Eco Survey Part1 Lyst7995

ECONOMIC SURVEY 2021-22 – Part I
How it is different from others?
Analytical Approach – Themes have been discussed in systematic way analytically not only
quantitative aspects
Do You Know Block – It helps you to understand the static basic terms discussed in Eco-Survey
Preparation of Mains – In last year also trend in budget and Eco survey was used to frame
question. This will help in covering the syllabus of mains too for example money and banking
chapter has been discussed exclusively with all basics and static part
Approach – First reading will take time but do it with full concentration it will clear your many
concepts and will be helpful not only for RBI but for NABARD, UPSC and state PSC’s also
Chapter 1-5 are more important for RBI aspirants where economy, finance, banking have been
covered similarly chapters 6-10 are more important for NABARD aspirants
More number of times you will read and revise this document more confident you will be for
writing Phase II. It forms backbone of your mains examination.
@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Contents
1 State of Indian Ecnomy 4
1.1 Sectoral trends/ Supply side 4
1.2 Demand side trends 7
1.3 Government Response- The Barbell Strategy 8
1.4 ‘Agile Policy Framework’ 9
1.5 ‘Policy of Safety Net’ 9
1.6 Concerns amidst Uncertainty 12
1.7 Supply chain measures- 12
1.8 Conclusion 13
2 Fiscal Development 14
2.1 Fiscal Policy Strategy In The Aftermath Of The Pandemic Outbreak 14
2.2 Fiscal Stimulus During 2021-22 15
2.3 Performance of Fiscal Indicators During 2021-22 Based on April- November 2021
data by Controller General of Accounts 16
2.4 Long Term Trend In The Government Finances 17
2.5 Trends in deficits of Government 19
2.6 Trends in capital and revenue expenditure. 19
2.7 Trends in tax as % of GDP 20
2.8 Composition of taxes in Gross tax revenue 20
2.9 % of Debt to GDP ratio 21
2.10 State finances 22
2.11 Fiscal Indicators of States 23
2.12 Policy Measures to Enhance the Efficiency of Government Spending 24
2.13 Conclusion 26
3 External Sector 27
3.1 Global Economic Environment 27
3.2 1. Current Account 28
3.3 Top 5 Export Commodities (% share in total export) 29
3.4 Top 5 Agricultural Export Products ($US Billion) 31
3.5 Top 10 Export Destinations of India in 2021-22 (Ap-Nov) by % share 31

3.6 Major Schemes & Initiatives to boost exports 32
3.7 Top ten Import Destinations in 2021-22 (Ap-Nov) by share in % 34
3.8 Trade in Invisibles 34
3.9 Current Account Balance: 35
3.10 3. BOP Balance 37
3.11 4. Exchange Rate 38
3.12 5. India’s External Resilience 39
3.13 External Vulnerability Indicators for India 40
3.14 External Debt 40
3.15 Conclusion 41
4 Monetary Management & Financial Intermediation 42
4.1 Monetary Developments 43
4.2 The measures taken by RBI to provide targeted liquidity support to the system in
2021-22 included: 47
4.3 Developments in Gsec market 48
4.4 Banking Sector 49
4.5 Credit Growth 55
4.6 Non-Banking Financial Sector 55
4.7 Development In Capital Market 57
4.8 Insurance Sector 58
4.9 Pension Sector 59
4.10 Conclusion 59
5 Price and Inflation 60
5.1 Domestic Inflation 60
5.2 What has driven retail inflation and why? 62
5.3 Measures to curb food inflation 63
5.4 Divergence between CPI and WPI 64
5.5 Cause of divergence between CPI and WPI 65
5.6 Long Term Perspective for Management of Supply Side Factors 66
5.7 Conclusion 67
5.8 Traditional measures to control inflation by the RBI 67

1 State of Indian Ecnomy
With the two years into COVID 19 pandemic, the global economy is plagued by
uncertainity, with resurgent waves of infection, supply chain disruption and inflation have
created challenging times for policy making. Moreover the likely withdrawal of liquidity by
major central banks may make the global capital flows more volatile. It is thus important to
evaluate both pace of growth revival, strength of macroeconomic stability indicators and
the Government of India’s response in this context.
Economy recovers past Pre-Pandemic level
Being in a ‘technical recession’ for the first half of 2020-21,the Indian economy has seen a
sustained recovery since then. The second wave of pandemic was more severe from a
health perspective than economic impact. The GDP is projected to grow at a rate of 9.2%
in 2021-22.
1.1 Sectoral trends/ Supply side

● Agriculture- Least impacted by pandemic related disruption, grew at 3.6% in 2020-21
and projected to grow at 3.9% in 2021-2022.
○ Rise in area sown under kharif and rabi crops
○ Kharif food grains production record high at 150.5 million tonnes
○ Rise in food procurement, minimum support prices
● Industry- Though contracting by 7% in 2020-21, it is projected to expand by 11.8% in
2021-22
○ Expansion of Purchasing Managers’ Index- Manufacturing, Index of Industrial
Production and Core Industry
4

○ Rise capital expenditure on infrastructure having a spillover effect on
construction sector
○ Rise in other high frequency indicators- GST collection, power consumption,
cargo movement, e- way bill collection etc
Various Index to measure manufacturing growth

1.Purchasing Managers’ Index-published by Markit Limited
It is a survey-based measure that asks the respondents about changes in their perception about key
business variables as compared with the previous month.
It is calculated separately for the manufacturing and services sectors and then a composite index is
constructed. It varies from 0-100 and a PMI above 50 represents an expansion when compared to the
previous month.
Purpose-To provide information about current and future business conditions to company decision-
makers, analysts, and investors. As the official data on industrial output, manufacturing and GDP growth
comes much later, PMI helps to make informed decisions at an earlier stage.
2.Index of Industrial Production
It is an index that shows the growth rates in different industry groups of the economy in a fixed period of
time. It is compiled and published monthly by the Central Statistical Organization (CSO), Ministry of
Statistics and Programme Implementation. IIP is a composite indicator that measures the growth rate of
industry groups classified under:
Broad sectors, namely, Mining, Manufacturing, and Electricity.
Base Year for IIP is 2011-2012.
3.Index of Core Industries
It is released by The Office of Economic Adviser, Department for Promotion of Industry and Internal Trade.
It comprises 40.27% of the weight of items included in the Index of Industrial Production (IIP).
The eight Core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel>
Coal> Crude Oil> Natural Gas> Cement> Fertilizers.

● Service- Services account for more than half of the Indian economy and was the most
impacted by the COVID19 related restriction, especially for the activities that need
human contact. This sector contracted by 8.4% in 2020-21, however estimated to
grow at 8.2% in 2021-22, as indicated by the new forms of high frequency indicators
to gauge real time trends.
○ Google mobility indicators for retail and recreation and transit stations
exceeded pre pandemic level
○ Rise in hotel occupancy rate
○ Rise in distance enabled services due to rising preference for remote interfaces
for office work, education and medical services
○ Boom in software and IT enabled exports
Share of sectors in nominal GVA(%)
Sectors 2019-20 2020-21 2021-22(Estimated)
Agriculture 18.4 20.2 18.8
Industry 26.7 25.9 28.2
Services 55.0 53.9 53.0
High frequency indicators
High frequency indicators are time series data that are available at frequent intervals, say, a month or a
week, obtained both from government departments/agencies as well as private institutions that enabled
constant monitoring and iterative adaptations. Such information includes GST collections, power
consumption, mobility indicators, digital payments, satellite photographs, cargo movements, highway toll
collections, and so on. These HFIs helped policy makers tailor their responses to an evolving situation rather
than rely on predefined responses of a Waterfall framework.
While HFIs have the advantage of being real-time and frequent, they need to be used with care. Each
indicator provides, at best, a partial view of developments. Moreover, the noise-to signal ratio can be
higher than for national accounts and other slower moving data. In a rapidly evolving situation, policy-
makers can pick up useful signals that allow for faster response and better targeting.

1.2 Demand side trends
Those components affecting the aggregate demand side of the economy i.e. total
consumption including private and government consumption, total investment, net export
i.e. export minus import
There have been full recovery of all components on the demand side in 2021-22 except for
private consumption
● Total Consumption- It is expected to grow by 7.0 % in 2021-22 with government

consumption biggest contributor, surpassing the pre pandemic projected to grow at
7.6%.
○ Rise in IIP Consumer Durables
○ Rise in consumers’ confidence
○ Rise in digital transaction
○ Rapid vaccination coverage
○ Employment demand under MGNREGA
The recent dip in vehicle registration reflects a supply side constraint occurring due to
shortage of semiconductor chips rather than a lack of consumption demand.

● Gross Fixed Capital Formation- it is expected to grow at 15% in 2021-22, with
investment to GDP ratio 29.6% (highest in seven years)
Gross fixed capital formation (GFCF) refers to the net increase in physical assets (investment minus disposals).
It does not account for the consumption (depreciation) of fixed capital.
GFCF is not a measure of total investment, because only the value of net additions to fixed assets is
measured, and all kinds of financial assets, as well as stocks of inventories and other operating costs are
excluded.
○ Crowd in effect of government’s capex in infrastructure

○ Rise in companies profit and stock market
○ Decline in Non-Performing Assets of banks and rise in Capital Adequacy Ratio
● Net export- India’s total export is projected to grow at 16.5% and import grow at 29.4%
in 2021-22 (both higher than pre pandemic level), though manageable current
account deficit owing to:
○ Robust increase in capital inflows sufficient to finance the modest current
account deficit and led to rise in foreign exchange a record high of US$ 634
billion.This is equivalent to 13.2 months of imports and higher than the country’s
external debt.
1.3 Government Response- The Barbell Strategy

The Government of India opted for a “Barbell Strategy” that combined a bouquet of safety-
nets to cushion the impact on vulnerable sections of society/business, with a flexible policy
response based on a Bayesian updating of information i.e. a ‘Agile” approach that uses
feedback loops and real time adjustment.
Barbell Strategy
The barbell strategy is an approach to uncertainty (risk) that uses two extremes - like weights on the opposite
ends of a barbell - to avoid ruin and simultaneously expose yourself to a speculative upside. On one end of
the barbell is extreme risk aversion (safety). On the other end is extreme risk loving (speculation). What you
avoid is the “middle” of the barbell - a moderate risk attitude that is highly prone to error.
It is a method that consists of taking both a defensive attitude and an excessively aggressive one at the
same time, by protecting assets from all sources of uncertainty while allocating a small portion for high-risk
strategies.(a financial market concept)

1.4 ‘Agile Policy Framework’
In an uncertain environment, the agile framework responds by assessing outcomes in short
iterations and constantly adjusting incrementally using High Frequency Indicators.
This Agile approach made it possible to change fiscal mix over time and requirement,
towards supporting demand side and supply side measures.
The flexibility of Agile improves responsiveness and aids evolution, but it does not attempt
to predict future outcomes. This is why the other leg of the Barbell strategy is also needed.
It cushions for unpredictable negative outcomes by providing safety nets.
Approach to Growth
Waterfall approach entails a detailed, initial assessment of the problem followed by a rigid upfront
plan for implementation. This methodology works on the premise that all requirements can be
understood at the beginning and therefore pre-commits to a certain path of action. This is the
thinking reflected in five-year economic plans, and rigid urban master-plans.
1.5 ‘Policy of Safety Net’

Government opted for a mix of emergency support and economic policy actions to
provide a cushion against shocks and flexibility to changing situations:
● In early 2020, during the first wave of the pandemic the Government focused on
saving lives through emergency policy actions. The first among these actions was the
imposition of a stringent lockdown in March 2020 when cases were still few. This
provided the necessary time to ramp up testing infrastructure, create quarantine
facilities and so on. Most importantly, it gave time to understand the COVID-19 virus,
its symptoms and how it spread.

● Later the government recognised that lockdowns and quarantines disrupt economic
activity. Therefore, it quickly put in place economic safety nets-
○ Cash transfers
■ ₹500/month for 3 months to women Jan Dhan Account holders
■ ₹1000 to vulnerable sections (widows, Divyangs, elderly)
■ Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)- ₹6000/- per year
in three installments
● Food security
■ Pradhan Mantri Garib Kalyan Anna Yojana - Additional free-of-
cost food grains to 80 Crore National Food Security Act (NFSA
■ One Nation One Ration Card to ensure PDS benefit for people in
transit, especially migrant workers
■ Cooking gas cylinders under Ujjawala
● Employment
■ Pradhan Mantri Garib Kalyan Rojgar Abhiyaan (PM-GKRA) for
immediate employment & livelihoods opportunities to returnee
migrant workers across 6 States of Bihar, Jharkhand, Madhya
Pradesh, Odisha, Rajasthan and Uttar Pradesh
■ MGNREGA wage increased by ₹20 over the wage rate of 2019-20
■ Contribution of 12 per cent employer and 12 per cent employee’s
share under Employees Provident Fund (EPF) for 6 months for
establishments with upto 100 employees with 90 per cent earning
less than ₹15000
■ Fresh skilling and upskilling of the returnee migrant workers under
Pradhan Mantri Kaushal Vikas Yojana (PMKVY) covering 6 states
● MSMEs
■ Emergency Credit Line Guarantee Scheme 100% guarantee for
additional funding of up to ₹ 4.5 lakh crore to businesses or COVID
affected sectors
■ Credit Guarantee Scheme (CGS) for MSMEs
■ Restructuring of MSME default loans – Aug 2020 and May 2021
Schemes of RBI
● Credit
■ Suspension of initiation of corporate insolvency process under
Insolvency and Bankruptcy Code for 1 year, and increasing
minimum threshold from ₹ 1 lakh to 1 crore
■ Term Liquidity Facility of ₹50,000 crore for Emergency Health
Services by RBI
■ Credit Guarantee Scheme to Micro Finance Institutions (MFIs) for
on-lending
10

■ Partial Credit card Guarantee Scheme 2.0 for NBFCs, HFCs and
MFIs for fresh lending to MSMEs & individual
■ Special Long Term Repo Operations for Small Finance Banks
■ Lending by Small Finance Banks (SFBs) to MFIs for on-lending to be
classified as priority sector lending up to 31.3.2022
■ Kisan Credit Cards Special Drive- ₹2 lakh crore Concessional credit
boost to 2.5 crore farmers
■ PM SVANidhi Scheme to provide working capital loan to urban
street vendors to resume their businesses
● Monetary Policy Measures- to provide a cushion and support growth and
avoid medium term dislocation of excess liquidity
■ The Monetary Policy Committee (MPC) cut the policy repo rate.
Since then, the MPC has maintained status quo on the policy repo
rate keeping it unchanged at 4 percent
■ The Marginal Standing Facility rate and the bank rate have also
remained unchanged at 4.25 percent and so has the reverse repo
rate at 3.35 percent
● Vaccination Drive-Vaccination has been an integral pillar of the
comprehensive strategy of Government of India for containment and
management of the pandemic. On 16th January 2021, India commenced the
world’s largest vaccination program with an ambitious target to inoculate its
entire eligible population by 31st December 2021, with at least the first dose.
Macroeconomic stability indicators- suggests sustainability indicators strong and much

improved as compared to their position in Global Financial Crisis of 2008-09 and Taper
tantrum of 2012-13:
Comparison of macroeconomic indicators during Global Financial Crisis, Taper Tantrum

and COVID19
Indicators Global Financial Crisis (2008-09) Taper Tantrum (2012-13) Covid Pandemic (2021-22)
CPI Inflation 9.1 9.4 5.2 (Ap-Dec 2021)
Gross Fiscal Deficit as % of GDP 8.3 6.9 10.2 (2021-22 BE)
Current Account Balance as % of GDP -2.3 -4.8 -0.2 (Ap-Sept 2021)
Forex Reserves (US$ billion) 252 292 634 (31st DEC 2021)
External Debt as % of GDP 20.7 22.4 20.2 (June 2021)
11

FDI inflows (US$ billion) 8.3 34.0 48.4 (Ap-Oct 2021)
Capital to Risk Weighted Assets Ratio 13.2 13.9 16.5 (Sept 2021)
of SCB
Taper Tantrum 2013

The phrase, taper tantrum, describes the 2013 surge in U.S. Treasury yields, resulting from the Federal
Reserve's (Fed) announcement of future tapering of its policy of quantitative easing. The Fed announced
that it would be reducing the pace of its purchases of Treasury bonds, to reduce the amount of money it
was feeding into the economy. The ensuing rise in bond yields in reaction to the announcement was
referred to as a taper tantrum in financial media.
The main worry behind the taper tantrum stemmed from fears that the market would crumble, as the result
of the cessation of quantitative easing (QE).In the end, the taper tantrum panic was unjustified, as the
market continued to recover after the tapering program began.
1.6 Concerns amidst Uncertainty

● Resurgent waves of mutant covid variants
● Surge in global inflation
● Balance of payments difficulties owing to expected
○ Likely monetary policy tightening across the developed countries leading to
capital flow volatility
○ Rise in global commodity prices especially crude oil
○ Freight cost
● Supply chain disruption- delivery delays, container shortage, shortage in
semiconductor chips, crude oil production etc
1.7 Supply chain measures-

Involves various policies of process reforms, relates to the simplification and smoothening of
the process for activities where government presence as facilitator is necessary and
increasing resilience of the economy
12

● Industry
○ Production Linked Incentive Scheme approved for 13 sectors including (i)
Automobiles and auto components, (ii) Pharmaceuticals drugs, (iii) Specialty
steel, (iv) Telecom & Networking Products etc
○ Retrospective tax repealed to promote tax certainty and foreign investment
○ Upward revised definition of MSMEs
● Service sector
○ Liberalized guidelines for Other Service Providers
○ Telecom Structural reforms- Rationalization of Adjusted Gross Revenue, huge
reduction in Bank Guarantee requirements against License Fee and other
similar levies,100 per cent FDI under automatic route permitted in telecom
sector
○ Aviation Drone Rules (announced in August 2021)
○ Financial sector -Banking Reforms in Deposit Insurance
○ Liberalizing the traditional Satellite Communication and Remote Sensing
sectors for increased private sector participation
● Disinvestment
○ Public sector commercial enterprises are classified as Strategic and Non
Strategic sectors, with the policy of privatization in non-strategic sectors and
bare minimum presence even in strategic sectors.
○ National Monetisation Pipeline -Top 5 sectors including roads, railways, power,
oil & gas pipelines and telecom
1.8 Conclusion
Overall, macroeconomic stability indicators suggest that the Indian economy is well placed
to take on the challenges of 2022-23. One of the reasons that the Indian economy is in a
good position is its unique response strategy. The Government of India opted for a “Barbell
Strategy'' that combined a bouquet of safety-nets to cushion the impact on vulnerable
sections of society/business, with a flexible policy response based on a Bayesian updating
of information. While HFIs have the advantage of being real-time and frequent, they need
to be used with care. Each indicator provides, at best, a partial view of developments.
Moreover, the noise-to signal ratio can be higher than for national accounts and other
13

slower moving data. In a rapidly evolving situation, policy-makers can pick up useful signals
that allow for faster response and better targeting.
2 Fiscal Development
Over the last two years, fiscal policy has remained a significant tool for addressing the
economic fallout of the pandemic.The Government of India has adopted a calibrated
fiscal policy approach to the pandemic, which had the flexibility of adapting to an evolving
situation in order to support the vulnerable sections of society/firms and enable a resilient
recovery. India’s unique agile policy response differed from the waterfall strategy of
introducing front-loaded stimulus packages, adopted by most other countries in 2020.
2.1 Fiscal Policy Strategy In The Aftermath Of The Pandemic Outbreak

The agile fiscal policy response adopted by Government of India encompassed a change
in mix of the stimulus measures amidst an uncertain evolution of the pandemic situation:
● In the initial phase it focused on building safety nets for poor and vulnerables to
hedge against worst case outcomes-
○ direct benefit transfers to the vulnerable sections
○ emergency credit to the small businesses
○ the world’s largest food subsidy programme targeting 80.96 crore beneficiaries
● In the later phase, a series of stimulus packages, driven by the available real time
information and needs which focused on restoring economic activity and stimulating
demand.
Fiscal stimulus refers to policy measures undertaken by a government that typically reduce taxes or
regulations—or increase government spending—in order to boost economic activity.
Fiscal stimulus differs from expansionary monetary and fiscal policy more generally, in that it is a more
specifically targeted and conservative approach to policy. Instead of using monetary and fiscal policy to
replace private sector spending, economic stimulus is supposed to direct government deficit spending, tax
cuts, lowered interest rates, or new credit creation toward specific key sectors of the economy to take
14

advantage of powerful multiplier effects that will indirectly increase private sector consumption and
investment spending.
Methods of Financing
● New Public Sector Enterprise (“PSE”) Policy for Atmanirbhar Bharat. The policy intends to minimize
the presence of the Government in the PSEs across all sectors of the economy. Under the New PSE
Policy, public sector commercial enterprises have been classified as Strategic and Non-Strategic
sectors. Following four broad strategic sectors have been delineated based on the criteria of
national security, energy security, critical infrastructure, provision of financial services and availability
of important minerals- (i) Atomic Energy, Space and Defense; (ii) Transport and Telecommunication;
(iii) Power, Petroleum, Coal and other minerals; and (iv) Banking.
The B.E for disinvestment proceeds for the year 2021-22 was fixed at rs 1,75,000 crore. So far, the Government
has received Rs 9,330 crores (as on 24 January 2022).
● Asset monetisation scheme- envisaged to serve as an essential roadmap for the asset monetisation
of various brownfield infrastructure assets across roads, railways, shipping, aviation, power, telecom,
oil & gas, and warehousing sectors. The NMP will also form a baseline for the asset owning ministries
for monitoring and tracking performance of the potential assets. While the monetization of core
assets is steered by NITI Aayog, the initiative for monetization of non core assets has been hitherto
steered by the Department of Investment and Public Asset Management (DIPAM).
2.2 Fiscal Stimulus During 2021-22

The stimulus measures announced during the year 2021-22 have continued the
emphasis on liquidity enhancing and investment boosting measures to support the
reviving economy, apart from providing free food grains to the poor.
● Loan Guarantee Scheme for COVID-19 affected sectors

● Emergency Credit Line Guarantee Scheme (ECLGS)
● Credit Guarantee Scheme for Micro Finance institutions
● Scheme for tourist guides/stakeholders
● Free one month tourist visa to 5 lakh tourists
● Extension of Atma Nirbhar Bharat Rozgar Yojana
● Additional subsidy for DAP & P&K fertilizers
● Free food grains under PMGKY (May 2021 to march 2022)
● Release of climate resilient special traits varieties
● Revival of North Eastern Regional Agricultural Marketing Corporation (NERAMAC)
(https://pib.gov.in/PressReleasePage.aspx?PRID=1746944)
● Boost for project exports through NEIA & Boost to export insurance cover
● Broadband to each village through BharatNet PPP Model
15

● Extension of tenure of PLI scheme for large scale electronic manufacturing
● Reform based result linked power distribution scheme
● India COVID-19 Emergency Response & Health System preparedness package:
Phase-II
2.3 Performance of Fiscal Indicators During 2021-22 Based on April- November

2021 data by Controller General of Accounts
Components of the Budget: There are three major components—expenditure, receipts and deficit
indicators.
Expenditure
● Capital expenditure is incurred with the purpose of increasing assets of a durable nature or of
reducing recurring liabilities.All these are classified as capital expenditure as they lead to creation
of new assets.
● Revenue expenditure involves any expenditure that does not add to assets or reduce liabilities.
Expenditure on the payment of wages and salaries, subsidies or interest payments would be typically
classified as revenue expenditure.
Receipts
The receipts of the Government have three components —revenue receipts, non-debt capital receipts and
debt-creating capital receipts.
● Revenue receipts involve receipts that are not associated with increase in liabilities and comprise
revenue from taxes and non-tax sources.Non-tax revenue consists mainly of interest receipts on loans
to States and UnionTerritories, dividends and profits from Public Sector Enterprises including surplus of
Reserve Bank of India transferred to Government of India, and external grants and receipts for
services provided by the Central Government. These services include fiscal services like currency,
coinage and mint, general services such as Public Service Commission and police, social services
like education and health, and economic services like irrigation, transportation and communication.
● Non-debt receipts are part of capital receipts that do not generate additional liabilities. Recovery
of loans and proceeds from disinvestments would be regarded as non-debt receipts since
generating revenue from these sources does not directly increase liabilities, or future payment
commitments.
● Debt-creating capital receipts are ones that involve higher liabilities and future payment
commitments of the Government.
Deficits
● Fiscal deficit by definition is the difference between total expenditure and the sum of revenue
receipts and non-debt receipts. It indicates how much the Government is spending in net
terms.Since positive fiscal deficits indicate the amount of expenditure over and above revenue and
non-debt receipts, it needs to be financed by a debt-creating capital receipt.
● Primary deficit is the difference between fiscal deficit and interest payments.
● Revenue deficit is derived by deducting capital expenditure from fiscal deficits.
YoY Growth of fiscal indicators

16

Fiscal indicators FY21 over FY20 FY22 over FY21
Gross tax revenue -12.6 50.3
Assignment to States -20.7 20.4
Non Tax Revenue -46.6 79.5
Revenue Expenditure 3.7 8.2
Capital Expenditure 12.8 13.5
● The fiscal deficit of the Central Government at end November 2021 stood at 46.2 %
of the BE compared to 135.1 % during the same period in 2020-21
● Revenue receipts have grown at a much higher pace compared to the
corresponding periods during the last two years, attributable to growth in both tax
and non tax revenue.
● Over the last 4 years, GST revenues have steadily grown and the year-average of
monthly GST collection has increased from 0.9 lakh crore in 2017-18 to 1.19 lakh crore
in 2021-22 (upto December)
Growth of major direct and indirect tax in Ap-Nov 2021-22
2.4 Long Term Trend In The Government Finances

Long term fiscal indicators(% of GDP and growth rate)
Indicators 2017-18 2018-19 2019-20 2020-21 2021-22(BE)
Revenue 14.35 4.4 15.33 8.2 16.84 8.4 16.32 -3.1 17.88 9.6
17

receipt
Gross tax 11.2 11.8 11.0 8.4 9.9 -3.4 10.3 0.7 9.9 9.5
revenue
Net tax revenue 7.3 12.8 6.9 6.0 6.7 3.0 7.24.9 6.9 8.5
Total 12.5 8.4 12.2 8.1 13.2 16.0 17.8 30.7 15.6 -0.8
expenditure
Revenue 11.0 11.1 10.6 6.8 11.6 17.1 15.6 31.3 13.1 -5.1
expenditure
Capital 1.5 -7.5 1.6 16.9 1.6 9.1 2.2 26.5 2.5 30.5
expenditure
Fiscal deficit 3.5 3.4 4.6 9.2 6.8
Revenue Deficit 2.6 2.4 3.3 7.4 5.1
● During the year 2020-21, the shortfall in revenue collection owing to the interruption
in economic activity and the additional expenditure requirements to mitigate the
fallout of the pandemic the budgeted fiscal deficit for 2020-21 was revised from 3.5
per cent in BE to 9.5 per cent in RE. The fiscal deficit for 2020-21 Provisional Actuals
stood at 9.2% of GDP i.e. lower than RE. The MediumTerm Fiscal Policy (MTFP)
Statement presented with Budget 2021-22 envisaged a fiscal deficit target of 6.8% of
GDP for 2021-22.
JOIN RBI PRELIMS POWER PLAY
CLICK
18

2.5 Trends in deficits of Government
● The expenditure policy during the pandemic year 2020-21 was focused on
prioritization of expenditure according to evolving situation
○ Nearly 60 percent of the increase in revenue expenditure during 2020-21 PA
was due to increase in major subsidies. This increase was driven by almost 400
per cent growth in food subsidies from 2019-20 to 2020-21 PA.
○ Capital expenditure registered a YoY growth of 26.5 per cent in 2020-21 PA, as
it increased from 1.6 percent of GDP in 2019-20 to 2.2 per cent of GDP in 2020-
21 PA and envisaged to continue in 2021-22 BE to reach 2.5 percent of GDP
2.6 Trends in capital and revenue expenditure.
● Revenue trend is illustrated in the table below
19

2.7 Trends in tax as % of GDP
2.8 Composition of taxes in Gross tax revenue
● Total liabilities of the Central Government, as a ratio of GDP, which were relatively
stable over the past decade, have risen sharply in 2020-21. This increase is on account
of higher borrowing resorted to due to COVID-19 pandemic as well as sharp
contraction in the GDP.
CLICK
20

2.9 % of Debt to GDP ratio
Total liabilities of the Central Government include debt contracted against the Consolidated Fund of India,
technically defined as Public Debt, as well as liabilities in the Public Account. These liabilities include
external debt (end-of-the financial year) at current exchange rate but exclude part of NSSF liabilities to the
extent of States’ borrowings from the NSSF and investments in public agencies out of the NSSF, which do
not finance the Central Government deficit.
Public Debt accounted for 89.9 per cent of total liabilities, while Public Account Liabilities, which include
National Small Savings Fund, State Provident Funds, Reserve Funds and Deposits and other Accounts,
constituted the remaining 10.1 per cent.
Factors making the public debt portfolio stable and also sustainable.
-low reliance on external borrowing and issuance of majority of securities at fixed coupon.
-external borrowing from official sources which are of long term and concessional in nature.
- low issuance of short-term bonds with a view to elongate the maturity profile.
- Issuance of dated securities is planned and conducted, keeping in view the debt management objective
of keeping the cost of debt low, while assuming prudent levels of risk and promoting market development
-A vibrant secondary market provides opportunity to the investors to balance their portfolio as desired and
at the same time diversify public debt.
Retail Direct Scheme by RBI
Under the scheme, retail investors will be able to open a Retail Direct Gilt (RDG) account using an online
portal through which they can directly invest a minimum of rs10,000 and maximum of rs2 crore per security.
The retail investors can not only place a non-competitive bid in primary issuance of all Central & State
Government securities such as Treasury Bills and bonds but also access Secondary market through
Negotiated Dealing System-Order Matching (NDS OM) - RBI’s trading system, which was previously
accessible only to select financial institutions.
21

2.10 State finances
15th Finance Commission recommendation
● The Post Devolution Revenue Deficit Grants are provided to the States under Article 275 of the
Constitution. The grants are released to the States as per the recommendations of the Fifteenth
Finance Commission
● With regard to the grants to Local Bodies, the XV-FC had recommended
(a) Category-I cities: urban agglomerations/cities with more than one million population -
100 per cent of the grants are performance-linked
(b) Category-II cities: other than million-plus cities and rural local bodies-60 percent of the
grants should be tied to supporting and strengthening the delivery of two categories of basic
services:
● sanitation, maintenance of 'Open Defecation Free' status (for Rural Local Bodies),
solid waste management and attainment of star ratings as developed by Ministry of
Housing and Urban Affairs
● drinking water, rain water harvesting and water recycling
● The XV-FC has recommended grants for Health to be channelised through Local Governments.
● With regard to the Disaster Management grants, the SDRF (State Disaster Response Fund)should get
80 per cent of the total allocation and the SDMF (State Disaster Mitigation Fund) 20 percent. Similarly,
the Commission has recommended that NDRF (National Disaster Response Fund) should get 80 per
cent of the total allocation of the National Disaster Risk Management Fund and the balance 20 per
cent for National Disaster Mitigation Fund.
22

2.11 Fiscal Indicators of States
● The Gross Fiscal Deficit of States is estimated to cross the Fiscal Responsibility Legislation
(FRL) threshold of 3 percent of GDP during 2020-21 RE and 2021-22 BE.
● The Revenue Deficit of the States also increased from 0.1 per cent of GDP in 2018-19
to 2 percent of GDP in 2020-21 (RE).
● The States’ combined own Tax revenue and own Non-Tax revenue were anticipated
to grow at 28.5 per cent and 36 per cent respectively over 2020-21 RE, as against the
low growth displayed in 2020-21 RE.
● On the expenditure side, revenue expenditure and capital expenditure in 2021-22 BE
were envisaged to grow at 12.1 per cent and 30.5 per cent respectively over 2020-21
RE
Measures taken by the Centre to support the States during pandemic
● Under the Atma Nirbhar Bharat package, additional borrowing limit of up to 2 percent of Gross State
Domestic Product (GSDP) was allowed to the States for FY 2020-21.Of the additional 2 percent
borrowing allowed to the States, the first installment of 0.5 per cent borrowing was untied for all the
states. The second part amounting to 1 per cent of GSDP was subject to implementation of following
four scheme
○ One Nation One Ration Card System
○ Ease of doing business reform
○ Urban Local body/ utility reforms
○ Power Sector reforms
Another, 0.5 per cent of GSDP, which was earlier linked to the completion of at least 3 out of 4
above mentioned reforms, was made united for States choosing Option 1 to meet the shortfall arising
out of GST implementation.
● The net borrowing of the States for the year 2021-22 has been fixed at 4 per cent of GSDP of the
States. Out of this 0.50 per cent of GSDP was earmarked for the incremental capital expenditure to
be incurred by the States during 2021-22.
23

● Loan to States in lieu of GST Compensation shortfall.
● Scheme for Special Assistance to States for Capital Expenditure-special assistance provided to the
State Governments in the form of 50-year interest free loan during 2020-21. This scheme has been
extended for the year 2021-22.
2.12 Policy Measures to Enhance the Efficiency of Government Spending

● New guidelines for reforms in Public Procurement and Project Management-
Government issued new guidelines for procurement and project management in
October 2021, which have expanded the ambit of selecting bidders for executing
government projects and procuring goods and services:
○ The revised guidelines now allow QCBS for the selection of bidders for works
and non-consultancy services as well .
○ The procuring entities now have the freedom to amend the specifications
based on their requirements and make any criteria used in evaluation as
mandatory
○ The new guidelines stipulate timely release of payments of 75 per cent or more
of bills raised within 10 working days of the submission of the bill. The remaining
bill payment is to be made after final checking within 28 working days. The
procuring entity is also liable to pay interest if the payment of bills is delayed by
over 30 working days.
○ The new rules stipulate public authorities to consider a single bid as valid .
The GFR 2017 guidelines provide three methods for selection and evaluation of bidders viz Least Cost System,
Quality-cum-Cost Based Selection (QCBS)5 and
Single Source Selection6 (SSS) for different categories of procurement
Least Cost System is based on a two-step consecutive evaluation, wherein a contract is granted to the
bidder with the lowest financial bid among those who passed the minimum technical evaluation. There is
no weightage for technical score in the final evaluation.
Quality-cum-Cost Based Selection, a bidder is selected on the basis of both the technical and financial
proposals. A contract is granted to that bidder whose bid has received the highest combined score.
A Single-source selection is one in which two or more vendors can supply the commodity, technology
and/or perform the services required, but the State agency selects one vendor over the others for reasons
such as expertise or previous experience with similar contracts.
● Tax Reforms
○ A new e-filing portal was launched in 2021
24

○ To ease burden of senior citizens above the age of 75 years, they have been
given exemption from filing income tax returns if they only have pension
income and interest income
○ The time limit for reopening of assessment has also been reduced from six years
to three years.
○ To reduce the compliance on small charitable trusts running educational
institutions and hospitals, relief by way of tax exemption to such trusts has been
provided by the Finance Act 2021 by increasing the existing threshold of annual
receipts from Rs 1 crores to Rs 5 crores.
○ The Faceless Assessment Scheme was launched in 2020 which abolishes the
earlier system of tax administration and assessment based on territorial
jurisdiction
○ Faceless Appeals Scheme has also been launched which allows taxpayers to
file their documents in an electronic mode and saves them the hassle of visiting
the Income Tax Department
○ Faceless Penalty scheme 2021 was also launched to impart greater efficiency,
transparency and accountability to the procedure for imposition of penalty
○ Finance Act 2021 like tax holiday on capital gains for aircraft leasing
companies, tax exemption for aircraft lease rentals paid to foreign lessor, tax
incentives for relocating foreign funds into IFSC and allowing tax exemption for
the investment division of foreign banks located in IFSC.
○ For widening the tax net of Tax Deduction at Source (TDS) and Tax Collection
at Source (TCS) several new transactions were brought into its ambit. These
transactions include huge cash withdrawal, foreign remittance, purchase of
luxury car, e-commerce participants, sale of goods, acquisition of immovable
property, etc
○ The customs duty structure has been calibrated in such way that incentivizes
investment in key areas like petroleum exploration, electronic manufacturing
etc
○ In order to ensure swift and secure movement of dutiable goods from port of
import to customs warehouse, CBIC has launched the use of ECTS (Electronic
Cargo Tracking System) in Oct 2021. This concept is borrowed from the
transhipment procedure for cargo meant for neighbouring countries.
○ CBIC has introduced Risk Management System (RMS) to facilitate faster
drawback disbursal for genuine exporters and to help in better checking of
fraudulent drawback claims on exports
○ CBIC has launched the Indian Customs Compliance Information Portal (CIP)
for providing free access to information on all Customs procedures and
regulatory compliance for nearly 12,000 Customs Tariff Items
25

○ A massive exercise of calibration of GST rates has also been done so as to fix
the rates and maintain revenue neutrality.
2.13 Conclusion
The General Government liabilities as a proportion of GDP increased steeply during 2020-
21 on account of the additional borrowings made by Centre and States due to the shortfall
in revenue and higher expenditure requirements arising out of COVID-19 pandemic.
However, in 2021-22 BE, the fiscal indicators are expected to rebound with the recovery in
the economy and the General Government is expected to follow the path of fiscal
consolidation.

CLICK
26

3 External Sector
External trade recovered strongly in 2021-22 after the pandemic-induced slump of the
previous year, with strong capital flows into India, leading to a rapid accumulation of foreign
exchange reserves. The resilience of India’s external sector during the current year augurs
well for growth revival in the economy.
The International Monetary Fund (IMF) in its World Economic Outlook (WEO) October 2021 edition projected
higher growth of global trade volume in goods and services of 9.7 percent in 2021, moderating to 6.7
percent in 2022, in line with the projected global recovery. The World Trade Organization (WTO) in its
October 2021 release, also upgraded its forecast for global merchandise trade volume growth to 10.8
percent in 2021, followed by a 4.7 percent rise in 2022.
3.1 Global Economic Environment

● There has been a revival in global economic activity and global merchandise trade
volume in H1 of 2021,which weakened again by the third quarter (Q3) due to rapid
spread of Delta variants and the threat of new variants, barring Russia in the case of
exports and Indonesia for imports.
● Trade of manufactured goods, agricultural products and fuels & mining products
(owing to rise in natural gas prices) witnessed positive and higher year-over-year (y-
o-y) growth during Q2 of 2021 than in Q1, before moderating in Q3. Among
manufactured goods, some sectors showed strong y-o-y increase, including iron and
steel, electronic components and pharmaceuticals while others such as automotive
products and telecommunications equipment showed stagnation or decline,
reflecting the recent shortage of semiconductors.
Balance of Payments
27

Balance of Payments (BoP) of a country can be defined as a systematic statement of all economic
transactions of a country with the rest of the world during a specific period usually one year.
For preparing BoP accounts, economic transactions between a country and the rest of the world are
grouped under - Current account, Capital account and Errors and Omissions. It also shows changes in
Foreign Exchange Reserves.
Current Account: It shows export and import of visibles (also called merchandise or goods - represent trade
balance) and invisibles (also called non-merchandise). Invisibles include services, transfers and income.
The balance of exports and imports of goods is referred to as the trade balance. Trade Balance is a part
of ‘Current Account Balance’.
A current account deficit occurs when the total value of goods and services a country imports exceeds
the total value of goods and services it exports.
Capital Account: It shows a capital expenditure and income for a country.
It gives a summary of the net flow of both private and public investment into an economy.
External Commercial Borrowing (ECB), Foreign Direct Investment, Foreign Portfolio Investment, etc form a
part of capital account.
Errors and Omissions: Sometimes the balance of payments does not balance. This imbalance is shown in
the BoP as errors and omissions. It reflects the country’s inability to record all international transactions
accurately.
Changes in Foreign Exchange Reserves: Movements in the reserves comprises changes in the foreign
currency assets held by the Reserve Bank of India (RBI) and also in Special Drawing Rights (SDR) balances.
Overall the BoP account can be a surplus or a deficit. If there is a deficit then it can be bridged by taking
money from the Foreign Exchange (Forex) Account.
3.2 1. Current Account

Development in India’s Merchandise Trade
28

In 2021, inflation picked up globally as economic activity revived with the opening up of
economies. Inflation in the US touched 6.8 per cent in November 2021, the highest since
1982, driven largely by energy and food prices. This may result in tightening of financial
conditions, adversely affecting capital flows, putting pressure on exchange rate and
slowing down growth in emerging economies. Further, in addition to the surge in global
inflation, as outlined above, longer port delays, higher freight rates, shortage of shipping
containers, shortage of inputs such as semiconductors, with supply-side disruptions being
exacerbated by recovery in demand, pose significant risks, inter alia, for global trade.
Against this backdrop, India’s external sector has shown immense resilience during the
year, which augurs well for growth revival in the economy
● Merchandise Exports
○ Out of an ambitious export target of US$ 400 billion set for 2021-22, India has
already attained more than 75 percent of it by exporting goods worth US$ 301.4
billion, which is actually higher than the export target of US$ 300 billion set for
the April-December period of 2021-22.
3.3 Top 5 Export Commodities (% share in total export)

Commodities 2019-2020 2020-21 2021-22(Ap-Nov)
Petroleum Products 13.2 8.8 14.9
Pearl, Precious and 6.6 6.2 6.8

Semi-precious Stones
Iron and Steel 3.0 4.2 6.0
Drug Formulations, 5.1 6.5 4.7

Biological
Gold and Other 4.4 2.3 2.8

precious metal
Jewellery
Note- In 2020-21 top 5th good to be exported was electric machinery and equipment with
total share in export at 2.8% and top 6th Organic chemicals with a share of 2.6%
○ The export of agriculture and allied products (including marine and plantation
products) grew by 23.2 per cent to US$ 31.0 billion during April-November, 2021
over the corresponding period of 2020-21
29

Agri Export
The Indian government has been encouraging agricultural exports to meet an ambitious target of $60bn
by 2022.Traditionally, Basmati rice is one of the top export commodities.
However, now there is an unusual spike in the export of non-basmati rice.
In 2020-21, India exported 13.09 million tonnes of non-basmati rice ($4.8bn), up from an average 6.9 million
tonnes ($2.7bn) in the previous five years.
Indian buffalo meat is seeing a strong demand in international markets due to its lead character and near
organic nature.The export potential of buffalo meat is tremendous, especially in countries like Vietnam,
Hong Kong and Indonesia.
The Ministry of Food Processing Industries shows that the contribution of agricultural and processed food
products in India’s total exports is 11%.
The exporters of processed food confront difficulties and non-tariff measures imposed by other countries on
Indian exports. Some of these include
-Mandatory pre-shipment examination by the Export Inspection Agency being lengthy and costly;
-Compulsory spice board certification being needed even for ready-to-eat products which contain spices
in small quantities;
-Lack of strategic planning of exports by most State governments;
-Lack of a predictable and consistent agricultural policy discouraging investments by the private sector;
-Prohibition of import of meat- and dairy based-products in most of the developed countries;
-Withdrawal of the Generalized System of Preference by the U.S. for import of processed food from India;
-Export shipments to the U.S. requiring an additional health certificate; and
-The absence of an equivalency agreement with developed countries for organic produce.
30

3.4 Top 5 Agricultural Export Products ($US Billion)
Commodities 2020-2021 2021-22(Ap-Nov)
Marine Product 6.0 5.4
Rice (other than Basmati) 4.8 3.9
Spices 4.0 2.7
Sugar 2.8 2.3
Buffalo Meat 3.2 2.2
○ The USA remained the top export destination, followed by UAE and China.
Belgium has replaced Malaysia and entered into the top 10 leading export
destinations of India
3.5 Top 10 Export Destinations of India in 2021-22 (Ap-Nov) by % share
Diversifying export
India has diversified its export destinations in the last 25 years, yet more than 40% India’s exports are still
accounted for by only 7 countries. A further push in this direction can be achieved by implementation of
various ongoing Free Trade Agreements- both bilateral and regional:
-Comprehensive Economic Cooperation Agreement (CECA) between India and Australia
31

-FTA with European Union (EU)
-Comprehensive Economic Partnership Agreement (CEPA) with Canada
-CEPA with the UAE
-FTA with UK
-Social Security Agreement, Mutual Recognition Agreements (MRAs) in nursing services and accountancy
services, and mobility issues concerning Indian professionals with the USA
Types of Trade Agreements
Free Trade Agreement (FTA):
A free trade agreement is an agreement in which two or more countries agree to provide preferential trade
terms, tariff concession etc. to the partner country.
India has negotiated FTA with many countries e.g. Sri Lanka and various trading blocs as well e.g. ASEAN.
Preferential Trade Agreement (PTA):
In this type of agreement, two or more partners give preferential right of entry to certain products. This is
done by reducing duties on an agreed number of tariff lines.
Tariffs may even be reduced to zero for some products even in a PTA. India signed a PTA with Afghanistan.
Comprehensive Economic Partnership Agreement (CEPA):
Partnership agreement or cooperation agreement are more comprehensive than an FTA.
CEPA covers negotiation on the trade in services and investment, and other areas of economic partnership.
India has signed CEPAs with South Korea and Japan.
Comprehensive Economic Cooperation Agreement (CECA):
CECA generally covers negotiation on trade tariff and TRQ (Tariff Rate Quotas) rates only. It is not as
comprehensive as CEPA. India has signed CECA with Malaysia.
3.6 Major Schemes & Initiatives to boost exports

❖ Remission of Duties and Taxes on Exported Products (RoDTEP)- a WTO compliant
RoDTEP scheme is brought into effect from 01.01.2021 which reimburses currently un-
refunded Central, State, and Local taxes and duties incurred in the process of
manufacture and distribution of exported products.
❖ Developing District as Export Hub-the focus is to make districts active stakeholders in
the promotion of exports of goods/services produced/ manufactured in the district.
District Export Promotion Committees (DEPCs) have been set up in each district.
❖ Production-Linked Incentive (PLI) scheme- for 14 key sectors starting from 2021-22. The
scheme provides incentives to companies on incremental sales for products
32

manufactured in domestic units, which is expected to create minimum production
of over US$ 500 billion in 5 years..
❖ Electronic Platform for Preferential Certificate of Origin (CoO)-In view of the COVID-
19 crisis, on-boarding of FTAs/ preferential trade agreements (PTAs) was quickly done
to allow electronic issuance to avoid physical movement.
❖ Export Credit Guarantee Corporation of India Ltd. (ECGC) -provides insurance cover
to banks against risks in export credit lending to the exporter borrowers
❖ Export Promotion Capital Goods (EPCG) Scheme-In order to increase procurement of
capital goods from indigenous manufacturers under the EPCG scheme, the
government has reduced specific export obligations from 90 per cent to 75 per cent
of the normal export obligation
❖ Enabling an efficient Logistics eco-system to boost exports-
➢ PM Gati Shakti NMP aims to provide multimodal connectivity to various
economic zones and integrate the infrastructure linkages holistically for
seamless movement of people, goods & services to improve logistics
efficiency.
● Merchandise Import
○ The merchandise imports grew at the rate of 68.9 percent to US$ 443.8 billion in
April-December, 2021 over the corresponding period of last year and 21.9
percent over April December, 2019, crossing the pre-pandemic levels.
Table 3- Top 5 Import Commodities (% share in total import)
Commodities 2019-20 2020-21 2021-22 (April to November)
Petroleum Crude 21.6 15.1 19.2
Gold 5.9 8.8 8.7
Petroleum 5.9 5.9 6.3

Products
Pearl, Precious, 4.7 4.8 5.0

Semi-precious
Stones
Coal, Coke and 4.7 4.1 4.9

Briquettes etc.
33

○ Among the top ten countries for import origin, China, UAE and USA were the top
import sources for India in April-November, 2021, with China's share reducing
to 15.5 per cent from 17.7 percent in corresponding period a year earlier –
reflecting increased diversification of India's import sources. Switzerland, which
was ousted last year from top ten sources of India’s import, bounced back at
sixth position with a share of 4.7 percent in April-November, 2021. Indonesia –
second biggest source of crude palm oil – remains to be one of top ten
suppliers of India.
3.7 Top ten Import Destinations in 2021-22 (Ap-Nov) by share in %
● Merchandise Trade Balance

○ The merchandise exports as well as imports rebounded strongly and surpassed
pre-pandemic levels leading to an increase in merchandise trade deficit. It
stood at US$ 142.4 billion in April-December, 2021 compared to the deficit of
US$ 61.4 billion in corresponding period of last year and US$ 125.9 billion in April-
December, 2019. India had the most favourable trade balance with the USA
followed by Bangladesh and Nepal.
3.8 Trade in Invisibles

● Services Exports
○ Despite pandemic induced global restrictions and weak tourism revenues,
India’s services exports recorded growth of 18.4 per cent to US$ 177.7 billion
during 2021-22 (April-December), over the corresponding period a year earlier.
○ This is mainly on account of top three computer, business and transportation
services that constitute more than 80 per cent of total services exports
● Services Imports
34

○ Services imports rose by 21.5 per cent to US$ 103.3 billion in 2021-22 (April-
December) from the corresponding period a year earlier.
○ The surge in services imports is mainly on account of payments for business,
transport, travel and computer services, which together constitute more than
75 percent of services imports
● Private transfers
○ In H1: FY 22, the net private transfers – mainly representing remittances by
Indians employed overseas – grew by 7.2 per cent to US$ 38.4 billion, over
corresponding period a year earlier and by modest 0.1 per cent over H1: FY 20,
exceeding the pre-pandemic levels.
● Invisibles Trade Balance
○ On account of higher net services receipts and private transfers, net invisibles
were higher at US$ 72.1 billion in H1: FY 22, compared to US$ 60.1 billion last year
As per the Migration and Development Brief, World Bank (November 2021), India continues to be the largest
remittance recipient country in the world in 2021 (in current US dollar terms) and has been so since 2008.
3.9 Current Account Balance:

After witnessing a surplus in H1: FY 21, India’s current account balance flipped into a deficit
of US$ 3.1 billion (0.2 percent of GDP) in H1: FY 22, on the back of sharp increase in
merchandise trade deficit. However, this current account deficit remained lower than the
deficit of US$ 22.6 billion recorded in H1: FY 20 (pre-pandemic level).
Current Account Balance
2. Capital Account/Finance Account
35

Net capital flows
● In H1: FY 22, net capital flows more than tripled to US$ 65.6 billion (4.5 per cent of GDP)
over those in H1: FY 21, on the back of continued inflow of foreign investment, rise in
loans mainly external commercial borrowings (ECBs), banking capital and other
capital (inclusive of SDR allocation of US$ 17.9 billion by the IMF).
● Net capital flows remained volatile yet witnessed y-o-y and sequential growth in both
quarters of 2021-22. While the capital flows rose in Q1: FY 22 mainly on account of
robust foreign direct investment on y-o-y basis, it increased further in Q2: FY 22 mainly
due to the increase in FPI, ECBs and allocation of special drawing rights (SDR) by IMF,
reflected in notable rise in net other capital.
○ Falling short of the pre pandemic level, the net foreign investment inflows (FIIs)
– primarily driven by FDI – moderated to US$ 25.4 billion in H1: FY 22 compared
to corresponding period of FY 21.
○ While net FDI recorded a lower inflow of US$ 24.7 billion, the gross FDI inflows
moderated at US$ 54.1 billion during April-November, 2021 compared to
corresponding period last year, largely due to lower equity investment.
Computer software and hardware attracted the highest FDI equity inflows of
US$ 7.1 billion in April-September, 2021. Singapore continues to be the top
investing country in terms of FDI equity inflow while USA occupies the second
position.
○ FPI flows remained volatile due to global uncertainties relating to US monetary
policy normalization, rising global energy prices, fear of new variants of COVID-
19 and strong inflationary pressures. While the debt market witnessed net
purchases during April-December, 2021, valuation concerns and profit booking
by portfolio investors led to outflows from the Indian equity market, leading to
net FPI outflow of 0.6 billion, vis-à-vis net FPI inflow of US$ 28.5 billion in
corresponding period a year earlier.
Foreign Investment, consisting of foreign direct investment (FDI) and foreign portfolio investment (FPI), is the
largest component of the capital account.
A Foreign Direct Investment (FDI) is an investment made by a firm or individual in one country into business
interests located in another country. FDI lets an investor purchase a direct business interest in a foreign
country.
Example: Investors can make FDI in a number of ways. Some common ones include establishing a subsidiary
in another country, acquiring or merging with an existing foreign company, or starting a joint venture
partnership with a foreign company.
Foreign portfolio investment (FPI) consists of securities and other financial assets passively held by foreign
36

investors. It does not provide the investor with direct ownership of financial assets and is relatively liquid
depending on the volatility of the market.
Examples of FPIs include stocks, bonds, mutual funds, exchange traded funds, American Depositary Receipts
(ADRs), and Global Depositary Receipts (GDRs).
3.10 3. BOP Balance

● Current account deficit (CAD) was adequately cushioned by robust capital flows,
resulting in an overall balance of payments (BoP) surplus of US$ 63.1 billion in H1: FY
22. This led to an augmented foreign exchange reserves crossing the milestone of US$
600 billion and touching US$ 635.4 billion as at end-September 2021.
● While the BoP surplus in Q1: FY 22 was on account of surplus in current as well as
capital account, BoP surplus in Q2: FY 22 was on the back of larger surplus on capital
account more than compensating the deficit on the current account.
The forex reserves stood higher at US$ 633.6 billion as at end-December 2021, than US$ 577.0 billion as at
end-March 2021. However, the import cover of India’s foreign exchange reserves declined to 13.2 months
at end-December 2021 from 17.4 months at end-March 2021 as merchandise imports increased with pick-
up in domestic economic activity. As at end-November 2021, India was the fourth largest foreign exchange
reserves holder in the world after China, Japan and Switzerland.
India’s Current account deficit is expected to be in a manageable limit and from a historical perspective;
India can sustain a current account deficit of 2.5-3.0 percent of GDP without getting into an external sector
crisis.
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can
include bonds, treasury bills and other government securities.
It needs to be noted that most foreign exchange reserves are held in US dollars.
India’s Forex Reserve include:
● Foreign Currency Assets

● Gold reserves
● Special Drawing Rights
● Reserve position with the International Monetary Fund (IMF).
Foreign Currency Assets
FCAs are assets that are valued based on a currency other than the country's own currency.
FCA is the largest component of the forex reserve. It is expressed in dollar terms.
The FCAs include the effect of appreciation or depreciation of non-US units like the euro, pound and yen
held in the foreign exchange reserves.
37

Special Drawing Rights
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’
official reserves.
The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable
currencies of IMF members. SDRs can be exchanged for these currencies.
The value of the SDR is calculated from a weighted basket of major currencies, including the US dollar, the
euro, Japanese yen, Chinese yuan, and British pound.
The interest rate on SDRs or (SDRi) is the interest paid to members on their SDR holdings.
Reserve Position in the International Monetary Fund
A reserve tranche position implies a portion of the required quota of currency each member country must
provide to the IMF that can be utilized for its own purposes.
The reserve tranche is basically an emergency account that IMF members can access at any time without
agreeing to conditions or paying a service fee.
3.11 4. Exchange Rate

● Indian rupee depreciated by 4.5 percent (y-o-y basis) against US dollar in 2020-21.
Although the rupee exhibited movements in both directions against the US dollar
during April-December, 2021, it depreciated by 3.4 per cent in December 2021 over
March 2021. The depreciation of the rupee, however, was modest as compared with
its emerging market peers, such as Turkish lira, Argentine Peso, Thai baht, and
Philippine peso .
● The rupee appreciated against euro, Japanese yen and pound sterling by 1.8 per
cent, 1.3 per cent and 0.6 per cent, respectively, in December 2021 over March 2021
● In terms of 6-currency nominal effective exchange rate (NEER) (trade-weighted), the
rupee depreciated by 2.1 per cent in December 2021 over March 2021, while it
appreciated by 0.9 per cent in terms of real effective exchange rate (i.e. REER) terms.
Exchange rate
The price of one currency in terms of the other is known as the exchange rate.
A currency’s exchange rate vis-a-vis another currency reflects the relative demand among the holders of
the two currencies.
For e.g. If the US dollar is stronger than the rupee (implying value of dollar is higher with respect to rupee),
then it shows that the demand for dollars (by those holding rupee) is more than the demand for rupees (by
38

those holding dollars).
The nominal exchange rate is the rate at which currency can be exchanged. If the nominal exchange rate
between the dollar and rupee is 75, then one dollar will purchase 75 rupee. Exchange rates are always
represented in terms of the amount of foreign currency that can be purchased for one unit of domestic
currency. Thus, we determine the nominal exchange rate by identifying the amount of foreign currency that
can be purchased for one unit of domestic currency.
The real exchange rate
While the nominal exchange rate tells how much foreign currency can be exchanged for a unit of domestic
currency, the real exchange rate tells how much the goods and services in the domestic country can be
exchanged for the goods and services in a foreign country. The real exchange rate is represented by the
following equation:
Real exchange rate = (nominal exchange rate X domestic price) / (foreign price)
Nominal Effective Exchange Rate (NEER)
The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country’s
currency exchanges for a basket of multiple foreign currencies. The nominal exchange rate is the amount
of domestic currency needed to purchase foreign currency.
In economics, the NEER is an indicator of a country’s international competitiveness in terms of the foreign
exchange (forex) market. Forex traders sometimes refer to the NEER as the trade-weighted currency index.
Real Effective Exchange Rate (REER)
The NEER may be adjusted to compensate for the inflation rate of the home country relative to the inflation
rate of its trading partners. The resulting figure is the real effective exchange rate (REER).
3.12 5. India’s External Resilience

Since the taper episode of 2013, India’s salient external sector sustainability indicators
improved-
The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP).
By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that
particular country’s ability to pay back its debts.
Import cover of reserves is a traditional trade-based indicator of reserve adequacy. It is defined in terms of
the number of months of import equivalent to reserves.
Concessional debt these are loans that are extended on terms substantially more generous than market
loans.
39

Net International Investment Position (IIP) is the difference between the value of financial assets of residents
of an economy that are claimed by non-residents and the liabilities of residents of an economy to non-
residents at a point in time. It represents either a net claim on or a net liability to the rest of the world.
3.13 External Vulnerability Indicators for India
3.14 External Debt

● India’s external debt as at end-September 2021, estimated at US$ 593.1 billion, grew
by US$ 22.3 billion (3.9 per cent) over the level as at end-June 2021.
● Commercial borrowings (the largest component of external debt), the NRI deposits
(second largest component) and short-term trade credit (the third largest
component). Together, these three components constitute 77.2 percent of total
external debt as at end-September, 2021.
● India’s external debt, which crossed the pre-crisis level as at end-March 2021,
consolidated further as at end-September 2021, aided by revival in NRI deposits and
the additional SDR allocation by the IMF. Commercial borrowings and the short-term
trade credit, on the other hand, which are growth-sensitive, still continued to be
below the pre pandemic levels
40

● US dollar denominated debt remained the largest component of India’s external
debt, with a share of 51 per cent at end-September 2021, followed by the Indian
rupee. External debt denominated in Indian rupee witnessed impressive increase
over the years owing to a calibrated encouragement of FPI investment into the Indian
debt market, apart from continued large accretion to Non Resident External Rupee
Account Accordingly, being the second largest component; Indian rupee
denominated debt provides significant insulation from exchange rate fluctuations.
● Debt service (i.e., principal repayments and interest payments) declined to 4.7 per
cent of current receipts at end-September 2021, as compared with 8.2 per cent at
end-March 2021, reflecting lower repayments and higher current receipts.
● Further, a sizable accretion in reserves, however, led to an improvement in other
external vulnerability indicators such as forex reserves to total external debt, short
term debt to foreign exchange reserves, etc.
3.15 Conclusion
As documented, from a medium-term perspective, India’s external debt continues to be
below what is estimated to be optimal for an emerging market economy, while various
external sector vulnerability indicators improved over the recent years, pointing towards the
resilience of India’s external sector.
In recent months, scaling back of pandemic-related stimulus programmes amidst persistent

inflationary pressures in advanced economies, particularly the US, have reignited some
fears of taper tantrum. However, India’s external sector – well supported by strong exports,
capital inflows, low CAD and external financing requirements and high foreign exchange
reserves, with various external vulnerability indicators well within manageable limits – is far
better prepared this time to face any external shocks arising out of tightening of the
monetary policy stance by the advanced economies in coming months.
41

4 Monetary Management & Financial Intermediation
Monetary policy and liquidity operations since the beginning of the COVID-19 pandemic
have geared towards mitigating its adverse impact on the economy. Accommodative
monetary policy along with other regulatory dispensations, asset classification standstill,
temporary moratorium and provision of adequate liquidity were put in place in order to
provide a safety net to the system. In 2021-22, liquidity has been wound down partly but
remains in surplus mode and regulatory measures have been realigned.
Accommodative monetary policy

It is also known as loose credit or easy monetary policy, occurs when a central bank (such as the Reserve
Bank of India) attempts to expand the overall money supply to boost the economy when growth is slowing
(as measured by GDP). The policy is implemented to allow the money supply to rise in line with national
income and the demand for money. It is done in two ways :
1. Reducing the cost of borrowing by reducing the rate of interest.

-Decreasing Repo rate, Bank rate, Marginal Standing Facility Rate etc
2. Increasing the availability of credit by increasing money supply.

-Open Market Operation, Reducing Cash Reserve Ratio and Statutory Liquidity Ratio etc
Instruments of monetary policy
● Open Market Operations: An open market operation is an instrument which involves buying/selling
of securities like government bonds from or to the public and banks. The RBI sells government
securities to control the flow of credit and buys government securities to increase credit flow.
● Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified amount of bank deposits which banks
are required to keep with the RBI in the form of reserves or balances. The higher the CRR with the
RBI, the lower will be the liquidity in the system and vice versa. The CRR was reduced from 15% in
1990 to 5 % in 2002. As of 31st December 2021, the CRR is at 4%.
● Statutory Liquidity Ratio (SLR): All financial institutions have to maintain a certain quantity of liquid
assets with themselves at any point in time of their total time and demand liabilities. This is known as
the Statutory Liquidity Ratio. The assets are kept in non-cash forms such as precious metals, bonds,
etc. As of December 2019, SLR stands at 18.25%.
● Bank Rate Policy: Also known as the discount rate, bank rates are interest charged by the RBI for
providing funds and loans to the banking system. An increase in bank rate increases the cost of
borrowing by commercial banks which results in the reduction in credit volume to the banks and
hence the supply of money declines. An increase in the bank rate is the symbol of the tightening of
the RBI monetary policy. As of 31 December 2019, the bank rate is 5.40%.
● Credit Ceiling: With this instrument, RBI issues prior information or direction that loans to the
commercial bank will be given up to a certain limit. In this case, a commercial bank will be tight in
advancing loans to the public. They will allocate loans to limited sectors. A few examples of credit
ceiling are agriculture sector advances and priority sector lending.
● Liquidity Adjustment Facility (LAF) is a tool used in monetary policy by the RBI that allows banks to
borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through
reverse repo agreements.
-Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the
42

country and an increased reverse repo rate reduces the liquidity.
-Repo rate is the rate at which the RBI lends loan to the commercial; banks and a rise in the repo
rate reduces the liquidity by increasing the cost of borrowing.
● Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in
an emergency situation when interbank liquidity dries up completely. Banks borrow from the central
bank by pledging government securities at a rate higher than the repo rate under liquidity
adjustment facility or LAF in short. The MSF rate is pegged 100 basis points or a percentage point
above the repo rate. Under MSF, banks can borrow funds up to one percent of their net demand
and time liabilities (NDTL).
4.1 Monetary Developments

● Since May 2020, the policy rates have been on hold along with an accommodative
monetary policy stance with forward guidance that this stance will continue as long
as necessary to revive growth on a durable basis while ensuring that inflation
remains within the target. The repo rate which currently stands at 4 percent is lowest
in the last decade.
The Flexible Inflation Target

The central bank and the government agreed in 2015 on a policy framework that stipulated a primary
objective of ensuring price stability while keeping in mind the objective of growth.
The Flexible Inflation Target (FIT) was adopted in 2016. The Reserve Bank of India Act, 1934 was amended to
provide a statutory basis for a FTI framework. The amended Act provides for the inflation target to be set by
the Government, in consultation with the RBI, once every five years.
India adopted a flexible inflation targeting mandate of 4 (+/-2) percent and headline consumer price
inflation was chosen as a key indicator.
It also established the Monetary Policy Committee as a statutory and institutionalized framework under the
Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of
growth. The Governor of RBI is ex-officio Chairman of the committee.
The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%).
43

Currency in circulation
It is the total value of the currency (coins and paper currency) that has ever been issued by the Reserve
Bank of India minus the amount that has been withdrawn by it.
Currency in circulation (currency with the public) comprises of:
● currency notes and coins with the public

● cash in hand with banks.
It is a major liability component of a central bank’s balance sheet.
Money Aggregates: Standard Measures of Money Supply
● Central bank money (M0) – obligations of a central bank, including currency and central bank
depository accounts.
● Commercial bank money (M1 and M3) – obligations of commercial banks, including current
accounts and savings accounts.
1.Reserve Money (M0):
Reserve money is also called central bank money, monetary base, base money, or high-powered money.
It is the base level for the money supply or the high-powered component of the money supply.
In the most simple language, Reserve Money is Currency in Circulation plus Deposits of Commercial Banks
with RBI.
Mo = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI
2.M1 (Narrow Money)
=Currency with the public + Deposit money of the public (Demand deposits with the banking system +
‘Other’ deposits with the RBI).
3.M2:
=M1 + Savings deposits with Post office savings banks.
4.M3: (Broad Money)
= M1+ Time deposits with the banking system
= Net bank credit to the Government + Bank credit to the commercial sector + Net foreign exchange
assets of the banking sector + Government’s currency liabilities to the public – Net non-monetary liabilities
of the banking sector (Other than Time Deposits).
5.M4:
=M3 + All deposits with post office savings banks (excluding National Savings Certificates).
Generally, the types of commercial bank money that tend to be valued at lower amounts are classified in
the narrow category of M1 while the types of commercial bank money that tend to exist in larger amounts
are categorized in M2 and M3. M3 is the largest of all money aggregates (M1-M3).
● In 2021-22 so far, the overall monetary and credit conditions remained

accommodative. However, the growth rates of monetary aggregates- including
Reserve money, Broad money, Currency in Circulation were lower as compared to
the last year, as the precautionary demand for cash subsided
44

The Motives for Holding Cash is simple, the cash inflows and outflows are not well synchronized, and i.e.
sometimes the cash inflows are more than the cash outflows while at other times the cash outflows would
be more. Hence, the cash is held by the firms or individuals to meet certain as well as uncertain situations.
● Transaction Motive: The transaction motive refers to the cash required by a firm/ individuals to meet
the day to day needs. In an ordinary course of business, the firm requires cash to make the
payments in the form of salaries, wages, interests, dividends, goods purchased, etc. Likewise, it also
receives cash from its sales, debtors, and investments. Often the firm’s cash inflows and outflows
do not match, and hence, the cash is held up to meet its routine commitments.
● Precautionary Motive: The precautionary motive refers to the tendency of a firm/ individuals to
hold cash, to meet the contingencies or unforeseen circumstances arising in the course of
business/life. Like covid pandemic, war, death etc
● Speculative Motive: The firm/individual holds cash for the speculative purposes to avail the benefit
of bargain purchases that may arise in the future. For example, if the firm feels the prices of raw
material are likely to fall in the future, it will hold cash and wait till the prices actually fall. Thus, a firm
holds cash to exploit the possible opportunities that are out of the normal course of business. These
opportunities could be in the form of the low-interest rate charged on the borrowed funds,
expected fall in the raw material prices or favorable change in the government policies.
● As on 31st March 2021, money multiplier (MM) stood at 5.2 from 5.6 a year ago.
Money multiplier, however, improved slightly to 5.3 as on 31st December 2021.
A money multiplier is an approach used to demonstrate the maximum amount of broad money that could
be created by commercial banks for a given fixed amount of base money and reserve ratio.
The money multiplier, m, is the inverse of the reserve requirement, R:
m=1/R
For example, with the reserve ratio of 20 per cent, this reserve ratio, R, can also be expressed as a fraction:
R=1/5
So then the money multiplier, m, will be calculated as:
m=1/5=5
In money supply terms,
Money multiplier- measured as a ratio of M3 to M0
● RBI has maintained ample surplus liquidity in the banking system to support growth.
In 2021-22 so far, the RBI resumed normal liquidity operations in a phased manner
and engaged in rebalancing liquidity from passive absorption under fixed rate
45

reverse repo under its Liquidity Adjustment Facility (LAF) to market based reverse
repo auctions (like Variable Rate Reverse Repo (VRRR).
● With RBI becoming the major counterparty for banks (in lending and borrowing
operations to manage liquidity), there was a shrinkage in interbank trading activity -
average daily volume in the call money market declined and interest rates on longer-
term money market instruments like 91-day Treasury Bills (T-Bills), 3-month Certificates
of Deposit (CDs) and Commercial Papers (CPs) generally traded above the reverse
repo rate during the year.
The term ‘Money Market’, according to the Reserve Bank of India, is used to define a market where short-
term financial assets are traded. These assets are a near substitute for money and they aid in the money
exchange carried out in the primary and secondary market. So, essentially, the money market is an
apparatus which facilitates the lending and borrowing of short-term funds, which are usually for a duration
of under a year.
Institutions like commercial banks, non-banking finance corporations (NBFCs) and acceptance houses are
the components which make up the money market.
Instruments of MM
● Call Money-Call money is mainly used by the banks to meet their temporary requirement of cash.
They borrow and lend money from each other normally on a daily basis. It is repayable on demand
and its maturity period varies in between one day to a fortnight. The rate of interest paid on call
money loan is known as call rate.
● Treasury Bill-A treasury bill is a promissory note issued by the RBI to meet the short-term requirement
of funds. Treasury bills are highly liquid instruments that mean, at any time the holder of treasury bills
can transfer or get it discounted from RBI. These bills are normally issued at a price less than their
face value; and redeemed at face value. So the difference between the issue price and the face
value of the Treasury bill represents the interest on the investment. These bills are secured
instruments and are issued for a period of not exceeding 364 days. Banks, Financial institutions and
corporations normally play a major role in the Treasury bill market.
● Commercial Paper -Commercial paper (CP) is a popular instrument for financing working capital
requirements of companies. The CP is an unsecured instrument issued in the form of a promissory
note. This instrument was introduced in 1990 to enable the corporate borrowers to raise short-term
funds. It can be issued for a period ranging from 15 days to one year. Commercial papers are
transferable by endorsement and delivery. The highly reputed companies (Blue Chip companies)
are the major players of the commercial paper market.
● Certificate of Deposit-Certificates of Deposit (CDs) are short-term instruments issued by Commercial
Banks and Special Financial Institutions (SFIs), which are freely transferable from one party to
another. The maturity period of CDs ranges from 91 days to one year. These can be issued to
individuals, cooperatives and companies.
● Trade Bill-Normally the traders buy goods from the wholesalers or manufacturers on credit. The
sellers get payment after the end of the credit period. But if any seller does not want to wait or in
immediate need of money he/she can draw a bill of exchange in favour of the buyer. When the
buyer accepts the bill it becomes a negotiable instrument and is termed as bill of exchange or
trade bill. This trade bill can now be discounted with a bank before its maturity. On maturity the
bank gets the payment from the drawee i.e., the buyer of goods. When trade bills are accepted
by Commercial Banks it is known as Commercial Bills. So a trade bill is an instrument, which enables
46

the drawer of the bill to get funds for a short period to meet the working capital needs.
4.2 The measures taken by RBI to provide targeted liquidity support to the system
in 2021-22 included:
● Special refinance facilities of rs 66,000 crore to all-India financial institutions-
NABARD,HFB,SIDBI
● Term liquidity facility of rs 50,000 crore to ramp up COVID-related healthcare
infrastructure and services in the country;
● Special Long-Term Repo Operations (SLTRO) for small finance banks of rs 10,000 crore
to support small business units, micro and small industries, and other unorganized
sector entities adversely affected during the second wave of the pandemic
● Extension of On taps Targeted Long-Term Repo Operations (On tap-TLTRO) till 31st
December 2021.
● A secondary market G-sec acquisition programme (G-SAP)-G-SAP involves upfront
commitment to purchase a specific quantum of government securities with a view
to enabling a stable and orderly evolution of the yield curve
● 14-day Variable Rate Reverse Repo (VRRR) auctions were deployed as the main
operation under the Liquidity Adjustment Facility (LAF)
● Further, the cash reserve ratio (CRR) which was reduced by 100 basis points (bps) in
March 2020, was gradually raised to its pre-pandemic level of 4 per cent by May
2021.
Fixed and Variable RRR

A reverse repo is a rate at which RBI takes money from banks. As of now, RBI pays 3.35 percent in the
fixed-rate repo window, but it takes only a maximum of Rs 2 lakh crore in that window. The balance
excess liquidity can be lent by banks to RBI at its variable rate reverse repo (VRRR) auctions. These may
be 7-day, 14-day or 28-day reverse repo auctions. Banks have been getting 3.8-3.99 percent at these
auctions.
There is something called “liquidity in the banking system”, which is the daily idle cash that banks may
have. Sometimes they may have no idle cash and in fact, “liquidity in the banking system” may be tight.
In such a situation, banks will be borrowing from each other or from RBI.
When the banking system has excess idle cash (like right now) the “reverse repo rate” becomes more
important, because all banks are lending to RBI.Alternatively, when banks have a liquidity shortage, they
are borrowing from RBI at the repo rate.
Long Term Reverse Repo Operation (LTRO) is a mechanism to facilitate the transmission of monetary
policy actions and the flow of credit to the economy. This helps in injecting liquidity in the banking
47

system.It is sometimes also called Special LTRO
Funds through LTRO are provided at the repo rate. This means that banks can avail one year and three-
year loans at the same interest rate of one day repo. But usually, loans with higher maturity periods (here
like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
Targeted Long-Term Repo Operations (TLTRO)
Targeted Long-Term Repo Operations (TLTRO), banks can invest in specific sectors through debt
instruments (corporate bonds, commercial papers, and non-convertible debentures (NCDs)) to push the
credit flow in the economy.
It is called 'Targeted' LTRO as in this case, the central bank wants banks opting for funds under this option
to be specifically invested in investment-grade corporate debt.
4.3 Developments in Gsec market
Understanding Gsec and yield curve
A government security (G-Sec) is a tradable instrument issued by the central government or state
governments. It acknowledges the government’s debt obligations.
Such securities can be both
● short term (treasury bills — with original maturities of less than one year)
● Long term (government bonds or dated securities — with original maturity of one year or more).
The central government issues both: treasury bills and bonds or dated securities i.e. short term and long term
bonds respectively
State governments issue only bonds or dated securities, which are called the state development loans that
are long term bonds.
Since they are issued by the government, they carry no risk of default, and hence, are called risk-free gilt-
edged instruments. FPIs are allowed to participate in the G-Sec market within the quantitative limits
prescribed from time to time.
Bond yield
Bond yield is the return an investor realizes on a bond.
The mathematical formula for calculating yield is the annual coupon rate divided by the current market
price of the bond
(Bond: Is an instrument to borrow money. A bond could be issued by a country’s government or by a

company to raise funds.)
Coupon Rate: It is the rate of interest paid by bond issuers on the bond's face value.
Movements in yields depend on trends in interest rates, it can result in capital gains or losses for investors.
48

A rise in bond yields in the market will bring the price of the bond down in the secondary market while a
drop in bond yield would benefit the investor as the price of the bond will rise, generating capital gains.
A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing
maturity dates.
The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured Open Market
Operation (OMO), of a much larger scale and size, to achieve a stable and orderly evolution of the yield
curve along with management of liquidity in the economy.
By purchasing G-secs, the RBI infuses money supply into the economy which in turn keeps the yield down
and lower the borrowing cost of the Government.
The government of India, with its massive borrowing programme (for example, National infrastructure
pipeline project), can now breathe a sigh of relief as long-term borrowing costs come down.
● In the first quarter (Q1) of 2021-22, yield on 10-year G-Sec stood at around 6.26 per
cent and when as low as 5.96% in May 2021.
● In the beginning of second quarter (Q2) of 2021-22, yields started to rise on account
of the announcement of phased increase in the quantum of VRRR operations and
shift in market sentiments to price in possibility of change in interest rate cycle
sometime ahead also led to some hardening of yields up to 6.26 per cent. In the third
quarter (Q3) of 2021-22, rise in US treasury yields and rising crude prices led the yields
to inch higher to 6.45 per cent at end-December 2021.
4.4 Banking Sector

Overall, the banking system appears to have weathered the pandemic shock well even if
there is some lagged impact still in the pipeline.
Classification of Banks NPA
Non-Performing Assets/NPA is a loan or an advance where,
-Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a
term loan.
-The account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC).
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
-The installment of principal or interest thereon remains overdue for two crop seasons for short duration
crops.
-The installment of principal or interest thereon remains overdue for one crop season for long duration
crops.
49

-The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation
transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
-In respect of derivative transactions, the overdue receivables representing positive mark-to-market value
of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for
payment.
Categories of NPAs
● Substandard Assets-An asset which remains as NPAs for less than or equal to 12 months.
● Doubtful Assets- An asset which remained in the above category for 12 months.
● Loss Assets-Asset where loss has been identified by the bank or the RBI, however, there may be
some value remaining in it. Therefore the loan has not been not completely written off.
Gross NPA is the amount obtained on adding principal and the interest on it while Net NPA is the amount
obtained on deducting provisions from gross NPA.
● The GNPA ratio of Scheduled Commercial Banks decreased from 7.5 percent at end
September 2020 to 6.9 percent at end-September 2021. NNPA ratio of SCBs was 2.2
per cent at end-September 2021
● The Capital Adequacy Ratio has continued to improve since 2015-16. Capital to Risk
Weighted Asset Ratio (CRAR) of SCBs increased from 15.84 per cent at end-
September 2020 to 16.54 per cent at end-September 2021.
Basel norms or Basel accords are the international banking regulations issued by the Basel Committee on
Banking Supervision.
50

Basel III
In 2010, Basel III guidelines were released, in response to the financial crisis of 2008.
The guidelines aim to promote a more resilient banking system by focusing on four vital banking
parameters viz. capital, leverage, funding and liquidity.
Capital: The capital adequacy ratio (CAR) is a measure of how much capital a bank has available,
reported as a percentage of a bank's risk-weighted credit exposures.
The capital adequacy ratio is to be maintained at 12.9%. The minimum Tier 1 capital ratio and the minimum
Tier 2 capital ratio have to be maintained at 10.5% and 2% of risk-weighted assets respectively.
In addition, banks have to maintain a capital conservation buffer of 2.5%. Counter-cyclical buffer is also
to be maintained at 0-2.5%.
Leverage: The leverage rate has to be at least 3 %. The leverage rate is the ratio of a bank’s tier-1 capital
to average total consolidated assets.
Funding and Liquidity: Basel-III created two liquidity ratios: LCR and NSFR.
The liquidity coverage ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient
to deal with the cash outflows encountered in an acute short term stress scenario as specified by
supervisors.
The Net Stable Funds Rate (NSFR) requires banks to maintain a stable funding profile in relation to their off-
balance-sheet assets and activities. NSFR requires banks to fund their activities with stable sources of
finance (reliable over the one-year horizon).
The minimum NSFR requirement is 100%. Therefore, LCR measures short-term (30 days) resilience, and NSFR
measures medium-term (1 year) resilience.
The deadline for the implementation of Basel-III was March 2019 in India. It was postponed to March 2020.
In light of the coronavirus pandemic, the RBI decided to defer the implementation of Basel norms by
51

further 6 months.
Banking Reforms
● The Debt Recovery Tribunals (DRTs) 1993-To decrease the time required for settling cases. They are
governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act.
● SARFAESI Act – 2002-The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their
NPAs without the involvement of the Court, through acquiring and disposing of the secured assets
in NPA accounts with an outstanding amount of Rs. 1 lakh and above. The banks have to first issue
a notice. Then, on the borrower’s failure to repay, they can:
○ Take ownership of security and/or
○ Control over the management of the borrowing concern.
○ Appoint a person to manage the concern.
● ARC (Asset Reconstruction Companies)-The RBI gave license to 14 new ARCs recently after the
amendment of the SARFAESI Act of 2002. These companies are created to unlock value from
stressed loans. Before this law came, lenders could enforce their security interests only through
courts, which was a time-consuming process.
● Insolvency and Bankruptcy code Act-2016-It has been formulated to tackle the Chakravyuha
Challenge (Economic Survey) of the exit problem in India. The aim of this law is to promote
entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating
and amending the laws relating to reorganization and insolvency resolution of corporate persons,
partnership firms and individuals in a time-bound manner and for maximization of value of assets of
such persons and matters connected therewith or incidental thereto.
● Two entities viz. National Asset Reconstruction Company Limited (NARCL), and
India Debt Resolution Company Limited (IDRCL) has been formed to provide stressed assets
management and resolution services.
● The Deposit Insurance and Credit Guarantee Corporation (Amendment) Act 2021, made significant
changes in the landscape of deposit insurance in India, the deposit insurance cover was increased
from rs1 lakh to rs5 lakh per depositor per bank.
● Pre-Pack Insolvency Resolution Process for MSMEs A pre-pack is an agreement for the resolution of
the debt of a distressed company through an agreement between secured creditors and investors
instead of a public bidding process.
● Section 59 of Insolvency and Bankruptcy Code (IBC), 2016 together with the IBBI (Voluntary
Liquidation Process) Regulations, 2017 (Voluntary Liquidation Regulations) provide the mechanism
for voluntary liquidation of a corporate person. Section 59 of IBC states that ‘A corporate person
who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary
liquidation proceedings
Monetary Policy Transmission
52

● Large surplus systemic liquidity, forward guidance of continuing with the
accommodative stance and the external benchmark system for pricing of loans in
select sectors aided monetary transmission.
● The transmission has been slightly higher in public sector banks than private sector
banks in the overall current monetary easing cycle, though it was higher for private
banks in April November 2021
Cross border Insolvency
IBC at present has no standard instrument to restructure the firms involving cross border jurisdictions. The
absence of standardized cross border insolvency
framework creates complexities and raises various issues such as:
• The extent to which an insolvency administrator may obtain access to assets held in a foreign country.
• Priority of payments- Whether local creditors may have access to local assets before funds go to the
foreign administration or not.
• Recognition of the claims of local creditors in a foreign administration.
• Recognition and enforcement of local securities, taxation system over local assets where a foreign
administrator is appointed etc.
Cross border insolvency is regulated by Section 234 and 235 of IBC. Section 234 empowers the Central
Government to enter into bilateral agreements with other countries to resolve situations about cross-
border insolvency. Further, the Adjudicating Authority can issue a letter of request to a court or an
authority (under Section 235) competent to deal with a request for evidence or action in connection
with insolvency proceedings under the Code in countries with the agreement (under Section 234).
The current provisions under IBC are ad-hoc in nature and are susceptible to delay, therefore, there is a
need for a standardized framework for Cross-Border insolvency. The Insolvency Law Committee has
recommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL)
with certain modifications to make it suitable to the Indian context. This law addresses the core issues of
cross border insolvency cases with the help of four main principles:
• Access: It allows foreign professionals and creditors direct access to domestic courts and
enables them to participate in and commence domestic insolvency proceedings against a debtor.
• Recognition: It allows recognition of foreign proceedings and enables courts to determine relief
accordingly.
• Cooperation: It provides a framework for cooperation between insolvency professionals and

courts of countries.
• Coordination: It allows for coordination in the conduct of concurrent proceedings in different

jurisdictions.
53

● The Insolvency and Bankruptcy (Amendment) Ordinance, 2020 was promulgated,
which suspended initiation of the Corporate Insolvency Resolution Process (CIRP) of
a corporate debtor (CD) for any default arising on or after 25th March 2020 to provide
relief to the firms undergoing stress due to the pandemic. The relaxation combined
with continued resolutions led the number of cases to decline during 2020- 21, which
has slightly increased to 1640 as of September 2021.
○ As of September 2021, the Code has rescued 421 CDs through resolution plans
and referred 1419 CDs for liquidation. In value terms, around 74 percent of
distressed assets were rescued.
○ Nearly 65 per cent of the total admitted cases have been closed, either by
resolution, withdrawal or liquidation.
○ Out of the 1640 ongoing CIRPs, nearly 75 per cent of the cases has been
ongoing for over 270 days
○ Till September 2021, 264 CDs had been completely liquidated which had
outstanding claims of rs45,790 crore, but the assets were valued at rs2,025 crore
and rs 1,983 crore was realised through the liquidation of these companies.
Transmission of Monetary Policy: The transmission of monetary policy describes how changes made by the
Reserve Bank of India (RBI) to the policy rate flow through to economic activity (like lending) and inflation.
● Internal Benchmark Lending Rate (IBLR): The Internal Benchmark Lending Rates are a set of reference
lending rates which are calculated after considering factors like the bank's current financial overview,
deposits and non-performing assets (NPAs) etc. BPLR, Base rate, MCLR are the examples of Internal
Benchmark Lending Rate.
○ Benchmark Prime Lending Rate (BPLR)-BPLR was used as a benchmark rate by banks for
lending till June 2010.Under it, bank loans were priced on the actual cost of funds. However,
the BPLR was subverted, resulting in an opaque system. The bulk of wholesale credit (loans to
corporate customers) was contracted at sub-BPL rates and it comprised nearly 70% of all bank
credit. Under this system, banks were subsidising corporate loans by charging high interest
rates from retail and small and medium enterprise customers.
○ Base Rate:-Loans taken between June 2010 and April 2016 from banks were on base rate.
During the period, base rate was the minimum interest rate at which commercial banks could
lend to customers. Base rate is calculated on three parameters — the cost of funds,
unallocated cost of resources and return on net worth. Hence, the rate depended on
individual banks and they changed it whenever their cost of funds and other parameters
changed.
○ Marginal Cost of Lending Rate (MCLR): It came into effect in April 2016. It is a benchmark
lending rate for floating-rate loans. This is the minimum interest rate at which commercial banks
can lend. This rate is based on four components—the marginal cost of funds, negative carry
on account of cash reserve ratio, operating costs and tenor premium. MCLR is linked to the
actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike
MCLR and lending rates are set to go up.
Issues Related to IBLR Linked Loans:
-The problem with the IBLR regime was that when RBI cut the repo and reverse repo rates, banks did not pass
54

the full benefits to borrowers.
-In the IBLR Linked Loans, the interest rate has many variables including bank’s spread, their current financial
overview, deposits and non-performing assets (NPAs) etc.
-Due to this, such internal benchmarks did little to facilitate any swift change in interest rates as per changes
in RBI repo rate policy.
-The opacity in interest rate setting processes under the internal benchmark regime hinders transmission to
lending rates.
● External Benchmark Lending Rate-To ensure complete transparency and standardization, RBI
mandated the banks to adopt a uniform external benchmark within a loan category, effective 1st
October, 2019. Unlike MCLR which was internal system for each bank, RBI has offered banks the
options to choose from 4 external benchmarking mechanisms:
○ The RBI repo rate
○ The 91-day T-bill yield
○ The 182-day T-bill yield
○ Anny other benchmark market interest rate as developed by the Financial Benchmarks India
Pvt. Ltd.
4.5 Credit Growth

● The credit growth has been declining since 2019. The credit growth was 5.3 per cent
at beginning of April 2021 and started to increase since then, but was still modest and
stood at 7.3 per cent as on 17th December 2021.In 2021-22, the risk capital (i.e. money
raised from capital markets) has so far been more important than the banks in
providing finance to the revival.
● Non-food bank credit growth that remained muted during much of the pandemic
period has gradually improved and stood at 9.3 per cent as on 31st December 2021,
as against 6.6 per cent a year ago. This growth was driven by personal loans and the
agriculture sector. Deceleration in credit growth in the services sector continued
through credit to industry showed signs of improvement.
● Financial transactions have been seeing high growth over the last few years with
multiple avenues for making digital payments and lending which are growing over
time.
4.6 Non-Banking Financial Sector
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities of a like nature, leasing, hire-
purchase, insurance business, chit business but does not include any institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property.
55

A non-banking institution which is a company and has principal business of receiving deposits under any
scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner,
is also a non-banking financial company (Residuary non-banking company).
Features of NBFC
NBFC cannot accept demand deposits.
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
depositors of NBFCs.
● In the current financial year, NBFCs directly raised finance from money and debt
markets given the easy financial conditions, though the Banks’ exposure to NBFCs
increased
● The credit intensity of NBFCs, measured by NBFC credit as a ratio of GDP, has been
rising consistently and stood at 13.7 at end March 2021. Industry remained the largest
recipient of credit extended by the NBFC sector, followed by retail loans and services.
● GNPA ratio of NBFCs was higher at 6.55 per cent at end-September 2021, as
compared to 6.06 per cent at end-March 2021. However, their net NPA ratio
remained at 2.93 per cent at end-September 2021 same as in March 2021.
● As against the regulatory requirement of 15 per cent, CRAR for the NBFC sector stood
at 26.64 per cent at end-September 2021.
Factoring is a transaction where an entity sells its receivables (dues from a customer) to a third party (a
‘factor’ like a bank or NBFC) for immediate funds. All or part of the invoice can be sold to a factor for
getting money immediately at a competitive interest rate. The factor then collects payments from the
buyer of goods and earns a commission in the form of some interest. This is different from bill discounting.
In bill discounting, a bank or NBFC gives a certain percentage of the total outstanding value of invoices
to the seller and in most cases the seller has to take on the responsibility for payment of invoices by the
buyer to the factor. However, in case of factoring, the factor takes on the responsibility for the collection
of pay back the advance obtained from the factor if buyer of goods fails to pay and ‘without recourse’
factoring where factor bears the risk of default in case of non-payment by buyer of goods. Invoices. There
are different types of factoring: ‘with recourse’ factoring where the seller has to pay back the advance
obtained from the factor if the buyer of goods fails to pay and ‘without recourse’ factoring where the
factor bears the risk of default in case of non-payment by the buyer of goods.
The Factoring Act 2011, four types of entities were allowed to engage in factoring business: Banks, Statutory
Corporations (which were exempted from registration under Section 5), NBFCs (which have to obtain
registration from RBI) and companies (which have to obtain specific registration from RBI under Section 3).
56

The Factoring Regulation (Amendment) Act, 2021 brought following chances
● Removal of principal business criteria has significantly increased the number of eligible NBFCs that
can undertake factoring business.
● The time period for registration of invoice and satisfaction of charge upon it may be specified by
the Government by rules to streamline the process and prevent frauds through dual financing.
● Allow the concerned TReDS platform to register charge directly with Central Registry of
Securitization Asset Reconstruction and Security Interest (CERSAI) on behalf of the factors using the
platform, so as to make the process operationally efficient, promote the use of TReDS and reduce
procedural burden on factors.
● Definitions of “assignment”, “factoring business” and “receivables” have been amended to bring
them in consonance with international definitions.
4.7 Development In Capital Market
Capital Market is an institutional arrangement for borrowing medium and long-term funds and which
provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks
and financial institutions, borrowings from foreign markets and raising of capital by issuing various securities
such as shares, debentures, bonds, etc. The securities market has two different segments namely primary
and secondary market.
The primary market consists of arrangements for procurement of long-term funds by companies by fresh
issue of shares and debentures. The secondary market or stock exchange provides a ready market for
existing long term securities. Stock exchange is the secondary market, which provides a place for regular
sale and purchase of different types of securities like shares, debentures, bonds & government securities. It
is an organised market where all transactions are regulated by the rules and laws of the concerned stock
exchanges.
Methods to raise money
● An initial public offering (IPO) refers to the process of offering shares of a private corporation to the
public in a new stock issuance.
● A preferential issue is an issue of shares or of convertible securities by listed companies to a select
group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a
public issue. This is a faster way for a company to raise equity capital.
● A qualified institutional buyer (QIB) is a class of investor that can safely be assumed to be a
sophisticated investor and hence does not require the regulatory protection that the Securities Act's
registration provisions give to investors. In broad terms, QIBs are institutional investors that own or
manage on a discretionary basis at least $100 million worth of securities.
● A rights offering is effectively an invitation to existing shareholders to purchase additional new shares
in the company. More specifically, this type of issue gives existing shareholders securities called
"rights," which, well, give the shareholders the right to purchase new shares at a discount to the
market price on a stated future date.
● In April-November 2021, IPOs of 75 companies were listed, indicating stupendous rise

of 504.5 per cent in fund mobilization. Though amount rose through Qualified
Institutional Placements (QIP) declined by 52.9 per cent, through rights issues
57

declined by 62.6 percent amount raised by way of preferential allotment increased
by 67.3 per cent during April-November 2021.
● The year 2021-22 so far has been an exceptional year for the primary markets with a
boom in fundraising through IPOs by many new age companies/tech start-
ups/unicorns.
● Overall, debt mobilization slowed, and this contrast with the equity market suggests
an increased appetite for risk among investors.
● The foreign interest in Indian capital markets has gone up as reflected in the large
inflows. During April-November 2021, FPIs made a net investment 82.8 percent lower
than what was made in the same period previous year. Though the cumulative net
investment by FPIs increased by 9.2 per cent to US$288.4 billion from US$ 264 billion at
end November 2020
● Participation by individual investors in the equity cash segment has increased and
the share of individual investors in total turnover at NSE (National Stock Exchange)
increased from 38.8 per cent in 2019-20 to 44.7 per cent in April-October 2021.
● The benchmark stock market indices in India - Sensex and Nifty 50, increased by 17.7
per cent and 18.1 percent, respectively during April-December 2021.Among major
emerging market economies, Indian markets outperformed its peers during April-
December 2021.
4.8 Insurance Sector

Internationally, the potential and performance of the insurance sector are generally assessed on the basis
of two parameters, viz., insurance penetration and insurance density. Insurance penetration is measured as
the percentage of insurance premium to GDP and insurance density is calculated as the ratio of premium
to population (measured in US$ for convenience of international comparison)
● In India, insurance penetration was 2.71 per cent in 2001 and has steadily increased
to 4.2 per cent in 2020. As of 2020, the penetration for life insurance in India is 3.2
percent and nonlife insurance penetration is 1 percent. India is at par with
international average in terms of insurance penetration for life insurance, we lag
behind in terms of non-life insurance globally, and insurance penetration was 3.3 per
cent for the life segment and 4.1 per cent for the non-life segment in 2020.
● The insurance density in India increased from $11.5 in 2001 to $78 in 2020. In 2020,
density for Life insurance in India is $59 and Non-Life insurance is $19, much lower than
global standards. Globally, insurance density was $360 for the life segment and $449
for the non-life segment respectively in 2020.
58

4.9 Pension Sector
● The total number of subscribers under New Pension Scheme (NPS) and Atal Pension
Yojana (APY) increased recording a growth of 23.7 per cent over the year September
2020-21.
● As of September 2021, more than 43 per cent subscribers were between 18 and 25
years, as compared to 29 per cent as of March 2016. Further, more people are now
opting for a pension amount of rs1000 per month.
● The gender gap in enrolments under APY has narrowed down with increased
participation of female subscribers, which has increased from 37 per cent as of
March 2016; to 44 per cent as of September 2021.
4.10 Conclusion
In 2021-22 so far, the overall monetary and credit conditions remained accommodative. In
the latest MPC meeting in December 2021, the committee pointed out that the outlook
was uncertain owing to global spillovers, potential resurgence in COVID-19 infections and
divergences in policy actions and stances across the world with inflationary pressures
increasing across economies. Accordingly, the MPC decided to continue monitoring the
inflationary pressures, keep the policy repo rate unchanged at 4 percent and persist with
the accommodative stance.
59

5 Price and Inflation
As economic activity started showing signs of picking-up in the second year of the
pandemic, the global economy faced the fresh challenge of rising global inflation. COVID-
19 related stimulus spending in major economies along with pent-up demand boosting
consumer spending pushed inflation up in many advanced and emerging economies. The
surge in energy, food, non-food commodities, and input prices, supply constraints,
disruption of global supply chains, and rising freight costs across the globe stoked global
inflation during the year. In the advanced economies, inflation has increased from 0.7 per
cent in 2020 to around 3.1 per cent in 2021 presenting a threat to domestic revival as well.
Inflation in the USA touched 7.0 per cent in December 2021, the highest since 1982, driven largely by second
hand vehicles and energy. While in the UK it hit a nearly 30 years high of 5.4 per cent in December 2021
mainly on account of rising food prices.Among emerging markets, Brazil witnessed high and rising inflation
during 2021 which touched 10.1 per cent in December 2021. Inflation in Turkey has been in double digits,
reaching 36.1 per cent in December 2021. Argentina has witnessed inflation rates above 50 per cent during
the last six months.
5.1 Domestic Inflation
Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food,
clothing, housing, recreation, transport, consumer staples, etc.
Inflation measures the average price change in a basket of commodities and services over time.
Measurement of Inflation
● Consumer Price Index/Retail Inflation-It measures price changes from the perspective of a retail
buyer. It is released by the National Statistical Office (NSO).The CPI calculates the difference in the
price of commodities and services such as food, medical care, education, electronics etc, which
Indian consumers buy for use.The CPI has several sub-groups including food and beverages, fuel
and light, housing and clothing, bedding and footwear.
Four types of CPI are as follows:
60

○ CPI for Industrial Workers (IW).
○ CPI for Agricultural Labourer (AL).
○ CPI for Rural Labourer (RL).
○ CPI (Rural/Urban/Combined).
Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and
Employment. Fourth is compiled by the National Statistical Office (NSO) in the Ministry of
Statistics and Programme Implementation.Base Year for CPI is 2012. The Monetary Policy
Committee (MPC) uses CPI data to control inflation. Thus, it is also called headline inflation
● Wholesale Price Index-It measures the changes in the prices of goods sold and traded in bulk by
wholesale businesses to other businesses.Published by the Office of Economic Adviser, Ministry of
Commerce and Industry. It is the most widely used inflation indicator in India and measures inflation
at wholesale level. The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
The index basket of the WPI covers commodities falling under the three major groups namely
Primary Articles, Fuel and Power and Manufactured products. (The index basket of the present
2011-12 series has a total of 697 items including 117 items for Primary Articles, 16 items for Fuel &
Power and 564 items for Manufactured Products.)
● Core Inflation-inflation excluding ‘food and beverages’ and ‘fuel and light’ – the transitory
components of the index.Conventionally, core inflation is calculated by excluding ‘food and
beverages’ and ‘fuel and light’ groups from overall inflation (CPI-C). However in the CPI-C these
fuel items are included in ‘transport and communication’, a subgroup under the miscellaneous
group. Therefore, conventional ways of calculating retail core inflation, instead of excluding the
volatile fuel items from core inflation, continue to include volatile fuel items in core inflation. As a
result, the fuel price rise continues to impact core inflation.
A ‘refined’ core inflation was constructed to address this anomaly by excluding main fuel items viz.,
‘petrol for vehicle’, ‘diesel for vehicle’ and ‘lubricants and other fuels for vehicles’, in addition to
‘food and beverages’ and ‘fuel and light’ from the headline retail inflation
● National Housing Bank (NHB) RESIDEX HPI@Assessment Prices index (Base 2017- 18) captures the
prices of residential housing properties for the transactions through primary lending institutions.
While house transactions mostly declined during the COVID-19 shocks, their prices did not fall in
most of the selected cities, some even increased.Further, decline in housing transactions have also
been much less during second COVID-19 wave than the decline during first COVID-19 wave.This
boost in housing demand is possibly because of pent up demand and measures taken by the
government to increase affordability. The number of unsold residential units has also witnessed
significant drops during the second wave of the pandemic.
● Retail inflation, as measured by Consumer Price Index-Combined (CPI-C) inflation, in

India, which was slightly above 6 per cent in 2020-21 owing to supply chain
disruptions caused by COVID-19 restrictions, lockdowns, and night curfews,
moderated during the current financial year stood at 5.2 per cent in 2021-22 (April-
December), owing mainly to the food prices which eased at 2.9% against the 9.1 %
in the same period.
● Average core inflation for the period April-December 2021 stood at 5.9 percent as
against 5.4 per cent in corresponding period last year, and remained below 6 per
cent during most months.
● Wholesale Price Index (WPI), after remaining benign during the previous financial
years, saw a sharp uptick during 2021-22 (April-December) due to low base effect
and rising energy and input prices.
61

In a notification on March 31, 2021, the Central Government, in consultation with the RBI, retained the
inflation target at 4 per cent (with the upper tolerance level of 6 percent and the lower tolerance level of
2 per cent) for the 5-year period April 1, 2021 to March 31, 2026.
5.2 What has driven retail inflation and why?

Components of CPI-C inflation
● 2021-22 (April to December) the major drivers of retail inflation have been
miscellaneous, within ‘miscellaneous group’, sub-group ‘transport and
communication’ contributed the most, followed by health.
● Retail inflation in ‘fuel and light’ and ‘transport and communication’ was mostly driven
by high international crude oil, petroleum product prices, and higher taxes.
● Clothing and footwear’ inflation also saw a rising trend during the current financial
year possibly indicating higher production and input costs (including imported inputs)
as well as due to revival of consumer demand.
● Food Inflation
○ Inflation in protein-based items like ‘meat and fish’ remained considerably
elevated during 2021-22 (April to December), due to COVID-19 related supply
disruptions and high poultry feed prices owing to high prices of soybean meal.
○ Seasonality in production and irregular shocks are two important components
contributing to the variations in prices of agriculture commodities, more so in
prices of perishable commodities such as tomato and onion.
■ The seasonal components tend to put an upward pressure on prices of
tomatoes during July to November every year; upward pressure remains
highest in July. On the other hand, seasonal factors put the largest
downward pressure on prices in March.
■ The seasonal component is found to put downward pressure on prices
coinciding with the Rabi harvest period, and upward pressure (positive
values) in other months, reaching peak in December in case of onions.
62

Tomato-About 70 percent of production of tomatoes takes place during Rabi season: transplantation
during October-February and harvest during December-June. Kharif production during July-November
usually contributes less than 30 per cent of total production of tomato in a year. This variation in supply
puts upward pressure on tomato prices every year during July-November.
Onion-Rabi season: transplantation in December-January and harvest in end March to May - accounts
for about 70 per cent of total onion production in a year. T The other two production seasons viz., Kharif -
transplantation in July-August and harvesting in October-December -, and late Kharif - transplantation in
October-November and harvest in January-March, face supply deficit
5.3 Measures to curb food inflation

1. Measures to curb seasonality in prices
-The Mission for Integrated Development of Horticulture (MIDH) envisages holistic development of
horticulture and provides assistance at 50 per cent of total cost of Rs. 1.75 lakh per unit for low-cost onion
storage structure having a capacity of 25 tonne each. Government also procures onions directly from
farmers at farm gate prices for the buffer.
- Schemes such as Agricultural Marketing Infrastructure (AMI) for rural godowns enables small farmers to
enhance their holding capacity to sell their produce at remunerative prices and avoid distress sale.
- “Operation Greens” for integrated development of Tomato, Onion and Potato (TOP) value chain. It
provides 50 per cent subsidy for the transportation and storage from surplus producing areas to consuming
centres
-Kisan Rail service was launched on 7th August 2020 to enable speedy movement of perishables including
fruits, vegetables, meat, poultry, fishery and dairy products from production or surplus regions to
consumption or deficient regions.
2. Measures to prevent supply chain disruptions

- Government has procured from farmers/farmers’ producers organisations (FPOs)
-To augment domestic availability of pulses, Tur and Urad are kept under ‘free’ import category
-Basic import duty and Agriculture Infrastructure and Development Cess on Masur have been brought
down to zero and 10 per cent respectively
-To soften the prices of edible oils, the duty on edibles oil has been reduced
-Futures trading in mustard oil suspended and stock limits have been imposed along stock limits on Edible
Oils and Oilseeds.
○ ‘Oils and fats’ contributed around 60 percent of ‘food and beverages’ inflation
despite having a weight of only 7.8 per cent in the group.
63

India imports around 60 per cent of its consumption of edible oils’, and Palm oils (Crude + Refined)
constitute around 60 per cent of the imports of edible oils. As a result, fluctuation in imports and
international prices transmit to domestic prices of edible oil. The current spike in prices of edible oils is
mainly on account of high and increasing international prices of edible oils
● In 2020, CPI-Urban inflation moved closely with CPI-Rural inflation, with declining
divergence between the urban and rural inflation.
This is mainly on account of large weights that have been assigned to ‘food and beverages’ groups in
both CPI rural and urban. Inflation of fuel and light in rural areas has been different from urban areas mainly
because of different fuel consumption patterns in the two sectors. However, it doesn’t emerge as the
dominant factor in diverging patterns of CPI-Rural and CPI-Urban mainly because of low weights assigned
in the overall index.
5.4 Divergence between CPI and WPI

WPI inflation during the current financial year, in contrast to the trends observed in CPI-C
inflation, has shown an increasing trend, and remained high. Between June 2019 and
February 2021, wholesale inflation was lower than retail inflation, while between March 2021
and December 2021, wholesale inflation remained above the retail inflation.
While on the one hand, low food inflation pulled down CPI, on the other hand high energy
and input prices pulled up WPI based inflation rate
Divergence between CPI and WPI
64

5.5 Cause of divergence between CPI and WPI
● A part of the high inflation in WPI being witnessed currently could be because of a low base in
the previous year. Consequent to the impact of the COVID-19 pandemic, production activity
remained muted in 2020-21 and global crude oil prices reached record lows due to lack of
demand. Therefore, the WPI based inflation rate touched a low of 1.3 per cent in 2020-21. With
economic activity picking up in 2021-22 and edging up of global crude oil prices, the low base of
2020-21 led to WPI inflation reaching a peak of 14.2 per cent in November 2021 and 12.5 per cent
during April-December 2021 (as against 0.04 per cent during April-December 2020-21).
● The reasons for the divergence between the two indices can also be partly attributed to the
difference in the weight of various items. Weights of items in CPI-C are based on the consumption
pattern of consumers and households, in case of WPI series, weights of the item basket are
derived by calculating the net traded value to the domestic production by adding net imports
to domestic production
○ While in CPI, food and beverages have the highest weight (45.9), in WPI, the
manufactured group has the highest weight (64.2)-food inflation witnessed a decline in
2021 and was 4.0 per cent in December 2021, food articles have a weight of only 24.4 in
the WPI (Food articles in primary group plus those in manufactured group). WPI is thus less
responsive to changes in food inflation.
○ The weight of the fuel group is much lower in CPI (6.8) as compared to WPI (13.2). Fuel in
CPI is also partially reflected under miscellaneous group under ‘transport and
communication’-with reopening up of the economies worldwide, unanticipated increase
in energy prices and emergence of industrial input cost pressure and high freight costs led
to a sharp spike in WPI inflation in 2021.
○ In November 2021, a reduction in central excise duty was announced for diesel and
petrol. While this cut in central excise duties and subsequent reduction in VAT by majority
of the states had a dampening effect on retail prices of diesel and petrol, wholesale
prices continued to reign high resulting in the widening of the divergence
○ The CPI basket consists of services like housing, education, medical care, recreation etc.
which are not part of WPI basket.
○ The manufactured sector not only uses crude oil but also several other imported items as
inputs such as iron ore, aluminum, other metals and cotton. The intermediate and inputs
items of WPI, not part of CPI, play a role in its divergence from CPI.(Domestic inflation as
measured through WPI of related items have been highly correlated with growth in the
international prices of these commodities. The inflation in domestic aluminum and copper
prices is positively and highly correlated with international prices).
○ India is a major producer, consumer, and exporter of cotton. Therefore, the prices of
domestic cotton and international prices are closely linked leading to a high correlation
(0.9) between WPI inflation in cotton yarn and international inflation in raw cotton.
○ Similarly, the movement in prices of non-tradable items included in the CPI basket widens
the gap between WPI and CPI movements. The relative price trends of tradable vis a vis
non-tradable is an important explanatory factor for divergence in the two indices in the
short term.
○ The high inflation rate reported in the manufactured Group in the WPI is therefore
significantly attributable to “imported inflation” resulting from high prices of imported
inputs. High freight costs and longer delivery times further exacerbated the price pressure
on imported inputs.
● Another reason for divergence is the lagging demand pick up. While production has gradually
picked up in 2021-22 to reach the pre-pandemic levels, consumption demand is yet to normalise
fully.
65

5.6 Long Term Perspective for Management of Supply Side Factors
● Encouraging farmers to shift from cultivation of rice and wheat to pulses and oilseeds
would help ensure that the country is self-reliant in pulses and oilseeds and also assist
in reducing import dependence.
● Calibrated Import Policy- to reduce price rise of essential commodities like pulses and
edible oils through frequent import duty/tariff revisions through providing immediate
relief to the consumers in the way of lower prices, send wrong signals to domestic
producers and create an environment of uncertainty.
● Focus on transportation and storage infrastructure for perishable commodities: Better
storage and supply chain management is required to ensure availability in lean
season and reduced wastages of horticulture and other perishable essential
commodities to reduce the seasonal spikes in prices for consumers, glut for the
farmers in times of good harvests due to lack of marketing infrastructure, resulting in
distress sales.
● Effective utilisation of the Agriculture Infrastructure Fund for investment in viable
projects for post-harvest management infrastructure for perishable commodities can
help improve agriculture infrastructure in the country.
Core Retail Inflation or Retail Inflation Targeting-
• Between 2016 and 2020, there were many times when the RBI’s single-minded focus on keeping
retail inflation within the 4% +/- 2% band was blamed for interest rates being too high for businesses,
and thus hurting India’s economic growth.
• One could argue that instead of headline retail inflation, the RBI should focus on the retail core
inflation rate, which is the inflation rate without taking into account the fluctuations in the prices of
fuel and food items. Since fuel and food prices often shoot up in the short-term due to temporary
factors — say, excessive rains or some other supply disruption — it is best for the RBI to focus on core
inflation. The logic being that it is the core inflation that is the most robust indicator of the rate of rise
in prices.
Sole focus on combined CPI inflation may not be appropriate for four reasons, as per the earlier Economic
Survey-
● Food inflation, which contributes significantly to CPI is driven primarily by supply-side factors.
● Given its role as the headline target for monetary policy, changes in CPI anchor inflation
expectations. This occurs despite inflation in CPI being driven by supply side factors that drive food
inflation.
● Several components of food inflation are transitory with wide variations within the food and
beverages group.
● While food habits have undergone revisions over the decade since 2011-12, which is the CPI base
year, the same is not reflected in the index yet. The base year of CPI therefore needs to be revised
to overcome the measurement error that may be arising from the change in food habits.
66

5.7 Conclusion
International commodity prices rose sharply during the second half of 2020 and 2021.
Fluctuations have been more in energy prices. Food and metals and mineral prices have
shown double digit growth during the current year. While inflation in food items in India
remained under control because of supply-side management, high global prices of
manufacturing items have had an impact on the domestic prices, especially basic metals.
Thus, efforts should be taken to diversify supply chain and selective credit control by the RBI
to adjust the money supply to the most needy sectors.
5.8 Traditional measures to control inflation by the RBI

In the Indian Economy, RBI is the sole authority that decides the money supply in the economy. And to control
this, RBI implements the monetary policy's Quantitative and Qualitative instruments to achieve economic
goals-
● The quantitative instruments are also known as general tools used by the RBI (Reserve Bank of India).
As the name suggests, these instruments are related to the quantity and volume of the money. These
instruments are designed to control the total volume/money of the bank credit in the economy.
○ The bank rate is the minimum rate at which the central bank lends money and rediscounts
first-class bills of exchange and securities held by commercial banks. When RBI gets a hint that
inflation is rising, it increases the bank interest rates so that commercial banks borrow less
money and the inflation stays under control
○ Legal Ratio-To maintain liquidity and to control credit in the economy, the RBI also keeps a
certain amount of cash reserves. These reserve ratios are known as SLR (Statutory Liquidity
Ratio) and CRR (Cash Reserve Ratio), increase in both of these ratios lead to decline in inflation.
○ Open Market Operation-If RBI sells securities in the money market, private and commercial
banks and even individuals buy it. This leads to a reduction in the existing money supply as
money gets transferred from commercial banks to the RBI.
○ A Repo rate is a rate at which commercial banks borrow money by selling their securities to
the RBI to maintain liquidity. A rise in Repo rate makes borrowing costlier thus, reduces inflation.
○ Reverse Repo Rate-At the time of higher inflation in the country, RBI increases the reverse repo
rate that encourages banks to park more funds with the RBI, which will help it earn higher
returns on excess funds.
● Qualitative instruments are also known as selective instruments of the RBI's monetary policy. These
instruments are used for discriminating between various uses of credit; for example, they can be used
for favouring export over import or essential over non-essential credit supply.
○ RBI fixes a credit amount to be granted for commercial banks. Credit is given by limiting the
amount available for each commercial bank. For certain purposes, the upper credit limit can
be fixed, and banks have to stick to that limit. This helps in lowering the bank's credit exposure
to unwanted sectors.
○ Regulation of consumers’ credit-consumers' credit supply is regulated through the installment
of sale and hire purchase of consumer goods
○ Change in Marginal Requirement-Margin is referred to the certain proportion of the loan
amount that is not offered or financed by the bank. Change in margin can lead to change in
the loan size. This instrument is used to encourage the credit supply for the necessary sectors
and avoid it for the unnecessary sectors. That can be done by increasing the marginal of
67

unnecessary sectors and reducing the marginal of other needy sectors.
○ Moral suasion refers to the suggestions to commercial banks from the RBI that helps in
restraining credits in the inflationary period. RBI implies pressure on the Indian banking system
without taking any strict action for compliance with rules.

CLICK
68

Eco Survey Part1 Lyst7995

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Eco Survey Part1 Lyst7995

Uploaded by

Copyright:

Available Formats

ECONOMIC SURVEY 2021-22 – Part I

How it is different from others?

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Economy recovers past Pre-Pandemic level

1.1 Sectoral trends/ Supply side

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Various Index to measure manufacturing growth

2.Index of Industrial Production

Broad sectors, namely, Mining, Manufacturing, and Electricity.

Base Year for IIP is 2011-2012.

3.Index of Core Industries

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Sectors 2019-20 2020-21 2021-22(Estimated)

Agriculture 18.4 20.2 18.8

Industry 26.7 25.9 28.2

Services 55.0 53.9 53.0

High frequency indicators

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

● Total Consumption- It is expected to grow by 7.0 % in 2021-22 with government

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

○ Crowd in effect of government’s capex in infrastructure

1.3 Government Response- The Barbell Strategy

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

1.5 ‘Policy of Safety Net’

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Macroeconomic stability indicators- suggests sustainability indicators strong and much

Comparison of macroeconomic indicators during Global Financial Crisis, Taper Tantrum

CPI Inflation 9.1 9.4 5.2 (Ap-Dec 2021)

Gross Fiscal Deficit as % of GDP 8.3 6.9 10.2 (2021-22 BE)

Current Account Balance as % of GDP -2.3 -4.8 -0.2 (Ap-Sept 2021)

External Debt as % of GDP 20.7 22.4 20.2 (June 2021)

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Taper Tantrum 2013

1.6 Concerns amidst Uncertainty

1.7 Supply chain measures-

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

2.1 Fiscal Policy Strategy In The Aftermath Of The Pandemic Outbreak

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

2.2 Fiscal Stimulus During 2021-22

● Loan Guarantee Scheme for COVID-19 affected sectors

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

2.3 Performance of Fiscal Indicators During 2021-22 Based on April- November

YoY Growth of fiscal indicators

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Gross tax revenue -12.6 50.3

Assignment to States -20.7 20.4

Non Tax Revenue -46.6 79.5

Revenue Expenditure 3.7 8.2

Capital Expenditure 12.8 13.5

2.4 Long Term Trend In The Government Finances

Indicators 2017-18 2018-19 2019-20 2020-21 2021-22(BE)

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

Fiscal deficit 3.5 3.4 4.6 9.2 6.8

Revenue Deficit 2.6 2.4 3.3 7.4 5.1

JOIN RBI PRELIMS POWER PLAY

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co

2.6 Trends in capital and revenue expenditure.

● Revenue trend is illustrated in the table below

@Clarity4sure Clarity4sure@gmail.com www.Clarity4sure.co