MAINS QUESTIONS DAILY QUESTIONS & MODEL ANSWERS
Q1. Is de-globalization taking place in the world’s countries? Analyze and illustrate the associated ramifications (250 words)
Paper & Topic: GS I à Effects of Globalization on Indian Society
- The current debate over a “trade war” and “de-globalization” arose when the United States placed 25% and 10% tariffs on steel and aluminum imports from specific nations in March 2018, citing national security and job creation as justifications.
- Economic and market observers use the word “de-globalization” to describe a trend in which various countries desire to return to economic and trade policies that prioritize their own national interests.
- Tariffs or quantitative barriers that obstruct the free movement of people, goods, and services between countries are common examples of these policies.
- The goal of all this protectionism is to defend domestic production by making imports more expensive.
- We still live in a very globalized world, and these protectionist actions upend the fundamental premise on which global growth is estimated and worldwide commerce is regulated by organizations like the WTO.
- When major, industrialized, and successful nations band together to create new entry barriers for goods and services, the fortunes of their many trading partners can be severely harmed.
- Then all global economic growth, inflation, and interest rate estimates go crazy.
- For example, the US economy imports a lot of low-cost manufactured items from China. If tariffs raise the cost of imports into the United States, domestic inflation might skyrocket, and US interest rates could rise even faster.
- Given that India accounts for just over 1% of the US’s steel and aluminum imports, the current spate of tariffs may have little impact on India.
- However, de-globalization in terms of service and people mobility may have an impact on both service export and the tendency of Indians to travel overseas for higher education and jobs.
- The recent global bull market is based on a worldwide recovery, and de-globalization can soon deflate that optimism.
- What begins with things has the potential to spread to people.
- Outsiders are already subjected to extremely strict immigration rules in the United States and the United Kingdom.
- Deglobalization has the potential to stymie efforts to achieve gender equality.
- Women’s ability to move in quest of better chances will be limited by restrictions on their movement.
- Reduced financial flows, which make investment capital more difficult to come by, may resurrect ancient cultural misconceptions about investing in women.
- Biases are weakened through internationalization, but with economic fragmentation, old biases resurface.
Steps to take:
- We must create peace and security in order to discourage nationalist and protectionist sentiments.
- It is necessary to bring emerging countries closer to global governance, indicating that they will share the responsibilities and expense of supporting capitalism and open society in return.
- Promotion of new forms of international and regional integration that protect and allow for the flourishing of life’s varied dimensions.
- Cooperation is essential for making the global economy more predictable, reducing vulnerabilities, and bolstering the free trade system.
- It is necessary to foster a culture of tolerance and understanding that allows for constructive conversation.
Protectionism is looming over the global economy, as politicians in various parts of the world cast doubt on globalization’s and free trade’s benefits. Deglobalization does not reject trade or the exchange of products or services; rather, it suggests that trade not be conducted at the expense of communities, local and national economies, and the diversity of its agricultural and industrial products.
Q2. The economic complement to political federalism is fiscal federalism. Provide appropriate examples to illustrate your point. ( 250 words)
Paper & Topic: GS I à Functions and responsibilities of the Union and the States, issues and challenges pertaining to the federal structure, devolution of powers and finances up to local levels and challenges therein.
- The financial interactions between units of government in a federal government system are known as fiscal federalism.
- It’s part of a larger public-finance framework.
- Richard Musgrave, a German-born American economist, coined the term in 1959.
- The separation of governmental activities and financial links among tiers of government is referred to as fiscal federalism.
- India has a federal government, which means it has a federal fiscal system.
- The backbone of a federal government’s successful operation is financial independence and adequacy.
- The necessity for fiscal federalism was stressed in the Economic Survey 2017-18.
Fiscal federalism and political federalism are linked:
- Fiscal federalism is concerned with the delegation of functions to various levels of government on the one hand, and the use of suitable fiscal tools to carry out these functions on the other.
- The central government is widely regarded to be required to deliver national public goods that benefit the entire people. Defense is a common example given.
- Sub-national governments are required to offer commodities and services that are only consumed within their borders.
- The identification of the exact fiscal tools that would enable the various levels of government to carry out their tasks is an equally essential subject in fiscal federalism. This is known as the ‘tax-assignment issue.’
- It is generally agreed that non-benefit taxes and taxes on movable units should be avoided at the decentralised levels of government.
- Income tax is only levied by the central government in India, albeit it is shared with the states. Many countries have an inter-governmental transfer system in place to address the possibility of resource and responsibility imbalances.
- The Indian Constitution establishes the functions of the Centre and States, as well as their taxing powers.
- Every Finance Commission has handled issues linked to the rectification of vertical and horizontal imbalances against this backdrop, taking into consideration the current set of circumstances.
- Transfers from the federal government to the states, on the other hand, are not limited to the recommendations of the Finance Commissions. Other options include the Planning Commission, which existed until recently, and the Central Government’s discretionary grants.
Concerns and obstacles that go along with it:
- Trends in Tax Revenue: A comparison of the proportion of central and state-owned taxes and expenditures reveals that the states own 38 percent and 58 percent of their own tax revenue and expenditure, respectively.
- This reflects the states’ higher-than-proportionate expenditure commitments, as well as their limited revenue-raising powers in comparison to the federal government.
- After the 80th Constitutional Amendment, the net earnings of all taxes levied by the union, except surcharges and cesses, are divided with the states under Article 270 of the Constitution.
- Article 279 of the Constitution defines net revenues as the center’s gross tax revenue less surcharges and cesses, as well as collection costs. The amount of net proceeds, however, is not included in the union’s budget statements.
- However, the proportion of surcharges and cesses in the federal government’s gross tax collection is increasing, counteracting the higher shares proposed by previous finance commissions.
- FRBM Acts and Asymmetric Impacts: In the early 2000s, the FRBM Acts were passed at the national and state levels.
- It was solely focused on meeting objectives. In exchange, if revenues could not be increased, expenditure (even if it was necessary) would be reduced.
- States have been required to restrict their deficits due to financial commission punishments, although the federal government is not bound by any such conditions.
- States have inefficient cash management because they are afraid of the implications of not adhering to deficit targets, which are not only a legislative constraint but also a conditionality enforced by finance commissions.
Steps to take/Conclusion:
- Perhaps now is the moment to alter the Constitution to ensure that the percentage of shared taxes that should go to the states is set at the appropriate amount.
- Because cesses and surcharges have risen dramatically in recent years, they must be included in the sharing tax pool.
- It appears reasonable to set the ratio at 42 percent of shareable taxes, including cesses and surcharges.
- Another option is to adopt the approach of the United States and Canada, which is to enable states to impose personal income taxes with limited restrictions.
- States must be restricted in their freedom. It’s crucial to highlight that the levy levied by the federal government and the states should be reasonable.
- The transfers from the Centre will also need to be adjusted once this power is given to the States.
- Horizontal Distribution: In India, the ability to achieve equalisation between states is limited.
- Even the relatively wealthier countries face problems and feel cheated as a result of the overuse of the equity criterion.
- Particularly in light of the surge in unconditional payments, a proper balancing of criteria is required.