Month: August 2024

Is India’s Toy Exports Success Sustainable?

The broad trends of toy exports and imports demonstrate that India has turned into a net exporter of toys.

The Economic Survey is an important policy document presented just one day prior to the budget. It provides a comprehensive assessment of the health of the economy and its challenges. Chapter 5 of the Survey applauds the country’s trade performance amid global economic uncertainty, global supply chain disruption(s) and geopolitical flux. It states that a number of policy interventions played a crucial role in boosting exports of specific product categories such as toys, defence, footwear and smartphones.

One needs to carefully weigh the policies implemented and look at further strategies to boost trade. We discuss these issues for the toy industry, which has a huge potential in both domestic and international markets.

Exports of the toy sector have witnessed a significant rise 2020 onwards. The total exports of the toy sector were $224.3 million in 2020 and reached $304.8 million in 2023. On the other hand, imports were $200.1 million in 2020 and reached $217.9 million in 2023 (Figure 1). However, imports experienced a sharp decline in 2021 and 2022.

The broad trends of toy exports and imports demonstrate that the country has turned into a net exporter of toys. In terms of export markets, India’s toy exports are mainly to developed economies. More than 70% of toy exports are to the United States, the UK, Germany, the Netherlands, Denmark and Australia (Table 1).

Several issues are worth studying in this context. First, the toy industry is highly fragmented and dominated by micro and small enterprises, representing 90% of the toy sector. They are also geographically dispersed in the country and produce low-quality toys only for the domestic market.

This means that exports of toys to developed markets are controlled by a handful of organised firms, who have production capabilities, the ability to adhere to international quality standards and a sound understanding of international markets.

Source: ITC Trade map, 2024. Chart by authors.

Consumers in developed economies are more quality-conscious and hence willing to pay premium prices. Moreover, standards for toys in developed economies are stringent, and only those firms that have the capability to comply with higher product and technical standards can export.

This essentially means that a large number of unorganised toy manufacturers in India cannot comply with the stringent quality standards and regulatory requirements of developed economies. Consequently, they may not succeed in the export business. The success story painted in the Economy Survey might thus be linked to a few firms.

This could lead to the development of oligopolies in the toy sector, which in turn make the sector much more capital intensive and jeopardise the potential opportunities for employment generation. The cartelisation of the toy sector will not only undermine competition, but can also exacerbate economic inefficiencies. Lack of competition will force consumers to buy products at higher prices and will negatively impact consumers’ welfare.

Table by authors.

Second, India’s success in shoring up exports in the toy sector is driven by trade policy intervention. India has increased import tariffs from 20% to 60% in almost all tariff lines of toy products. High-level import protection has provided protection from international competition, thereby supporting domestic manufacturers in scaling up domestic production and exports.

It is important to note that a high degree of import protection to the domestic toy industry has also contributed to an increase in the domestic prices of toys between 30% and 40%, which in turn promotes producers’ welfare at the expense of consumers’ well-being.

It needs to be noted that an initial increase in price fuelled by a tariff increase may not come down later (as domestic supply goes up) if the producers have greater market power due to limited competition.

Furthermore, the government introduced quality standards to regulate the import of low-quality toys in the Indian market. Quality standards act as double-edged swords, given the diversity and heterogeneity of firms in the toy sector. As the toy sector constitutes a bulk of MSMEs who are geographically located in small towns, the need to comply with quality standards poses a formidable challenge for them.

Large firms can comply with the quality standards, but small informal sector firms face significant challenges to adhere to these quality standards given their limited technical know-how and financial constraints. This naturally places them at a disadvantageous position vis-à-vis large firms, not only in the domestic market but also in their ability to capture the export market.

Hence, initiatives like the UNIDO National Programme for Development of Indian Toy Industry for technology transfer to toy manufacturers may be looked at. Common Facility Centers in identified clusters can be a cost-effective way to maintain standards for MSMEs.

Also read: Economic Survey Reads Like a Part Fantasy, Part Mythology Document

Third, the toy sector has been identified as one of the sectors for production-linked incentives (PLIs). Given the industrial configuration of this sector, the financial incentives under the PLI scheme require careful deliberation with a diverse range of stakeholders involved in toy supply chains.

The toy sector is highly complex owing to its heterogeneous structure. The requirements of different segments differ in terms of raw materials, production processes, technology and manpower. Understanding the value chain of the toy sector is important to provide financial incentives. A one-size-fits-all approach used in other, more homogenous sectors may not work here.

In addition, the toy sector is also dependent on Southeast Asian economies for imports of certain kinds of intermediate inputs and equipment, such as raw materials, testing and cutting instruments, moulding, and embroidery machines. This requires trade policy alignment with the PLI scheme.

Further, PLI benefits need to be given in such a manner that they not only augment domestic production capabilities, but also enhance the competitiveness of the sector vis-à-vis other countries.

In conclusion, it is heartening to note that India is a net exporter of toys. The benefit from increasing tariffs on imported toys and quality control have helped us achieve this feat. The global market for toys stood at a staggering $60.3 billion in 2022. If we want to increase our market share, which is dominated by China, the ecosystem of the sector must be boosted further.

Policies to incentivise the domestic production of critical inputs, encouraging FDI by global giants and using technical requirements to produce according to the buyers’ need, both at the international and national level, can benefit the sector.

Bibek Ray Chaudhuri is a professor at Indian Institute of Foreign Trade, Kolkata. Surendar Singh is an associate professor at FORE School of Management, New Delhi. Views are personal.

Rahul Gandhi’s Chakravyuha Metaphor Against Modi Draws on a Worldview Central to the Idea of India

By invoking the chakravyuha analogy from the Mahabharata to indict crony capitalism, majoritarianism, and Modi’s reliance on fear, Rahul Gandhi is tapping into the age-old legacy of India.

While speaking on Budget 2024 in parliament, Rahul Gandhi recalled the Mahabharata war from Indian mythology and invoked the ‘chakravyuha’ – a formidable military formation adopted by Dronacharya, one of the great warriors on the Kaurava side. Rahul said that the chakravyuha was also known as the Padma or Kamal (lotus) Vyuha, formation, as it was in the shape of that flower. While the chakravyuha is part of the texture of India’s folklore and public consciousness, its other name as Padma or Kamal Vyuha is much less known to the larger public.

In a very calculated manner, Gandhi used the Kamal Vyuha phrase and drew its parallel with BJP’s symbol, the lotus flower, which he said Prime Minister Modi proudly wore a picture of on his chest during the election campaign. He then  remarked that just like the chakravyuha of the Mahabharata – defined by violence, fear, killing and the employment of deadly weapons to trap an opponent – the Modi regime has encircled India and different sections of the population  by a 21st century  chakravyuha.

While recalling that in the original chakravyuha, six warriors from the Kaurava side killed young Abhimanyu of the Pandavas,  he said that the 21st century chakravyuha is also commanded and controlled by six people: Prime Minister Modi and Home Minister Amit Shah, RSS chief Mohan Bhagwat, National Security Adviser Ajit Doval and the businessmen Gautam Adani and Mukesh Ambani. Lok Sabha Speaker Om Birla expunged the last four names.

Gandhi identified these factors – monopoly capital and the entire wealth of the country in the hands of two bug business houses, the agencies including the CBI, ED and Income Tax Department  and the political executive – commanding and controlling the 21st chakravyuha which was devastating the country.

Countering 21st century chakravyuha

Gandhi said that only those six people can enter that chakravyuha where fear and violence dominate and set the tone of rule of frightfulness. He proceeded to add that such a lotus shaped formation controlled exclusively by six people would be countered by “Shiv ki baaraat” – Lord Shiva’s marriage procession – which is open to anyone to participate and imagine the way one likes to wish without any fear. He then juxtaposed this “Shiv ki Baaraat” with Shiva’s ‘abhaya mudra’, or fearless posture, which he had referred to in his first intervention in the current session of parliament.

Rahul Gandhi asserted that the remedy to the chakravyuha controlled by six people in the 21st century would be shattered by the mechanism of the caste census which he said would be conducted after the INDIA alliance formed the government.

The Congress leader’s use of the chakravyuha analogy reminds one of C Rajagopalachari, who, in his book, Mahabharata, first published by the Bharatiya Vidya Bhavan in 1951, referred to the death of Abhimanyu in the lotus formation strategy adopted by the Kauravas. Rajagopalachari wrote his book at the formative stage of nation building following India’s independence to educate the public about the enduring significance of our epics.

Prior to that, Mahatma Gandhi, while spearheading the first Satyagraha in South Africa, wrote in Indian Opinion on August 19, 1911 that “Millions of Indians in India, although they may not be able to sign their own names, know the spirit of the great epics, Mahabharata and Ramayana, which play a part in our national life that very few other similar works do”.

Later, Jawaharlal Nehru in his Discovery of India wrote, “The old epics of India, the Ramayana and the Mahabharata and other books, in popular translations and paraphrases, were widely known among the masses, and every incident and story and moral in them was engraved on the popular mind and gave a richness and content to it”. “Illiterate villagers,” he remarked, “would know hundreds of verses by heart and their conversation would be full of references to them or to some story with a moral, enshrined in some old classic”. “Often I was surprised, by some such literary turn given by a group of villagers to a simple talk about present-day affairs”, he noted. Nehru relied  on  recorded history or some  ascertained fact and was fascinated by the fact  that “even the illiterate peasant had a picture gallery in his mind, though this was largely drawn from myth and tradition and epic heroes and heroines, and only very little from history”.

By invoking the chakravyuha analogy from the Mahabharata to indict crony capitalism, majoritarianism, and Modi’s reliance on fear, Rahul Gandhi is tapping into the age-old legacy of India. Contextualising today’s challenges by referencing the epics in this way reinforces the rational, plural worldview that has always been central to the idea of India.

S.N. Sahu served as officer on special duty to former President KR Narayanan.

This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been updated and republished here. To subscribe to The India Cable, click here.

Supreme Court Proposes Exclusion of Creamy Layer Among SC/STs from Reservations

While allowing states to sub-categorise SCs and STs for the sake of reservation, four of the seven judges on the constitutional bench proposed the identification of creamy layers among SCs and STs to ensure that reservation truly reaches the deserving.

New Delhi: Four judges of the seven-judge constitutional bench, which ruled in favour of sub-categorisation of Scheduled Castes and Scheduled Tribes for the sake of reservation, called for the identification of creamy layers among SCs and STs, so that they can be taken out of the fold of reservation.

Justice B.R. Gavai, Justice Vikram Nath, Justice Pankaj Mithal and Justice Satish Chandra Sharma underlined that a creamy layer system akin to the one existing for Other Backward Classes (OBCs) must be put in place to ensure that reservations reach the most deserving among SCs and STs.

“State must evolve a policy to identify creamy layer among the SC ST category and take them out of the fold of affirmative action (reservation). This is the only way to gain true equality,” Justice Gavai said, according to Bar and Bench.

Justice Vikram Nath concurred with Justice Gavai. “I am also in agreement with the opinion of brother Justice Gavai that the creamy layer principle is also applicable to Schedule Castes and Scheduled Tribes and that the criteria for exclusion of creamy lawyer for the purpose of affirmative action could be different from the criteria as applicable to the Other Backward Classes,” Justice Nath said.

Justice Mithal too shared the same opinion. “Reservation should be meant for only the first generation among a category and if the second generation has come up then benefits of reservation shall not be given and the State should see if after reservation the second generation has come shoulder to shoulder with the general category.”

Justice Sharma too said that the identification of creamy layer among SC and STs must become “a constitutional imperative”.

Landmark ruling on SC/ST sub-categorisation 

In a landmark judgement, the Supreme Court on Thursday upheld the power of states to sub-categorise reserved groups of Scheduled Castes and Scheduled Tribes to provide wider representation for underrepresented groups.

In effect, a seven-judge bench which heard the matter overruled its own verdict of 2005 in the EV Chinnaiah v. State of Andhra Pradesh case, which had ruled that SC/ST sub-classification was contrary to Article 341 of the constitution. The particular Article confers the right on the President of India to prepare the list of SCs and STs.

While six of the seven judges allowed for the sub-classification, Justice Bela M Trivedi dissented from the majority and ruled that such sub-classification is not permissible. The Constitution bench was headed by Chief Justice D.Y. Chandrachud. The other judges on the bench were Justice B.R. Gavai, Justice Vikram Nath, Justice Bela M Trivedi, Justice Pankaj Mithal, Justice Manoj Misra, and Justice Satish Chandra Sharma.

“The members of SC/ST are not often able to climb up the ladder due to the systemic discrimination faced. Article 14 permits sub-classification of caste. Court must check if a class is homogeneous or and a class not integrated for a purpose can be further classified,” the Bench said pronouncing its majority judgment, according to Bar and Bench.

The court then went on to say there is historical evidence and social parameters to indicate clearly that all SC/STs do not constitute a homogenous class. “Historical evidence shows that depressed class were not homogenous class and social conditions show that all classes under that is not uniform. In state of Madhya Pradesh, out of 25 castes only 9 are scheduled castes,” the court added.

The court made it clear that the sub-categorisation of SCs and STs does not in any way violate Article 341 of the constitution.

“We have also established through historical evidence that Scheduled Castes notified by the President are a heterogenous class. There is nothing in Article 15, 16 and 341 which prevents sub-classification for SCs if there is a rational for distinction and there is a rational nexus for the object sought to be achieved. State can sub-classify for the inadequate representation of some class,” the court observed.

The court, however, issued a note of caution, saying that sub-classification by states has to be supported by empirical data and should be ensured that it is not based on “whims or political expediency”.

“State can adopt any measures to judge inter se backwardness. If the parameter is untouchability, it is not needed that inter se backwardness is also justified on the basis of that but State has to prove it by empirical and quantifiable data. State cannot act on its whims or political expediency and it is amenable to judicial review,” the court underlined.

The court ruling, in effect, provided legal sanctity to laws which provide for such sub-classification in Punjab, Tamil Nadu and other states.

‘Ceasefire Now’: India’s Right to Food Campaign Condemns Israel’s Use of Starvation as a Weapon in Gaza

“Unfortunately, the government of India has done nothing to contribute to an end to these war crimes,” the RTF said in a statement.

New Delhi: The Right to Food (RTF) Campaign has strongly condemned the Israeli government’s use of starvation as a weapon of war in Gaza. The campaign also criticised the Indian government’s complicity in Israel’s war crimes.

In a statement, the campaign — a network of organisations and individuals advocating for the right to food and nutrition in India — expressed outrage over the humanitarian crisis in Gaza, where over 90% of the population is suffering from acute food deprivation. The campaign noted that the Israeli army has targeted hospitals, health centers, ambulances, and health workers, leaving the injured without medical care.

“During the last nine months, tens of thousands of Palestinian civilians including countless children have been blown to pieces, buried under the rubble, charred to death or grievously wounded. Most of the injured have been deprived of medical care as the Israeli army relentlessly targeted hospitals, health centres, ambulances and health workers (more than 500 have been killed so far). For good measure, the survivors are now being starved,” the RTF mentioned.

The RTF added: “United Nations agencies estimate that more than 90% of the population of Gaza is suffering from acute food deprivation. Rampant undernutrition and abominable sanitary conditions have led to the rapid spread of disease. The Health Ministry in Gaza has recently declared a polio epidemic, no less.”

Also read: What Has India Risked by Exporting Arms to Israel?

The campaign demanded an immediate ceasefire and an end to all cooperation with the state of Israel. It also called for the Indian government to take a strong stance against Israel’s war crimes, rather than subsidising Indian companies that produce military material for Israel.

“Unfortunately, the government of India has done nothing to contribute to an end to these war crimes. On the contrary, it has remained a faithful ally of the Israeli government – subsidising Indian companies that produce military material for Israel, sending Indian workers to Israel in replacement of Palestinian workers, and suppressing protests against Israel in India. Even at the United Nations, India has mostly abstained from efforts to bring about resolutions that would restrain Israel,” the RTF stated.

Underlining the role of the Indian government, the RTF further said that “complicity with genocide occurs when “some positive action has been taken to furnish aid or assistance to the perpetrators of the genocide” and suggested that “this is an accurate description of what the Indian Government is doing at the moment”.

“The use of starvation and disease as weapons of war is unacceptable, full stop,” the RTF mentioned.

The RTF stands in solidarity with the people of Gaza and Palestine, upholding their right to food, freedom, and self-determination.

“We call for an immediate end to the war and ceasefire now. We the Right to Food Campaign of India uphold the Right to Food and Freedom of the Palestinian People,” it added.

The statement was signed by prominent activists and organisations, including Aysha and Gangaram Paikra, Kavita Srivastava, Aruna Roy, and Colin Gonsalves, among others.

Opposition Takes a Dig at Modi Govt After Videos Show Water Leaking from Parliament Roof

Videos currently doing rounds on social media show water dripping from the roof inside the parliament lobby along the path used by the President and it is being collected in a bucket. ‘Paper leakage outside, water leakage inside,’ Congress MP Manickam Tagore wrote on X (Twitter).

New Delhi: The Opposition has been hitting out at the Narendra Modi government after images and videos surfaced on social media on Thursday showing water leaking from the roof of the new parliament building being collected in a bucket. Built at Rs 1,200 crore, the building was inaugurated with much fanfare on May 28, 2023.

Videos currently doing rounds on social media show water dripping from the roof inside the parliament lobby along the path used by the President and water being collected in a blue bucket.

Congress MP Manickam Tagore was quick to share the video and took a dig at the Modi government. “Paper leakage outside, water leakage inside,” he wrote on X (formerly Twitter).

Samajwadi Party chief and Lok Sabha MP Akhilesh Yadav weighed in on the matter. “The old Parliament was better than this new one, where even the former MPs could visit. Why not return to the old Parliament until the issues with the new one, built with billions of rupees, are resolved?” Akhilesh said.

He went onto add, “People are questioning whether the water dripping from every new roof constructed under the BJP government is part of their well-thought-out design or something else.”

Aam Aadmi Party also mocked the government saying, “The Parliament which was built at the cost of 1200 crores is now dependent on a bucket of Rs 120.”

In addition to water leaking in the lobby, a video on social media shows a flood of water entering into what is the Rajya Sabha part of the parliament complex. The Wire, however, has not verified the video independently.

Tagore submitted an adjournment motion notice in the Lok Sabha, proposing the formation of a special committee to investigate the issues concerning the parliament building.

Meanwhile, the Lok Sabha Secretariat said the “minor water leak” in the new parliament building was due to the displacement of an adhesive material used to fix glass domes over the lobby and corrective measures were taken immediately.

“During the heavy rain on Wednesday, the adhesive material used to fix the glass domes over the Lobby of the Building was slightly displaced, causing minor leakage of water in the Lobby. It said the problem was detected timely and corrective measures were taken immediately. Thereafter, no further leakage of water has been noticed,” the Lok Sabha Secretariat said.

RBI’s Extraterritorial Influence on the Rupee Market

The emergence of the offshore non-deliverable forward market in the rupee has made it more challenging for the RBI to maintain exchange rate stability.

Maintaining stability of the exchange rate is among the most important goals of the Reserve Bank of India (RBI). On a de-jure basis, India moved towards a market-determined exchange rate system in 1993. Yet the de-facto reality is that the RBI regularly and actively intervenes in the foreign exchange (FX) markets. The official position of the RBI is that FX interventions are made to curb excessive volatility of the exchange rate and maintain orderly conditions in the market. This task however has become progressively more challenging for the Central Bank owing to the steady rise of the offshore non-deliverable forward (NDF) market in the rupee (INR).

An NDF contract is similar to a regular forward currency contract (which sets a fixed foreign currency exchange rate for a transaction at a future date), with the main difference that an NDF does not require physical exchange of the underlying currency. Instead, it allows the counterparties to settle profit or loss in a convertible currency like the US dollar. Hence, the moniker “non-deliverable”.

The INR-NDF market has grown substantially in size over the years. It has emerged as the second largest NDF market globally in terms of average daily turnover. In fact, the INR-NDF market is almost thrice as large as the onshore deliverable forward market. This has led to concerns in the RBI that the offshore market is playing an increasingly important role in determining the value of the rupee and hence may hamper the ability of the Central Bank to maintain exchange rate stability. This has been of concern especially because the offshore market is beyond the RBI’s legal jurisdiction.

It seems that the RBI may have finally found a way to influence this offshore market. The Central Bank recently released a draft direction proposing to allow offshore electronic trading platforms (ETPs) to register with it. If this regulatory strategy works, it could help establish the RBI’s extraterritorial reach over the offshore market in an unprecedented manner, and other emerging-market (EM) central banks could also follow suit. 

Background

After World War II, the Bretton Woods Conference of 1944 led to a fixed exchange rate system under which all countries’ currencies were fixed, but adjustable, to US dollar. This system came to an end in 1971, and the world’s major currencies moved towards floating exchange rate regimes. On the other hand, emerging economies like India, gradually shifted to ‘managed floating’ regimes over the next couple of decades, wherein their central banks would intervene in the FX markets to maintain currency stability.

In an increasingly globalised world where investors, traders and other market participants regularly conduct transactions in multiple currencies, fluctuations in exchange rates expose them to currency risks – that is, they experience financial gains or losses depending on fluctuations in exchange rates. To protect themselves from such risks, they use financial instruments called currency derivatives such as currency forwards. Currency derivatives are contracts in which a specified amount of a particular currency pair is traded on a specified date in the future. These instruments help hedge their currency exposures and also help FX market participants take speculative positions in multiple currencies.

For participants undertaking transactions in EM currencies such as the rupee, there are additional layers of complication. The financial markets in these economies are underdeveloped and currency derivatives may not be available. And even if these financial products are available, foreign investors’ access to these derivative markets is limited. This is because EM policymakers occasionally impose capital controls to limit the flow of foreign money moving in and out of their economies.

Access to Indian financial markets is even more difficult than most other EMs because India is the only emerging economy, other than China, that continues to have in place a complex and elaborate framework of capital controls, despite liberalisation reforms undertaken more than three decades ago.3 Hence, despite the existence of an onshore INR forward market, capital controls and other institutional constraints such as high transaction costs, complex tax regime, etc., impede the ability of foreign participants to take positions on this market.

As a result, over the years an offshore INR-NDF market has developed at various international locations such as Singapore, Hong Kong, London, Dubai, and New York. This offshore market allows participants to avoid the stringent capital-account restrictions of India and take positions on the rupee. Given that the NDF does not require physical exchange of the underlying currency, it is ideal for hedging risks arising from currencies such as the rupee, which are not freely convertible due to capital controls.

Apart from INR, South Korean won, Brazilian real, Chinese renminbi and New Taiwan dollar also have sizable offshore NDF markets. The NDF contracts in rupees are bilaterally settled in the US dollar and are traded in the over-the-counter (OTC) market. India accounts for close to 20% of the global trade in NDFs. According to the Bank of International Settlements (BIS) Triennial Survey, 2019, the NDF volumes for the USD-INR currency pair reported a staggering three-fold increase, from around US$16.4 billion in 2016 to US$50 billion in 2019. 

Domestic impact of offshore NDF market

Over the years, the linkages between the NDF market and the onshore financial markets have drawn considerable policy attention. In India’s case, there is evidence that the NDF market exerts influence on the value as well the volatility of the INR-USD exchange rate. Especially in times of heightened uncertainty and stress (such as the taper tantrum episode of 2013-14 or the 2018 emerging market crisis when the rupee depreciated substantially), the price volatility in the NDF market tends to spill over to the domestic market.

In response to this, the RBI set up the Task Force on Offshore Rupee Markets in July 2019, under the chairmanship of ex-Deputy Governor Usha Thorat, for a deeper understanding of the factors causing the sharp growth of the NDF market and to identify measures to reverse the trend. Based on the recommendations of this committee, the RBI allowed all Indian banks having an IFSC (International Financial Services Centre) Banking Unit to participate in the NDF market from June 2020 onwards. This would arguably give the RBI greater control over the NDF market.

However, in October 2022, the RBI reversed its stance and informally restricted banks from building additional positions on the NDF. This was done presumably to manage the rupee, which was rapidly depreciating against the US dollar in response to the aggressive interest rate hikes by the US Federal Reserve. In December 2022, RBI lifted these restrictions only to bring them back in August 2023 when the rupee began depreciating again. By April 2024, banks were once again allowed to take positions on the NDF market, but by then, according to news reports, banks were no longer interested due to the uncertainty arising from the RBI’s policy flip-flops.

It seems that the RBI has now proposed the latest regulations on offshore ETPs, in an attempt to once again encourage Indian banks to take positions on the NDF market.

Regulations for ETPs

One of the crucial learnings from the 2008 Global Financial Crisis was that the OTC derivatives market needs to become more transparent. This had prompted the G20 group of countries to come to an agreement in 2009 that all standardised OTC derivatives should be traded on ETPs. Since then, ETPs have been encouraged globally.

In October 2018, the RBI issued its first ETP directions providing detailed eligibility criteria, technology requirements and reporting standards for ETPs executing transactions in financial instruments regulated by the Central Bank. Thirteen ETPs run by five operators have since been authorised under these directions. On 8 February 2024, the RBI’s statement on developmental and regulatory policies highlighted some new developments in this space:

“Over the last few years, there has been increased integration of the onshore forex market with offshore markets, notable developments in the technology landscape and an increase in product diversity. Market makers have also made requests to access offshore ETPs offering permitted Indian Rupee (INR) products. In view of these developments, it has been decided to review the regulatory framework for ETPs. The revised regulatory framework will be issued separately for public feedback.”

On 29 April 2024, RBI released a draft Master Direction on ETP for public feedback. This draft adds a new concept, namely, ‘offshore ETP’. Such an ETP is operated from outside India by an operator incorporated outside India. Operators of offshore ETPs need to apply for registration with RBI only if they are desirous of providing resident Indians access to their platform for transactions with non-residents in eligible derivative instruments involving rupee or rupee interest rate, as permitted by RBI under the Foreign Exchange Management Act (FEMA). This implies that, effectively, only registered offshore ETPs can allow residents to transact with non-residents in INR-NDF contracts, albeit on the assumption that residents (other than banks) are also prima facie permitted to enter into such transactions on a cross-border basis.

Legality of extraterritorial operation

A unique feature of RBI’s proposed regulation on offshore ETPs is its extraterritorial nature, that is, its effect beyond the territory of India. It may be worthwhile to note here that Article 245(2) of the Indian Constitution categorically states:

“No law made by Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation.”

The RBI Act, 1934 is a parliamentary legislation. Section 45W of this legislation empowers RBI to give directions to any agency dealing in derivatives as long as the same is “in public interest or to regulate the financial system of the country to its advantage”. The definition of ‘derivative’ includes an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, etc.

The RBI proposes to issue the new directions for registration of offshore ETPs under this provision. However, section 1(2) of the RBI Act, 1934 explicitly states that the RBI Act “extends to the whole of India”, thus potentially implying that it does not extend beyond India. The legal implications of this particular provision on RBI’s proposed directions on offshore ETPs merit a brief discussion.

A similar provision exists in section 1(2) of the SEBI Act, 1992. The Supreme Court in SEBI vs. Pan Asia Advisors, however, upheld SEBI’s powers to initiate proceedings even when the underlying acts or transactions took place outside India as long as they have an effect on the interest of investors in India. This legal position is supported by the constitution bench decision in GVK Industries Ltd. vs. Income Tax Officer, which held that the parliament is empowered to make laws with respect to extraterritorial aspects or causes that may have an impact on or nexus with India.

The underlying legal principle is often referred to as the “effects doctrine”. Following the same doctrine, it could be argued that the proposed RBI directions requiring registration of offshore ETPs are within the scope of the RBI Act, 1934 since such offshore ETPs are envisaged to permit Indian residents to enter into INR-NDF contracts offshore. This in turn will have an effect on the INR-USD exchange rate and consequently, the RBI’s attempt to stabilise the exchange rate. Therefore, the extraterritorial operation of RBI’s proposed intervention could be legally justified under Indian laws.

Potential impact

Offshore ETPs as well as the RBI are likely to benefit from this new regulation. Offshore ETP operators interested in the INR-NDF market have strong commercial reasons to apply for an RBI registration under this proposed direction. This is because Indian banks and other Indian entities can potentially become important players in the INR-NDF market. Till date, their participation in the NDF market was limited due to the lack of a comprehensive regulatory framework. The RBI is clearly trying to fix this lacuna. Hence this should make offshore ETP operators keen to offer their NDF products to Indian banks, which are all major potential clients in this space.

From the RBI’s side, the more offshore ETP operators register with the Central Bank, the more leverage RBI will have on the NDF market. RBI is likely to exert its extraterritorial influence on this market by modulating Indian banks’ access. This will effectively enhance the RBI’s influence over the INR exchange rate in the NDF markets.

For this strategy to yield results, RBI has to be cautious that its regulatory approach is predictable and consistent. If it arbitrarily keeps cutting out Indian banks’ access to this market, like it did over the last few years, these banks will once again stop building positions on the offshore NDF market. That would ultimately limit their influence in this market, which in turn would also limit RBI’s own extraterritorial influence.

Conclusion

A large offshore INR-NDF market has developed over the years largely owing to capital controls imposed by the RBI on onshore currency and financial markets. Yet the existence of this offshore market has made it more challenging for the RBI to manage the INR-USD exchange rate. The RBI has been trying to get a hold on the NDF market, albeit with little success. So now, in order to deal with the problems created largely by its own capital controls, and given its objective of exchange rate management, the RBI has issued directions to register offshore ETPs. This latest attempt may be more successful than the previous ones at getting a foot in the door because the commercial incentives of offshore ETPs are aligned with the RBI’s objectives – to increase the participation of domestic Indian banks in the NDF market.

If this strategy works, other EM central banks may follow suit. How this may impact the NDF market in the long run is difficult to predict at this point in time. At an extreme, extraterritorial application of rigid local laws of EMs with capital controls may end up shifting the focus of the NDF market from registered ETPs to unregistered ETPs. EM policymakers such as in India should instead take proactive steps to liberalise their onshore currency derivative markets, if they want to curb the influence of the NDF market on exchange rates.

Pratik Datta is Associate Director (Research) at Shardul Amarchand Mangaldas & Co, a leading Indian law firm. Dr. Rajeswari Sengupta is an Associate Professor of Economics at the Indira Gandhi Institute of Development Research (IGIDR) in Mumbai, India.

This article was originally published by Ideas for India. 

Outrage as Donald Trump Says Kamala Harris ‘Turned Black’

‘I didn’t know she was Black until a number of years ago when she happened to turn Black and now she wants to be known as Black. So, I don’t know, is she Indian or is she Black?’

Former US President Donald Trump attended a conference with Black journalists in Chicago on Wednesday where he falsely claimed that Vice President Kamala Harris had previously identified only as Indian before “turning Black.”

Trump has been seeking to improve his support among Black voters, however, he appeared combative at the event, calling the interviewers “rude” and “nasty,” especially after they called him out for his falsehoods.

Trump confused over Harris’s race

“I didn’t know she was Black until a number of years ago when she happened to turn Black and now she wants to be known as Black. So, I don’t know, is she Indian or is she Black?” Trump said at the annual convention of National Association of Black Journalists conference (NABJ).

In reality, Harris — the daughter of a Jamaican father and an Indian mother — has always embraced her heritage.

She attended Howard University, a prestigious historically Black university, and was also a member of the historically Black sorority Alpha Kappa Alpha.

As a US senator, Harris was part of the Congressional Black Caucus, where she supported legislation aimed at strengthening voting rights and reforming policing.

Audience groans at Trump’s responses

The contentious interview started with Trump calling ABC News reporter Rachel Scott’s question on his previous racist comments “horrible,” “hostile” and a “disgrace” and describing ABC as a “fake” network.

Scott was one of three Black women moderators during the event.

Trump called himself “the best president for the Black population since Abraham Lincoln,” on being asked why Black voters should support him. His answer drew groans from the audience.

The former president has often claimed that illegal immigrants would take away “Black jobs.” On being asked by Scott to define a “Black job,” Trump fired back, “A Black job is anybody with a job.” Again the audience groaned.

Although the event was scheduled for an hour, the Trump campaign pulled the plug after 35 minutes saying he was out of time, according to the moderators.

His appearance at the event was part of his campaign’s effort to appeal to Black voters and comes as he faces scrutiny over his record on race issues. Trump’s racial remarks at the event in Chicago could hurt his candidacy in critical states with a large Black population, such as Georgia.

Harris winning ground

Since launching her White House campaign earlier this month, Vice President Harris has been at the receiving end of sexist and racist attacks online.

Meanwhile, Trump’s attacks against Harris — who he has called “Lyin’ Kamala,” “Laughin’ Kamala” and “Crazy Kamala” — have become increasingly vicious as she has erased Trump’s lead in multiple key battleground states, according to a Bloomberg News/Morning Consult poll, since becoming the likely Democratic nominee.

Earlier this week, Trump suggested in a Fox News interview that other world leaders are “going to walk all over her.”

‘Americans deserve better’

While Trump was making his claims, the US Vice President was in Houston addressing a gathering of Sigma Gamma Rho, a historically Black sorority.

She responded to Trump’s comments saying, “It was the same old show. The divisiveness and the disrespect.”

“The American people deserve better,” Harris said.

“We deserve a leader who understands that our differences do not divide us, they are an essential source of our strength.”

This article was first published by DW.

Amid West Asia Turmoil, India Asks its Citizens to Leave Lebanon

This is the second advisory in a matter of few hours, where the previous advisory had asked Indians not to travel to Lebanon. 

New Delhi: Amid fast-changing developments in West Asia, the Indian Embassy in Beirut has asked Indian nationals to leave Lebanon. This is the second advisory in a matter of few hours, where the previous advisory had asked Indians not to travel to Lebanon.

The advisories come close on the heels of Israel carrying out a strike on Beirut, and the situation turning grave in the region.

Israel, according to the Associated Press, has claimed that the strike killed Fouad Shukur, the commander of the Hezbollah, a Lebanese armed group. Israel blames Shukur for orchestrating an attack in the Israeli-controlled Golan Heights, which killed 12 children.

Israel’s strike also killed a woman and two children. Many are hurt. Hostilities have escalated in West Asia. A day ago, Ismail Haniyeh, the political leader of Hamas, was killed in Iran’s capital Tehran.

In addition to asking Indian nationals to not travel to Lebanon, the Indian embassy has asked Indian nationals living in Lebanon to “exercise caution, restrict their movements and remain in contact with Embassy of India in Beirut.”

The Embassy has asked people to be in touch through their email ID – cons.beirut@mea.gov.in – or an emergency phone number, +96176860128.

‘Kanwariyas Beat Him in Such a Way That He Appeared Almost Dead’: Slain Driver’s Family Disputes Police Claim

Mohit’s family also alleged that the police made them submit an affidavit stating that they did not want any further legal action in the matter.

New Delhi: The family of an e-rickshaw driver who died five days after being assaulted by kanwariyas in Muzaffarnagar, Uttar Pradesh have insisted that he died from the injuries suffered at the hands of the saffron-clad pilgrims and not due to any pre-existing illness as claimed by the police.

Mohit’s family also alleged that the police made them submit an affidavit stating that they did not want any further legal action in the matter.

The incident took place on July 23, when Mohit became another victim of mob violence by kanwariyas during this year’s Kanwar Yatra.

Mohit’s e-rickshaw brushed against one of the kanwars carried by the kanwariyas in Muzaffarnagar’s Khatauli area. They accused him of desecration. Sensing the outrage among the kanwariyas, Mohit tried to escape from the scene, but his vehicle turned turtle as it lost balance in his desperate bid to get away, police said.

The kanwariyas grabbed him and assaulted him, the Muzaffarnagar police stated, adding that a local police team reached the spot and calmed the situation.

Police further said that Mohit “suffered minor injuries” in the attack and was taken home by his family after receiving first aid at a hospital.

On July 28 night, Mohit died. This is where his family have disputed the police version.

Soon after Mohit’s death, Muzaffarnagar police issued a press note saying that on July 28 night, Mohit suffered severe pain in his chest. His family took him to a hospital but the doctors declared him dead, the police said.

The police also claimed that Mohit’s family “did not want any legal action”. Mohit died due to an illness he had been suffering from for a while, the police said, quoting his family.

The police was left red-faced after Mohit’s sister Neelam, speaking in front of local news television channels, contradicted the official claims.

Neelam said that her brother had been brutally assaulted by the kanwariyas. “The bhole (kanwariyas) beat him in such a way that he appeared almost dead. If he had collided against them, they could have hit him slightly,” she said.

Neelam said that Mohit had received injuries on his head, chest, waist and legs. There may have been “internal injuries,” she said, not ruling out the possibility that Mohit may have been stabbed.

Also read: Modi Govt Says File Revoking Ban on Govt Servants Joining RSS ‘Classified’

Neelam dismissed the police’s version that Mohit died due to a pre-existing illness.

“He was a healthy young man. How can he be ill, when he was out driving an e-rickshaw,” she asked.

She also alleged that the affidavit submitted to the station house officer of Khatauli in their name was drafted on the dictation of the police itself.

“I’m an illiterate person. We wrote down whatever the police dictated,” Neelam said.

In an affidavit shared by local media, Mohit’s family allegedly said that “nobody was to blame” for his death.

“We don’t need any police action. He died due to illness,” the affidavit said, adding that the family also did not want the police to conduct any postmortem of the body.

While talking to the media, Neelam did say that they decided against conducting a post mortem but also asked if the police were trying to protect someone.

Police have insisted that the allegations that Mohit died due to the assault of the kanwariyas were “false and baseless”.

Also read: ‘Angered at Being Asked Not to Smoke at Petrol Station, Kanwariyas Booked for Rioting, Assault in UP

After Neelam came out in public, Muzaffarnagar police issued a small rejoinder on social media site X, saying that the family had “refused to take any legal action at the time.”

Adopting a “humanitarian approach,” the police handed over Mohit’s body to his family, said Muzaffarnagar police.

The district police also said that Mohit’s sister Neelam had refused the police request for carrying out an autopsy of the body.

Does the Budget Give Us Jobs?

In reality, do the schemes of the government create new jobs?

The first Budget of the third Narendra Modi government has proposed taking a prioritised approach in the fields of employment and skilling. The Union Budget has proposed five schemes with an outlay of Rs 2 lakh crore to generate jobs for the youth. This is what we are told by newspapers; it is possible that the total amount that may be spent in five years amount to that sum. On that, we shall see.

The schemes related to the Employees’ Provident Fund Organisation are merely to support formalisation, not new jobs. Government economists will not tell you this basic fact. There has been a rising number of contract  workers in the organised sector: if they are begun to be shown in the employers’ payroll for regular workers, then their EPFO costs will be – for a limited period – be borne by the government. This is unlikely to create new jobs. This is not stated, but it is the reality.

The reader can assess by reading the FM’s scheme text below:

“Our government will implement following 3 schemes for ‘Employment Linked Incentive’, as part of the Prime Minister’s package. These will be based on enrolment in the EPFO, and focus on recognition of first-time employees, and support to employees and employers.”

Scheme A: First timers

This scheme will provide one-month wage to all persons newly entering the workforce in all formal sectors. The direct benefit transfer of one-month salary in three instalments to first-time employees, as registered under the EPFO, will be up to Rs 15,000. The eligibility limit will be a salary of Rs 1 lakh per month. The scheme is expected to benefit 210 lakh youth.

How many it will actually benefit remains to be seen.

Scheme B: Job creation in manufacturing

This scheme will incentivise additional employment in the manufacturing sector, linked to the employment of first-time employees. An incentive will be provided at specialised scale directly both to the employee and the employer with respect to their EPFO contribution in the first 4 years of employment. The scheme is expected to benefit 30 lakh youth entering employment, and their employers.

Scheme C: Support to employers

This employer-focussed scheme will cover additional employment in all sectors. All additional employment within a salary of Rs 1 lakh per month will be counted. The government will reimburse to employers up to Rs 3,000 per month for two years towards their EPFO contribution for each additional employee. The scheme is expected to incentivise additional employment of 50 lakh persons.

Also read: The Deep Crisis in the Informal Sector Is Still Keeping the Lid on Real Wages

Participation of women in the workforce

They also claim that they will facilitate higher participation of women in the workforce through setting up of working women hostels in collaboration with industry, and by establishing creches. In addition, the partnership will seek to organise women-specific skilling programmes, and promotion of market access for women Self-Help Group enterprises.

However, if that is all they plan to do for promoting women’s work, then the women of India, who are getting much better educated than 15 years ago, will continue to remain excluded. This is minimalist approach to promoting female Labour Force Participation Rate. India’s women deserve better.

Skilling programme

The FM announced a new centrally sponsored scheme for skilling in collaboration with state governments and industry. Twenty lakh youth will be skilled over a five-year period. A thousand Industrial Training Institutes will be upgraded. Course content and design will be aligned to the skill needs of industry, and new courses will be introduced for emerging needs.

There is nothing new about this kind of effort. It has been tried before. Let us remember that there are over 2,500 public sector ITI and another 12,000 private ones. Upgrading 1,000 of about 15,000 is a drop in the ocean. More importantly, upgrading alone is not good enough. The foundational problem with India’s skill development programmes for 15 years has been that they have been government driven, and government financed and managed. They have very little industry engagement. We wait to see what form industry engagement takes this time around. Under UPA too, Industrial Management Committees were created across some reformed ITI in public sector, with little to show for it.

Skilling loans

The Model Skill Loan Scheme will be revised to facilitate loans up to Rs 7.5 lakh with a guarantee from a government promoted fund. This measure is expected to help 25,000 students every year, according to the finance minister. This is merely part of the effort to increase student loans. For helping our youth who have not been eligible for any benefit under government schemes and policies, the finance minister has announced support for loans upto Rs 10 lakh for higher education. E-vouchers for this purpose will be given directly to one lakh students every year for annual interest subvention of 3% of the loan amount.

The foundational problem with India’s skill development strategy, regardless of regime, and regardless of the five pillars that form that strategy, is that they are supply driven, and not demand driven. The countries that have run successful skill development programmes (German, China, South Korea, and Singapore) all have very demand driven, as they are industry driven, programmes. Industry also tends to finance most of that effort, as they are the ultimate beneficiaries of the outcome. Unless India’s efforts become demand-driven they are unlikely to be show much improvement, in either quantitative or qualitative terms. The reasons are straightforward. 

MSME support

The EPFO schemes for job creation are all for the organised sector, and that too for formalisation of existing jobs. There is a new welcome focus in the budget on MSMEs, that could, however, actually create jobs.

This budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing. It claims to have formulated a package covering financing, regulatory changes and technology support for MSMEs to help them grow and also compete globally, as mentioned in the interim budget.

The FM announced the following specific measures.

Credit guarantee scheme for MSMEs in the manufacturing sector

For facilitating term loans to MSMEs for purchase of machinery and equipment without collateral or third-party guarantee, a credit guarantee scheme will be introduced. The scheme will operate on pooling of credit risks of such MSMEs. A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to Rs 100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance.

New assessment model for MSME credit

Public sector banks will build their in-house capability to assess MSMEs for credit, instead of relying on external assessment. They will also take a lead in developing or getting developed a new credit assessment model, based on the scoring of digital footprints of MSMEs in the economy.This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. That will also cover MSMEs without a formal accounting system.

Credit support to MSMEs during stress period

The finance minister also announced a new mechanism for facilitating continuation of bank credit to MSMEs during their stress period. While being in the ‘special mention account’ (SMA) stage for reasons beyond their control, MSMEs need credit to continue their business and to avoid getting into the NPA stage. Credit availability will be supported through a guarantee from a government promoted fund.

Mudra loans

The limit of Mudra loans will be enhanced to Rs 20 lakh from the current Rs 10 lakh for those entrepreneurs who have availed and successfully repaid previous loans under the ‘Tarun’ category.

It is another matter that the Mudra loans have created only poor quality jobs, if any. The number and share of self employed in the workforce has grown in the last six years from 52 to 57%; this is the worst form of employment, with the lowest level of earnings, according to PLFS data. The majority of loans are in the ‘less than Rs 50,000’ category, and in fact, the average loan size here is only Rs 27,000; not much employment can be created from it.

Enhanced scope for mandatory onboarding in TReDs

For facilitating MSMEs to unlock their working capital by converting their trade receivables into cash, she proposed to reduce the turnover threshold of buyers for mandatory onboarding on the TReDS platform from Rs 500 crore to Rs 250 crore. This measure will bring 22 more Central Public Sector Enterprises and 7,000 more companies onto the platform. Medium enterprises will also be included in the scope of the suppliers.

SIDBI branches in MSME cluster

SIDBI will open new branches to expand its reach to serve all major MSME clusters within three years, and provide direct credit to them. With the opening of 24 such branches this year, the service coverage will expand to 168 out of 242 major clusters.

MSME units for food irradiation, quality and safety testing

Financial support for setting up of 50 multi-product food irradiation units in the MSME sector will be provided. Setting up of 100 food quality and safety testing labs with NABL accreditation will be facilitated.

E-Commerce export hubs

To enable MSMEs and traditional artisans to sell their products in international markets, e-commerce export hubs will be set up in public-private-partnership (PPP) mode. These hubs, under a seamless regulatory and logistic framework, will facilitate trade and export related services under one roof.

Measures for promotion of manufacturing and services: Internship in top companies

As part of the Prime Minister’s package, government will launch a comprehensive scheme for providing internship opportunities in 500 top companies to 1 crore youth in five years. They will gain exposure for 12 months to real-life business environment, varied professions and employment opportunities. An internship allowance of Rs 5,000 per month along with a one-time assistance of Rs 6,000 will be provided. Companies will be expected to bear the training cost and 10 per cent of the internship cost from their CSR funds.

This is by far the least likely to succeed. Large companies in the private sector have been unwilling to take apprentices. When they have not been hiring workers in the recent past, it is a bit unlikely that they can now be merely exhorted to take on interns (another name for apprentices) only because the government is offering them a stipend. Most large companies do not have the physical or human resource infrastructure to undertake training; setting those up itself will cost money, and it is not clear why they will do that. We will wait to see how they respond.

Santosh Mehrotra is an independent economist.