PM IAS AUG 26 EDITORIAL

‘Freebies’, a judicial lead and a multi-layered issue

Context:

The Prime Minister’s recent comment on “freebies” handed out by governments has reignited the debate on the economic rationale for granting subsidies.

About freebies:

• Freebies here refers to electoral promises by political parties and politicians for certain goods and services to be provided to the public for free or at heavily subsidised cost out of taxpayers’ money.
• Political parties promise to offer free electricity/water supply, monthly allowance to unemployed, daily wage workers, and women as well as gadgets like laptops, smartphones etc in order to secure the vote of the people.
• Freebies often involve heavy amounts of ‘subsidy’.

About subsidy:

According to World Trade Organization, a subsidy is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), government revenue foregone, and/or goods or services provided by government.  ‘Subsidy’ can also be any form of income or price support by the government.

Tax policy and measures:

• Tax policy includes a range of measures that include special tax rates, exemptions, deductions, rebates, deferrals, and credits, all of which affect the level and distribution of tax.
• These measures are often called “tax preferences”, which are built into both direct and indirect tax regimes for realising specific benefits serving the greater public good.
• Tax preferences are considered as implicit (indirect) subsidies to preferred tax payers; therefore, they merit attention in the current debate on justification of subsidies.
• A 2016 Comptroller and Auditor General of India (CAG) report in 2016, showed that revenue foregone in 2010-11 was 21% of direct tax revenue and had decreased to 15% in 2014-15. However, a subsequent report showed that the share had climbed again to reach 22% of tax revenue in 2019-20.

Subsidy to corporates vs subsidy to people:

• There are several important facets of the “tax preferences” provided by the Government in respect of direct taxes that are germane to this debate on subsidies.
• First, as compared to individuals, corporates have been enjoying a larger share for all years except in 2019-20 when the share of individuals inexplicably increased. The figures of 2019-20 are significant also because “tax preferences” for corporates registered an increase, even as corporate taxes were reduced.
• While the Finance Minister spoke about eliminating “tax preferences” available to income-tax payers in lieu of lower tax slabs, which is optional at present, the corporate sector enjoys “tax preferences” as well as lower tax rates.
• A related issue that must be mentioned here is that handouts from the Government, whether they are in the form of “tax preferences”, tax-cuts and the plethora of incentives are given for realising specific objectives. If these objectives are not realised, as for instance, the corporate tax cuts effected in 2019-20 did not result in higher private investment as the Government had expected, should this tax cut not be considered “freebies”?

Fading support:

• Targeting agricultural subsidies and support provided to public health and education for making these services available to all. Market fundamentalists have forever opposed these subsidies/support by arguing that they are a wasteful use of resources.
• But this argument has gained currency since every Central government in the past three decades has adopted policies to whittle down support to these sectors extended by the government.
• Public health and education have consistently been undermined to create space for private players. And, in agriculture, the Government had brought the controversial farm laws for dealing with the issue of increasing farm subsidies.
• Public expenditure on health has struggled to cross 1.5% of GDP, which is significantly lower than those in other major economies.
• In education, the Kothari Commission’s target set in 1966, that public investment should be increased to “6 percent of the national income as early as possible” is but a distant dream.

Arguments against freebies:

1. Freebies are a burden on taxpayers’ money and divert national resources from productive to unproductive areas.
2. Freebies undercut the basic framework of macroeconomic stability.
3. The politics of freebies distort expenditure priorities. For instance, Rajasthan’s decision to revert to the old pension scheme for civil servants will benefit only 6% of the population, from 56% of the state’s revenues.
4. The issue of intergenerational equity leads to greater social inequalities because of expenditure priorities being distorted away from growth-enhancing items.
5. Provision of free power, water, etc. distracts outlays from environmental and sustainable growth, renewable energy and more efficient public transport systems.
6. The depleting supply of groundwater is an important issue to consider when speaking of freebies pertaining to free consumption goods and resources.
7. Freebies lower the quality and competitiveness of the manufacturing sector by detracting from efficient and competitive infrastructure.

Market fundamentalists have seized the opportunity to press home the point yet again that subsidies are, per se, undesirable for they contribute to suboptimal outcomes for the economy.

This unbridled affront on subsidies does not make a distinction between transfer payments that are made for running social welfare schemes without which disenfranchised citizens of this country cannot hope to survive.

When this debate began to go astray, it needed a strong reminder by the Supreme Court of India that in the on-going debate on subsidies and “freebies”, a distinction had to be made between expenditure made on social welfare schemes and “irrational freebies” offered to voters during elections.

Arguments for freebies:

1. Constitutional provision- As per Article 282, the Union or a State may make any grants for any public purpose.
2. Due to pending on health and nutrition, freebies can build a healthier and a stronger workforce, which is a necessary part of any growth strategy. For example, the MGNREGA type of spending and subsidy in the form of food ration schemes.
3. Increased productivity and capacity building- Subsidies going into education, such as for laptops have now become necessities for increasing productivity, knowledge and skills.
4. Some expenditure outlays do have overall benefits such as the Public Distribution System, employment guarantee schemes, support for education and enhanced outlays for health, particularly during the pandemic.
5. For states that have a comparatively lower level of development with a larger share of the population suffering from poverty, such kinds of freebies become need/demand-based and it becomes essential to offer the people such subsidies for their own upliftment.
6. Share of India’s investment in agriculture sector was 10%. In recent years, it has almost halved. As the crisis in agriculture has deepened as a result of this chronic underinvestment, subsidies have been the palliatives extended by the Government for farmers to merely protect their livelihoods. These agricultural subsidies should not be seen as “freebies”.

Way forward:

1. Differentiation–

• We need to distinguish between the concept of merit goods and public goods.The strengthening of the public distribution system, employment guarantee schemes, support to education and enhanced outlays for health are considered to be desirable expenditures.
• The subsidies in basic necessities such as giving free education to younger children and offering free meals at schools are rather positive approaches.

2. Sustainability–

It’s not about how cheap the freebies are but how expensive they are for the economy, life quality and social cohesion in the long run.

3. Revising the Seventh Schedule–

Most of the centrally sponsored schemes are subjects which are classic subjects in the domain of the states, such as employment, food, education.

4. Development that obviates the need for freebies:

If the political parties go for effective economic policies where the welfare schemes have good reach to the targeted population, then infrastructure and development will take care of itself and the people will not require such kinds of freebies.

Conclusion:

Give a man a fish and you feed him for a day, teach a man to fish and you feed him for a lifetime. It is always better to provide useful skills to the people than to give them freebies.

---

The Competition (Amendment) Bill, 2022

Context:

The long-awaited Bill to amend the Competition Act, 2002, was finally tabled in the Lok Sabha recently.

Background:

• Indian Competition Act was passed in 2002. It set up the regulatory body called Competition Commission of India (CCI).
• It aims at establishing a competitive environment in the Indian economy through proactive engagement with all the stakeholders, the government, and international jurisdiction.
• As the dynamics of the market changes rapidly due to technological advancements, artificial intelligence, and the increasing importance of factors other than price, amendments became necessary to sustain and promote market competition. Therefore, a review committee was established in 2019 which proposed several major amendments.
• This led to the new amendment bill to the 2002 Act.

About the Competition Act:

• The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) was repealed and replaced by the Competition Act, 2002.
• This was done based on the recommendations of the Raghavan Committee.

The Act:

• Prohibits anti-competitive agreements;
• Prohibits abuse of dominant position by enterprises and
• Regulates combinations (acquisition, acquiring of control, and M&A), which can cause or is likely to cause an appreciable adverse effect on the competition within India.

About Competition Commission (CCI):

It is a statutory body established in 2009 under the 2002 Act.

Major objectives of CCI:

1. Prevent anti-competitive agreements- To prevent practices that harm the competition.
2. Prevent abuse of dominance
3. To protect the interests of consumers.
4. To ensure freedom of trade
5. To create level playing field for all players in the economy

Composition:

• Competition Commission of India is currently functional with a Chairperson and two members. All 3 are full time members.
• Eligibility for the Commission: The Chairperson and every other Member shall be a person of ability, integrity, and who, has been, or is qualified to be a judge of a High Court, or, has special knowledge of, and professional experience of not less than fifteen years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration or in any other matter which, in the opinion of the Central Government, may be useful to the Commission.

Major change in dealing with new-age market combinations:

• Any acquisition, merger or amalgamation may constitute a combination. Section 5 of the Act in operation currently says parties indulging in merger, acquisition, or amalgamation need to notify the Commission of the combination only on the basis of ‘asset’ or ‘turnover’.
• The new Bill proposes to add a ‘deal value’ threshold. It will be mandatory to notify the Commission of any transaction with a deal value in excess of ₹2,000 crore and if either of the parties has ‘substantial business operations in India’.
• The Commission shall frame regulations to prescribe the requirements for assessing whether an enterprise has ‘substantial business operations in India’.
• This change will strengthen the Commission’s review mechanism, particularly in the digital and infrastructure space, a majority of which were not reported earlier, as the asset or turnover values did not meet the jurisdictional thresholds.
• When business entities are willing to execute a combination, they must inform the Commission. The Commission may approve or disapprove the combination, keeping in mind the appreciable adverse effect on competition that is likely to be caused.
• The Commission earlier had 210 days to approve the combination, after which it is automatically approved. The new Bill seeks to accelerate the timeline from 210 working days to only 150 working days with a conservatory period of 30 days for extensions. This will speed up the clearance of combinations and increase the importance of pre-filing consultations with the Commission.

Gun-jumping:

• Parties should not go ahead with a combination prior to its approval. If the combining parties close a notified transaction before the approval, or have consummated a reportable transaction without bringing it to the Commission’s knowledge, it is seen as gun-jumping.
• The penalty for gun-jumping was a total of 1% of the asset or turnover. This is now proposed to be 1% of the deal value.

Challenges faced by combining parties in open market purchases:

• There have been several gun-jumping cases owing to the combining parties’ inability to defer the consummation of open market purchases. Many of them argue that acquisitions involving open market purchase of target shares must be completed quickly, lest the stock value and total consideration undergo a change. If parties wait for the Commission’s clearance, the transaction may become unaffordable.
• The present amendment Bill also proposes to exempt open market purchases and stock market transactions from the requirement to notify them to the Commission in advance. This is subject to the condition that the acquirer does not exercise voting or ownership rights until the transaction is approved and the same is notified to the Commission subsequently.

Hub-and-Spoke Cartels:

• A Hub-and-Spoke arrangement is a kind of cartelisation in which vertically related players act as a hub and place horizontal restrictions on suppliers or retailers (spokes).
• Currently, the prohibition on anti-competitive agreements only covers entities with similar trades that engage in anti-competitive practices. This ignores hub-and-spoke cartels operated at different levels of the vertical chain by distributors and suppliers.
• To combat this, the amendment broadens the scope of ‘anti-competitive agreements’ to catch entities that facilitate cartelisation even if they are not engaged in identical trade practices.

The ‘settlements’ and ‘commitments’ mechanisms:

• The new amendment proposes a framework for settlements and commitments for cases relating to vertical agreements and abuse of dominance. In the case of vertical agreements and abuse of dominance, the parties may apply for a ‘commitment’ before the Director General (DG) submits the report.
• ‘Settlement’ will be considered after the report is submitted and before the Commission decides. According to the amendment, the Commission’s decision regarding commitment or settlement will not be appealable after hearing all stakeholders in the case. The Commission will come out with regulations regarding procedural aspects.

Way forward:

• By implementing these amendments, the Commission should be better equipped to handle certain aspects of the new-age market and transform its functioning to be more robust.
• The proposed amendments are undoubtedly needed; however, these are heavily dependent on regulations that will be notified by the Commission later. These regulations will influence the proposals.
• Also, the government needs to recognise that market dynamics change constantly, so it is necessary to update laws regularly.