Daily Prelims Notes 15 June 2024

Daily Prelims Notes

15 June 2024

1. India’s Growth and the ‘Beneficial Ownership’ Hurdle

Sub: Economy

Sec: External Sector

Overview

India aims to become a $5 trillion economy by 2025-26, and foreign investments are critical in achieving this goal. However, regulatory challenges, particularly regarding the ‘beneficial ownership’ clause in the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (FEMA NDI), are creating obstacles.

FEMA NDI Amendment: Press Note 3 of 2020

• Objective: Introduced to prevent opportunistic takeovers by entities from countries sharing land borders with India during the COVID-19 pandemic.
• Requirement: Investments from these countries, or where the beneficial owner is from these countries, need prior government approval.

Challenges Posed

• Lack of Definition: The term ‘beneficial owner’ is not clearly defined, leading to interpretation issues.
• RBI’s Conservative Stance: Since late 2023, the RBI has adopted a stricter interpretation, impacting Foreign Owned or Controlled Companies (FOCCs).
• Regulatory Uncertainty: Lack of clarity on beneficial ownership thresholds creates compliance risks and hesitancy among foreign investors.
• Time-Consuming Approvals: The approval process is slow and has a high rejection rate, with significant investments pending or rejected.
• Penalties: Severe penalties for non-compliance, potentially up to three times the investment received, pose existential threats to companies.

Proposed Solutions

• Define ‘Beneficial Owner’:
  • Ownership Thresholds: Establish clear thresholds, such as 10% (as per Indian company law) to 25% (recommended by the Financial Action Task Force).
  • Control Rights: Specify control-conferring rights, excluding typical investor protection rights like veto powers over mergers.
• Consultation Mechanism:
  • Introduce a time-bound consultation process with regulatory authorities to determine whether specific clauses confer control.
• Indemnity Provisions:
  • Require foreign investors to provide representations and indemnities, although this may deter some investments.

Implications for India’s Growth

• Enhanced Clarity: Clear definitions and guidelines can reduce compliance risks and attract more foreign investments.
• Increased Efficiency: A streamlined approval process can facilitate quicker investments, vital for start-ups and small enterprises.
• Economic Stability: Better regulatory frameworks can enhance investor confidence, contributing to economic stability and growth.

Conclusion

Addressing the ambiguities in the FEMA NDI regulations, particularly concerning beneficial ownership, is crucial for India to attract and sustain foreign investments.

Clear definitions, efficient processes, and reasonable compliance requirements will help India move closer to its $5 trillion economy goal while safeguarding its economic interests.

2. NSSO Survey Findings: Impact of COVID-19’s Second Wave on India’s Informal Economy

Sub: Economy

Sec: National Income

The National Sample Survey Office (NSSO) conducted an Annual Survey of Unincorporated Sector Enterprises (ASUSE) to assess the impact of COVID-19, particularly the second wave, on India’s informal non-agricultural sector.

Key Findings

• Initial Impact:
  • The second wave of COVID-19 severely affected the informal sector, especially during its peak in April-June 2021.
  • During this period, the number of informal enterprises was estimated at 50.32 lakh, employing about 85.6 lakh workers.
• Gradual Recovery:
  • From July 2021 onwards, there was a gradual improvement in the sector.
  • By January-March 2022, the estimated number of informal firms rose to 1.91 crore with 3.12 crore employees.
• Annual Estimates:
  • For the financial year 2021-22, the survey estimated 5.97 crore informal firms with nearly 9.8 crore workers.
  • The lower numbers reported during the peak of the second wave significantly affected these overall annual estimates.
• Growth in 2022-23:
  • By October 2022 to March 2023, the number of informal firms increased to 6.5 crore, with employment rising to 11 crore workers.
  • This represented a 7.84% annual growth in employment.
• Sectoral Growth:
  • The greatest employment growth during this period was seen in the “other services” sector, which grew by 13.42%.
  • Manufacturing also saw significant growth, with a 6.34% increase in employment.
• Economic Value:
  • The Gross Value Added (GVA) by these enterprises grew by 9.83% at current prices from October 2022 to March 2023 compared to the previous financial year.

Implications 

• Employment Generation: The informal sector demonstrated a significant capacity to generate employment despite the initial setbacks due to the pandemic.
• Economic Resilience: The gradual recovery and subsequent growth highlight the resilience and adaptability of the informal sector.
• Policy and Planning: The survey data is crucial for national account statistics and informs policies aimed at supporting and revitalizing the informal sector, which is key to India’s socio-economic landscape.

Conclusion

The NSSO survey underscores the significant impact of the COVID-19 second wave on India’s informal non-agricultural sector but also showcases a robust recovery. With continued monitoring and supportive policies, the sector is poised to contribute significantly to job creation and economic value in the post-pandemic period.

The Government has taken a number of measures to formalise the informal sector. The details are as under: –

i. Pradhan Mantri Rojgar Protsahan Yojana (PMRPY): –

Government is implementing Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) since 2016 with the objective to incentivise employers for creation of new employment and also aimed to bring informal workers to the formal workforce.

Under the scheme, Government of India is paying Employer’s full contribution i.e. 12% towards Employees’ Provident Fund (EPF) and Employees’ Pension Scheme (EPS) both (as admissible from time to time) for a period of three years to the new employees through Employees’ Provident Fund Organisation (EPFO). The terminal date for registration of beneficiary through establishment was 31 st March 2019. The beneficiaries registered upto 31st March, 2019 will continue to receive the benefits for 3 years from the date of registration under the scheme. As on 3 rd March, 2021, benefits have been provided to 1.21 crore beneficiaries through 1.52 lakh establishments.

The total outlay of the PMRPY scheme for entire period of the scheme is Rs. 10178.60 Crore.

ii. Aatmanirbhar Bharat RozgarYojana (ABRY):-

Aatmanirbhar Bharat Rozgar Yojana (ABRY) has been launched to incentivize employers for creation of new employment along with social security benefits and restoration of loss of employment during COVID-19 pandemic. Under the scheme;

• An employee drawing monthly wage of less than Rs. 15000/- who was not working in any establishment registered with the Employees’ Provident Fund Organization (EPFO) before 1st October, 2020 and did not have a Universal Account Number or EPF Member account number prior to 1st October 2020 is eligible for the benefit.
• Any EPF member possessing Universal Account Number (UAN) drawing monthly wage of less than Rs. 15000/- who made exit from employment during Covid pandemic from 01.03.2020 to 30.09.2020 and did not join employment in any EPF covered establishment up to 30.09.2020 is also eligible to avail benefit.

This scheme being implemented through the Employees’ Provident Fund Organisation (EPFO), that reduces the financial burden of the employers of various sectors/industries and will encourage them to hire more workers. Under ABRY, Government of India is crediting for a period of two years, both the employees’ share (12% of wages) and employers’ share (12% of wages) of contribution payable or only the employees’ share, depending on employment strength of the EPFO registered establishments.

The scheme has commenced from 1st October 2020 and shall remain open for registration of eligible employers and new employees upto 30th June 2021. Government will pay the subsidy for two years from the date of registration. The total outlay of the ABRY scheme for entire period of the scheme is Rs. 22810 Crore.