Daily Prelims Notes 8 May 2024

Daily Prelims Notes

8 May 2024

1. Inheritance Tax: A Tool for Reducing Inequality

Subject: Economy

Sec: Fiscal Policy

Tag: Inheritance Tax, Inequality

Introduction:

• Sam Pitroda’s suggestion of implementing an inheritance tax for wealth redistribution has sparked debates.
• This article advocates for progressive taxes to address high inequality.

Impact of Inequality:

• Inequality undermines democratic decision-making by concentrating power in the hands of a wealthy few.
• It hampers economic growth, affects labor income, and diverts resources from essential services like education.
• Unequal countries see disparities based on place of birth, leading to unequal outcomes.
• Inequality contributes to political polarization, conflicts, and negative economic effects.

Arguments for Inheritance Tax:

• Wealth redistribution through an inheritance tax can reduce wealth concentration and promote productive investments.
• Property inheritance without work undermines economic principles.
• Concerns about disincentivizing innovation are unfounded, as revenue from taxes can fund diverse innovations.
• Historical examples like Japan’s 55% inheritance tax and India’s past estates duty show effectiveness in wealth distribution.

Alternatives to Inheritance Tax:

•   Land value tax (LVT) targets rental value of land, providing a fair source of revenue.
•   LVT can address feudal caste relations in rural India and the politician-builder nexus in urban areas.
•   Tax evasion concerns among the wealthy can be addressed with improved tax compliance measures.

Economic Impact and Potential:

• Investment in tax compliance can yield significant revenue gains, according to recent research.
• Wealth and inheritance taxes on the top 1% in India can generate substantial public expenditure for socioeconomic rights.

Conclusion:

• Implementation of progressive taxation measures, including inheritance tax, can pave the way for socioeconomic rights and reduce inequality with political will and technological advancements.

Understanding Inheritance Tax: A Comprehensive Overview

Application:

• Inheritance tax is a tax levied on the value of property or assets inherited from a deceased individual.
• Paid by the beneficiary, it can reach up to 55% in some countries.
• In India, inheritance tax is currently not enforced.

Global Examples:

• Many European, American, and African nations levy inheritance tax.
• Countries like France, Germany, and Japan have high rates.
• Inheritance tax rates vary globally, reaching up to 55%.

Factors Influencing Demand in India:

• Rising wealth and income inequality.
• Disproportionate tax burden on the poor.
• Lack of inclusive growth and social safety nets.

Advantages and Challenges of Implementation:

• Advantages:
  • Efficient wealth dispersion and social mobility.
  • Based on egalitarian ideals and progressive taxation.
  • Additional revenue for public welfare programs.
• Challenges:
  • Tax system complexity and enforcement issues.
  • Resistance from wealthy families and political/social challenges.
  • Lack of comprehensive data and potential tax evasion.

Similar Taxes in India:

1. Death Tax: Imposed on inherited property, abolished in 1985.
2. Gift Tax: Duty on gifts, abolished in 1998 and reintroduced in 2004.
3. Wealth Tax: Duty on net worth, abolished in 2015.

Way Forward:

• Introduction with higher thresholds targeting the super-rich.
• Exemptions for endowments to specific institutions.
• Utilizing advanced technologies to improve tax administration.

2. RBI’s Provisioning Norms Affect PSU Banks and Infrastructure Financers

Subject: Economy

Sec: Monetary Policy

Tag: RBI’s Provisioning Norms

What Happened:

• The Reserve Bank of India (RBI) proposed tighter norms for project financing, recommending increased standard asset provisioning of up to 5% on loans.
• This move is anticipated to result in additional provisioning of 0.5-3% of banks’ net worth.
• Shares of state-owned banks and project financers fell significantly in response.
• The Common Equity Tier 1 (CET1) ratio, a measure of a bank’s core equity capital, could be impacted by 7-30 basis points.

Details of the Proposal:

• Under the proposed norms, lenders must make provisions of up to 5% of outstanding exposures for under-construction projects.
• These norms also apply to commercial real estate financing for all lenders and are set to be implemented immediately.

Impact on Financial Institutions:

• Analysts predict adverse effects on profitability and capital expenditure growth as provisioning requirements increase.
• PSU banks and infrastructure-focused financers like PFC and REC are expected to be particularly affected.

Expert Analysis:

• Analysts suggest that while the impact on profit after tax (PAT) may be limited for some institutions like IREDA, there could be marginal effects on net worth and Capital Adequacy Ratio (CAR).
• The robustness of institutions’ CAR levels may help absorb these impacts without significant consequences.

Impact on NBFCs:

• Additional provisions for non-banking finance companies (NBFCs) will be apportioned to the impairment reserve, sparing the impact on Return on Equity (RoE).
• Infrastructure-focused NBFCs like REC Ltd, PFC, and IREDA may see a potential hit of 200-300bps to their capital ratio.

Understanding Capital Adequacy Ratio (CAR)

• Capital Adequacy Ratio (CAR) is a measure of a bank’s capital in relation to its risk-weighted assets and current liabilities.

Risk Weighting:

• Risk-weighted assets consider credit risk, market risk, and operational risk to determine the appropriate amount of capital a bank should hold.

Regulatory Criteria:

• Basel III norms originally stipulated a capital to risk-weighted assets ratio of 8%.
• However, Indian scheduled commercial banks are mandated by the RBI to maintain a CAR of 9%, while public sector banks must adhere to a CAR of 12%.

Profit After Tax (PAT)

Profit After Tax (PAT) is a financial metric that represents the net profit of a company after deducting taxes. It is a key indicator of a company’s profitability and financial performance.

PAT is calculated as follows:

PAT=Net Profit−Taxes

Where:

• Net Profit is the total earnings of the company before taxes.
• Taxes represent the income tax expense incurred by the company.

PAT is an essential measure for investors, analysts, and stakeholders as it reflects the amount of money a company has earned after accounting for all expenses, including taxes. It provides insights into the company’s ability to generate profits and its overall financial health.

In financial analysis, PAT is often compared over different periods to assess the company’s performance trends. Higher PAT indicates stronger profitability and efficiency in generating earnings for shareholders.

3. Combating forest fires in focus on Day 1 of UN forum; India Shares Revised National Forest Policy

Subject: Environment

Sec: Int convention

Tag: UN Forum on forest

Context:

• 19th United Nations Forum on Forests held in New York, United States.

Details

• Theme of discussion: Combating forest fires and developing a Model Forest Act.
  • Discussions on the UN’s strategic plan for forests 2017-2030 and considered activities that support the thematic priorities for the biennium 2023-24.
• Global forest goals include:
  • Enhancing forest-based economic, social, and environmental benefits; significantly increasing the area of protected forests; mobilising financial resources; and promoting governance frameworks to implement sustainable forest management.
  • Additional focus was given to fostering cooperation, coordination, and synergies as cross-cutting goals.

India’s contribution:

• India shared its revised National Forest Policy, which included a series of recommendations aimed at addressing forest fires.
• India advocated for a holistic strategy towards forest fire management, emphasizing prevention, management, and post-fire restoration through policy reforms. The country has incorporated technology such as remote sensing and online geoportals for real-time fire monitoring and reporting. It also supports the use of ecosystem-based methods for rehabilitation after fires.
• India called for the development of universal global standards for forest certification to ensure consistent quality across existing programs.
• The nation acknowledged the vital role communities play in managing forest fires and highlighted the increasing frequency, scale, and impact of these fires on biodiversity, ecosystem services, and human welfare.
• Moreover, India proposed the establishment of a Global Fire Management Hub, facilitated by the UNEP and FAO, to foster international collaboration and knowledge sharing in fire mitigation efforts.

Contributions of other countries:

• Ukraine outlined its expanded Forest Code, detailing the impact on forests due to the Russian invasion.
• Costa Rica highlighted its ban on deforestation, forest cover protection, and payment for ecosystem services.
• Indonesia presented its Forest and Other Land Use Net Sink 2030 strategy.
• Malaysia committed to keeping at least 50 per cent of its territory under tree cover, with a plan to plant 7.9 million trees.
• Nepal reviewed its progress in community-managed forests, restored forests, protected areas, and tree planting policies.
• Guatemala from Latin America reported a reduction in its annual deforestation rate to 0.36 per cent.

About the UN Forum on Forests:

• It promotes the management, conservation, and sustainable development of all types of forests.
• Established in 2000 by the UN Economic and Social Council of the United Nations (ECOSOC).
• The Forum meets annually at the UN Headquarters in New York, bringing together representatives of all member states and forest-related agencies for high-level dialogue on technical matters in odd years and policy matters in even years.
• The forum has universal membership and is composed of all Member States of the United Nations and specialized agencies.
• India is a founding member of UNFF.

About the United Nations Strategic Plan for Forests 2017–2030:

• In January 2017, during a special session of the UN Forum on Forests, the first-ever UN Strategic Plan for Forests was agreed upon, outlining a forward-looking vision for the world’s forests by 2030.
• This plan, officially adopted by the UN Economic and Social Council in April 2017 and later by the UN General Assembly, comprises six Global Forest Goals along with 26 associated targets.
• These targets, which are both voluntary and universal, include an ambitious aim to expand global forest area by 3% or 120 million hectares (more than twice the size of France) by 2030. 
• The plan aligns with the broader 2030 Agenda, emphasizing the need for decisive and collective action to achieve significant and sustainable change.

Source: DTE

4. Why electric vehicles are at the heart of trade frictions between China and Europe

Subject: Economy

Sec: External sector

Context:

• Chinese President Xi Jinping on Sunday arrived in France on a state visit hosted by Emmanuel Macron where the French leader will seek to push his counterpart on issues ranging from Ukraine to trade.

More on news:

• China’s trade issues with the European Union (EU) arise mainly out of friction over exports of cheap Chinese electric vehicles (EVs), and constrained access for European companies to markets in China.

The EVs question:

• Chinese exports to European markets significantly outweigh European exports to mainland China.
• The EU has complained that unfair market access is a key reason for this situation.
• China’s car shipments to foreign markets, and to the EU in particular, have surged in recent years.
• The EU opened an investigation into subsidies going into Chinese EVs, which Beijing denounced as an example of “naked protectionism”.
• Brussels has also opened separate investigations that could limit Chinese solar exports to the EU, and put restrictions on imports of wind turbines and medical devices.
• This is significant because the EC used the “facts available” in 10 previous anti-subsidy cases against China to fill in certain gaps, which allowed Brussels a free hand to impose higher duties.

Fear of Chinese flood:

• China-made EVs are projected to make up more than a quarter of all EV sales in Europe in 2024, with the country’s share in the market increasing by more than 5 percentage points from a year earlier.
• The share of Chinese-made vehicles in the EU is expected to rise to more than 25% in 2024, according to the T&E report, as brands such as BYD and SAIC step up their global expansion plans.
• The majority of foreign EVs currently sold in the EU are from Western brands such as Tesla, which manufactures and ships from factories in China.

About Trade Protectionism:

• Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations.

About Naked Protectionism:

• When protectionist measures are described as “naked,” it implies that they are blatantly obvious and lack any attempt to conceal their intent.
• This might occur when a government openly imposes high tariffs on imported goods or implements strict quotas to limit foreign competition without providing any justification beyond protecting domestic industries.

5. What was the three-phase ceasefire deal that Hamas backed, Israel rejected as ‘soft’?

Subject: IR

Sec: Places in news

Tags: Gaza strip , Israel -Palestine, three-phase ceasefire deal

Context:

• Israeli forces seized the control of Gaza’s vital Rafah border crossing — the sole crossing between Egypt and southern Gaza — on Tuesday.

More on news:

• The development came a day after Palestinian militant group Hamas had agreed to a three-phased deal for a ceasefire and hostages-for-prisoners swap.

Various phases of the deal:

Areas in news:

Israel:

Red Sea:

• The Red Sea (Erythraean Sea) is a seawater inlet of the Indian Ocean, lying between Africa and Asia.
• The connection to the ocean is in the south through the Bab el Mandeb strait and the Gulf of Aden.
• To the north lie the Sinai Peninsula, the Gulf of Aqaba, and the Gulf of Suez (leading to the Suez Canal).
• The sea is underlain by the Red Sea Rift which is part of the Great Rift Valley.
• The six countries bordering the Red Sea are: Saudi Arabia, Yemen , Egypt , Sudan , Eritrea ,  Djibouti .

6. MDH-Everest row: FSSAI raises default limit for pesticides in spices but will that impact your health?

Subject: Science and tech

Sec: Health

Context:

• The country’s apex food safety regulator, the Food Safety and Standards Authority of India (FSSAI), has increased the default limit for pesticide residues in spices to 0.1 mg/kg last month, a ten-fold increase over the previous 0.01 mg/kg.

More on news:

• This will be applicable only in cases where the Indian regulation does not specifically mention the maximum residue limits (MRL) for a pesticide for the crop.
• The default MRL for other food products remains the same at 0.01 mg/kg.
• The total number of pesticides registered in India are more than 295, out of which 139 pesticides are registered for use in spices.

Why were the limits increased for spices?

• It is difficult to keep the limits below the 0.01 mg/kg limit because of the confounding effect of the large number of phenols present in spices.
• Imports from other countries may contain pesticides that are approved for use in those countries but not in India.
• The default MRL is used in cases where the limit for a pesticide for a particular crop is not present in India.
• There could be seepage of a pesticide not approved in spices from other crops where it might be allowed.

About Maximum Residue Level(MRL):

• A maximum residue level (MRL) is the highest level of a pesticide residue that is legally tolerated in or on food or feed when pesticides are applied correctly (Good Agricultural Practice).
• The maximum residue limit (also maximum residue level, MRL) is the maximum amount of pesticide residue that is expected to remain on food products when a pesticide is used according to label directions, that will not be a concern to human health.

About Food Safety and Standards Authority of India (FSSAI):

• The Food Safety and Standards Authority of India (FSSAI) is an autonomous statutory body established under the Food Safety and Standards Act of 2006.
• Establishment: FSSAI was established to consolidate various laws related to food safety and standards in India.
• The Act of 2006 brought together laws such as the Prevention of Food Adulteration Act, 1954, the Fruit Products Order, 1955, the Meat Food Products Order, 1973, and others.
• Responsibilities: FSSAI is responsible for protecting and promoting public health by regulating and supervising food safety and quality in India.
• It operates under the Ministry of Health & Family Welfare.
• Headquarters: FSSAI has its headquarters in New Delhi.