make Overseas Direct Investment (ODI) in a foreign entity in International Financial Services Centre (IFSC), which is directly or indirectly engaged in financial services activity, except banking or insurance.
- A person resident in India can make a contribution to an investment fund or vehicle setup in IFSC as Overseas Portfolio Investment.
It has also introduced the facility of late submission fee for filing various overseas investment-related returns / documents on lines similar to that for Foreign Investment and External Commercial Borrowings related transactions.
The separate reporting requirements for setting up/winding up of step-down subsidiaries or alteration in the shareholding pattern of the foreign entity have now been dispensed

3. Labour Codes

Subject: Economy

Section: Unemployment

Context:

Prime Minister Narendra Modi will inaugurate the two-day conference at Tirupati on Thursday which will deliberate on various issues:

Details of deliberations

Reforms and social security for informal workers,
Vision-2047 for workforce
Proposed implementation of the four labour codes.
- Central government is aiming for consensus with states in all respects as well as publishing draft rules by all states and Union Territories.
Integrating e-Shram portal for social security schemes run by the Central and state governments to universalise social protection for workers and improve employment opportunities for all.
Improving medical care and services through ESI (employee state insurance) hospitals run by state governments and integration with Pradhan Mantri Jan Arogya Yojna (PMJAY).

Concept:

Major Highlights of the New Labour Code

Code of Wages 2019:

It regulates the wages and bonus payments in all employment areas where any industry, trade, business, or manufacturing is being carried out.
It subsumes the following four labour laws:
- The Payment of Wages Act, 1936
- The Minimum Wages Act, 1948
- The Payment of Bonus Act, 1965
- The Equal Remuneration Act, 1976
It universalizes the provisions of minimum wages and timely payment of wages to all employees irrespective of the sector and wage ceiling and seeks to ensure “Right to Sustenance” for every worker and intends to increase the legislative protection of minimum wage.
It has been ensured that employees getting monthly salary shall get the salary by 7th of next month, those working on a weekly basis shall get the salary on the last day of the week and daily wagers should get it on the same day.
The Central Government is empowered to fix the floor wages by taking into account the living standards of workers. It may set different floor wages for different geographical areas.
The minimum wages decided by the central or state governments must be higher than the floor wage.

Industrial Relations Code 2020

Industrial Employment (Standing Orders) Act, 1946 makes it obligatory for employers of an industrial establishment where 100 or more workers are employed to clearly define the conditions of employment and rules of conduct for workmen, by way of standing orders/services rules and to make them known to the workmen employed.
- The new provision for standing order will be applicable for every industrial establishment wherein 300 or more than 300 workers are employed or were employed on any day of the preceding twelve months.
It proposes that workers in factories will have to give a notice at least 14 days in advance to employers if they want to go on strike.
- No person employed in any industrial establishment shall go on strike without a 60-day notice and during the pendency of proceedings before a Tribunal or a National Industrial Tribunal and sixty days after the conclusion of such proceedings.
It also introduces new conditions for carrying out a legal strike. The time period for arbitration proceedings has been included in the conditions for workers before going on a legal strike as against only the time for conciliation at present.
Besides, every industrial establishment employing 20 or more workers will have one or more Grievance Redressal Committees for resolution of disputes arising out of employees’ grievances.
The code also proposes setting up of a reskilling fund to help skill retrenched workers.

Occupational Safety, Health and Working Conditions Code 2020

It spells out duties of employers and employees, and envisages safety standards for different sectors, focusing on the health and working condition of workers, hours of work, leaves, etc.
The code also recognises the right of contractual workers.
The code provides employers the flexibility to employ workers on a fixed-term basis, on the basis of requirement and without restriction in any sector.
More importantly, it also provides for statutory benefits like social security and wages to fixed-term employees at par with their permanent counterparts.
It also mandates that no worker will be allowed to work in any establishment for more than 8 hours a day or more than 6 days in a week.
In case of overtime, an employee should be paid twice the rate of his/her wage. It will be applicable to even small establishments, which have upto 10 workers.
The code also brings in gender equality and empowers the women workforce. Women will be entitled to be employed in all establishments for all types of work and, with consent, can work before 6 am and beyond 7 pm subject to such conditions relating to safety, holidays and working hours.
For the first time, the labour code also recognises the rights of transgenders. It makes it mandatory for industrial establishments to provide washrooms, bathing places and locker rooms for male, female and transgender employees.

Code on Social Security 2020

This will replace nine social security laws, including Maternity Benefit Act, Employees’ Provident Fund Act, Employees’ Pension Scheme, Employees’ Compensation Act, among others.
The code universalizes social security coverage to those working in the unorganised sector, such as migrant workers, gig workers and platform workers.
For the first time, provisions of social security will also be extended to agricultural workers also.
The code also reduces the time limit for receiving gratuity payment from the continuous service of five years to one year for all kinds of employees, including fixed-term employees, contract labour, daily and monthly wage workers.
It proposes a National Social Security Board which shall recommend to the central government for formulating suitable schemes for different sections of unorganized workers, gig workers and platform workers.
Also, aggregators employing gig workers will have to contribute 1-2% of their annual turnover for social security, with the total contribution not exceeding 5% of the amount payable by the aggregator to gig and platform workers.

4. Highways Sector

Subject :Economy

Section: Infrastructure

Context: Union Road Transport & Highways Minister Nitin Gadkari said that the highways sector in India has immense potential as a driver of growth in the economy.

Concept:

Models of highway development:

There are combinations of models used in India —

BOT (build operate transfer)-
- This is the simple and conventional PPP model where the private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector.
- Role of the private sector partner is to bring the finance for the project and take the responsibility to construct and maintain it.
- In return, the public sector will allow it to collect revenue from the users.
- The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
TOT (toll operate transfer) models-
- TOT is an asset recycle programme wherein, already operational National Highways are given to private entities on long-term contracts.
- Total contract period of a TOT is 20 years in which a concessionaire would be required to maintain and operate the stretch.
Hybrid annuity model or HAM-
- Hybrid Annuity Model is a mix of the EPC and BOT models.
  - EPC stands for Engineering, Procurement, and Construction and refers to that method of infrastructure growth wherein the government pays private companies or players to lay roads.
- The government will contribute to 40% of the project cost in the first five years through annual payments (annuity).
- The balance 60 per cent is arranged by the developer, and is recovered as variable annuity amount after the completion of the project from NHAI which collects revenue.
Infrastructure investment trust-
- It is a Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects.
- They are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. Part of this cash flow would be distributed as a dividend back to investors.
- The InvITs are regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014.

Other models:

Build-Own-Operate (BOO):
- This is a variant of the BOT and the difference is that the ownership of the newly built facility will rest with the private party here.
- The public sector partner agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms and conditions.
Build-Own-Operate-Transfer (BOOT):
- This is also on the lines of BOT. After the negotiated period of time, the infrastructure asset is transferred to the government or to the private operator.
- This approach has been used for the development of highways and ports.
Build-Operate-Lease-Transfer (BOLT):
- In this approach, the government gives a concession to a private entity to build a facility (and possibly design it as well), own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
Lease-Develop-Operate (LDO):
- the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter.
- This approach is mostly followed in the development of airport facilities.
Rehabilitate-Operate-Transfer (ROT):
- Under this approach, the governments/local bodies allow private promoters to rehabilitate and operate a facility during a concession period.
- After the concession period, the project is transferred back to governments/local bodies.
DBFO (Design, Build, Finance and Operate):
- In this model, the private party assumes the entire responsibility for the design, construction, finance, and operation of the project for the period of concession.

5. Alternative fuel technology

Subject :Science and Technology

Alternative fuels include gaseous fuels such as hydrogen, natural gas, and propane; alcohols such as ethanol, methanol, and butanol; vegetable and waste-derived oils; and electricity.
These fuels may be used in a dedicated system that burns a single fuel, or in a mixed system with other fuels including traditional gasoline or diesel, such as in hybrid-electric or flexible fuel vehicles.
Some vehicles and engines are designed for alternative fuels by the manufacturer. Others are converted to run on an alternative fuel by modifying the engine controls and fueling system from the original configuration.

Flexible fuel engines (flexible fuel vehicles or FFVs have an internal combustion engine and are capable of operating on gasoline and any blend of gasoline and ethanol).

6. Vigyan Pragati

Subject :Science and Technology

Context: CSIR-National Institute of Science Communication and Policy Research (CSIR-NIScPR), New Delhi organized the release function of the Special issue of its Popular Science Hindi magazine “Vigyan Pragati” on 23 august 2022.

Details:

In the year 2022, this popular magazine of NIScPR has completed the glorious 70 years of spreading science among the public. The very first issue of this magazine was published in August, 1952. This special issue (August 2022) of ‘Vigyan Pragati’ contains India’s leading organisations engaged in science popularization. Both government and voluntary organisations have been covered in this special issue.

Vigyan Prasar (VP) is an autonomous organization under the Department of Science and Technology (DST), Government of India.

The principal objective of VP is to serve India’s science popularization agenda. This is achieved through several strategically important two – way stakeholder specific approaches to communicate about principles and practice of science and technology and implications for development and quality of life. Science popularization, therefore serves as a robust knowledge led tool to fulfill three mutually reinforcing public policy objectives.

7. I-T dept issues notice to Anil Ambani for holding funds worth Rs 814 cr in two Swiss bank accounts

Subject :Economy

Section: Fiscal Policy

Context:

The income tax department has sought to prosecute Reliance Group Chairman Anil Ambani under the Black Money Act for allegedly evading Rs 420 crore in taxes on undisclosed funds worth more than Rs 814 crore held in two Swiss bank accounts.

The department has charged Ambani, 63, with “wilful” evasion, saying he “intentionally” did not disclose his foreign bank account details and financial interests to Indian tax authorities.
The department said he was liable to be prosecuted under Sections 50 and 51 of the Black Money (undisclosed foreign income and assets) Imposition of Tax Act of 2015 that stipulates a maximum punishment of 10 years imprisonment with a fine.

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015

‘Undisclosed foreign income and asset’ is defined as the total amount of undisclosed income of an assesses from a source located outside India and the value of an undisclosed asset located outside India.
It penalises the concealment of foreign income and provides for criminal liability for attempting to evade tax in relation to foreign income.
The Act gave a one-time opportunity to Indian residents to declare undisclosed foreign income and assets.
The concerned person had to pay tax at the rate of 30% and an equal amount by way of penalty if found having undisclosed overseas wealth.
However, in case of non-declaration, the provisions included slapping of tax at the rate of 30% along with a penalty equal to three times the amount of tax evaded or 90% of the undisclosed income or the value of the asset.
The Act provides for punishment of jail for 3-10 years for the willful evasion.
The total undisclosed foreign income and asset of an individual would include:

(i) income, from a source located outside India, which has not been disclosed in the tax returns filed;

(ii) income, from a source outside India, for which no tax returns have been filed; and

(iii) value of an undisclosed asset, located outside India.

Administering authority-The Central Board of Direct Taxes and the existing hierarchy of tax authorities under the provisions of the Income Tax Act, including the appeals machinery prescribed thereunder, have been tasked with implementation of the new legislation
The Act will be applicable to a person:

(i) who is a tax resident of India as per the tests of the Income Tax Act, 1961 (ITA);

(ii) who is not a person who is a ‘resident but not ordinarily resident’; and

(iii) by whom tax is payable under the UFIA Bill on undisclosed foreign income and assets or any other sum of money.

Black economy :https://optimizeias.com/black-money/

8. Department of Commerce being rejigged to make it future ready: Minister

Subject :Polity

Section: National organization

Context: The Department of Commerce is being restructured to make it ‘future ready’ and put in place an ecosystem to achieve the $2 trillion export target by 2030, Union Minister Piyush Goyal said on Tuesday.

A dedicated trade promotion body to be set up to devise overall strategy to achieve targets, said Union Minister Piyush Goyal

Departments

Department of Commerce
Department of Industrial Policy and Promotion
- Autonomous Institutions
  - Indian Rubber Manufacturers Research Association
  - National Institute of Design
  - National Productivity Council
  - Quality Council of India
- Attached Offices
  - Office of the Economic Adviser, New Delhi.
  - Tariff Commission, New Delhi.
  - Office of the Salt Commissioner, Jaipur
- Subordinate Offices
  - Office of the Controller General of Patents, Designs and Trade Marks, Mumbai.
  - Petroleum & Explosives Safety Organization, Nagpur
  - Copyrights Office
    - Intellectual Property Appellate Board

Attached Offices

Directorate General of Foreign Trade

Directorate General of Trade Remedies (DGTR)

Sub-ordinate Offices

Directorate General of Commercial Intelligence and Statistics
Special Economic Zones

Autonomous bodies

Agricultural and Processed Food Products Export Development Authority
The Marine Products Export Development Authority (MPEDA)
Indian Institute of Foreign Trade
Indian Institute of Packaging
Export Inspection Council
Export Inspection Agency
Commodity Boards
- Coffee Board : HQ – Bengaluru, Karnataka
- Tobacco Board : HQ – Guntur, Andhra Pradesh
- Rubber Board – HQ – Kottyam, Kerala
- Tea Board : HQ – Kolkata, West Bengal
- Spices Board : HQ – Kochi, Kerala

PSU

GEM (Directorate General of Supplies and Disposals)
State Trading Corporation
PEC Limited
MMTC Limited
Export Credit Guarantee Corporation of India Limited
India Trade Promotion Organization

Other Organization

Indian Diamond Institute
Footwear Design And Development Institute (FDDI)
India Brand Equity Foundation
Price Stabilization Fund Trust
Indian Institute of Plantations Management, Bengaluru

Export Promotion Councils

Federation of Indian Export Organisations
Cashew Export Promotion Council of India
Basic Chemicals, Pharmaceuticals and Cosmetics Export Promotion Council
Council for Leather Exports
Chemical and Allied Products Export Promotion Council
The Gem and Jewellery Export Promotion Council
Engineering Export Promotion Council
National Manufacturing Competitiveness Council
Plastics Export Promotion Council
Sports Goods Export Promotion Council
Project Exports Promotion Council of India
Pharmaceutical Export Promotion Council
Indian Oil Seeds & Produce Export Promotion Council (IOPEPC)
Services Export Promotion Council
EEPC India

9. Iran has dropped some demands for nuclear deal -U.S. official

Subject :International relations

Section: International news

Iran has dropped some of its main demands on resurrecting a deal to rein in Tehran’s nuclear program, including its insistence that international inspectors close some probes of its atomic program, bringing the possibility of an agreement closer, a senior U.S. official told Reuters on Monday.

Iran Nuclear Deal

The deal was named as Joint Comprehensive Plan of Action (JCPOA) and in common parlance as Iran Nuclear Deal.
In 2015, Iran with the P5+1 group of world powers – the USA, UK, France, China, Russia, and Germany agreed on a long-term deal on its nuclear programme.
The deal was named as Joint Comprehensive Plan of Action (JCPOA) and in common parlance as Iran Nuclear Deal.
Under the deal, Iran agreed to curb its nuclear activity in return for the lifting of sanctions and access to global trade.
The agreement allowed Iran to accumulate small amounts of uranium for research but it banned the enrichment of uranium, which is used to make reactor fuel and nuclear weapons.
Iran was also required to redesign a heavy-water reactor being built, whose spent fuel could contain plutonium suitable for a bomb and to allow international inspections.
In May 2018, the USA abandoned the deal criticising it as flawed and reinstated and tightened its sanctions.
Since sanctions were tightened, Iran has been steadily breaking some of its commitments to pressure the remaining signatories to find a way to provide sanctions relief.

10. What You Need to Know About Immunity Debt and How May It Affect Kids

Subject :Science and Technology

Section: Biotechnology

Context:
Just when it felt like the resumption of regular life was on the horizon, parents are being warned of a new threat to their children’s health. Doctors have expressed concern that a surge in common illnesses—such as respiratory syncytial virus (RSV)and seasonal influenza—could be around the corner. This is due to what is being called an “immunity debt,” a phenomenon caused by the non-pharmaceutical measures taken to combat COVID-19.

Doctors fear that as COVID-19 restrictions end, so too will the temporary suppression of illnesses such as RSV, chickenpox, strep throat, flu, and more, potentially causing further epidemics down the line.

Immunity Debt

“Immunity debt” refers to the lack of immune stimulation due to the reduced exposure to viruses, germs and bacteria as a result of COVID-19 safety and lockdown measures.
The “immunity debt” occurs because of measures like lockdowns, hand-washing, social distancing and masks which are not only effective at controlling Covid-19 but they also suppress the spread of other illnesses that transmit in a similar way, including the flu, common cold etc.

Respiratory syncytial virus (RSV)

It is a common respiratory virus that usually causes mild, cold-like symptoms.

Symptoms

Runny nose, Decrease in appetite, Coughing, Sneezing, Fever, Wheezing
The symptoms usually reflect within 4-6 days after getting infected and appear in stages.

Recovery Period

Usually, people recover in 1-2 weeks but it can prove to be serious for infants and older adults.

Cure

While there is no specific treatment for RSV infection, consuming over the counter fever reducers and pain relievers, drinking enough fluids to prevent dehydration may provide some relief to the symptoms.