GS-III: Land Degradation Neutrality

Context

Union Environment Ministry has committed to rejuvenating 50 lakh hectares (5 million) of degraded land between 2021 and 2030. A Centre for Excellence would be set up in Dehradun for land degradation neutrality.

Why such a move?

• India faces a severe problem of land degradation, or soil becoming unfit for cultivation. About 29% or about 96.4 million hectares are considered degraded.
• The State of India’s Environment report, 2017 calculates that nearly 30 per cent of India is degraded or facing desertification. This figure touches 40 to 70 per cent in eight states—Rajasthan, Delhi, Goa, Maharashtra, Jharkhand, Nagaland, Tripura and Himachal Pradesh.

Land Degradation Neutrality

Land degradation neutrality (LDN) is a condition where further land degradation (loss of productivity caused by environmental or human factors) is prevented and already degraded land can be restored.

Benefits of Land Degradation Neutrality

• As land is fixed in quantity, there is ever-increasing competition to control land resources and capitalize on the flows of goods and services from the land.
• LDN represents a paradigm shift in land management policies and practices.
• It is a unique approach that counterbalances the expected loss of productive land with the recovery of degraded areas.

India’s Initiative

• This January, India became part of the “Bonn Challenge”, a global effort to bring 150 million hectares of the world’s deforested and degraded land into restoration by 2020, and 350 million hectares by 2030.
• India’s pledge is one of the largest in Asia.
• Schemes such as the Pradhan Mantri Fasal Bima Yojana, Soil Health Card Scheme, Soil Health Management Scheme and Pradhan Mantri Krishi Sinchayee Yojana are seen as prongs to tackle this land degradation.

GS-III: It’s time for a direct tax regime that’s growth-focused and fair.

CONTEXT

India overhauled its indirect tax system with the introduction of goods and services tax (GST). It now has to do the same with the direct tax system.

Background

The task force on the direct tax code (DTC) submitted its final report to the finance minister. The proposed new code will replace the Income-tax Act of 1961.

DTC – what it has to say about direct taxes

• The report says that the direct tax system is designed to improve the efficiency, equity, and effectiveness of the tax system.
• A good tax system has to promote rather than hinder economic activity, aid economic equality rather than inequality, and be easy rather than complicated to administer.
• The task force argued that high tax cost on return on equity inhibits private sector investment.
• They suggested that a sharp reduction in the corporate tax rate can substantially reduce the tax cost on equity. This will also eliminate the bias in favour of debt.
• This will enable the revival of private sector investment and reduce bankruptcy risk.
• A lower tax on capital could increase inequality. The task force has sought to counter it with the reintroduction of a wealth tax.
• It recommended that policymakers have to think of the tax system as a whole, rather than obsessively focus on each part separately.

Debating the proposals

• International experience shows that zero tax on capital is impractical. But lower corporate taxes could bring down the general cost of capital in India.
• Global tax reforms over the past few decades have flattened marginal tax rate schedules. There is now a narrower gap between the lowest and top marginal tax rates.
• Some ideas on optimal tax theory suggest that tax rates should generally be higher in societies with greater income inequality.

GST lessons

• The GST design was based on sound economic principles derived from the theory of optimal taxation.
• The tax is imposed on final consumption goods rather than intermediate goods.
• It sought to impose a uniform tax rate on most consumption goods. But this was compromised during the complex federal bargain
• The idea that each tax has to be progressive has led to a complicated GST that is now resulting in suboptimal revenue.

Direct – Indirect tax shares

• In the distribution of revenues from income versus consumption taxes, the former tends to be progressive, while the latter tends to be regressive.
• Before the 1991 reforms, India had a regressive tax system because of the overwhelming dependence on indirect taxes. Direct taxes then contributed less than one-fifth of total tax revenue.
• Now, the two types of taxes have approximately equal weights in government revenues.

Way ahead

Direct taxes have to keep growing in importance as labour and capital incomes rise. A new DTC will be important in a distributional sense. Higher direct tax collections can create space for a restructuring of the GST.

GS-III: RBI Surplus

Context

The RBI Board approved a surplus transfer of Rs 1,76,051 crore to the central government.

How does a central bank like the RBI make profits?

• The RBI is a “full service” central bank— not only is it mandated to keep inflation or prices in check, it is also supposed to manage the borrowings of the Government of India and of state governments; supervise or regulate banks and non-banking finance companies, and manage the currency and payment systems.
• While carrying out these functions or operations, it makes profits. Typically, the central bank’s income comes from the returns it earns on its foreign currency assets, which could be in the form of bonds and treasury bills of other central banks or top-rated securities, and deposits with other central banks.
• It also earns interest on its holdings of local rupee-denominated government bonds or securities, and while lending to banks for very short tenures, such as overnight. It claims a management commission on handling the borrowings of state governments and the central government.

Arrangement for surplus transfer

• The RBI isn’t a commercial organisation like the banks or other companies that are owned or controlled by the government – it does not, as such, pay a “dividend” to the owner out of the profits it generates.
• Although RBI was promoted as a private shareholders’ bank in 1935 with a paid-up capital of Rs 5 crore, the government nationalized it in January 1949, making the sovereign its “owner”.
• What the central bank does, therefore, is transfer the “surplus” – that is, the excess of income over expenditure to the government, in accordance with Section 47 (Allocation of Surplus Profits) of the RBI Act, 1934.

Does the RBI pay tax on these earnings or profits?

• Its statute provides exemption from paying income-tax or any other tax, including wealth tax.
• Section 48 (Exemption of Bank from income-tax and super-tax) of the RBI Act, 1934 provides that the Bank shall not be liable to pay income-tax or super-tax on any of its income, profits or gains.

Is there an explicit policy on the distribution of surplus?

• But a Technical Committee of the RBI Board headed by Y H Malegam, which reviewed the adequacy of reserves and a surplus distribution policy, recommended, in 2013, a higher transfer to the government.
• Earlier, the RBI transferred part of the surplus to the Contingency Fund, to meet unexpected and unforeseen contingencies.
• It was also transferred to the Asset Development Fund, to meet internal capital expenditure and investments in its subsidiaries to build contingency reserves of 12% of its balance sheet.

Issues

• The government has long held the view that going by global benchmarks, the RBI’s reserves are far in excess of prudential requirements. Former Chief Economic Advisor Arvind Subramanian had suggested that these funds be utilised to provide capital to government-owned banks.
• The central bank, on its part, has traditionally preferred to be more cautious and build its reserves – keeping in mind potential threats from financial shocks, and the need to ensure financial stability and provide confidence to the markets.
• From the central bank’s perspective, bigger reserves on its balance sheet is crucial to maintaining its autonomy.