Private projects give investment boost in Q2, Digital banking units dedicated to nation, SpaceX Crew-4 astronauts splash down, Will Electoral Bonds Reveal The Source Of Funds, SC Asks Centre

Private projects give investment boost in Q2

India’s private sector investment announcements soared 66% between July and September to nearly ₹5.7 lakh crore, compared to the first quarter of 2022­ 23, even as there was a worrying dip in the execution rate for outstanding projects already committed to.

• (Q1) of the year had reported a 20.5% sequential dip in new investments,  second quarter (Q2) was boosted by super mega projects like Vedanta’s ₹1.54 lakh crore plans to produce chips in Gujarat, driving a sharp 41% jump in investment projects.
• Projects Today’s latest Projex survey also shows a sharp 87% spike, quarter on quarter, in manufacturing sector investments at ₹4.34 lakh crore, which accounted for more than 56% of all new investment outlays in Q2
• Though the value of investments is up, the number of new investment projects dropped by about 4.9% from 5,251 projects between April and September 2021 to 4,996 in the same period this year.

Reasons for low Private Investment:

• There are multiple reasons for the decline in investments – supply chain problems, land acquisition problems, lack of environmental and other clearances, lack of promoter interests, tough labour laws and other regulatory burdens among others.
• However, the biggest reason remains lack of funds, as a CMIE survey reports. The main source of funds, bank credit, has not been very reliable in the recent few years. Credit offtake by key sectors in the economy has been declining.
• In short, banks are unwilling to lend, and the monetary policy transmission mechanism is not working in India. The main reason for declining credit growth is the balance sheet problem – the situation where both banks and private firms have stressed balance sheets.
• Nearly 17 per cent of the entire bank loans in India are stressed, a significant share of which may not be repaid, which explains the reluctance of banks to lend. Nearly 40 per cent of debt is owned by overleveraged corporates who are unable to make interest payments.
• Another problem with large government borrowing is that it does not leave any room for private borrowing and investment.
• Of the three sectors of the economy – government, business, and households – it is only the last that has a positive savings rate. The household sector financial savings is about 7 per cent of GDP, the combined fiscal deficit of the states and union government is well above that figure. PSU borrowings require about 1.5 per cent of GDP in addition to government’s borrowings. This leaves no room for private sector borrowing, which explains the lack of funds and low investment rates.

Private Investment and GDP Growth:

• Conceptually, investment links the present to the future by moving the economy to a higher growth trajectory through higher investment. As evidence suggests, private investment is an important component of aggregate demand that contributed more than 73 per cent to the total investment and accounted for around 22 per cent of the GDP during the period 2017-2020.
• Thus, private investment is the key to sustaining GDP growth momentum. The financial performance of the private corporate sector in Q2-FY-2022 suggests a steady growth in sales but investment indicators reflect subdued activity.
• A historical view of data of real GDP and real investment represented by Gross Fixed Capital Formation (GFCF) for the period 1951-2020, reveals that there is a co-movement between these two.

• Further, during the same period, the share of private sector investment in GDP is higher than the share of public sector investment in GDP. This is because public investment is guided by budgetary resource allocation.
• During the pre-pandemic period, due to hard budget constraints and because of its discretionary nature there, has been a lower allocation of investment spending.

However, during the pandemic, the Union Budget has enhanced the capital expenditure allocations substantially to boost public investment at the cost of higher fiscal deficit and debt relative to GDP. These higher allocations could facilitate private investment as it will play a complementary role to private investment.

Capacity utilisation

• A key factor influencing the private investment in the manufacturing sectors is the level of capacity utilisation (CU). Conceptually, CU is ratio of actual output to potential output. Potential output capacity critically depends upon available capital and labour to produce maximum output.
• The order books, inventories and capacity utilisation survey (OBICUS) of RBI presents the level of CU. Higher CU, accompanied by order book growth, signals robust demand conditions in the economy. According to the RBI of February 2022: “at the aggregate level, CU for the manufacturing sector recovered to 68.3 per cent in Q2:2021-22 after the waning of the second wave of Covid-19 pandemic in the country, which had caused plummeting of CU to 60.0 per cent in the previous quarter.”
• Thus, capacity utilisation is at a lower level than the pre-pandemic level of around 75 per cent. CU functioning below the long-term average reflects both demand and supply constraints

Way forward:

• It is true that the private sector makes business decisions for investment to earn profits. It is important to note that capital goods have a long gestation lag. Investment decisions critically hinge on
  • Level of output produced by new investment,
  • Taxation system,
  • Cost of credit reflected in lower interest rate regime,
  • Timely delivery of credit and
  • Business expectations of the domestic and global economy.
• Thus, a positive sentiment is warranted to boost investment which should be guided by “spontaneous optimism rather than mathematical expectation.”
• The government must revise specific schemes, designed to augment production for exports, to suit the changing global environment and ensure proper functioning. Apart from infrastructure development, which reduces trade cost and improves competitiveness, the government must work on trade facilitation that includes logistics.
• There is an urgent need to activate stalled projects and clean up balance sheets of corporate firms and the banking sector to revive the investment cycle. It is important to revive overall investment — especially in infrastructure —- for balanced growth.
• The thrust for private investment in the budget continues with the announcement of extending the credit lines by INR 50,000 crore to a total cover of INR 5 lakh crore for the worst-hit sectors during the pandemic- the hospitality and the travel sector.
• Recognising startups as the key drivers of growth, Budget 2022-23 provides an impetus to entrepreneurial ventures by securing an enabling startup ecosystem, with an announcement of extension of the tax exemption to startups by another financial year; in addition to the previously announced three years tax exemption. To ensure an upbeat animal spirit, Budget 2022-23 announced an increase in the outlay for Aatmanirbhar Bharat Yojana by about 28 per cent vis-à-vis Budget 2021-22.
• The need of the hour is increasing private investment in the economy for India to remain on a high growth trajectory.

 

Digital banking units dedicated to nation

Prime Minister on 16 October 2022 dedicated 75 digital banking units to the nation, taking forward an announcement that was made in the 2022-23 Union Budget by Finance Minister Nirmala Sitharaman. The digital banking units will “further financial inclusion” and “significantly improve banking experience for the citizens”.

What are these DBUs?

• In April this year, the Reserve Bank of India (RBI) announced the guidelines for DBUs, following the report of a working group of the Indian Banks Association (IBA).
• A digital banking unit is a specialised fixed point business unit or hub, housing a certain minimum digital infrastructure for delivering digital banking products and services as well as servicing existing financial products and services digitally in self-service mode at any time.
• Commercial banks (other than regional rural banks, payment banks and local area banks) with past digital banking experience are permitted to open DBUs in tier 1 to tier 6 centres, unless otherwise specifically restricted, without having the need to take permission from the RBI in each case.
• The services include saving bank accounts under various schemes, current accounts, fixed deposit and recurring deposit accounts, digital kits for customers, mobile banking, Internet banking, debit cards, credit cards, and mass transit system cardss, digital kits for merchants, UPI QR codes, BHIM Aadhaar and point of sale (PoS).
• Other services include making applications for and onboarding customers for identified retail, MSME or schematic loans. This may also include end-to-end digital processing of such loans, starting from online application to disbursal and identified government-sponsored schemes that are covered under the national portal.

What was the initial announcement?

1. In the Budget for 2022-23, the Finance Minister said: “In recent years, digital banking, digital payments and fintech innovations have grown at a rapid pace in the country.
2. The government is continuously encouraging these sectors to ensure that the benefits of digital banking reach every nook and corner of the country in a consumer-friendly manner.
3. Taking forward this agenda, and to mark 75 years of our independence, it is proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks”.

 

SpaceX Crew-4 astronauts splash down

NASA’s SpaceX Crew-4 astronauts, who spent 170 days in orbit aboard the Dragon spacecraft, completed the agency’s fourth commercial crew mission to the International Space Station by safely splashing down the coast of Jacksonville, Florida.

• The Crew-4 mission launched on 27 April 2022 on Falcon 9 rocket from NASA’s Kennedy Space Center in Florida.
• Hines, Lindgren, Watkins, and Cristoforetti travelled 72,168,935 miles during their mission, spent 170 days aboard the space station, and completed 2,720 orbits around Earth.
• Throughout their mission, the Crew-4 astronauts contributed to a host of science and maintenance activities and technology demonstrations.
• Crew-4 continued work on investigations documenting how improvements to the space diet affect immune function and the gut microbiome, determining the effect of fuel temperature on the flammability of a material, exploring possible adverse effects on astronaut hearing from equipment noise and microgravity, and studying whether additives increase or decrease the stability of emulsions.
• The astronauts also investigated microgravity-induced changes in the human immune system similar to ageing, tested a novel water-reclamation membrane, and examined a concrete alternative made with a material found in lunar and Martian dust.
• The spacecraft, named Freedom by Crew-4, will return to Florida for inspection and processing at SpaceX’s Dragon Lair, where teams will examine the spacecraft’s data and performance throughout the flight.
• The Crew-4 flight is part of NASA’s Commercial Crew Program and its return to Earth follows on the heels of NASA’s SpaceX Crew-5 launch, which docked to the station on 6 October 2022, beginning another science expedition.

Will Electoral Bonds Reveal The Source Of Funds, SC Asks Centre

Why in the news?

• The Supreme Court resumed hearing the case on October 14 after the previous hearing on March 26, 2021.
• A group of petitions submitted by non-governmental organizations Association for Democratic Reforms, Common Cause, and Communist Party of India (Marxist) against the electoral bonds program was considered by a bench of Justices BR Gavai and BV Nagarathna.
• The Supreme Court asked the government whether the electoral bonds’ system reveals the source of money pumped in to fund political parties.
• The Supreme Court announced that it would decide on December 6 whether to submit the arguments against the laws allowing this kind of funding to a larger court.

What are electoral bonds?

• Election bonds are interest-free bearer instruments that were introduced in the 2017 Union Budget and are used to make donations to political parties in an anonymous manner.
• A bearer instrument does not carry any information about the buyer or payee and the holder of the instrument (which is the political party) is presumed to be its owner.
• The bonds are only permitted to be offered by the State Bank of India (SBI), and they are sold in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh, and Rs 1 crore.
• The bonds are available for donors to buy and then give to the party of their choice.
• The party can then cash the bonds through its verified account within 15 days.
• SBI deposits these into the Prime Minister’s Relief Fund if a party hasn’t encashed its bonds within 15 days.

Who is eligible to buy electoral bonds?

• A citizen of India or a body incorporated in India will be eligible to purchase the bond.
• A political party must be registered under Section 29A of the Representation of the People Act, 1951 (43 of 1951) and have received at least 1% of the votes cast in the most recent general election for the House of People or the State’s Legislative Assembly in order to be eligible to receive Electoral Bonds.
• A qualifying political party may only redeem the electoral bonds through a bank account with the authorized bank.

What are the criticisms against these bonds?

• Lack of transparency: The electoral bonds scheme is criticized for doing the exact opposite of what it was intended to do, which was to increase transparency in funding elections.
• Anonymity: According to some, electoral bonds’ anonymity only applies to the general people and the opposing parties.
• Such bonds are sold through a government-owned bank State Bank of India (SBI), which gives the government access to information about the financiers of its adversaries.
• The scheme has an impact on the fundamental notion of free and fair elections guaranteed by Article 324 of the Constitution.
• Denominations: Election-related bonds were introduced with the goal of facilitating easy funding of political parties by the general public, however, more than 90% of the bonds issued have been of the highest denomination (Rs 1 crore).
• Corporate Funding: Additionally, there was a limit on the sum of money that a firm may donate to a political party until the electoral bonds program was established. However, critics claim that after changing the Companies Act, the government abolished this prohibition, enabling corporate India to receive limitless funding.

Kamikaze drones allegedly deployed by Russia

Ukraine’s capital region was struck by Iranian-made kamikaze drones early on 14 October 2022. Three drones struck the small town of Makariv, situated west of the Ukrainian capital Kyiv. These kamikaze drones are not new, and have also been supplied by the US to Ukraine in its ongoing war with Russia.

What are Kamikaze drones?

1. These are small unmanned aircraft packed with explosives that can be flown directly at a tank or a group of troops that are destroyed when it hits the target and explodes.
2. The name comes from the World War 2 era’s feared Japanese kamikaze pilots, who conducted suicide attacks by intentionally crashing their explosive filled aircraft into enemy targets.
3. The modern drone versions have the capability of surpassing traditional defences to strike their targets and are also cheaper than their larger counterparts.
4. The small lethal drones are difficult to detect on radar, and through the use of facial recognition, can be programmed to hit targets without human intervention.

Which countries have such drones?

1. Some countries have admitted to using such armed drones, while others have been accused of utilising them to carry out covert attacks.
2. According to the US military, Iranian-backed militias have used small drones in 10 attacks on US bases in Iraq this year.
3. Azerbaijan had used small Turkish-made drones against the Armenian military in the last few years, shifting the prolonged stalemate over a disputed enclave decisively in Azerbaijan’s favour.
4. There have been also multiple occasions where Russia has used such suicide drones to launch attacks in Ukraine following their invasion. Iranian-backed Houthi rebels also used them to blow up Saudi oil facilities in 2019.
5. Although the US Kamikaze might be the most advanced in this class of drones, Russia, China, Israel, Iran and Turkey all have some versions of it.