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1.Air India disinvestment, FDI reforms (The Hindu)

2.A global opportunity for the Indian workforce (Live Mint)

 

1.Air India disinvestment, FDI reforms (The Hindu)

Synoptic line: It throws light on the proposed reforms in the foreign direct investment regime. (GS paper III)

Overview

  • The government had decided to push Air India for wholesale privatisation. And to expedite such privatisation move, the government has now made this announcement of permitting 49 per cent FDI.

Change in rules

  • In a move designed to expedite the strategic divestment in Air India, the Cabinet on Wednesday decided to open up the national carrier for foreign direct investment (FDI) up to 49 percent under the approval route.
  • The present rules allow foreign airlines to invest under the government approval route in the capital of Indian airline companies up to the limit of 49 percent of their paid-up capital, which is, however, not applicable to Air India.
  • It has now been decided to do away with this restriction and allow foreign airlines to invest up to 49 percent under approval route in Air India subject to the conditions that foreign investments in Air India including that of foreign airlines shall not exceed 49 percent either directly or indirectly.
  • The airline, which is under a massive debt burden of Rs 50,000 crore, had posted an operating profit of Rs 105 crore in 2015-16, and is expected to report an improved operating profit margin for the last fiscal. The national carrier got a new lease of life in April 2012, when the then UPA government approved a Rs 30,000-crore turnaround and financial restructuring package spanning up to 2021. 

Prudent step

  • This comes just a little more than six months after the Cabinet Committee on Economic Affairs gave its nod for a strategic disinvestment of the airline. The relaxation in ownership norms clears the decks for possible bidders such as the Singapore Airlines-Tata combine and Jet Airways with its overseas equity and route partners to make a more detailed commercial assessment of the investment opportunity the state-owned flag carrier presents.
  • For the fiscally constrained government, the decision couldn’t have come sooner. With the Union Budget due soon and the government woefully short of its budgeted strategic disinvestment goal for the current financial year as of end-November, only 28% of the targeted ₹15,000 crore had been realised the hope must be for an accelerated timetable for the stake sale.
  • Still, the fulfilment of a necessary condition for a strategic sale doesn’t automatically become sufficient grounds for a successful privatisation. Given the carrier’s accumulated debt of about ₹50,000 crore and the fact that the interest of potential investors is likely to be focussed on Air India’s lucrative long-haul international routes and its fleet of more than 40 wide-bodied aircraft, disinvestment will be neither easy nor guaranteed. At the very least, the government needs to set a clear, unambiguous road map for the sale process.

Other reforms

  • The other reform cleared by the Cabinet was the crucial decision to put 100% FDI in Single Brand Retail Trading under the ‘automatic’ route, accompanied by the long-sought relaxation of mandatory local sourcing norms.
  • This had been a major issue with potential investors including Apple, which had repeatedly urged the government to take a more benign view given the level of technological advancement incorporated in its products and the difficulty in finding local sources of supply at the requisite scale. The five-year holiday on the 30% local-sourcing requirement is expected to give companies setting up shop here adequate time to identify, train and even technologically assist in the creation of local supply chains.

Conclusion

  • The other reform cleared by the Cabinet was the crucial decision to put 100% FDI in Single Brand Retail Trading under the ‘automatic’ route, accompanied by the long-sought relaxation of mandatory local sourcing norms. This had been a major issue with potential investors including Apple, which had repeatedly urged the government to take a more benign view given the level of technological advancement incorporated in its products and the difficulty in finding local sources of supply at the requisite scale.
  • The five-year holiday on the 30% local-sourcing requirement is expected to give companies setting up shop here adequate time to identify, train and even technologically assist in the creation of local supply chains.

Question: What are the potentials of the recent FDI reforms in addressing the fiscal health of the aviation industry?

 

2.A global opportunity for the Indian workforce (Live Mint) 

Synoptic line: It throws light on why India will need to make policy adjustments to be able to take advantage of a potential change in the composition of the global labour force. (GS paper III)

Overview

  • The integration of developing economies such as China and India into the global economy in the last few decades has helped lift millions out of poverty. The introduction of their labour forces into the global economy increased growth and income in these economies which also resulted in a decline in global inequality.

The next wave of change

  • The World Bank’s latest “Global Economic Prospects” report shows that the second wave of change in the global labour market will play out over the next two decades, with developing economies contributing to all of the addition in the global skilled labour force, as the number of skilled workers in advanced economies is expected to decline.
  • The rising level of skill and education in developing economies will also lift potential global growth and continue to reduce global inequality.
  • The global skilled workforce is likely to increase from 1.66 billion workers in 2011 to 2.16 billion by 2040. Skilled workers have been defined as those having at least nine years of education. Since improvement in the level of education and skill tends to increase income, rising income in the developing world will lead to a reduction in inequality.
  • The global Gini coefficient is estimated to decline from 65.8 in 2012 to 62.6 by 2030. However, income from other sources may still increase inequality. The way things progress in India, to a large extent, will determine how fast income convergence happens and the level of global inequality declines.
  • While India benefited by integrating with the global economy, the next wave of gains will depend on how well it adjusts to the changing economic and technological environment. India will need to make adjustments to be able to take advantage of a potential change in the composition of the global labour force. Policymakers will need to work on different levels to be able to create a competitive labour force and make India benefit from the emerging global situation.

Much needed reforms

  • First, India urgently needs to focus on education and skill development. A lot has been written on this subject in the past. The “Annual State of Education Report” periodically shows the depressing state of education in Indian schools. The World Bank also highlighted the problem in its “World Development Report” last year. Despite several initiatives by the government, outcomes in the area of skill development have also not been as desired. One way of improving outcomes could be better use of technology in education. India needs rapid improvement from primary to tertiary education to be able to compete in the global market. The changing technological landscape also means that the workforce should be in a position to make quick adjustments.
  • Second, the World Bank in its analysis assumes that additional workers will get employed . This will be a big challenge for India. It has not been able to create enough employment opportunities for people moving out of agriculture. The basic reason for this is India has not capitalized on labour-intensive manufacturing.
  • Recent research shows that India’s competitive advantage in some of the labour-intensive sectors has actually declined in recent years. The legal and regulatory requirements in markets like land and labour make it difficult for firms to grow and take advantage of economies of scale. To be able to absorb its rising workforce, India needs to remove impediments in the manufacturing sector. If prospects for manufacturing don’t improve soon, even better outcomes in education would be of limited use.
  • Third, even though inequality at the global level declined in recent decades, it has gone up in advanced economies as the national income share of wages came down. This has resulted in a political backlash. Therefore, the lingering risk of protectionism is unlikely to dissipate in a hurry. India will need to protect its interest in such an environment and look for opportunities to increase trade at both bilateral and multilateral forums. Also, adequate attention should be paid to currency management in the world of volatile capital flows. Exports are an important driver of growth and job creation. It will be difficult to grow at a faster pace without the backing of strong exports.

Way ahead

  • Even though India is likely to regain its position as the fastest growing large economy in the world this year, the rate of growth will still be much lower than what China attained in its high growth years. A skilled labour force along with a focus on manufacturing and exports will help India grow at a faster rate in the medium to long run. An increasing number of skilled workers not only raises the potential growth but also reduces inequality within the country by reducing the skill premium.

Question: How an increasing number of skilled workers not only raises the potential growth but also reduces inequality within the country by reducing the skill premium?