📰 Government slashes rates on small savings schemes by up to 1.1%
Move comes after retail inflation breaches 6% mark
•The government has sharply slashed the rates on all small savings instruments for the first quarter of 2021-22, bringing the rate of return on the Public Provident Fund down from 7.1% to 6.4% and effecting cuts ranging from 40 basis points (0.4%) to 110 basis points (1.1%) through a notification on Wednesday.
•The sharpest cut announced earlier was seen in the quarterly interest rate paid on one-year term deposits, from 5.5% in the January to March quarter to 4.4% in this quarter. The rate of return on the Senior Citizen Savings’ Scheme was cut from 7.4% to 6.5%, while the Sukanya Samriddhi Account Scheme’s return was reduced from 7.6% to 6.9%.
•While the government resets the interest rate on small savings instruments every quarter, this round of rate cuts assume significance as retail inflation has been breaching the 6% mark and the government is keen to lower interest rates to make it easier to execute its borrowing plans for the year and spur growth.
Major impediment
•The government plans to borrow ₹12.05 lakh crore in 2021-22, on the back of a record gross borrowing of ₹13.71 lakh crore in 2020-21. High small savings rates have been cited by the central bank as a major impediment in ensuring policy rate cuts get transmitted into the banking system.
•“After keeping rates largely unchanged over the last few quarters, the government has effected a substantial lagged revision in small savings rates, mirroring the moderation in interest rates in the wider economy seen over the last year,” said Aditi Nayar, principal economist at ICRA Limited.
•The interest rate paid on National Savings Certificate and Kisan Vikas Patra were also reduced significantly, from 6.8% to 5.9%, and from 6.9% to 6.2%, respectively. Consequently, the Kisan Vikas Patra, which used to mature in 124 months, will now mature in 138 months.
•While savings deposits earned the lowest rate of 4% till now, that return has now been further slashed to 3.5%. Among time deposits, the return on five year deposits has been reduced from 6.7% to 5.8%. Five-year recurring deposits, whose interest is compounded quarterly, will get a return of 5.3% instead of 5.8% in the previous quarter.
•For savers, the option with the highest returns at this point is the Sukanya Samriddhi Account Scheme, followed by the Senior Citizens’ Savings Schemes and the Public Provident Fund.
*Update: In a tweet on early Thursday, April 1, 2021, Finance Minister Nirmala Sitharaman said that the order has been withdrawn. “Orders issued by oversight shall be withdrawn,” she said in a tweet, stating that rates will continue at the same level as last quarter. The development assumes significance with five State assembly polls are underway. A detailed report on the Ministry's latest order is awaited.
Decision based on rising prices, industry’s need for the specific products: Pakistan Finance Minister
•Partially reversing a two-year old decision to suspend all trade with India, Pakistan announced on Monday that it would allow the import of cotton and sugar from across the border. The decision follows the Line of Control (LoC) ceasefire announced by India and Pakistan in February, and a number of moves seen as part of a larger dialogue process to de-freeze ties.
•Addressing the media at the end of a Cabinet meeting that cleared the two proposals from Pakistan’s Commerce Ministry, Pakistan’s newly appointed Finance Minister Hammad Azhar said however that the decision was driven by rising prices and Pakistani industry’s need for the specific products.
•“We have allowed the import of sugar, but in the rest of the world too, sugar prices are high because of which imports are not possible. But in our neighbouring country — India — the prices of sugar are much less as compared to Pakistan, so we have decided to reopen sugar trade with India up to 0.5 million tonnes for the private sector,” Mr. Azhar said, adding that there was also high demand for cotton and cotton yarn from India, especially from Pakistani Small and Medium Enterprises (SME) due to increased textile exports but a reduced crop in 2020.
•The decision to cancel trade was taken by the Imran Khan government on August 9, 2019, days after the government amended Article 370 and reorganised Jammu and Kashmir.
•India’s Ministry of External Affairs did not respond to the development, nor did it respond to questions on whether it was considering any complimentary steps. While India had not banned trade with Pakistan, it suspended cross-LoC trade and withdrew Most Favoured Nation (MFN) status to Pakistan in the wake of the amended Article 370 and reorganised Jammu and Kashmir
•Experts said that the move by Pakistan, which follows the granting of sports related visas by India after a gap of three years, scheduling a much-delayed meeting of the Indus Water Commissioners in Delhi in March, peace at the LoC after more than 5,000 ceasefire violations last year, as well as the exchange of salutary messages between Prime Minister Narendra Modi and PM Khan, has raised hopes for further measures.
•“The decision by Pakistan to allow trade in the selected items will gradually lead to restoration of normalcy in India-Pakistan trade,” said Afaq Hussain, Director, Bureau of Research on Industry and Economic Fundamentals, that studies India-Pakistan and cross-LoC trade.
•“It will help Pakistan’s domestic manufacturers to reduce their cost of production, which had increased because of the trade ban from India. The garment manufacturing industry in Pakistan will be a key beneficiary while it is also going to benefit manufacturers and exporters in India along with the stakeholders in trade, like truckers and service staff, in Punjab,” he added.
📰 Enter the peace process: On India’s role in Afghanistan
India should use its influence to ensure peace within Afghanistan and the wider region
•External Affairs Minister S. Jaishankar’s comment that India supports talks between the Afghan government and the Taliban signals a subtle shift in New Delhi’s approach towards the Afghan crisis. At the 9th Heart of Asia Conference in Tajikistan, he said India has been supportive of all efforts being made to “accelerate the dialogue” between the Afghan government and the Taliban, in a rare direct reference to the insurgent group. In the 1990s and 2000s, India was steadfastly opposed to any dealings with the Taliban. But its position seems to have evolved over the years. In 2018, when Russia hosted Afghan and Taliban talks, India had sent a diplomatic delegation to Moscow. In September 2020, at the intra-Afghan peace talks in Doha, Mr. Jaishankar was present at the inaugural session via a video link, reaffirming the long-held Indian position that any peace process should be Afghan-led, Afghan-owned and Afghan-controlled. His latest comments come close on the heels of a new peace push by the Joe Biden administration of the U.S. The Biden plan includes two key proposals — a unity transition government between the warring parties and a UN-led multilateral conference of envoys from India, China, Iran, Pakistan, Russia, and the U.S. India has supported the UN-led process, in an apparent climbdown from its earlier position, and now shown willingness to deal with the Taliban.
•The evolution of India’s position is in sync with the evolution of the reality in Afghanistan. The Taliban, no longer an untouchable force, control much of the country’s rural territories. The U.S. has already signed a deal with the Taliban, wherein American troops are scheduled to pull back from Afghanistan by May 1. China had long ago reached out to the Taliban. Russia has hosted talks between the two sides. European powers have also shown interest in sponsoring talks. So, India has to be more flexible and adapt to the new strategic reality. Since the fall of the Taliban, India has cultivated deep ties with the Afghan people and the government, with investments in multiple projects dealing with education, power generation, irrigation and other infrastructure development. The first batch of vaccines Afghanistan got was from India, in February. Recently, India signed an agreement to build the Shahtoot dam near Kabul. Thus, its economic, strategic and security ties could be disrupted if the Taliban were to take over. The question India faces, like the other stakeholders, is how to help Afghanistan end the violence without a total capitulation to the Taliban. India joining the peace process could strengthen the hands of the Afghan government, which is negotiating from a position of weakness. New Delhi should, using its regional clout as well as its deep ties with both the U.S. and Russia, strive for what Mr. Jaishankar called “double peace”, both inside Afghanistan and in the region.
📰 Still no recognition of the third tier
In the FC-15 proposals, the goal of fiscally empowering local governments to deliver territorial equity is still far away
•This article is a brief critique of the recommendations of the Fifteenth Finance Commission with regard to local governments. The primary task of the Union Finance Commission is to rectify the vertical and horizontal imbalances in resources and expenditure responsibilities between Union and States, which after the 73rd and 74th Constitutional Amendments includes the third tier of local governments. This Commission is the fifth after the incorporation of Part IX and Part IX-A to the Constitution which mandate the Union Finance Commission to supplement the resources of panchayats and municipalities on the basis of the recommendations of the State Finance Commission (another institution created by the Amendments). Now, nearly 2.5 lakh local governments and over 3.4 million elected representatives form the real democratic base of the Indian federal polity. Unlike the previous Commissions, the Fifteenth Finance Commission was in the background of the COVID-19 pandemic which reinforced the significance of local governments, gram sabha and other participatory institutions in containing the crisis and delivering social protection in India.
Higher vertical devolution
•While there are some critical lacunae in its recommendations regarding local governments, the Fifteenth Finance Commission has several positive aspects to be said in its favour. For one, the vertical devolution recommended to local governments is raised remarkably high. From a measly share of 0.78% of the divisible pool with an absolute sum of ₹10,000 crore by the Eleventh Commission, the Fifteenth Finance Commission raised it to 4.23% with a reasonably estimated amount of ₹4,36,361 crore. Compared with the Fourteenth Finance Commission there is a 52% increase in the vertical share. Even if we deduct the grant of ₹70,051 crore earmarked for improving primary health centres, the share is still an all-time high of 4.19%.
•Continuity and change should be the overarching salience of a transfer system, which is designed to build a viable third tier to Indian democracy. All the Commissions since the Eleventh Commission have tied specific items of expenditure to local grants and the Fifteenth Finance Commission has raised this share to 60% and linked them to drinking water, rainwater harvesting, sanitation and other national priorities in the spirit of cooperative federalism.
•However, it reduced the performance-based grant to just ₹8,000 crore — and that too for building new cities, leaving out the Panchayati Raj Institutions (PRIs) altogether. The performance-linked grants thoughtfully introduced by the Thirteenth Finance Commission earmarked 35% of local grants specifying six conditions for panchayats and nine for urban local governments and covered a wide range of reforms: from the establishment of an independent ombudsman to notifying standards for service sectors such as drinking water and solid waste management.
•The Fourteenth Finance Commission, however, cut the performance grant share to 10% for gram panchayats and 20% to municipalities with the conditionality that all local governments will have to show improvements in own source revenue. Municipalities are additionally required to publish service level benchmarks for basic services. The transformative potential in designing performance-linked conditionalities for improving the quality of decentralised governance in the context of indifferent states is missed.
Entry-level criterion
•An important recommendation of the the Fifteenth Finance Commission is the entry-level criterion to avail the union local grant (except health grant) by local governments (strictly speaking, it is performance-linked). For panchayats, the condition is online submission of annual accounts for the previous year and audited accounts for the year before. For urban local governments, two more conditions are specified: after 2021-22, fixation of minimum floor for property tax rates by the relevant State followed by consistent improvement in the collection of property taxes in tandem with the State’s own Gross State Domestic Product. It is not clear why gram panchayats (especially the affluent and semi-urban categories) are left out from this. Although Finance Commissions, from the Eleventh to the Fourteenth, have recommended measures to standardise the accounting system and update the auditing of accounts, the progress made has been halting. Therefore, the entry-level criteria of the Fifteenth Finance Commission are timely. The moot question is, will this bring about substantive changes? The Eleventh Finance Commission published the fiscal data of all tiers of panchayats and municipalities in its report. But the data proved defective. The Twelfth Finance Commission did not publish any local fiscal data. The Thirteenth Finance Commission published data online and some researchers did use them. Unlike the previous Commissions, the Fourteenth Finance Commission conducted a sample survey covering 15% gram panchayats, 30% block panchayats and all district panchayats besides 30% municipalities, presumably to ensure quality in canvassing data. The results too were not published. Interestingly, neither the Fifteenth Finance Commission nor the earlier counterparts took pains to examine how and where the financial reporting system has failed. Without reliable data can you ensure good governance?
•The Fifteenth Finance Commission, which generally takes care to go into details (see recommendations on health care, air pollution etc.) and is well aware of India’s regional heterogeneity, failed to carry policy choices forward systematically. Articles 243G, 243W and 243ZD read along with the functional decentralisation of basic services like drinking water, public health care, etc., mandated in the Eleventh and Twelfth schedules demand better public services and delivery of ‘economic development and social justice’ at the local level. While the grants to the primary health centres must be acknowledged as a great gesture, a good opportunity to ensure comparable minimum public services to every citizen irrespective of her choice of residential location has not been taken forward in an integrated manner.
Equalisation principle
•It may be relevant to recall that the Alma-Ata declaration of the World Health Organization (1978) which outlined an integrated, local government-centric approach with simultaneous focus on access to water, sanitation, shelter and the like. The Fifteenth Finance Commission claims that it seeks to achieve the “desirable objective of evenly balancing the union and the states”. It is not clear why there is no recognition of the third tier in this balancing act. Although the Fifteenth Finance Commission outlines nine guiding principles as the basis of its recommendation to local governments, there is no integrated approach (in contrast to the recommendations of the Thirteenth Finance Commission). It is forgotten that public finance is an integrated whole. That the tasks of the Union Finance Commission were broadened as part of the decentralisation reforms (280(3) (bb) and (c)) is a firm recognition of the organic link of public finance with the development process at all tiers of government. Although the Fifteenth Finance Commission stresses the need to implement the equalisation principle, it is virtually silent when it comes to the local governments.
•It is equally important to note that in the criteria used by the Fifteenth Finance Commission for determining the distribution of grant to States for local governments, it employed population (2011 Census) with 90% and area 10% weightage the same criteria followed by the Fourteenth Finance Commission. While this ensures continuity, equity and efficiency criteria are sidelined. Equity is the foundational rationale of a federation. Abandoning tax effort criterion incentivises dependency, inefficiency and non-accountability.
•In sum, if decentralisation is meant to empower local people, the primary task is to fiscally empower local governments to deliver territorial equity. We are far from this goal.
📰 A step that enhances cooperative federalism
The amendments to the GNCTD Act define, without doubt, who represents the ‘Government’ in the unique case of Delhi
•On January 17, 2017, the Lieutenant Governor of Delhi wrote to the Speaker of the Legislative Assembly of Delhi stating that the President of India had considered the Delhi Netaji Subhas University of Technology Bill, 2015 and directed that it be returned to the Legislative Assembly of Delhi.
•One of the reasons stated for the return was the inconsistent definition of the term “Government.” In June 2015, when the Legislative Assembly of Delhi had passed the Delhi Netaji Subhas University of Technology Bill and sent it for the President’s assent, it had defined the term “Government” as the “Government of the National Capital Territory of Delhi.”
Formalises the definition
•After the Bill was returned, the Delhi Assembly sent a modified version of the Bill for the President’s assent where the definition of “government” was described as: “Lieutenant Governor of NCT Delhi appointed by the President.”
•Last week, both Houses of Parliament voted overwhelmingly in favour of the amendments to the Government of the National Capital Territory (NCT) of Delhi Act.
•The aim of the amendments were to clear such ambiguities in the roles of various stakeholders and provide a constructive rule-based framework for stakeholders within the Government of Delhi to work in tandem with the Union Government. One of the changes made was to bring consistency in the definition of the term “Government”. In this instance, the government was only formalising the definition of a term that the Delhi Assembly itself had already accepted. This rule-based framework is especially important given that Delhi is also India’s national capital and the symbolism that comes with being the seat of the sovereign power.
Partners not adversaries
•The National Democratic Alliance Government, under the leadership of the Prime Minister, has completely transformed Centre-State relationships. At the core of this transformation is the outlook that States — and by extension the Chief Ministers of the States — are partners in the national agenda, and hence must have platforms and frameworks available to work together.
•In earlier governments we saw State Chief Ministers queuing up in front of unelected officials in the erstwhile Planning Commission supplicating for grants. The creation of NITI Aayog, the establishment of the Goods and Services Tax Council, the restructuring of central schemes and accepting the Fifteenth Finance Commission’s recommendations for greater devolution are clear examples of the Union Government viewing States as equal partners.
A legislative right
•This partnership requires an environment of trust and mutual co-operation. A necessary condition for such an environment is the distinct delineation of roles and responsibilities, the removal of ambiguities, and the definition of a clear chain of command among stakeholders. In this regard, it was important to define, without doubt, who represents the Government in the unique case of Delhi.
•On December 20, 1991, Home Minister S.B. Chavan tabled the Constitution Amendment Bill in the Lok Sabha to add Articles 239AA and 239AB into the Constitution that paved the way for the creation of a Legislative Assembly and a Council of Ministers for the National Capital Territory (NCT) of Delhi. This amendment passed in 1991 empowers Parliament to enact laws supplementing constitutional provisions. Similarly, the Government of NCT Delhi also has the power to enact laws regarding matters specified under the State list and Concurrent list, to the extent these are applicable to a Union Territory.
•It becomes important to ensure there is complete synchronisation between the Union Government and the Government of NCT Delhi and that there is no encroachment in legislative matters. In the case of the Government of NCT Delhi, it has no legislative competence in matters pertaining to the police, public order, and land. The risk of incremental encroachments on these subjects in the legislative proposals under consideration of the Delhi Legislative Assembly can have severe ramifications for Delhi.
•Thus, for the Opposition to portray a government exercising its constitutional responsibilities as an undemocratic act shows a wilful lack of understanding.
•The national capital hosts the country’s legislature, the seat of the Union Government, the judiciary, diplomatic missions, and other institutions of national importance. It deserves smooth functioning and cannot be subject to misadventures arising from the ambiguities in the roles and responsibilities of its stakeholders.
A functioning relationship
•While some in the Opposition have accused the government of undermining the federal structure of the country, others have painted an even darker picture proclaiming the death of democracy itself. Nothing can be farther from the truth. Making Delhi Assembly rules consistent with the rules of the Lok Sabha or ensuring that the opinion of the Lieutenant Governor is taken can only ensure clarity and foster an environment of co-operation. In no manner do these amendments dilute or affect the powers of the Delhi Legislative Assembly. Various court judgments have also observed the ambiguities and lack of clarity. The people of Delhi deserve a functioning government, and the amendments made aid in creating such an environment.
📰 Re-examining the EPF tax rules
The recent policy changes are flawed and take a myopic view of the interests of beneficiaries
•Gene Roddenberry’s Star Trek had a wonderful concept, one called ‘Prime Directive’. It required outer space explorers from Earth to avoid interference with the affairs of civilisations they came across. This ensured natural progression instead of a nudged progression, biased by Earth sensibilities. Events over the past few years in the Employees’ Provident Fund programme can make one think that policymaking should take a ‘Prime Directive’ break in affairs related to the EPF.
•Take, for instance, the recent amendments to tax regulation affecting EPF. For long, taxation surrounding the EPF was simple to understand and easy to execute. If one contributed more than the limit prescribed under Section 80C of the Income Tax Act, they did not get a tax break on the excess contribution. Earnings on contributions rarely suffered taxation since tax laws pegged tax-free earnings to rates higher than that of interest rate on the EPF. One paid tax on their corpus only if they withdrew it within five years of commencing contribution. Rightly so, since the EPF is a retirement product. This taxation framework incentivised employees to use the EPF as their primary retirement saving. Indeed, for many, the EPF remains the sole ‘risk-free’ retirement savings mode given its design, asset allocation and the ‘government-run’ tag.
‘HNI’ individuals
•This will change for many because of the new tax regulation that, in effect, labels one “a high net worth individual (HNI) who is misusing EPF” if one contributes more than ₹2.5 lakh per annum to the EPF. The limit is ₹5 lakh in cases where employers do not make contributions to the provident fund. Indeed, the day after the announcement of this change, the media was filled with statistics of a staggering twenty members that had over ₹800 crore in their EPF accounts — just twenty out of the several crore accounts overseen by the Employees’ Provident Fund Organisation (EPFO). The move should be given a rethink because it is flawed in principle and difficult to administer.
Regressive view
•The basis of this new tax law reeks of a 1970s’ Bollywood-style narrative where the affluent do only evil and need to be punished. The ‘rich man’s pension vs. poor man’s pension’ divide, that we have seen earlier in policymaking in case of superannuation plans (the Fringe Benefit Tax and the perquisite tax on superannuation contributions), and now in the case of EPF, is regressive. It assumes that the government knows what is adequate for an individual on retirement.
•We live in an era of evolving post-retirement aspirations, medical cost inflation, volatile interest rate cycles, credit busts and minimal choices for post-retirement investments. The best bet for employees, then, is to maximise savings via statutory and voluntary contributions. Intuitively, most employees who start to contribute large sums of money to their retirement plan do so when there are surpluses — when mortgages have been paid off and children’s education is funded. This occurs closer to retirement. So, the need to catch up is significant.
•While other investment products have grown in popularity, one does realise that for most working Indians, the EPF typifies safety with governance. For the government, therefore, to decide on a common threshold of adequacy is incorrect — it suffers the flaws of a one-size-fits-all approach.
•Furthermore, the ‘misuse’ that was used to justify the imposition of the tax is difficult to comprehend. The EPF is solely a payroll deduction and cannot be contributed in any other manner. It, therefore, suffers taxation for amounts exceeding the limit prescribed in Section 80C of the Act. This last point makes the new clause bring the EPF to the borders of double taxation.
•Further, close to 65% of EPF is invested in government securities, with the rest being invested largely in PSU bonds and the equity index. Earnings are made available to the employee via an interest credit mechanism. Despite the stickiness of these interest rate declarations and their often being higher than market rates, it is certain that the government does not subsidise this interest rate credit.
•Unlike the Employees’ Pension Scheme (EPS), the EPF remains a subsidy-free, pay-what-is-earned retirement fund. The flaws it suffers are related to design and administration and are equally applicable to all segments of its members — the affluent and not-so-affluent. It is accessible to employees on permanent cessation of employment and, thanks to the Universal Account Number (UAN) regime, cannot be accessed easily before retirement. Given all this, the argument of misuse of the EPF by the higher-salaried segment is incorrect.
•In addition to flaws in the principle, there can be difficulties in the administration of the new tax rule. Various interpretative inadequacies surrounding the applicability to EPF, especially in light of the changed threshold from ₹2.5 lakh to ₹5 lakh, remain. It is also unclear if the interest on such excess contributions is taxed once during the year of contribution or throughout the term of investment in EPF. The mechanism of tax communication from the EPFO to the member also remains uncertain. One assumes that the systems at the EPFO will need changes and such ongoing taxation of the annual interest rate credit is a first-time measure for the organisation.
The bigger picture
•In a wider context, it is important that policymakers reflect on what the EPF has come to signify. While pension funds are seen by governments in myriad policy contexts, they should remain, foremost, the retirement funds of their beneficiaries.
•Regulations governing contributions, taxation, investments, administration and benefits should be made in the interest of the beneficiary. But it may seem that other imperatives dominate the agenda in pension policymaking in India. Hence, the resultant outcomes are, at best, sub-optimal from a beneficiary point of view. An example of this is how regulation has obsessed over the coverage of lower-income employees, who have often preferred current compensation over deferred compensation such as retirement funds, while tax laws frown upon other segments of employees increasing voluntary provident fund.
•Some of these re-looks are important to execute over time, but an immediate rollback of the tax rules will demonstrate the will of the policymakers to encourage retirement savings. And then, a period of ‘Prime Directive’ adoption will help ‘energise’ the vision of a pensioned society.
