News 1: OECD flags global recession risk on energy, inflation crisis
Background
Global economic growth is slowing in the wake of Russia’s invasion of Ukraine, as energy and inflation crisis risk snowballing into recession in major economies.
While global growth this year was still expected at 3%, it is now projected to slow to 2.2% in 2023, according to Organization for Economic Cooperation and Development (OECD).
OECD
- Established: 1961
- Headquarters: Paris
- Members: 38 countries (India is not a member of OECD)
- The majority of OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.
- OECD is an official UN Observer
Base Erosion Profit Shifting (BEPS)
Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
Developing countries rely highly on corporate income tax and hence suffer more due to BEPS.
Recession
Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.
“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
Main drivers of recession
A sudden economic shock: In the 1970s, OPEC doubled the oil prices without warning in India, causing an economic crisis. The coronavirus outbreak, which shut down economies worldwide, is a more recent example of a sudden economic shock.
Excessive debt: When individuals or businesses take on too much debt, the cost of servicing the debt can grow to the point where they can’t pay their bills. Growing debt defaults and bankruptcies then capsize the economy. The housing bubble that led to the Great Recession is a prime example of excessive debt causing a recession.
Asset bubbles: Investors can become too optimistic during a strong economy. Former Fed Chair Alan Greenspan famously referred to this tendency as “irrational exuberance,” in describing the outsized gains in the stock market in the late 1990s. Irrational exuberance inflates stock market or real estate bubbles—and when the bubbles burst, panic selling can crash the market, causing a recession.
Too much inflation: Inflation is the steady, upward trend in prices over time. Inflation isn’t a bad thing per se, but excessive inflation is a dangerous phenomenon. Central banks control inflation by raising interest rates, and higher interest rates depress economic activity. Out-of-control inflation was an ongoing problem in the U.S. in the 1970s. To break the cycle, the Federal Reserve rapidly raised interest rates, which caused a recession.
Too much deflation: Deflation is when prices decline over time, which causes wages to contract, which further depresses prices. When a deflationary feedback loop gets out of hand, people and business stop spending, which undermines the economy. Central banks and economists have few tools to fix the underlying problems that cause deflation. Japan’s struggles with deflation throughout most of the 1990s caused a severe recession.
Technological change: In the 19th century, there were waves of labor-saving technological improvements. The Industrial Revolution made entire professions obsolete, sparking recessions and hard times. Today, some economists worry that AI and robots could cause recessions by eliminating whole categories of jobs.
Recession vs Depression
Recessions and depressions have similar causes, but the overall impact of a depression is worse. There are greater job losses, higher unemployment and steeper declines in GDP.
Most of all, a depression lasts longer—years, not months—and it takes more time for the economy to recover. Routine recessions can cause the GDP to decline 2%, while severe ones might set an economy back 5%, according to the IMF.
News 2: A push for the semiconductor industry
Background
In a bid to make India’s $10 billion chip-making initiative more attractive to investors, the Centre on September 21, approved changes to the scheme for the development of a semiconductor and display manufacturing ecosystem.
What are semiconductors?
A semiconductor has an electric conductivity of more than insulator but less than of conductor. The ability to conduct electricity goes up as the temperature rises.
The basic component of a semiconductor chip is a sliver of silicon, which is etched with billions of microscopic transistors, forming patterns to control the flow of current while following different computational instructions.
How big is the industry?
- Semiconductors are the thumbnail-sized building blocks of almost every modern electronic device from smartphones to connected devices on the Internet of Things (IoT). They help give computational power to devices. The global semiconductor industry is currently valued at $500-$600 billion.
- The chip-making industry is a highly concentrated one, with the big players being Taiwan, South Korea and the U.S. among others. In fact, 90% of 5nm (nanometre) chips are mass-produced in Taiwan, by the Taiwan Semiconductor Manufacturing Company (TSMC).
- Therefore, the global chip shortage, U.S.-China tensions over Taiwan, and the supply chain blockages owing to the Russia-Ukraine conflict have led major economies to enter the chip-making sector with a renewed push.
- For example, the U.S. announcement of $52.7 billion in government funding for the CHIPS and Science Act and the EU’s Chips Act that will mobilise €43 billion for public and private investments.
What are the changes to India’s chip-making scheme?
- In December 2021, India announced its’ roughly $10 billion dollar production-linked incentive (PLI) scheme to encourage semiconductor and display manufacturing in the country.
- It also announced fiscal support for a design-linked initiative (DLI) scheme to drive global and domestic investment related to design software, IP rights etc.
- According to the Electronics and IT Ministry, semiconductor demand in India would increase to $70-$80 billion by 2026 with the growing demand for digital devices and electronic products.
- So far, Vedanta and Taiwanese chipmaker Foxconn have signed an MoU to set up a ₹1,54,000 crore semiconductor plant in Gujarat.
- Two other projects have also been announced — a $3 billion plant in Karnataka by the International consortium ISMC and a $3.5 billion plant in Tamil Nadu by Singapore’s IGSS Ventures.
- The modified scheme also emphasized the production of the 45nm chip, which is fairly less time-consuming and economical in terms of production.
Challenges
- While the scheme is an encouraging move, chip production is a resource-intensive and expensive process.
- While the new scheme provides equal funding for all steps of the process, the outlay of the scheme remains $10 billion. Notably, just the setting up of one semiconductor fab requires an investment of anywhere between $3 and $7 billion.
- Analysts are concerned that not much of the current scheme outlay would be left to support other elements including display fabs, packaging and testing facilities, and chip design centers.
- They also argue that the initial funding should focus on areas like design and R&D, for which India already has an established talent pool.
- Chip-making also requires gallons of ultrapure water in a single day, which experts say, could be a task for the government to provide to factories, compounded also by the drought conditions which often prevail in large parts of the country.
News 3: NavIC System (Navigation with Indian Constellation)
Background
The Union government is pushing tech giants to make smartphones compatible with its home-grown navigation system within months, worrying the likes of Samsung, Xiaomi and Apple who fear elevated costs and disruptions as the move requires hardware changes.
NavIC (Navigation with Indian Constellation)
- The govt. wants to reduce dependence on foreign navigation systems, such as U.S. Global Positioning System (GPS), and use ingrown NavIC system which provides more accurate domestic navigation, and its use would benefit the economy.
- Operational since 2018, NavIC’s uptake is minimal; it is mandated in public vehicle location trackers.
- IRNSS is an independent regional navigation satellite system being developed by India. It is designed to provide accurate position information service to users in India as well as the region extending up to 1500 km from its boundary, which is its primary service area.
- The system currently consists of a constellation of seven satellites, with two additional satellites on ground as stand-by.
- IRNSS will provide two types of services, namely, Standard Positioning Service (SPS) which is provided to all the users and Restricted Service (RS), which is an encrypted service provided only to the authorized users.
- The IRNSS System is expected to provide a position accuracy of better than 20m in the primary service area.
Some applications of IRNSS are
- Terrestrial, Aerial and Marine Navigation
- Disaster Management
- Vehicle tracking and fleet management
- Integration with mobile phones
- Precise Timing
- Mapping and Geodetic data capture
- Terrestrial navigation aid for hikers and travelers
- Visual and voice navigation for drivers
News 4: NASA is about to crash into asteroid
Background
NASA’s Double Asteroid Redirection Test Spacecraft (DART) is set to collide with Dimorphos, a small asteroid that is the moon of a larger space rock, Didymos. These two near earth objects do not pose an immediate threat to our world.
Why is NASA crashing into an asteroid?
Blowing up an asteroid generally would not be a good thing to do. Rather, the mission is a proof-of-principle demonstration that hitting an oncoming asteroid with a projectile can nudge it into a different orbit. For a dangerous incoming asteroid, the nudge could be enough to change the trajectory from a direct hit to a near miss.
Double Asteroid Redirection Test (DART)
- The objective of the mission is to test a planetary defense to near earth objects.
- DART will be the first demonstration of the kinetic impactor technique to change the motion of an asteroid in space. It is a suicide mission, and the spacecraft will be completely destroyed.
- It also carries about 10 kg of xenon which will be used to demonstrate the agency’s new thrusters called NASA Evolutionary Xenon Thruster–Commercial (NEXT-C) in space.
- NEXT-C gridded ion thruster system provides a combination of performance and spacecraft integration capabilities that make it uniquely suited for deep space robotic missions.
- The spacecraft carries a high-resolution imager called Didymos Reconnaissance and Asteroid Camera for Optical Navigation (DRACO). Images from DRACO will be sent to Earth in real-time and will help study the impact site and surface of Dimorphos (the target asteroid).
- DART will also carry a small satellite or CubeSat named LICIACube (Light Italian CubeSat for Imaging of Asteroids). LICIACube is expected to capture images of the impact and the impact crater formed as a result of the collision.
Other important news
World Tourism Day
- September 27 was chosen to celebrate World Tourism Day
- Theme: Rethinking Tourism
- Host country: Indonesia
Port of Odesa:
- The Port of Odesa or Odesa Sea Port, located near Odesa, is the largest Ukrainian seaport and one of the largest ports in the Black Sea basin.
- The Port of Odesa is a major freight and passenger transportation hub of Ukraine
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.
Globally, around 80% of wastewater flows back into the ecosystem without being treated or reused, according to the United Nations.
This can pose a significant environmental and health threat.
In the absence of cost-effective, sustainable, disruptive water management solutions, about 70% of sewage is discharged untreated into India’s water bodies.
A staggering 21% of diseases are caused by contaminated water in India, according to the World Bank, and one in five children die before their fifth birthday because of poor sanitation and hygiene conditions, according to Startup India.
As we confront these public health challenges emerging out of environmental concerns, expanding the scope of public health/environmental engineering science becomes pivotal.
For India to achieve its sustainable development goals of clean water and sanitation and to address the growing demands for water consumption and preservation of both surface water bodies and groundwater resources, it is essential to find and implement innovative ways of treating wastewater.
It is in this context why the specialised cadre of public health engineers, also known as sanitation engineers or environmental engineers, is best suited to provide the growing urban and rural water supply and to manage solid waste and wastewater.
Traditionally, engineering and public health have been understood as different fields.
Currently in India, civil engineering incorporates a course or two on environmental engineering for students to learn about wastewater management as a part of their pre-service and in-service training.
Most often, civil engineers do not have adequate skills to address public health problems. And public health professionals do not have adequate engineering skills.
India aims to supply 55 litres of water per person per day by 2024 under its Jal Jeevan Mission to install functional household tap connections.
The goal of reaching every rural household with functional tap water can be achieved in a sustainable and resilient manner only if the cadre of public health engineers is expanded and strengthened.
In India, public health engineering is executed by the Public Works Department or by health officials.
This differs from international trends. To manage a wastewater treatment plant in Europe, for example, a candidate must specialise in wastewater engineering.
Furthermore, public health engineering should be developed as an interdisciplinary field. Engineers can significantly contribute to public health in defining what is possible, identifying limitations, and shaping workable solutions with a problem-solving approach.
Similarly, public health professionals can contribute to engineering through well-researched understanding of health issues, measured risks and how course correction can be initiated.
Once both meet, a public health engineer can identify a health risk, work on developing concrete solutions such as new health and safety practices or specialised equipment, in order to correct the safety concern..
There is no doubt that the majority of diseases are water-related, transmitted through consumption of contaminated water, vectors breeding in stagnated water, or lack of adequate quantity of good quality water for proper personal hygiene.
Diseases cannot be contained unless we provide good quality and adequate quantity of water. Most of the world’s diseases can be prevented by considering this.
Training our young minds towards creating sustainable water management systems would be the first step.
Currently, institutions like the Indian Institute of Technology, Madras (IIT-M) are considering initiating public health engineering as a separate discipline.
To leverage this opportunity even further, India needs to scale up in the same direction.
Consider this hypothetical situation: Rajalakshmi, from a remote Karnataka village spots a business opportunity.
She knows that flowers, discarded in the thousands by temples can be handcrafted into incense sticks.
She wants to find a market for the product and hopefully, employ some people to help her. Soon enough though, she discovers that starting a business is a herculean task for a person like her.
There is a laborious process of rules and regulations to go through, bribes to pay on the way and no actual means to transport her product to its market.
After making her first batch of agarbathis and taking it to Bengaluru by bus, she decides the venture is not easy and gives up.
On the flipside of this is a young entrepreneur in Bengaluru. Let’s call him Deepak. He wants to start an internet-based business selling sustainably made agarbathis.
He has no trouble getting investors and to mobilise supply chains. His paperwork is over in a matter of days and his business is set up quickly and ready to grow.
Never mind that the business is built on aggregation of small sellers who will not see half the profit .
Is this scenario really all that hypothetical or emblematic of how we think about entrepreneurship in India?
Between our national obsession with unicorns on one side and glorifying the person running a pakora stall for survival as an example of viable entrepreneurship on the other, is the middle ground in entrepreneurship—a space that should have seen millions of thriving small and medium businesses, but remains so sparsely occupied that you could almost miss it.
If we are to achieve meaningful economic growth in our country, we need to incorporate, in our national conversation on entrepreneurship, ways of addressing the missing middle.
Spread out across India’s small towns and cities, this is a class of entrepreneurs that have been hit by a triple wave over the last five years, buffeted first by the inadvertent fallout of demonetization, being unprepared for GST, and then by the endless pain of the covid-19 pandemic.
As we finally appear to be reaching some level of normality, now is the opportune time to identify the kind of industries that make up this layer, the opportunities they should be afforded, and the best ways to scale up their functioning in the shortest time frame.
But, why pay so much attention to these industries when we should be celebrating, as we do, our booming startup space?
It is indeed true that India has the third largest number of unicorns in the world now, adding 42 in 2021 alone. Braving all the disruptions of the pandemic, it was a year in which Indian startups raised $24.1 billion in equity investments, according to a NASSCOM-Zinnov report last year.
However, this is a story of lopsided growth.
The cities of Bengaluru, Delhi/NCR, and Mumbai together claim three-fourths of these startup deals while emerging hubs like Ahmedabad, Coimbatore, and Jaipur account for the rest.
This leap in the startup space has created 6.6 lakh direct jobs and a few million indirect jobs. Is that good enough for a country that sends 12 million fresh graduates to its workforce every year?
It doesn’t even make a dent on arguably our biggest unemployment in recent history—in April 2020 when the country shutdown to battle covid-19.
Technology-intensive start-ups are constrained in their ability to create jobs—and hybrid work models and artificial intelligence (AI) have further accelerated unemployment.
What we need to focus on, therefore, is the labour-intensive micro, small and medium enterprise (MSME). Here, we begin to get to a definitional notion of what we called the mundane middle and the problems it currently faces.
India has an estimated 63 million enterprises. But, out of 100 companies, 95 are micro enterprises—employing less than five people, four are small to medium and barely one is large.
The questions to ask are: why are Indian MSMEs failing to grow from micro to small and medium and then be spurred on to make the leap into large companies?
At the Global Alliance for Mass Entrepreneurship (GAME), we have advocated for a National Mission for Mass Entrepreneurship, the need for which is more pronounced now than ever before.
Whenever India has worked to achieve a significant economic milestone in a limited span of time, it has worked best in mission mode. Think of the Green Revolution or Operation Flood.
From across various states, there are enough examples of approaches that work to catalyse mass entrepreneurship.
The introduction of entrepreneurship mindset curriculum (EMC) in schools through alliance mode of working by a number of agencies has shown significant improvement in academic and life outcomes.
Through creative teaching methods, students are encouraged to inculcate 21st century skills like creativity, problem solving, critical thinking and leadership which are not only foundational for entrepreneurship but essential to thrive in our complex world.
Udhyam Learning Foundation has been involved with the Government of Delhi since 2018 to help young people across over 1,000 schools to develop an entrepreneurial mindset.
One pilot programme introduced the concept of ‘seed money’ and saw 41 students turn their ideas into profit-making ventures. Other programmes teach qualities like grit and resourcefulness.
If you think these are isolated examples, consider some larger data trends.
The Observer Research Foundation and The World Economic Forum released the Young India and Work: A Survey of Youth Aspirations in 2018.
When asked which type of work arrangement they prefer, 49% of the youth surveyed said they prefer a job in the public sector.
However, 38% selected self-employment as an entrepreneur as their ideal type of job. The spirit of entrepreneurship is latent and waiting to be unleashed.
The same can be said for building networks of successful women entrepreneurs—so crucial when the participation of women in the Indian economy has declined to an abysmal 20%.
The majority of India’s 63 million firms are informal —fewer than 20% are registered for GST.
Research shows that companies that start out as formal enterprises become two-three times more productive than a similar informal business.
So why do firms prefer to be informal? In most cases, it’s because of the sheer cost and difficulty of complying with the different regulations.
We have academia and non-profits working as ecosystem enablers providing insights and evidence-based models for growth. We have large private corporations and philanthropic and funding agencies ready to invest.
It should be in the scope of a National Mass Entrepreneurship Mission to bring all of them together to work in mission mode so that the gap between thought leadership and action can finally be bridged.