Fodder Material for RBI Grade B

2022- Phase 2 – English

Descriptive

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Contents
Topic 1: What is Bank Recapitalization and discuss the drivers and concerns associated with it? ......................... 3
Topic 2: What is e-RUPI and its significance in Indian economy? ............................................................................ 4
Topic 3: What is Sagarmala Program and its significance? ...................................................................................... 6
Topic 4: What is Payment System Operators (PSOs)? Discuss the RBI’s New Framework for Payment Systems
Topic 5: What is Current Account Deficit (CAD)? Also discuss the reasons and threats of increasing CAD. ........... 9
Topic 6: Discuss the India’s service sector export target of USD 1 trillion in brief? ...............................................10
Topic 7: What are derivatives? Discuss the SEBI ban on derivative trade in agriculture sector? ..........................12
Topic 8: What is Carbon Trading? Discuss the Significance of an efficient Carbon trading market in India? ........13
Topic 9: Discuss the status of NPAs in agriculture sector and scope of an ARC? ...................................................14
Topic 10: What is Informal Economy? Discuss the present scenario and challenges related to informal sector? 16

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Topic 1: What is Bank Recapitalization? Discuss the drivers and concerns associated with
the same.

Introduction
• Bank recapitalization means infusing more capital in state-run banks so that they meet the
capital adequacy norms.
o Capital adequacy ratio (CAR) or capital to risk weighted assets ratio (CRAR) is the ratio
of regulatory capital funds to risk-weighted assets.
• Primary responsibility of recapitalization of PSBs often devolves on the Government, being the
majority shareholder in these banks.
• Recently, Centre has announced to recapitalize weak Public Sector Banks (PSB) as part of Rs
15000 crore capital infusions.

Drivers of Bank Recapitalization

• To meet regulatory requirements of capital adequacy: The regulatory architecture is globally
framed by the Basel Committee on Banking Supervision. So far, three sets of Basel norms have
been issued (refer box).
• Credit Growth: To create a virtuous cycle of investment and jobs, the banks should be healthy
enough to lend to healthy firms and borrowers.
• Tackling NPAs: Any recapitalization will strengthen the capital base of the banks. It will help
them write-off bad loans.
• Stimulus to Economy: It will pull down lending rates, spur aggregate demand, and put idle
factories to work, exhaust capacity and spark investment.
• Saving important banks: Bank bailouts, mainly via recapitalization, have historically been
undertaken to protect failing banks that are large and systemically important.

Concerns rose against recapitalization

• Fiscal deficit: Bailing out public-sector banks will either increase the fiscal deficit or lead to
cuts in welfare and capital expenditures. About Basel Norms
• No intrinsic change in governance: Public funds or taxpayer money is being provided year
after year to a set of intermediaries, without any intrinsic changes in the governance of these
lenders.
• Impact working culture: Banks will not take adequate precautions when they are lending
when they know that the government will step in to help if the loans turn sour.
• No Accountability: Neither linked to the banks’ performance nor efficiency, bank
recapitalization has been ad-hoc and without absence of any accountable policy guidelines.

Conclusion
• Structural Reforms: A key recommendation of the P.J. Nayak committee was that the
government should form a Bank Investment Company for professionalizing the running of
these banks and their boards.
• Criteria for infusion: Criteria for fund infusion, once finalized, may be consistently applied
across all PSBs, however in case of variation, reasons should be well documented.

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 • Better Monitoring: There should be an effective monitoring system in place and this system
should ensure fulfillment of the intended objectives of fund infusion.
• Autonomy for banks: For a durable remedy to NPAs, PSBs must be given adequate functional
autonomy and operational flexibility and bureaucratic and political interference must be
consciously minimized.
• Modern HR management: Re-skilling the existing staff, along with direct recruitment of
specialists, is needed to address the talent issue, especially in domains like forex, treasury, IT,
data, and research etc.

Topic 2: What is e-RUPI and its significance in Indian economy?

Introduction
• The Indian government has recently launched an electronic voucher based digital payment
system e-RUPI.
• It is a cashless and contactless method for digital payment. It is a Quick Response (QR)
code or SMS string-based e-voucher, which is delivered to the mobile of the users.
o e-RUPI is backed by the existing Indian rupee as the underlying asset and specificity
of its purpose makes it different to a virtual currency and puts it closer to a voucher-
based payment system.
• Through this, user will be able to redeem the voucher without needing a card, digital
payments app, or internet banking access, at the service provider.
• It connects the sponsors of the services with the beneficiaries and service providers in a
digital mode without any physical interface.
• The system is pre-paid in nature and hence, assures timely payment to the service
provider without the involvement of any intermediary.
o The mechanism also ensures that the payment to the service provider is made only
after the transaction is completed.
• There are already many countries using the voucher system for example the US, Colombia,
Chile, Sweden, Hong Kong, etc.

Issuing Entities & Beneficiary Identification

• It has been developed by the National Payments Corporation of India on its Unified
Payments Interface (UPI) platform, in collaboration with the Department of Financial
Services, Ministry of Health & Family Welfare, and National Health Authority.
• It has boarded banks that will be the issuing entities.
o Any corporate or government agency will have to approach the partner banks, which
are both private and public-sector lenders, with the details of specific persons and the
purpose for which payments must be made.
• The beneficiaries will be identified using their mobile number and a voucher allocated by a
bank to the service provider in the name of a given person would only be delivered to that
person.

Expected Use and Benefits

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 • In government sector it is expected to ensure a leak-proof delivery of welfare services and
can also be used for delivering services under schemes meant for providing drugs and
nutritional support under Mother and Child welfare schemes, drugs & diagnostics under
schemes like Ayushman Bharat Pradhan Mantri Jan Arogya Yojana, fertiliser subsidies etc.
o Even the private sector can leverage these digital vouchers as part of their
employee welfare and Corporate Social Responsibility (CSR) programmes.

Significance in Indian Economy

• The main objective and long-term vision behind e-RUPI is financial inclusion of unbanked
citizens and bridging the digital gap.
• The government is already working on developing a Central Bank Digital Currency and the
launch of e-RUPI could potentially highlight the gaps in digital payments
infrastructure that will be necessary for the success of the future digital currency.
• The Reserve Bank of India (RBI), has also mentioned that there are at least four reasons
why digital currencies are expected to do well in India:
o Increasing Penetration: There is increasing penetration of digital payments in the
country that exists alongside sustained interest in cash usage, especially for small
value transactions.
o High Currency to GDP Ratio: India’s high currency to Gross Domestic Product
(GDP) ratio holds out another benefit of CBDCs.
✓ Cash-to-GDP Ratio or Currency in Circulation (CIC) to GDP Ratio or simply
currency-to-GDP ratio shows the value of cash in circulation as a ratio of
GDP.
o Spread of Virtual Currencies: The spread of private virtual currencies such as
Bitcoin and Ethereum may be yet another reason why CBDCs become important
from the point of view of the central bank.
o Central bank digital currencies might also cushion the general public in an
environment of volatile private virtual currencies.

Conclusion
It will not only satisfy India’s increasing appetite for digital payments and crypto currencies like
Bitcoin, Ethereum, and more, along with it will also literate Indian people more about digital
currencies and digital system.

These types of digital currencies simply involve the nation’s current fiat currency, the rupee,
taking on a digital avatar. However, it would require a major legal overhaul since our current
system is built to deal only with physical currency but will help in setting a stage for the RBI’s
digital currency or CBDC.

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Topic 3: What is Sagarmala Program? Discuss its significance.

Introduction
• The Sagarmala is a series of projects to leverage the country’s coastline and inland waterways
to drive industrial development.
• The concept of Sagarmala was approved by the Union Cabinet on March 25, 2015. As part of
the programme, a National Perspective Plan (NPP) for the comprehensive development of
India's 7,500 km coastline, 14,500 km of potentially navigable waterways and the maritime
sector was prepared which was released in April 2016, at the Maritime India Summit 2016.
• It aims to achieve
o Port modernization and new port development
o Port connectivity enhancement
o Port-led industrialization
o Coastal community development.
• Implementation of the projects identified under the Sagarmala Programme will be taken up
by the relevant Ports, State Governments / Maritime Boards, Central Ministries, mainly
through private or Public Private Partnership (PPP) mode.
• The financial assistance is provided to State Government and other MoPSW agencies for port
infrastructure projects, coastal berth projects, Road and Rail projects, fishing harbours, skill
development projects, cruise terminal and unique projects such as Ro-Pax ferry services etc.
• 802 projects worth Rs. 5.48 lakh Crore under the Sagarmala program targeted to be executed
by 2035 out of which 194 projects worth Rs. 99,000 Crore have been completed.

Significance of the program

• Reduce the logistic cost: The core vision of the Sagarmala programme is to reduce the
logistics cost for EXIM and domestic trade with minimal infrastructure investment.
o Under Sagarmala Programme, endeavor is to provide enhanced connectivity between
the ports and the domestic production/consumption centers.
• Increasing Efficiency
o Modern governance of major ports: A new era has begun for the administration of
major ports in India, in which they will have greater autonomy in decision making,
adopting the 'Landlord Model' of development and providing world class port
infrastructure.
o Ease of Doing Business (EODB) in Major Ports and Shipping Sector
✓ Seamless Cargo movement: It also aims at simplifying procedures used at ports
for cargo movement and promotes usage of electronic channels for
information exchange leading to quick, efficient, hassle-free and seamless
cargo movement.
✓ Improvement of operational efficiency: It aims to undertake business process
re-engineering to simplify processes and procedures in addition to
modernizing and upgrading the existing infrastructure and improved
mechanisation.

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 • Aid Economy: Strong marine sector will aid economy. Sagarmala meets all the critical
elements of a Blue Economy – port efficiency and modernization, port connectivity, port-
linked industrialization, and coastal community development.
o Sagarmala could boost India’s merchandise exports to $110 billion by 2025 and create
an estimated 10 million new jobs (four million in direct employment).
o Development of port-based smart cities and other urban infrastructure to improve
standards of living.
• Aid Regional growth: India’s consolidation of strategic intent in the Indian Ocean region is a
signal to the global trade community that, as a member of the global comity, it will strive to
keep international shipping channels free from any threats.
o The Sagarmala initiative will also allow India to revive its old trade links with
traditional African, West Asian and South-east Asian entrepots.
• Coastal Community Development: Promoting sustainable development of coastal
communities through skill development & livelihood generation activities, fisheries
development, coastal tourism etc.
o It also aims to create a community development Fund to provide funding for such
projects and activities.
• Promote Skill development: Deen Dayal UpadhyayGrameen Kaushalya Yojna Sagarmala
Convergence Programme, under Ministry of Rural Development, to enable skilling of coastal
population, trained more than 1,900 candidates.

Conclusion
• India’s maritime sector is widely believed to be on the cusp of a revolution and is expected
to grow significantly with increases in international and domestic trade volumes.
• Modernizations of port infrastructure have been the focus of the Government under the
Sagarmala Programme and ports have taken several initiatives under it.
• Also, requisite technologies and laws are in place to promote the working of this sector, much
more needs to be done on both the cargo and cruise fronts to ensure continued progress in
this regard

Topic 4: What is Payment System Operators (PSOs)? Discuss the RBI’s New Framework
for Payment Systems Operators.

Introduction
• A payment system is a system used to settle financial transactions through the transfer of
monetary value and consist of the various mechanisms that facilitate the transfer of funds
from one party (the payer) to another (the payee).
• A payment system includes the participants (institutions) and the users (customers/clients),
the rules and regulations that guide its operation and the standards and technologies on
which the system operates.

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 o The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS),
a sub-committee of the Central Board of the RBI is the highest policy making body on
payment systems in India.

Payment System Operators (PSOs)

• PSOs by virtue of services they provide and the construct of models on which they operate,
largely outsource their payment and settlement-related activities to various other entities.
• It is an institution which has been granted an authorisation for the operation of a payment
system.

RBI’s new framework for Payment Systems Operators

• Recently, the Reserve Bank of India (RBI) has issued a framework for payment and settlement
related activities by payment system operators.
o This framework is issued under provisions of Payment and Settlement Systems Act,
2007.
o The Payment and Settlement Systems Act, 2007 provides for the regulation and
supervision of payment systems in India and designates the RBI as the authority for that
purpose and all related matters.
• Key points to new framework:
o Its objective is to put in place minimum standards to manage risks in outsourcing of
payment and settlement-related activities including tasks such as on boarding
customers and IT-based services.
o Now the licensed non-bank Payment System Operators (PSOs), cannot outsource core
management functions.
✓ Core management functions include risk management and internal audit,
compliance, and decision-making functions such as determining compliance
with KYC norms.
o It will be applicable to all service providers, whether located in India or abroad.
• As per the framework, PSOs will have to exercise due diligence, put in place sound and
responsive risk management practices for effective oversight, and manage the risks arising
from such outsourcing of activities.
• It has been done as there is a potential area of operational risk associated with outsourcing
by payment system operators and participants of authorized payments systems.

Conclusion
• Since, India is the second-fastest digital adapter among 17 of the most-digital economies
globally, and rapid digitization does require forward-looking measures to boost cyber
security.
• It is important for the corporate or the respective government departments to find the gaps
in their organizations and address those gaps and create a layered security system, wherein
security threat intelligence sharing is happening between different layers.

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Topic 5: What is Current Account Deficit (CAD)? Also discuss the reasons and threats of
increasing CAD.

Introduction
Current Account Deficit (CAD)
• Balance of Payments (BoP) records the transactions in goods, services, and assets between
residents of a country with the rest of the world for a specified time period typically a year.
o When viewed from the perspective of investment-savings dynamics, the current
account can also be expressed as the difference between national (both public and
private) savings and investment.
• One of the two main accounts in the Balance of Payments (BoP), CAD records exports and
imports in goods and services and transfer payments of a country.
o When exports exceed imports, there is a trade surplus and when imports exceed
exports there is a trade deficit.
o Transfer payments are receipts received by the residents ‘for free’, without any present
or future payments in return. It includes remittances, gifts and grants.
• Capital account is the second account, recording all international purchases and sales of assets
such as money, stocks, bonds, etc. for a specified time, usually a year

Primary reasons behind India’s CAD

• Increased domestic demand/consumer spending due to domestic economic growth which is
reflected in revival of imports post-pandemic recovery.
• Uncompetitive exports due to unfavorable policies, exchange rate or lack of essential goods
exports.
• Increased Energy imports due to increasing demand and lower domestic production. E.g., in
2021-22, India’s domestic crude oil production fell by 2.67%.
• Rise in Global Commodity Prices, especially high import commodities such as crude oil, gas,
coal, edible oils, gold, etc.

Potential threats from increasing CAD

• Based on historical perspective, India can sustain a CAD of 2.5-3.0% of GDP without getting
into an external sector crisis (Economic Survey 2021-22). But rising geo-political risks, elevated
global commodity prices, new Covid-19 variants fear and looming threat of US monetary policy
normalization can widen CAD with other threats such as:
o Pull out of foreign institutional investors or limited capital flow. E.g., the Taper Tantrum
of 2013.
o Costly macroeconomic adjustments due to free fall in currency exchange rate.
o Inflationary concerns leading to further reduction in domestic savings, leading to lower
investments or foreign borrowing to fund growth needs.
✓ In the short-term, such foreign borrowings may help a debtor but in the long-
term it is worrisome due to concerns over returns from investors and rise in debt
to GDP ratio.

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 • Payment imbalances, leading to BoP crisis as observed in the Asian Financial Crisis (1997) and
the recent Sri Lankan crisis.
• Recent contraction in Forex Reserves and import coverage are first signs of slowed or reversed
capital flows. Between October 2021 and March 2022, Forex reserves contracted from US$
642 billion to US$ 607 billion.

Conclusion
• To be prepared to face external shocks, India should build higher Forex Reserves and further
improve the external sector resilience through steps such as:
o Increase domestic production of oil and gas with faster adoption of renewable energy
fuels such as solar, hydrogen etc.
o Import substitution under Atma Nirbhar Bharat with increased exports through best
use of Free Trade Agreements.
✓ Fair valuation of Rupee can help in keeping the exports competitive. Also, steps
can be taken to curb nonessential imports such as gold, mobiles, and electronics.
• Maintain Capital inflows through continued Ease of Doing Business reforms and gain investors’
confidence through FDI reforms for ease of flow of foreign investments.
• Starting Fiscal Consolidation through tight monetary policy to control inflation and promote
savings to control CAD. For example, as suggested by the NK Singh Committee.
o For example, keep external debt to GDP ratio low, especially short-term debt due to
higher volatility.

Topic 6: Discuss the India’s service sector export target of USD 1 trillion in brief.

Introduction
• India is the world’s seventh-largest services exporter.
• The services sector is a key driver of India’s economic growth, providing employment to
nearly 26 million and contributing about 40% to India’s total global exports.
• The services sector has also been the largest recipient of foreign direct investment, making
up for 53% of the total inflows between 2000 and 2021.
• India’s services sector covers a wide variety of activities such as trade, hotel and restaurants,
transport, storage and communication, financing, insurance, real estate, business services,
community, social and personal services, and services associated with construction.
• Surplus in services trade has decreased the often-huge deficit in India’s merchandise
shipments. With renewed focus and targeted government intervention, services trade
surplus could rise further from as much as $89 billion in FY21 and almost wipe out the deficit
caused by merchandise exports.
• This sector is boosting India’s transition from an ‘assembly economy’ to a ‘knowledge-
based economy’.

Recent updates in service sector exports

• The services sector of India remains the engine of growth for India's economy and contributed
53% to India's Gross Value Added at current prices in FY22 (until January 2022).
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 • India's services sector GVA increased at a CAGR of 11.43% to Rs. 101.47 trillion (US$ 1,439.48
billion) in FY20, from Rs. 68.81 trillion (US$ 1,005.30 billion) in FY16. Between FY16 and FY20,
financial, real estate and professional services augmented at a CAGR of 11.68% (in Rs. terms),
while trade, hotels, transport, communication, and services related to broadcasting rose at a
CAGR of 10.98% (in Rs. terms).
• India's IT and business services market is projected to reach US$ 19.93 billion by 2025.

Export target of USD 1 trillion

• Recently, the Ministry of Commerce and Industry announced that it is working on a plan to
reach a services export target of USD 1 trillion by 2030. This target is nearly five times of what
India exported last fiscal (FY 2020).

Government initiatives and expected plans to achieve this target

• There is a need to boost opportunities in high-growth segments beyond the dominant
information technology and IT-enabled services (ITeS).
o The opening up of the domestic legal services sector will benefit Indian lawyers as they
would get huge opportunities in countries such as Europe, Australia and America.
o Further, the need is to focus on promising areas like higher education, hospitality and
medical tourism.
• To support the services sector, the government has been actively pursuing market access
opportunities via Free-Trade Agreements (FTAs) with key economies (including the UK, the
EU, Australia and the UAE).
• The government is working on a programme that could replace the Service Exports from India
Scheme (SEIS) in its current form.
o According to the government, the services industry needs to shun the crutches of
government subsidies.
o This will encourage firms to raise competitiveness.
o Also, the subsidy amount can be utilised for those who need it more.
• Launch of a production linked incentive (PLI) scheme to boost manufacturing of telecom and
networking products in India.
o The scheme is expected to attract an investment of Rs. 3,345 crore over the next four
years and generate additional employment for >40,000 individuals.
• India and Australia has announced its collaboration in cyber-enabled critical technologies,
highlighting the requirement to boost the critical information security infrastructure such as
5G telecom networks.
• FDI limit for insurance companies has been raised from 49% to 74% and 100% for insurance
intermediates.
• In the next five years, the Ministry of Electronics and Information Technology is working to
increase the contribution of the digital economy to 20% of GDP.

Conclusion
• The government should consider something for the services sector, in line with
the production-linked incentive scheme.

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 • India should be striving to embed itself in global value chains.
• If India wants to become a major exporter, it should specialize more in the areas of its
comparative advantage and achieve significant quantity expansion.
o Developing a dynamic business 2 business (B2B) portal, which can be used by service
providers to reach out to the markets abroad.

Topic 7: What are derivatives? Discuss the SEBI ban on derivative trade in agriculture
sector?

Introduction
• The term derivative refers to a type of financial contract whose value is dependent on
an underlying asset, group of assets, or benchmark.
• A derivative is set between two or more parties that can trade on an exchange or over the
counter (OTC).
• These contracts can be used to trade any number of assets and carry their own risks. Prices
for derivatives derive from fluctuations in the underlying asset.
o These financial securities are commonly used to access certain markets and may be
traded to hedge against risk.
• The derivatives market is the financial market for derivatives, financial instruments like
futures contracts or options, which are derived from other forms of assets.
o The market can be divided into two, that for exchange-traded derivatives and that
for over-the-counter derivatives.
SEBI ban on derivative trade in agriculture sector:
• Recently, the Securities and Exchange Board of India (SEBI) has banned the derivative trade
of seven agricultural commodities on the future’s platform of National Commodities and
Derivatives Exchange (NCDEX) for a year.
o The regulator has banned derivative contracts trade in chana, wheat, paddy (non-
basmati), soyabean and its derivatives, mustard seed and its derivatives, crude palm
oil and moong for a year with immediate effect.
o The commodity derivatives market has been prone to such sudden suspensions of
trading in agriculture items ever since it was introduced under the erstwhile Forward
Markets Commission (FMC).
Reason behind this ban
• India’s retail inflation rose to a three-month high of 4.91 % in November from 4.48 % in the
previous month primarily because of a rise in food inflation to 1.87 % from 0.85 % over this
period.

• Wholesale Price Index-based inflation has remained in double digits for eight consecutive
months beginning in April, mainly because of surging prices of food items.
o In November 2021, the wholesale price-based inflation surged to a record high of
14.23 % amid hardening of prices of mineral oils, basic metals, crude petroleum and
natural gas.

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 • In view of agricultural output that might be affected morbidly because of fertiliser shortage
faced in many parts of the country.

o By banning future’s trade, the government is trying to insulate any price shock the
market might feel in the days to come in case the production is not up to par.
Impact of this ban
• The suspension comes ahead of the rabi crop, sown in winter, hitting the markets in a couple
of months. With no reference price, traders will be clueless on future sentiment.
• Importers, who hedge on the derivative market to safeguard themselves from price moves,
may be more vulnerable.
• Impact on prices initially, the outlook will be bearish as traders rush to square off open
positions on derivatives.

Topic 8: What is Carbon Trading? Discuss the Significance of an efficient Carbon trading
market in India?

What is carbon trading?

• Carbon trading, also referred to as carbon emissions trading, is a market-based system of
buying and selling permits and credits that allow the permit holder to emit carbon dioxide.
o The model used in most carbon trading schemes is called ‘cap and trade’.
• The carbon credits and the carbon trade are authorized by governments with the goal of
gradually reducing overall carbon emissions and mitigating their contribution to climate
change.
• The idea of applying a cap-and-trade solution to carbon emissions originated with the Kyoto
Protocol.
o Kyoto Protocol created three such “market mechanisms: Emissions Trading, Clean
Development Mechanism, Joint implementation.
o Under Article 6 of the Paris Agreement, parties agreed to create a new market
mechanism and a framework for non-market approaches mechanism.
• Carbon marketplaces associated with carbon trading can exist at international, national,
state or local level.
o For instance, in 2021, China launched the world's largest market for carbon emissions
trading.
Significance of an efficient Carbon trading market in India
• Financial gains: India is the largest exporter of carbon credits the country and could stand to
gain $11 trillion over 50 years by limiting rising global temperatures and realizing its potential
to 'export decarbonization' to the world.
• Help achieve India’s net zero targets: Carbon markets can help in reducing green-house gas
emissions by incentivizing the adoption of innovative low carbon technologies and assigning
financial accountability to high emitters to reduce emissions.
• Finance avenues for carbon transition: The market will let green plants and energy efficient
units estimate earnings through carbon trade. This will help boost and finance more such
projects.
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 • Enhance private sector participation in climate actions: Giving voluntary players an
opportunity to trade in carbon instrument could enhance GHG emission reduction
commitments in the private sector.
Conclusion
• Examination of present trade of various environmental instruments to observe trading
trends.
• Calibration and effective management of demand and supply of instruments.
• Making the instrument more fungible: Developing a provision for fungibility of the unit
trading to emission reduction may attract voluntary buyers and lead to international
participation in the market.
• Adding more participants into the pool: like State Designated Agencies (SDAs), airlines
industry, Indian private companies participating in the Science-Based Targets initiative's
(SBTi) who have set targets under their 'Business Ambition for 1.5 C' campaign etc.
o This will require updating of PAT market rules to allow voluntary players to be part of
the buyer/seller pool.
• Regularizing trading period: For instance, in the EU-ETS system, auctioning of allowances
happens monthly on the European Energy Exchange (EEX).
• Supply of verifiable permits: by enabling project level registration and their proper validation,
verification, and issuance of emission reduction units (ERU).
• Developing Institutional and policy mechanisms for
o Fair and transparent price discovery.
o Linking other carbon trading market.
o Registry management and operation
o Participation protocol and methodology. o Monitoring and reporting of carbon
market performance.
o Gradually moving to moving to a cap-and-trade system wherein sectors and within
sectors specific companies are earmarked for only a specific amount of emissions.

Topic 9: Discuss the status of NPAs in agriculture sector and scope of an ARC?

Introduction
• Non-Performing Assets have been a bane for banks for a long time. There have been renewed
efforts on part of the Government of Indian and Reserve Bank of India to tackle the problem
of Non-Performing Assets.
• As per the Reserve Bank of India (RBI), an asset becomes non-performing when it stops to
generate income for the bank. The Non-Performing Assets in Public Banks are valued at
approximately $ 62 Billion, which represents 90% of total NPA in India.
• Based on different parameters the Non-Performing Assets are classified into different types.
o Substandard Assets: These are the assets which have remained NPA for a period of less
than or equal to 12 months
o Doubtful Assets: If the asset is in the substandard category for a period of 12 months

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 o Loss Assets: These assets are of little value; it can no longer continue as a bankable
asset, there could be some recovery value.
NPA’s in agriculture sector and other issues
• As per the RBI’s Financial Stability Report, bad loans (gross NPAs) for the agricultural sector
stood at 9.8% at the end of March 2021.
o In comparison, they were at 11.3% and 7.5% for the industry and services sectors
respectively.
• The announcement of farm loan waivers by states around elections leads to “deteriorating
credit culture”.
o Since 2014, at least 11 states have announced farm loan waivers including Rajasthan,
MP, Punjab, Chhattisgarh, Andhra Pradesh, Telangana, Maharashtra, Punjab and UP.
o It creates a concern among banks regarding the rise of NPAs in the farm sector
and leads to recovery challenges for the banks.
o Loan waivers stress the budgets of the waiving state or central government.
o Also, these waivers are poorly targeted, and eventually reduce the flow of credit
• At present, there is neither a unified mechanism to tackle NPAs in the farm sector nor a single
law that deals with enforcement of mortgages created on agricultural land.
o However, the recovery laws vary from state to state wherever agricultural land is
offered as collateral.
• While farmers in India are struggling to get bank loans, as formal sector lenders have become
even more risk averse amid the Covid-19 pandemic, the banks are challenged by huge Non-
Performing Assets (NPAs) as they’re unable to recover farm loans.
• In this context, the Indian Banks’ Association in a recently held meeting proposed the idea of
floating an Asset Reconstruction Company (ARC) to improve the recovery from bad loans in
the agricultural sector.
Proposed proposal for agricultural bad bank
• To improve recovery of bad loans in the agriculture sector, leading banks have made a pitch
for setting up an ARC specifically to deal with collections and recovery of farm loans.
o With a government-backed ARC having been recently set up to deal with bank NPAs to
the industry, this idea has acceptability among banks.
• As agricultural markets are dispersed, a single institution, as opposed to multiple banks, would
be more suited to deal with collections and recoveries from farm loans, optimising the costs
of the recovery.
o Considering the absence of a unified framework to deal with the enforcement of
mortgages created on agricultural land, there is a case for creating an effective
mechanism for the recovery of dues.
Associated Concerns with this proposal
• The requirement of the ARC is to have sufficient availability of funds to match the huge
amount of the NPA market.
o Even if sufficient funds are available with ARC, the price expectation mismatch
between selling bank (s) and buying ARC and agreement on an acceptable valuation
of the bad assets will also create a challenge for ARC.

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 • As local banks have far greater presence on the ground than a single ARC, they are likely to
be more capable of navigating the local terrain to recover their dues.
• As rural land markets are characterized by lack of clear titles and multiple stakeholders, ARCs
specifically the farm sector is not an as prudent approach.
• There is also a possibility that since agriculture is a state subject, such an approach could risk
being seen as encroaching on the rights of states.

Topic 10: What is Informal Economy? Discuss the present scenario and challenges related
to informal sector.

Introduction
• An Informal economy represents enterprises that are not registered, where employers do not
provide social security to employees.
• In many parts of the developing world, including India, informality has reduced at a very
sluggish pace, manifesting itself most visibly in urban squalor, poverty and unemployment.
• Despite witnessing rapid economic growth over the last two decades, 90% of workers in India
have remained informally employed, producing about half of Gross Domestic Product (GDP).
• Official Periodic Labor Force Survey (PLFS) data shows that 75% of informal workers are self-
employed and casual wage workers with average earnings lower than regular salaried workers.
o Combining the ILO’s widely agreed upon definition with India’s official definition (of
formal jobs as those providing at least one social security benefit — such as EPF), the
share of formal workers in India stood at only 9.7% (47.5 million).
Present scenario of Informal Sector Workers in India:
• Over 94% of 27.69 crore informal sector workers registered on the e-Shram portal have a
monthly income of Rs 10,000 or below and over 74% of the enrolled workforce belongs
to Scheduled Castes (SC), Scheduled Tribes (ST) and Other Backward Classes (OBC).
o The proportion of the General Category workers is 25.56%.
• The data showed that 94.11% of the registered informal workers have a monthly income
of Rs 10,000 or below, while 4.36% have a monthly income between Rs 10,001 and Rs
15,000.
• 61.72% of the registered workers on the portal are of the age from 18 years to 40 years,
while 22.12% are of the age from 40 years to 50 years.
• The proportion of the registered workers aged above 50 years is 13.23% while 2.93% of
workers are aged between 16 and 18 years.
• 52.81% of registered workers are female and 47.19 % are male.
• Top-5 States in Terms of Registration:
o Uttar Pradesh, Bihar, West Bengal, Madhya Pradesh, and Odisha.
• Agriculture is at the top with 52.11% of enrolments done by those related to the farm
sector followed by domestic and household workers at 9.93% and construction workers at
9.13%.

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Challenges related to Informal Sector Workers:
• Labour Related Challenges: On dividing the large number of workforces between the rural
and the urban segment, although the large number is employed in the rural sector, the
bigger challenge is in the urban workforce in the informal sector.
o Long working hours, low pay & difficult working conditions.
o Low job security, high turnover, and low job satisfaction.
o Inadequate social security regulation.
o Difficulty in exercising rights.
o Child and forced labour and discrimination on basis of various factors.
o Vulnerable, low-paid, and undervalued jobs.
• Productivity: The informal sector basically comprises MSMEs and household businesses
which are not as big as firms like Reliance. They are unable to take advantage of economies
of scale.
• Inability to Raise Tax Revenue: As the businesses of the informal economy are not directly
regulated, they usually avoid one or more taxes by hiding incomes and expenses from the
regulatory framework. This poses a challenge for the government as a major chunk of the
economy remains out of the tax net.
• Lack of Control and Surveillance: The informal sector remains unmonitored by the
government.
o Further, no official statistics are available representing the true state of the economy,
which makes it difficult for the government to make policies regarding the informal
sector and the whole economy in general.
• Low-quality Products: Although the informal sector employs more than 75% of the Indian
population, the value-addition per employee is very low. This means that a major portion
of our human resource is under-utilized.

Conclusion
• Simpler regulatory framework: The transition of the informal sector to the formal sector can
only occur when the informal sector is given relief from the burden of regulatory
compliance and is given enough time to adjust with the modern, digitized formal system.
• Financial Support for Formalization: Giving financial support to help small-scale industries
stand on their own is a crucial step in bringing them to the organized sector.
o Schemes like MUDRA loans and Start-up India are helping the youth carve a niche in
the organized sector.

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