Rajesh Nayak

CONTENTS
INDIA UNDER THE BRITISH RULE
INFLATION IN INDIA
MONETARY POLICY OF INDIA
MONEY MARKET
ROLE OF RBI
NATIONALISATION OF BANKS, JULY 1969
NARSIMHAN COMMITTEE (1991)
FISCAL POLICY OF INDIA
FISCAL RESPONSIBILITY AND BUDGETARY MANAGEMENT ACT, 2003
ROLE OF RBI
GENERAL ROLES
INDIA REFORMS EXPERIENCE
EXTERNAL SECTOR REFORMS
FINANCIAL SECTOR REFORMS
FINANCIAL INCLUSION AND CUSTOMER SERVICES
PROSPECTS, CHALLENGES AND STRENGTHS OF THE ECONOMY NOW
INDIAN PUBLIC FINANCE
VALUE ADDED TAX
GOODS AND SERVICE TAX
STATE FINANCES
PUBLIC DEBT
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India under the British Rule

The economic consequences of the British rule can be studied under three heads:

 Decline of Indian Handicrafts and progressive ruralisation of the Indian economy

 Growth of the new land system and the commercialisation of Indian agriculture
 Process of industrial transition of India

Decline of Handicrafts

 While India was an exporter of Handicrafts before the Industrial Revolution, the revolution
reversed the character of India‟s foreign trade
o Increase in demand for raw material for British industries
o Hence, steps were made to crush Indian handcrafts as well as commercialise
agriculture to meet the interests of the British industries
 Principle causes for the decline of Indian handicrafts
o Disappearance of Princely courts
o Hostile policy of the East India Company and the British Parliament
o Competition of machine-made goods
o The development of new forms and patterns of demand as a result of foreign
influence
 Economic consequences of the decline of handicrafts
o Increased unemployment
o Back-to-the-land movement: handicrafts were forced to take up agriculture or
become landless labourers. This increased the pressure on land. This trend of
growing proportion of the working force on agriculture is described as „progressive
ruralisation‟ or „deindustrialisation of India‟. Thus, the crisis in handicrafts and
industries seriously crippled Indian agriculture.

Land System during 1793-1850

 1793: permanent settlement

 Zamindari, Ryotwari, Mahalwari systems
 Absentee landlordism emerged
 The result of the whole change in the land system led to the emergence of subsistence
agriculture
 It helped the concentration of economic power in the hand of absentee landlords and
moneylenders in rural India.

Commercialisation of Agriculture (1850-1947)

 Define: Production of crop for sale rather than for family consumption
 What distinguished commercial agriculture from normal sales of marketable surplus was
that it was a deliberate policy worked up under the pressure from British industries. It was
thus forced upon the Indian peasantry.
 Resistance: Indigo revolution etc
 Why CA? Industrial Revolution
 Impact of railways and road transport: Railways and road transport made possible a huge
expansion in cash cropping, for national and international markets, and production regimes
across the subcontinent were placed in a new context of opportunity
 Impact of CA
o Mass movement to commercial agriculture caused decline in food production,
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increase in prices and famines.
o Halted the process of industrialisation in India

Industrial Transition in India

 The process of industrial transition divided into: industrial growth during the 19th century
and industrial progress during the 20th century
 Industrial growth during the 19th century
o Decline of indigenous industries and the rise of large scale modern industries
o 1850-55: first cotton mill, first jute mill and the first coal mine established.
Railway also introduced.
o Despite some industrialisation, India was becoming an agricultural colony
o The thrust to industrialisation came from the British because
 They had capital
 They had experience in setting up industries in Britain
 They had state support
o British industrialists were interested in making profits rather than economic growth
of India
o Parsis, Jews and Americans were also setting industries
o No Indian industrialists because
 Neither the merchants nor the craftsmen took the lead in setting industries
 While the craftsmen didn‟t possess capital, the merchants were happy with
trading and money lending activity which was also growing at that time.
o However, some Parsis, Gujaratis, Marwaris, Jains and Chettiars joined the ranks
of industrialists
 Industrial Growth in the first half of the 20th century
o Imp events that stimulated industrial growth
 1905: Swadeshi Movement
 First WW
 Second WW
o Great stimulus was given to the production of iron and steel, cotton and woollen
textiles, leather products, jute.
o Tariff protection was given to Indian industries between 1924 and 1939. This led
to growth and Indian industrialists were able to capture the market and eliminate
foreign completion altogether in important fields
o The increase in industrial output between 1939 and 1945 was about 20 percent
o After the WW I, the share of the foreign enterprises in India‟s major industries began
to decline.
 Causes for the slow growth of private enterprise in India‟s industrialisation
o Inadequacy of entrepreneurial ability
 Indian industrialists were short-sighted and cared very little for replacement
and renovation of machinery
 Nepotism dictated choice of personnel
 High profits by high prices rather than high profits by low margins and
larger sales
o Problem of capital and private enterprise
 Scarce capital
 Few avenues for the investment of surplus
 No government loans
 Absence of financial institutions
 Banking was not highly developed and was more concerned with commerce
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rather than industry
o Private enterprises and the role of government
 Lack of support from the government
 Discriminatory tariff policy: one way free-trade
 Restrictions transfer of capital equipments and machinery from Britain
 Almost all machinery was imported
 Despite these difficulties, the Indian indigenous business communities continued to grow,
albeit at a slow pace.

Forms and Consequences of Colonial Exploitation

 Main forms of colonial exploitation
o Exploitation through trade policies
o Exploitation through export of British Capital to India
o Exploitation through finance capital via the Managing agency system
o Exploitation through the payments for the costs of the British administration
 Exploitation through trade policies
o Exp of cultivators to boost indigo export: forced
o Exp of artisans by compulsory procurement by the Company at low prices: gomastas
were the agents of the Company who used to do this
o Exp through manipulation of export and import duties:
 Imports of Indian printed cotton fabrics in England were banned
 Heavy import duties on Indian manufactures and very nominal duties on
British manufactures.
 Discriminating protection was given (to industries that had to face
competition from some country other than Britain). This was whittled down,
however, by the clause of Imperial Preference under which imports from GB
and exports to GB should enjoy the MFN status.
 Exploitation through export of British Capital to India
o There were three purposes of these investment (in transport and communication)
 To build better access systems for exploited India‟s natural resources
 To provide a quick means of communication for maintaining law and order
 To provide for quicker disbursal of British manufactures throughout the
country and that raw materials could be easily procured
o Fields of FDI
 Economic overhead and infrastructure like railways, shippings, port, roads,
communication
 For promoting mining of resources
 Commercial agriculture
 Investment in consumer goods industries
 Investments made in machine building, engineering industries and chemicals
o Forms of investment
 Direct private foreign investment
 Sterling loans given to the British Government in India
o Estimates show that foreign capital increased from 365 mn sterling in 1911 to 1000 mn
sterling in 1933.
o British multinationals were the chief instruments of exploitation and it were they
who drained out the wealth of India.
o These investments show that
 British were interested in creating economic infrastructure to aid
exploitation and resource drain

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
They invested in consumer goods and not in basic and heavy industries to
prevent the development of Indian industries
 Ownership and management of these companies lay in British hands
 Exploitation through finance capital via the Managing agency system
o Managing agency system: The British merchants who had earlier set up firms acted as
pioneers and promoters in several industries like jute, tea and coal. These persons were
called managing agents
o It may be described as partnerships of companies formed by a group of individuals
with strong financial resources and business experience
o Functions of managing agents
 To float new concerns
 Arrange for finance
 Act as agents for purchase of raw materials
 Act as agents to market the produce
 Manage the affairs of the business
o They were important because they supplied finance to India when it was starved of
capital
o In due course, they started dictating the terms of the industry and business and
became exploitative and inefficient
o They demanded high percentage of profits. When refused they threatened to
withdraw their finance
 Exploitation through payments for the costs of British administration
o British officers occupied high positions and were paid fabulous remunerations.
o These expenditures were paid by India
o They transferred their savings to Britain
o India had to pay interest on Sterling Loans
o India has to pay for the war expedition of the Company and later the Crown
Consequences of the exploitation

 India remained primarily an agricultural economy

 Handcrafts and industries were ruined
 Trade disadvantage developed due to the policy of the British
 Economic infrastructure was developed only to meet the colonial interests
 Drain of Wealth
 The net result of the British policies was poverty and stagnation of the Indian economy

Drain Theory <take notes from History NCERT>

 Dadabhai Naoroji: „Poverty in India‟ (1876)

 He claimed that the drain of wealth and capital from the country which started after 1757
was responsible for absence of development in India.
 Drain was done through trade, industry and finance
 Two elements of the drain
o That arising from the remittances by European officials of their savings, and fro their
expenditure in England
o Arising from remittance by non-official Europeans
 India has to export much more than she imported to meet the requirements of the
economic drain
 In 1880 it amounted to 4.14% of India‟s national income
 Consequences of the Drain
o Prevented the process of capital formation in India
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o Through the drained wealth, the British established industrial concerns in India
owned by British nationals
o It acted as a drag on economic development

Inflation in India
<use fundaes from your MAP> this question is very likely to be asked given the present inflationary
trend.

Monetary Policy of India

Topics

1. MP background
2. Evolution of monetary policy in India: Different phases
3. Transmission Mechanism
4. Goals of MP
5. Instruments of MP
6. Determinants of MP
7. Role of RBI: Pre and post-reforms
8. MP: pre and post reforms
9. Committees on Monetary Management in India
10. MP and Money Market
11. MP and Fiscal Policy
12. MP and the external sector
13. MP and the banking sector
14. MP and Economic growth
15. MP and Inflation
16. Financial Stability: New Challenge
17. Challenges before monetary policy
18. Criticisms of India‟s MP

Some background information

 An important factor that determines the effectiveness of MP is its transmission – a process

through which changes in the policy achieve the objectives of controlling inflation and
achieving growth
 MP transmission mechanism describes how MP action affects output and inflation, the final
objectives of MP
 Various MP transmission channels
o Quantum Channel relating to money supply and credit
o Interest Rate Channel –this has become important in the post reform period
o Exchange Rate Channel
o Asset Price Channel
 How these channels function in an economy depends on its stage of development and its
underlying financial structure.
 These channels, however, are not mutually exclusive. There could be considerable feedback
and interaction among them.

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Evolution of MP

 1935: Proportional Reserve System

 1954: Minimum Reserve System
 1973-76: Minimum and maximum lending rates for bank loans prescribed
 1985: Flexible monetary targeting with feedback
 1998: Multiple indicator approach adopted

Functions of RBI

 Monetary functions
o Conduct of monetary policy
o Bank of issue
o Banker to the government
o Banker‟s Bank and Lender of the Last Resort
o Controller of credit
o Custodian of foreign exchange reserves
o Foreign exchange management – current and capital account management
o Oversight of the payment and settlement systems
 Non-monetary functions
o Regulation and supervision of the banking and non-banking financial institutions,
including credit information companies
o Regulation of money, forex and government securities markets as also certain
financial derivatives
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o Promotional functions: promotion of IFCI, SFC etc

o Developmental role
o Research and statistics

Objective of MP

 To catalyse economic growth: by ensuring adequate flow of credit to productive sectors

 Price stability
 After the financial crisis, achieving Financial Stability has emerged as an important objective.
Exchange rate management can be yet another objective

Tools of MP

 General Credit Control (Quantitative Control)

o Bank Rate
o Open Market Operations
o Cash Reserve Ratio
 Specific and direct credit control (Qualitative Control)
o Lending margins
o Purpose specific credit ceiling
o Discriminatory interest rates
o Eg: Credit Authorisation Scheme, Credit Monitoring Arrangement.

MP pre-reforms

 MP in India was conducted under the monetary targeting framework till 1997-98 with M3 as
an intermediate target. This amounted to regulating money supply consistent with the
expected growth in real income and a projected level of inflation.
 During the monetary targeting phase (1985-1998), while M3 growth provided the nominal
anchor, reserve money was used as the operating target and cash reserve ratio (CRR) was used
as the principal operating instrument. Besides CRR, in the pre-reform period prior to 1991,
given the command and control nature of the economy, the Reserve Bank had to resort to
direct instruments like interest rate regulations and selective credit control. These instruments
were used intermittently to neutralize the expansionary impact of large fiscal deficits which
were partly monetised. The administered interest rate regime kept the yield rate of the
government securities artificially low. The demand for them was created through periodic
hikes in the Statutory Liquidity Ratio (SLR) for banks. The task before the Reserve Bank was,
therefore, to develop the financial markets to prepare the ground for indirect operations.
MP post-reform

 In the wake of the financial reforms, questions were raised about the appropriateness of this
framework.
 Working Group on Money Supply (1998)
o Highlighted that the interest rate channel of transmission mechanism was gaining
importance
 On the recommendation of this working group, RBI shifted over to a multiple-indicator
approach from 1998-9
 Multiple Indicator Approach: Interest rates or rates of return in different markets (money,
capital and g-sec), along with such data as on currency, credit extended by banks and
financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate,

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refinancing and transactions in foreign exchange available on high-frequency basis, are

juxtaposed with output data for drawing policy perspectives.
 LAF: Another important feature post reform is the increased use of LAF. It has enabled RBI
to modulate short-term liquidity under varied financial market conditions, including large
capital inflows from abroad.
 CRR: Reduced
 1992-93: market borrowing programme of the government was put through the auction
process
 SLR was brought down to its statutory minimum of 25 pc by Oct 1997 and 24 pc in 2010
 CRR was brought down from 15 pc of NDTL of banks to 9.5 pc in Nov 1997 which
has stabilised at 6 pc for a long time. Not bound by its statutory limit (lower) of 3 pc
now.
 Narsimhan Committee (1998) recommended reforms in the money market
o RBI introduced LAF in 2000 to manage market liquidity on a daily basis and also to
transmit interest rate signals to the market. In the post-reform period, LAF, with
OMO, has emerged as the dominant instrument of MP, though CRR continued to be
used as an additional instrument of policy.
o Call money market was transformed into a pure inter-bank market by 2005.
o With the introduction of prudential limits on borrowing and lending by banks in the
call money market, the collateralized money market segments developed rapidly
 To absorb the capital inflows in excess of the absorptive capacity of the economy MSS was
introduced in 2004. Interestingly, in the face of reversal of capital flows during the recent
crisis, unwinding of the sterilised liquidity under the MSS helped to ease liquidity conditions.
 Increased Micro-finance: To strengthen rural finance RBI has focused on SHGs.
 Fiscal Monetary Separation: Automatic monetization of deficit faced out since 1994. Thus
it has separated the monetary policy from the fiscal policy.
 Changed interest rate structure: Phased deregulation of lending rates in the credit market.
Minimum lending rates had been abolished and lending rates above Rs. 2 lakh were freed. In
2010, the base rate mechanism was adopted. Savings rate was deregulated in 2011
 Higher market orientation for banking: the banking sector got more autonomy
and operational flexibility.
Challenges in the post-reform period

 A major challenge is the conduct of monetary policy in surplus liquidity conditions.

 Increased capital inflows
o To deal with this, RBI initiated the Market Stabilization Scheme (MSS) in 2004
o Under the scheme RBI issues Treasury Bills and dated government securities. The
money generated from sale of these bills is kept in a different account held by the
government and maintained and operated by RBI. This money is not available for
government‟s expenditure. Thus, liquidity in the market is mopped.
o The operationalisation of the MSS to absorb liquidity of more enduring nature has
considerably reduced the burden of sterilization on the LAF window.
 Financial stability is an emerging concern
 The ongoing modernisation of the payments system with the introduction of RTGS would
have a significant impact on MP.
 The transmission of policy signals to banks‟ lending rates has been rather slow. <base rate
system introduced to correct this?>
 Central bank independence
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Criticisms/Limitations

 In case of high fiscal deficit, monetary expansion has continued to happen

 Limited coverage: The MP covers only commercial banking system and leaves out the non-
bank institutions. This limits the effectiveness of MP
 Unorganised money market: Its pretty large and does not come under the control of the RBI.
Hence, MP does not affect them.
 Predominance of cash transcation (?): <check out the current situation> In India, still there is
huge dominance of cash in total money supply. It is one of the main obstables in the effective
implementation of MP. Because MP operates on the bank credit rather than cash.
 Increase volatility: As MP has adoptged changes in accordance to the changes in the external
sector as well, it could lead to a high amount of volatility.

Evaluation of the changes in MP and Money Market

 In response to the reforms, over the years the turnover in various market segments
increased significantly
 The reforms have also led to improvement in liquidity management operations by the RBI as
is evident from the stability in call money rates, which also helped improve integration of
various money market segments and thereby effective transmission of policy signals
 The rule based fiscal policy pursued under the FRBM Act, by easing fiscal
dominance, contributed to overall improvement in monetary management.
 With the changing framework of monetary policy in India from monetary targeting to an
augmented multiple indictors approach, the operating targets and processes have also undergone
a change. There has been a shift from quantitative intermediate targets to interest rates, as the
development of financial markets enabled transmission of policy signals through the interest rate
channel. At the same time, availability of multiple instruments such as CRR, OMO including
LAF and MSS has provided necessary flexibility to monetary operations. While monetary policy
formulation is a technical process, it has become more consultative and participative with the
involvement of market participant, academics and experts. The internal process has also been re-
engineered with more technical analysis and market orientation. In order to enhance
transparency in communication the focus has been on dissemination of information and analysis
to the public through the Governor‟s monetary policy statements and also through regular
sharing of policy research and macroeconomic and financial information.
 The availability of multiple instruments and their flexible use in the implementation of
monetary policy have enabled the RBI to successfully influence the liquidity and interest
rate conditions in the economy.

Changes in MP

Operating Target
Pre-reform Post-reform
Reserve Money was used as the Multiple Indicator Approach
operating target in the monetary
targeting framework until mid-
1990s

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Monetary CRR and SLR was heavily used Reliance on direct instruments
Policy has been reduced and liquidity
Instruments management in the system is
carried out through OMOs in the
form of outright purchases of g-
secs and daily repo and reverse
repo operations under LAF.
MSS also introduced.
Large capital inflows witnessed
in recent years have posed a
major challenge in the conduct
of monetary and exchange rate
management.
Phased deregulation of the
interest rates
High SLR and CRR Low SLR and CRR

Money Market
 RBI operationalises its monetary policy through its operations in government
securities, foreign exchange and money markets
 1985: Money Market reforms begin
 1992: Introduction of auction system for government securities
 1996: Primary Dealer System initiated
 2002: Electronic trading and guaranteed settlement through CCIL for G-Sec starts
 2006: RBI expressly empowered to regulate money, forex, G-sec and gold related
securities markets
Role of RBI
Pre-reform Post-reform
Developmental Role: the Priority Sector Lending: In the revised guidelines for
developmental role has Introduced from 1974 with PSL the thrust is on ensuring
increased in view of the public sector banks. Extended adequate flow of bank credit to
changing structure of the to all commercial banks by those sectors that impact large
economy with a focus on 1992 segments of the population and
SMEs and financial inclusion weaker sections, and to the
sectors which are employment
intensive such as agriculture
and small enterprises
Lead Bank Scheme Special Agricultural Credit
Plan introduced.
Kisan Credit Card
scheme (1998-99)
Focus on credit flow to micro,
small and medium enterprises
development
Financial Inclusion

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Monetary Policy: the role of M3 as an intermediary target Multiple Indicator Approach

RBI has changed from
regulating credit and money
flow directly to using market
mechanisms for achieving
policy targets. MP framework
has changed to promote
financial deregulations and
market development. Role as a
facilitator rather than as
principal actor.

Regulation of foreign exchange Management of foreign

Banker to the government
As regulator of financial
sector: As regulator of the
financial sector, RBI has faced
the challenge of regulating the
increasing financial sector in
India. Credit flows have
increased. RBI had to make
sure that financial institutions
Direct credit control
Rupee convertability
highly managed
Monetary policy was linked to
the fiscal policy due to
automatic monetisation of the
deficit
Reduction in SLR
exchange
Open Market Operations, MSS,
LAF
Full current ac convertability
and some capital account
convertability
Delinking of monetary policy
from the fiscal policy. From
2006, under FRBM, RBI
ceased to participate in the
primary market auctions of the
central government‟s
securities.

are regulated in a way to protect

the consumers while not
impeding economic growth.
Custodian of FOREX reserves
Inflation
Financial Stability
Money Market
Direct instruments were used
Closed economy
Forex reserves have increased
drastically. Need to manage it
adequately and avoid
inflationary impact
Multiple indicators
Increased FDI and FII has
made financial stability one of
the policy objectives.
Narsimhan Committee (1998)
recommended reforms in the
money market

Refer to the 2006 report on Currency and Finance for further details. Reforms and the banking sector

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Nationalisation of Banks, July 1969

Why? Also, elaborate on the situation in 1969

 To extend the reach of banks geographically

 To extend reach of banks functionally to priority sectors. <directed credit>
Narsimhan Committee (1991)
Problems with the banking system:
Revenue Side

 High reserve requirements in form of CRR and SLR

 Directed credit programme
o The banks were told to shift from security-oriented credit to purpose-
oriented credit.
 Political and Administrative Interference. This led to lower income for banks,
inadequate provisioning for bad debt, locking of credit from more productive uses and
erosion of profitability
 Subsidizing of credit: Low rate of interest.

Expenditure Side

 Phenomenal increase in branch banking led to increased expenditure of the banks.

Rapid increase in the number of staff.
 Trade unions contributed to the restrictive practices regarding promotions, transfers,
discipline, work culture etc.
 Extension of the coverage of bank credit to priority sectors with higher administrative and
functional costs.

Fiscal Responsibility and Budgetary Management Act, 2003

What is the FRBM Act?
The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the
President‟s assent in August the same year. The United Progressive Alliance (UPA) government had
notified the FRBM Rules in July 2004.

As Parliament is the supreme legislative body, these will bind the present finance minister P
Chidambaram, and also future finance ministers and governments.

How will it help in redeeming the fiscal situation?

The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union
government to stick to the deficit targets.

As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be
reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the
revenue deficit by 0.5% of the GDP.

The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of
fiscal deficit by 0.3 % of GDP every year.

How are these targets monitored?

The Rules have mid-year targets for fiscal and revenue deficits. The Rules required the government to
restrict fiscal and revenue deficit to 45% of budget estimates at the end of September (first half of the
financial year).
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In case of a breach of either of the two limits, the FM will be required to explain to Parliament the
reasons for the breach, the corrective steps, as well as the proposals for funding the additional
deficit.

What is fiscal deficit?

Every government raises resources for funding its expenditure. The major sources for funds are taxes
and borrowings. Borrowings could be from the Reserve Bank of India (RBI), from the public by
floating bonds, financial institutions, banks and even foreign institutions. These borrowings
constitute public debt and fiscal deficit is a measure of borrowings by the government in a financial
year.

In budgetary arithmetic, it is total expenditure minus the sum of revenue receipts, recoveries of
loans and other receipts such as proceeds from disinvestment.

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Do economies need a fiscal deficit?

Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to
boost an economy, especially in times of crises. What it means is that government should
raise public investment by investing borrowed funds. This exercise is also called pump-
priming. The basic purpose of the whole exercise is to accelerate the growth of an economy by
public intervention.
Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of
intervention does not exceed the emanating benefits.

The darker side of the story is that the borrowed funds, which always remain on tap,
have to be repayed. And pending repayment, these loans have to be serviced.

Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing.

For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on
investment of Rs 100. In that situation, fiscal deficit will not pose any problem.

However, the government spends money on all kinds of projects, including social sector
schemes, where it is impossible to calculate the rate of return at least in monetary terms. So,
one will never know whether the borrowed funds are being invested wisely.

And how grave is the problem of fiscal deficit?

Over the years, public debt has continued to mount and so have interest payments.
According to budget figures (revised estimates for 2003-04) the government borrowed Rs
1,32,103 crore. The interest payment during the year was Rs 1,24,555 crore.

What is alarming is that except for a comparatively small sum of about Rs 7,500 crore, more
than 94% of borrowed funds are being used to pay interest for past loans. This is what is called
the debt trap, where one is compelled to borrow to service past loans.

The other way of looking at the fiscal problem is that more than 66% of government taxes,
totalling Rs 1,87,539 crore in 2003-04 were used to pay interest on past borrowings.

Servicing of loans also erodes the government‟s ability to spend money on critical areas
such as health and education and on essential sovereign functions like policing, judiciary
and defence.

The following points are worth notable of FRBM Act.

1) The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of
the Union government to stick to the deficit targets.

2) As per the target, revenue deficit, which is revenue expenditure minus revenue receipts,
have to be reduced to nil in five years beginning 2004-05.

3) The target reduction annually is in Deficits, Government borrowings and debt.

4) A cap on the level of guarantee and total liabilities of the government.

5) Prohibits Government to borrow from RBI(major step)

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6) Placing an assessment of trends in receipts and expenditure before both house of the
parliament on a quarterly basis

7) Annual presentation in the Parliament , the Frame work Statement, Medium Term Fiscal
Policy Statement and Fiscal policy strategy statement.

8) Under exceptional circumstances, Government may be compelled to fall short of the

targets. In case of deviations, the Government would not only be required to take corrective
measures, but the Finance Minister shall also make a statement in both the House of
Parliament.

9) Borrowing from RBI is permitted in exceptional situations like natural calamities.

10) The need for fiscal discipline , Increase plan expenditure, Reduce the amount of
borrowings is clear, Particularly in the era of Globalization when penalty for
irresponsibility is high.

11) The government can engage in capital expenditure without violating the FRBM Act.

Cons
 The act would, in effect, force the government to undertake market borrowings at
relatively higher rates of interest that, in turn, would increase revenue expenditures
 The governments may reduce even productive expenditure in order to meet the fiscal
deficit targets.
 There are a series of substantial programmes like Bharat Nirman, SSA, MNREGA
etc that need high government spending. FRBM should not be used as an excuse to
cut spending on the social sector.
 The Parliamentary Standing Committee on the FRBM bill had cautioned in 2000
that the rigidities such as ban on government borrowing from RBI (except for
ways and means advances) serve as a binding constraint on capital expenditures
and development programmes and not on revenue expenditures.
 Some economists argue that fiscal discipline and prudence are better achieved by
concerted reforms on the administrative front, including effective decentralisation
rather than by controlling single measures like the fiscal and revenue deficits.
 Chelliah: Reducing the growth of expenditure and/or raising the rate of growth of
revenue in a mechanical way irrespective of prevalent and emerging economic
conditions might adversely affect the growth rate. Policies need to be calibrated
according to economic trends.
 How was it decided that 3% FD is optimal? No economic rule suggests that.
 There should be more dynamic sources of resource mobilisation
 The focus deserves to be shift in favour of not the size of gross fiscal
deficit but the productive purposes for which government deficits are
incurred.
 Increasing social expenditure will call for some pressure on the revenue
deficit of the government which will have to be tolerated.
 Fiscal rules could not have been adhered to in the 2009-10 budget in the milieu of
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 Rajesh Nayak

the global meltdown.

 For fiscal responsibility (Rangarajan and Subbarao: 2007)
o There needs to be fiscal correction not just at the centre but also in the
states
o For sustaining and accelerating growth, achieving the FRBM targets is
necessary, but not sufficient. It must, however, be borne in mind that
sustained growth is an essential prerequisite for meeting the fiscal caps.
o We need to pay attention to achieving the targets not only in quantitative
terms but also with respect to the quality of adjustment.
 Plug the inadequacies that have become evident in the Act since it was passed in
2003.
Update

 Amendment to FRBM Act is being proposed by the finmin

 The idea is to have some leeway for counter-cyclical adjustments in case of
economic or political shocks
 This will mean the Centre will have the leeway to increase its spending and deviate
from deficit targets in times of economic crisis. But in good times, when the
revenues are buoyant, it would have to perform better
 The 13th Finance Commission had also suggested such a cushion and said it can be
used in times of an agrarian crisis, asset price bubble or a global recession
Role of RBI

General Roles
 Role in the fiscal system: As the banker and the debt manager of both Central and
State Governments. It also provides temporary support to tide over mismatches in
their receipts and payments in the form of Ways and Means Advances (WMA).

India Reforms Experience

External Sector Reforms

 Reforms
o Exchange rate of rupee became market determined from 1993
o 1994: India became current account convertible
o FEMA was enacted in 2000. With this, the objectives of regulation have
been redefined as facilitating trade and payments as well as orderly
development and functioning of foreign exchange market in India.
 Effects
o India‟s external sector has become more resilient
o Exports growth rate: -- pc
o Current account deficit an issue
o Strengthening of the capital account
o Accretion of the foreign exchange reserves
o Capital outflows: the current regime of outflows in India is characterized by
liberal but not incentivised framework for corporates to invest in the real
economic outside India, including through the acquisition route.

Financial Sector Reforms

 Situation before reforms
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o Financial markets were marked by administered interest rates, quantitative

ceilings, statutory pre-emptions, captive market for government securities,
excessive reliance on central bank financing of fiscal deficit, pegged exchange
rate and current and capital account restrictions.
 Reforms
o Phased reductions in statutory pre-emption like CRR and SLR
o Deregulation of interest rates on deposits and lending, except for a select
segment.
o Diversification of ownership of banking institutions: private shareholding
in public sector banks
o Financial Markets: removal of structural bottlenecks,
introduction/diversification of new players/instruments, free pricing of
financial assets, relaxation of quantitative restrictions, better regulatory
systems, introduction of new technology, improvement in trading
infrastructure, clearing and settlement practices and greater transparency.
 Effects
o The banking sector reform combines a comprehensive reorientation of
competition, regulation and ownership in a non-disruptive and cost-effective
manner.
o FDI in the private sector banks is now allowed upto 74 pc
o 100 pc FDI is allowed under the automatic route in NBFCs
o Urban Cooperative Banks suffer from various problems. Several structural,
legislative and regulatory measures have been initiated in recent years for
UCBs with
a view to evolving a policy framework oriented towards revival and healthy
growth of the sector.
o Fin mkt: the price discovery in the primary market is more credible than
before and secondary markets have acquired greater depth and liquidity.
o Number of steps (like RTGS) for making the payment systems safe,
secure and efficient.

Financial Inclusion and Customer Services

A. Initiation of no-frills account – These accounts provide basic facilities of deposit and
withdrawal to accountholders makes banking affordable by cutting down on extra frills that are
no use for the lower section of the society. These accounts are expected to provide a low-cost
mode to access bank accounts. RBI also eased KYC (Know Your customer) norms for opening
of such accounts.

B. Banking service reaches homes through business correspondents – The banking systems have
started to adopt the business correspondent mechanism to facilitate banking services in those
areas where banks are unable to open brick and mortar branches for cost considerations.
Business Correspondents provide affordability and easy accessibility to this unbanked
population. Armed with suitable technology, the business correspondents help in taking the
banks to the doorsteps of rural households.

C. EBT – Electronic Benefits Transfer – To plug the leakages that are present in transfer of
payments through the various levels of bureaucracy, government has begun the procedure of
transferring payment directly to accounts of the beneficiaries. This “human-less” transfer of
payment is expected to provide better benefits and relief to the beneficiaries while reducing
government‟s cost of transfer and monitoring. Once the benefits starts to accrue to the masses,
those who remain unbanked shall start looking to enter the formal financial sector.
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Why Financial Inclusion?

 It mobilizes savings that promote economic growth through productive investment.
 It promotes financial literacy of the rural population and hence guides them to avoid the
expensive and unreliable financial services.
 This helps the weaker sections to channelize their incomes into buying productive resources or
assets.
 In the situations of economic crisis, the rural economy can be a support system to stabilize the
financial system. Hence, it helps in ensuring a sustainable financial system.

Prospects, Challenges and Strengths of the economy now

 Prospects
o High growth rate
o Macroeconomic stability
o Service Sector
 Challenges
o While over 60 pc of the workforce is dependent on agriculture, the sector
accounts for 20 pc of the GDP
o Slow pace of poverty reduction
o Volatility in agricultural growth
o Inadequate availability of modern infrastructure
o Regulatory framework and overall investment climate
o For fiscal consolidation the subsidies need to be reduced while making the
existing ones more effective
o The delivery of essential public services such as education and health to
a large section of the population is a major challenge
o Governance reforms: they are essential to strengthen state capacity and enable
it to perform its core functions
o Good governance can co-exist only when public sector functions
fairly and efficiently, which is achievable by improving and not
undermining it.
 Strength
o Increasing human resource. English speakers.
o Demographics: Young country
Indian Public Finance

Value Added Tax

 Under the constitution the States have the exclusive power to tax sales and
purchases of goods other than newspapers
 There are however defects of sales tax
o It is regressive in nature. Families with low income a larger proportion
of their income as sales tax.
o Has a cascading effect – tax is collected at all stages and every time a
commodity is bought or sold
o Sales tax is easily evaded by the consumers by not asking for receipts.
 VAT is the tax on the value added to goods in the process of production and
distribution.
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 With the implementation of VAT, the origin based Central Sales Tax is phased out.
 Introduced from April 1, 2005
 Advantages
o Is a neutral tax. Does not have a distortionary effect
o Imposed on a large number of firms instead of at the final stage
o Easier to enforce as tax paid by one firm is reported as a deduction by a
subsequent firm
o Difficult to evade as collection is done at different stages
o Incentive to produce and invest more as producer goods can be easily
excluded under VAT
o Encourages exports since VAT is identifiable and fully rebated on exports
 Difficulties in implementing
o For collection of VAT all producers, distributers, traders and everyone in the
chain of production should keep proper account of all their transactions
o Bribing of sales tax officials to escape taxes
o The government has to simplify VAT procedures for small traders and
artisans

Goods and Services Tax

 The Goods and Service Tax Bill or GST Bill, officially known as The Constitution
(122nd Amendment) Bill, 2014, would be a Value added Tax (VAT) to be implemented
in India, from April 2016. GST stands for “Goods and Services Tax”, and is proposed to
be a comprehensive indirect tax levy on manufacture, sale and consumption of goods as
well as services at the national level. It will replace all indirect taxes levied on goods and
services by the Indian Central and Stategovernments. It is aimed at being comprehensive
for most goods and services
State Finances
 Borrowing by the State governments is subordinated to prior approval by the
national government <Article 293>
 Furthermore, State Governments are not permitted to borrow externally unlike the
centre.

Public Debt
 The aggregate stock of public debt of the Centre and States as a percentage of GDP
is high (around 75 pc)
 Unique features of public debt in India
o States have no direct exposure to external debt
o Almost the whole of PD is local currency denominated and held almost
wholly by residents
o The PD of both center and states is actively managed by the RBI ensuring comfort
the financial markets without any undue volatility.
o The g-sec market has developed significantly in recent years
o Contractual savings supplement marketable debt in financing deficits
o Direct monetary financing of primary issues of debt has been discontinued since
April 2006.

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 INTERNATIONAL ECONOMIC ORGANISATIONS & INDIA

INTERNATIONAL MONETARY SYSTEM

 refers to the customs, rules, instruments, facilities, and organisations facilitating international
(external) payments.
 also referred to as an international monetary order or regime.
 IMS can be classified according to the way in which exchange rates are determined (i.e., fixed
currency regime, floating currency regime or managed exchange regime) and the form foreign
reserves take (i.e., gold standard, a pure judiciary standard or a gold-exchange standard).
An IMS is considered good if it fulfills the following two objectives in an impartial manner:
(i) maximises the flow of foreign trade and foreign investments, and
(ii) leads to an equitable distribution of the gains from trade among the nations of the world.
The evaluation of an IMS is done in terms of adjustment, liquidity, and confidence which it manages to
weild.

Adjustment

 refers to the process by which the balance-of-payment (BoP) crises of the nations of the world (or
the member nations) are corrected.
 A good IMS tries to minimise the cost of BoP and time for adjustment for the nations.
Liquidity

 refers to the amount of foreign currency reserves available to settle the BoP crises of the nations.
 A good IMS maintains as much foreign reserves to mitigate such crises of the nations without
any inflationary pressures on the nations.

Confidence
 refers to the faith the nations of the world should show that the adjustment mechanism of the IMS is
working adequately and that foreign reserves will retain their absolute and relative values.
 This confidence is based on the transparent knowledge information about the IMS.

BRETTON WOODS DEVELOPMENT

 As the powerful nations of the world were hopeful of a new and more stable world order with the
emergence of the UNO, on the contrary, they were also anxious for a more homogenous world
financial order, after the Second World War.
 The representatives of the USA, the UK and 42 other (total 44 countries) nations met at Bretton
Woods, New Hampshire, USA in July 1944 to decide a new international monetary system (IMS).
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  The International Monetary Fund (IMF) and the World Bank (with its first group-institution
IBRD) were set up together—popularly called as the Bretton Woods‘ twins3 —both having their
headquarters in Washington, DC, USA

INTERNATIONAL MONETARY FUND

 came up in 1944 whose Articles came into force on the December 27, 1945 with the main
functions as exchange rate regulation, purchasing short-term foreign currency liabilities of the
member nations from around the world, allotting special drawing rights (SDRs) to the member
nations and the most important one as the bailor to the member economies in the situation of any
BoP crisis.
The main functions of the IMF are as given below:
(i) to facilitate international monetary cooperation;
(ii) to promote exchange rate stability and orderly exchange arrangements;
(iii) to assist in the establishment of a multilateral system of payments and the elimination of
foreign exchange restrictions; and
(iv) to assist member countries by temporarily providing financial resources to correct
maladjustment in their balance of payments (BoPs).
 The Board of Governors of the IMF consists of one Governor and one Alternate Governor from each
member country.
 For India, Finance Minister is the Ex-officio Governor while the RBI Governor is the Alternate
Governor on the Board.
 The day-to-day management of the IMF is carried out by the Managing Director who is Chairman
(currently, Ms Christine Lagarde) of the Board of Executive Directors. Board of Executive
Directors consists of 24 directors appointed/elected by member countries/group of countries - is
the executive body of the IMF.
 India is represented at the IMF by an Executive Director ( currently
Arvind Virmani), who also represents three other countries in India‘s constituency - Bangladesh,
SriLanks and Bhutan.
India’s Quota & Ranking

 IMF reviews members‘ quotas once in five years - last done in December 2010 - here,
India consented for its quota increase.
 After this India‘s quota (together with its 3 constituency countries) has increased to 2.75 per cent
(from 2.44 per cent) and it has become the 8th (from 11th) largest quota holding country among
the 24 constituencies.

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  Once a member nation has signed the EFF (Extended Fund Facility) agreement with the IMF,
borrowing can be done by the member nation –
 India signed this agreement in the fiscal 1981-82.
 India has been borrowing from the IMF due to critical balance of payment (BoP) situations - once
between 1981-84 (SDR 3.9 billion) and next during 1991 (SDR 3.56 billion).
 All the loans taken from the IMF have been repaid. India is now a contributor to the IMF as it
participates in the Financial Transactions Plan (FTP) of the IMF since September 2002 - at
this time India was in strong balance of payment situation and in a comfortable forex reserves
position.
Current US/EU Financial Crises: Challenges regarding International Payments

 The recent financial crises of the US and the EU nations have raised the questions of the challenges of
international payments once again. At this crucial juncture, the world seems tossing the idea of
a reserved currency for all international payments - as if the famous Keynesian idea of such a
currency (Bancor) is going for a kind of revival.
 The Bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher
conceptualized in the years 1940-42 which the United Kingdom proposed to introduce after the
Second World War.
 The proposed currency was, viz., be used in international trade as a unit of account within a
multilateral barter clearing system, the International Clearing Union, which would also have to be
founded.
 The Bancor was to be backed by barter and its value expressed in weight of gold.
 However, this British proposal could not prevail against the interests of the United States, which
at the Bretton Woods conference established the U.S. dollar as world key currency.
 the Governor of the People‘s Bank of China called Keynes‘s bancor approach farsighted and
proposed the adoption of International Monetary Fund (IMF) special drawing rights (SDRs) as a
global reserve currency as a response to the financial crisis of 2007-2010.
WORLD BANK

 The World Bank (WB) Group today consists of five closely associated institutions propitiating
the role of development in the member nations in different areas. A brief account is as follows:

1. IBRD
 The International Bank for Reconstruction and Development is the oldest of the World
Bank institutions which started functioning (1945) in the area of reconstruction of the war-ravaged
regions (World War II) and later for the development of the middle-income and creditworthy
poorer economies of the world.
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  Human development was the main focus of the developmental lending with a very low interest rate
(1.55 per cent per annum)—the areas of focus being agriculture, irrigation, urban development,
healthcare, family welfare, dairy development, etc. It commenced lending for India in 1949.
2. IDA

 The International Development Agency (IDA) which is also known as the soft window of the WB
was set up in 1960 with the basic aim of developing infrastructural support among the member
nations, long-term lending for the development of economic services.
 Its loans, known as credits are extended mainly to economies with less than $895 per capita
income.
 The credits are for a period of 35-40 years, interest-free, except for a small charge to cover
administrative costs.
 Repayment begins after a 10-year grace period.
 There was no human angle to its lending. But now there remain no hard and fast differences between
the purposes for the IBRD and IDA lending.
 Every year developing nations make enough diplomatic attempts to carve out maximum loan
disbursal for themselves.
 India had been the biggest beneficiary of the IDA support.

3. IFC

 was set up in 1956 which is also known as the private arm of the WB.
 lends money to the private sector companies of its member nations.
 interest rate charged is commercial but comparatively low.
 finances and provides advice for private public ventures and projects in partnership with
private investors and, through its advisory work, helps governments of the member nations to create
conditions that stimulate the flow of both domestic and foreign private savings and investment.
 focuses on promoting economic development by encouraging the growth of productive enterprises
and efficient capital markets in its member countries.
 participates in an investment only when it can make a special contribution that complements the
role of market investors (as a Foreign Financial Investor (FFI).
 plays a catalytic role, stimulating and mobilising private investment in the developing world by
demonstrating that investments there too can be profitable.
4. MIGA
 The Multilateral Investment Guarantee Agency (MIGA), set up in 1988 encourages foreign investment
in developing economies by offering insurance (guarantees) to foreign private investors against loss

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 caused by non-commercial (i.e. political) risks, such as currency transfer, expropriation, war and
civil disturbance.
 provides technical assistance to help countries disseminate information on investment
opportunities.
5. ICSID
 The International Centre for Settlement of Investment Disputes (ICSID), set up in 1966 is
an investment dispute settlement body whose decisions are binding on the parties.
 was established under the 1966 Convention on the Settlement of Investment Disputes
between States and Nationals of Other States.
 Though recourse to the centre is voluntary, but once the parties have agreed to arbitration, they
cannot withdraw their consent unilaterally.
 settles the investment disputesarising between the investing foreign companies and the host
countries where the investments havebeen done.
 India is not its member (that is why the Enron issue was out of its preview).
BIPA

 As part of the Economic Reforms Programme initiated in 1991, the foreign investment policy of the
Government of India was liberalised and negotiations undertaken with a number of countries to enter
into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to promote and
protect on reciprocal basis investment of the investors.
 Government of India have, so far, (as by July 2012) signed BIPAs with 82 countries out of which
72 BIPAs have already come into force and the remaining agreements are in the process of being
enforced.
 The objective of the BIPA is to promote and protect the interests of investors of either country in the
territory of other country.
 Such agreements increase the comfort level of the investors by assuring a minimum standard of
treatment in all matters and provides for justifiability of disputes with the host country (it should be
noted here that India is not a member of the World Bank group‘s body, the ICSID, serving the
same purpose.
 BIPA is India‘s version. While the former is a multilateral body, the latter is a bilateral one).

ASIAN DEVELOPMENT BANK

 The Asian Development Bank (ADB), with an international partnership of 63 member countries, was
established in 1966 and has headquarters at Manila, the Philippines. India is a founder member
of ADB.

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  The Bank is engaged in promoting economic and social progress of its developing member
countries in the Asia-Pacific region. Its principal functions are as follows:
(i) to make loans and equity investments for the economic and social advancement of its
developing member countries;
(ii) to provide technical assistance for the preparation and execution of development projects and
programmes and advisory services;
(iii) to respond to the requests for assistance in coordinating development policies and plans in
developing member countries; and(iv) to respond to the requests for assistance and coordinating
development policies and plans of developing member countries.
 India started borrowing from ADB‘s Ordinary Capital Resources(OCR) in 1986.
 The Bank‘s lending has been mainly in the Energy, Transport and Communications, Finance,
Industry and Social Infrastructure sectors.
 The Bank has extended technical assistance to India in addition to loans from its OCR window.
 The technical assistance provided include support for institutional strengthening, effective
project implementation and policy reforms as well as for project preparation.
 India holds the position of Executive Director on the Board of Directors of the Bank—its
Constituency comprises India, Bangladesh, Bhutan, Lao PDR and Tajikistan.
 The Finance Minister is India‘s Governor on the Board of Governors of the Asian Development
Bank and Secretary (EA) is the Alternate Governor.

OECD
 The roots of the Organisation for Economic Co-operation and Development (OECD), Paris, go back
to the rubble of Europe after World War II.
 Determined to avoid the mistakes of their predecessors in the wake of World War I, European
leaders realised that the best way to ensure lasting peace was to encourage co-operation and
reconstruction, rather than punish the defeated.
 The Organisation for European Economic Cooperation (OEEC) was established in 1947 to run
the US-financed Marshall Plan for reconstruction of a continent ravaged by war.
 By making individual governments recognise the interdependence of their economies, it paved
the way for a new era of cooperation that was to change the face of Europe.
 Encouraged by its success and the prospect of carrying its work forward on a global stage, Canada
and the US joined OEEC members in signing the new OECD Convention on December 14, 1960.
 The Organisation for Economic Co-operation and Development (OECD) was officially born on
September 30, 1961, when the Convention entered into force.
 Other countries joined in, starting with Japan in 1964.

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  Today, 34 OECD member countries worldwide regularly turn to one another to identify problems,
discuss and analyse them, and promote policies to solve them.
 The US has seen its national wealth almost triple in the five decades since the OECD was created,
calculated in terms of gross domestic product per head of population.
 There are many countries that a few decades ago were still only minor players on the world stage
China, India and Brazil have emerged as new economic giants.
 Most of the countries that formed part of the former Soviet bloc have either joined the OECD or
adopted its standards and principles to achieve the common goals.
 Russia is negotiating to become a member of the OECD, and now the organisation has close
relations with Brazil, China, India, Indonesia and South Africa through its ―enhanced
engagement‖ programme.
 Together with them, the OECD brings around its table 40 countries that account for 80% of
world trade and investment, giving it a pivotal role in addressing the challenges facing the world
economy.

WORLD TRADE ORGANISATION (WTO)

 The World Trade Organisation (WTO) came into being as a result of the evolution of the multilateral
trading system starting with the establishment of the General Agreement on Tariffs and Trade (GATT)
in 1947.
 The protracted Uruguay Round negotiations spanning the period 1986-1994, which resulted
in the establishment of the WTO, substantially extended the reach of multilateral rules and disciplines
related to trade in goods, and introduced multilateral rules applicable to trade in
agriculture (Agreement on Agriculture), trade in services (General Agreement on Trade in
Services—GATS) as well as Trade Related Intellectual Property Rights (TRIPS).
 A separate understanding on WTO dispute settlement mechanism (DSU) and trade policy review
mechanism (TPRM) was also agreed upon.
WTO and India
 India is a founder-member of both GATT and WTO. The WTO provides a rule based, transparent and
predictable multilateral trading system.
 The WTO rules envisage non-discrimination in the form of National Treatment and Most Favoured
Nation (MFN) treatment to India‘s exports in the markets of other WTO Members.
 National Treatment ensures that India‘s products once imported into the territory of other WTO
Members would not be discriminated vis-à-vis the domestic products in those countries.
 MFN treatment principle ensures that members do not discriminate among various WTO Members.

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  If a Member country believes that the due benefits are not accruing to it because of trade
measures by another WTO Member, which are violative of WTO rules and disciplines, it may file a
dispute under the Dispute Settlement Mechanism (DSM) of the WTO.
 There are also contingency provisions built into WTO rules, enabling member countries to take care
of exigencies like balance of payment problems and situations like a surge in imports.
 In case of unfair trade practices causing injury to the domestic producers, there are provisions to
impose Anti-Dumping or Countervailing duties as provided for in the Anti-Dumping
Agreement and the Subsidies and Countervailing Measures Agreement.

WTO Membership

 The present strength of WTO membership is 161. Last member-Yemen-2014.

 Russian Federation joined it after an 18-year accession process - it applied to join the WTO in
1993 - then they entered a period of 18 years of bilateral negotiations with GATT/WTO
members concerning goods and services and various systemic obligations.
 Significant divergence of views between Russia and the EU, US and Georgia respectively were
the source of repeated setbacks in the accession process

WTO MINISTERIAL CONFERENCES

 highest decision-making body of the WTO is the Ministerial Conference, which has to meet at
least once every two years.
 brings together all members of the WTO, all of which are countries or separate customs territories.
 The Ministerial Conference can take decisions on all matters under any of the multilateral trade
agreements.
Fifth Trade Policy Review (TPR) of India
 In order to promote transparency and provide better understanding of the trade policies and
practices of its members, the WTO has a mechanism for regular review of their trade policies.
 Depending upon its share in world trade, each member‘s trade policy is reviewed by the WTO at
fixed periodic intervals.
 India‘s TPR is carried out every four years.
 The TPR offers an opportunity to other WTO members to ask questions and raise concerns
on different aspects of policies and practices of the country under review.
 The Fifth TPR of India was held on 14 and 16 September 2011 in the WTO. Before the meeting, the
WTO Secretariat circulated a compilation of India‘s written replies to 886 advance questions raised
by 26 WTO members.

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  During the review, most of the members commended the resilience of the Indian economy
that smoothly withstood the adverse effects of global financial crisis without taking
recourse to protectionist measures.
 Members appreciated India for using its trade policy to promote sustainable development and
inclusive growth.
 Members also noted India‘s positive engagement in Doha Round negotiations.
 Some of the members, notably the US, raised concerns in certain areas, namely tariffs and duties,
licensing and restrictions, trade defence measures (anti-dumping), government
procurement, incentive schemes to promote investments and exports and protect agriculture,
tariff protection on agriculture, services and investments. Responses to the issues raised were
provided in India‘s Closing Statement on September 16, 2011 which are as follows:
Gap between Rates on Agri Products

 Some members mentioned the large gap between India‘s bound and applied rates on
agricultural products.
 India responded that the large gap reflected India‘s steady and continued autonomous tariff
liberalization.
 During the four years since the last TPR, the tariffs on some agricultural commodities
had to be adjusted in the face of high volatility in food prices.
 In most cases, tariffs have been brought down and have stayed down. In a few instances, they have
been raised again but never above their original levels.
Export Incentives

 India‘s export promotion schemes are based on the concept of duty neutralization and
providing a level playing field.

FDI Policy

 To a number of questions on FDI policy, India explained that the continuing thrust, during the period
since India‘s last TPR in 2007, has been on making the FDI policy more liberal and investment
friendly.
 The FDI guidelines have been significantly rationalized, simplified, and consolidated, with the aim
of providing a single policy platform for reference of foreign investors.
 Several new sectors, such as petroleum and natural gas and civil aviation were either opened up to
foreign investment or significantly liberalised during this period. Efforts were also being made to
streamline and simplify the business environment and make regulations conducive to business.
IPRs

 On questions related to India‘s IP policies, India replied that a number of initiatives have been taken
to enhance IP protection and enforcement.

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  The changes proposed in the Copyright and Trademark Acts would enhance protection to
intellectual property rights (IPRs) in digital technology particularly with regard to the
dissemination of protected material over digital networks.
 These have been supplemented by administrative as well as judicial measures to strengthen
the IPR regime.
 The provisions on IP protection in these laws are further supplemented by broader measures to
prevent the import of goods involving copyright piracy and counterfeit trademarks.
 Another initiative taken by Indian customs is the facility for online registration by the right
holders through the web-based Automatic Recordation and Targeting for IPR Protection System.

Sanitary & Phyto-sanitary (SPS) and Technical Barriers to Trade (TBT)

 In response to question on India‘s SPS and TBT measures, India explained that specific trade
concerns raised against India have been largely addressed.
 Regulations adopted in the past have been on the basis of scientific risk analysis.

Export Restrictions
 There were some questions on India‘s use of export restrictions. India responded that export
restrictions have been used on some occasions for purposes of domestic supply management,
but these have been purely on a temporary basis.
 The ban on the export of rice and wheat had to be extended in 2009 due to a dislocation in
production and again in 2010 due to the severest drought in the country in the last forty years.
 However, the export of wheat and non-basmati rice is now completely free. The export of
basmati rice is and has always been free.
 Restrictions on cotton exports were imposed for only a brief period last year. Cotton yarn
exports have been made completely free. Similarly, cotton is also freely exportable.
LOOKING BEYOND DOHA
 At the Eighth Ministerial Conference (MC8) of the WTO in Geneva, December 15-17 , 2011
three
 Working Sessions were held in parallel (the NGOs were not allowed to take part in it), directed to
three topics:
i.Importance of the Multilateral Trading System and the WTO;
ii.Trade and Development; and
iii. The Doha Development Agenda negotiations.

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  As had been expressly stated in the run-up to the MC8 both from the WTO, from capitals, and
in media reports, the Doha Round negotiations generally had come to an impasse.
 The impasse was made especially clear from the outcome of the so-called Easter Package in
April 2011 - which comprised the collected reports of the WTO negotiating bodies in all the
different areas involved in the Doha Round negotiations.
 Pascal Lamy, Director General of the WTO, said in a statement March 29, 2011, that the ‗biggest
stumbling block‘ was what is called ‗NAMA sectorals‘.
 This is about proposals for major trading countries, including emerging economies, to allow
duty-free or lower-than-normal duty on imports in particular sectors within the non-agricultural
market access (NAMA),negotiations.
 That assessment was also made very clear in the statement by the US Trade Representative at
the MC8, ‗… the current impasse in many ways comes down to one single, vexing quandary: the
WTO has not come to terms over core questions of shared responsibilities among its biggest
and most successful Members.
 The world has changed profoundly since the negotiations began a decade ago, most obviously
in the rise of the emerging economies.
 The results of our negotiations thus far do not reflect this change, and yet they must if we are to
be successful.‘
 TRIPS issues had already earlier in 2011 been placed in what was called a ‗slow lane‘ in the
negotiations.
 For the ‗Easter package‘ in April 2011, the status of the GI (Geographic Indication)
issues and of the TRIPS/CBD issue was reported by the Director-General, document TN/C/W/61
dated April 21, 2011. On the TRIPS/CBD issue a submission was made in the context of the
Easter Package from a number of WTO Members including Brazil, India, and China in April
2011, requesting a revised version of the TRIPS Agreement calling for disclosure of origin of
genetic resources and/or associated Traditional Knowledge involved in patent applications.
Noteworthy in that this submission was not sponsored by the EU and Switzerland, two of the original
sponsors of the 2008 ‗mini-ministerial‘ proposal for a TRIPS package on GIs and disclosure of
origin of genetic resources. Nevertheless, of the decisions taken at the MC8, two are TRIPS-related:
(i) extending until the next Ministerial Conference, to be held in 2013, the moratorium on what is
called ―non-violation complaints‖ under the TRIPS Agreement; and
(ii) instructing the TRIPS Council to extend, under TRIPS Article 66.1, the transition period
expiring June 30, 2013, for LDCs, for implementing the TRIPS Agreement.
Future Directions
At the MC8 the WTO members acknowledged the concerns on the global economic climate and agreed
that:

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(i) There is no credible alternative to the rules based multilateral trading system; and
(ii) Protectionist trade measures must be avoided.

BILATERAL AND REGIONAL COOPERATION

 India has always stood for an open, equitable, predictable, non-discriminatory, and rule-
based international trading system.
 Considering that regional and bilateral trade and economic cooperation agreements serve as
building blocks towards achieving the multilateral trade liberalisation objective, India is actively
engaging in regional and bilateral negotiations with her trading partner countries/blocs to
diversify and expand the markets for its exports. Some of the recent developments related to major
Free Trade Agreements (FTAs) are the following:
(i) India-Japan Comprehensive Economic Partnership Agreement (CEPA)
(ii) India-Malaysia Comprehensive Economic Cooperation Agreement (CECA)
(iii) India-ASEAN Trade in Goods Agreement
(iv) India-EU Trade and Investment Agreement Negotiations
(v) India-European Free Trade Association (EFTA)
(vi) BTIA (Iceland, Norway, Liechtenstein, and Switzerland)
(vii) India-New Zealand FTA/CECA
(viii)India-Australia CECA

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 TAX STRUCTURE IN INDIA

TAX

 Modern economics defines tax as a mode of income redistribution.

 the usual meaning of tax people think is that a tax is imposed by the government to fulfill its
important obligations on the expenditure front

Incidence of Tax
 The point where tax looks being imposed is known as the incidence of Tax—the event of tax
imposition

Impact of Tax

 The point where tax makes its effect felt is known as the impact of tax—the after effect of
tax imposition.

Direct Tax
 The tax which has incidence and impact both at the same point is the direct tax—the person who is
hit, the same person bleeds. As for example income tax, interest tax, etc

Indirect Tax

 The tax which has incidence and impact at the different points is the indirect tax—the person who is
hit does not bleed someone else bleeds.
 As, for example, excise, sales tax, etc which are imposed on either producers or the traders, but it is
the general consumers who bear the burden of tax.

METHODS OF TAXATION
There are three methods of taxation prevalent in economies with their individual merits and demerits
—
Progressive Taxation

 method has increasing rates of tax for increasing value or volume on which the tax is being
imposed.
 Indian income tax is a typical example of it.
 The idea here is less tax on the people who earn less and higher tax on the people who earn
more—classifying income earners into different slabs.
 method is believed to discourage more earnings by the individual to support low growth and
development unintentionally.

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  Being poor is rewarded while richness is punished.
 Tax payers also start evading tax by showing lower unreal income. But from different angles this
tax is pro-poor and taxes people according to their affordability/ sustainability.
 the most popular taxation method in the world and a populist one, too.
Regressive Taxation

 just opposite to the progressive method having decreasing rates of tax for increasing value or
volume on which the tax is being imposed.
 There are not any permanent or specific sectors for such taxes.
 As a provision of promotion, some sectors might be imposed with regressive taxes.
 As for example, to promote the growth and development of the small scale industries, India at one
time had regressive excise duty on their productions—with increasing slabs of volume they
produced, the burden of tax used to go on decreasing.
 appreciated for rewarding the higher producers or income-earners, is criticised for being more
taxing on the poor and low-producers.
 not a popular mode of taxation and not as per the spirit of the modern democracies.
Proportional Taxation
 In such taxation method, there is neither progression nor regression from the rate of taxes point
of view.
 Such taxes have fixed rates for every level of income or production, they are neutral from the poor
or rich point view or from the levels of production point of view.
 Usually, this is not used by the economies as an independent method of taxation.
 Generally, this mode is used as a complementary method with either progressive or regressive
taxation.
 If not converted into proportional taxes, every progressive tax will go on increasing and similarly
every regressive tax will decrease to zero, becoming completely a futile tax methods.
 That is why every tax, be it progressive or regressive in nature, must be converted into proportional
taxes after a certain level.

A GOOD TAX SYSTEM

 there is a broad consensus on five principles10 of a good tax system, among economists and the
policy making experts:

(i) Fairness

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  Though fairness (i.e., the first criteria of a good tax system) is not always easy to define, economists
suggest inclusion of two elements in the tax system to make it fair namely, horizontal equity and
vertical equity.
 Individuals in identical or similar situations paying identical or similar taxes is
known as horizontal equity.
 When ‗better off‘ people pay more taxes it is known as vertical equity.

(ii) Efficiency

 Efficiency of a tax system is its potential to affect or interfere the efficiency of the economy.
 A good tax system raises revenue with the least cost on the taxpayers and least interference on the
allocation of resources in the economy.
 The tax system affects the economic decisions of individuals and groups by either encouraging or
discouraging them to save, spend, invest, etc.
 Taxes can improve efficiency of economy—taxes on pollution or on smoking give revenue to the
government and serves broader social purposes, too.
 This is known as the double dividend of a tax.

(iii) Administrative Simplicity

 This is the third criterion which includes factors like computation, filing, collection, etc. of the taxes
that all should be as simple as possible.
 Simplicity checks tax evasion too. Tax reform in India has simplification of tax as its major
plank—also recommended by the Chelliah Committee.

(iv) Flexibility

 A good tax system has the scope of desirable modifications in it if there is any such need.

(v) Transparency
 How much tax taxpayers are actually paying and what are they getting against it in the form of the
public services should be ascertainable i.e. the transparency factor.
METHODS OF EXPENDITURE

 Similar to the methods of taxation the modes of government expenditure are also of three types
—Progressive, Regressive and Proportional.

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  At first instance it seems that as a country achieves better levels of development, sectoral and the
item-wise expenditure of the economy must have decreasing trends.
 But practical experience shows that the level of expenditure needs enhancement everyday and
economy always needs more and more revenues to fulfill the rising expenditures.
 That is why for economies the best form of government expenditure is the progressive expenditure.
 The best way of taxation is progressive and the best way of government expenditure is
also progressive and they suit each other beautifully.
 Most of the economies around the world are having progressive taxation with progressive
expenditure.

VALUE ADDED TAX

 a method of tax collection as well as name of a state level tax ( at present) in India.
 A tax collected at every stage of value addition, i.e., either by production or distribution is
known as value added tax.
 The name itself suggests that this tax is collected on the value addition (i.e., production).
 Production of goods or services is nothing but stages of value additions where production of goods is
done by the industrialists or manufacturers.
 But these goods require value addition by different service providers/ producers (the agents,
the wholesalers and the retailers) before they reach the consumers.
 From production to the level of sale, there are many points where value is added in all goods.
 VAT method of tax collection is different from the non-VAT method in the sense that it is
imposed and collected at different points of value addition chain, i.e., multi-point tax collection.
 That is why there is no chance of imposing tax upon tax which takes place in the non-VAT method
—single point tax collection.
 This is why VAT does not have a ‗cascading effect‘ on the prices of
goods it does not increase inflation—and is therefore highly suitable for an economy like India
where due to high level of poverty large number of people lack the market level purchasing
capacity.
 It is a pro-poor tax system without being anti-rich because rich people do not suffer either.

NEED OF VAT IN INDIA

 Over 150 nations in the world have implemented the VAT system of taxation regarding
collecting their indirect taxes.
 There have been valid reasons why India should move towards the VAT method of tax collection.
We may see some of the major reasons:
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(i) Indian indirect tax collection system was price-increasing (having cascading effect on the price)
was highly detrimental to the poor masses.
Implementation of VAT will improve the purchasing capacity and so living standard of thepoor people.
(ii) Being a federal political system the central government states have also been given power to
impose taxes and collect them. At the central level, there had been uniformity of taxes for the economy. But
there was no ‗uniformity‘ at the state level taxes (i.e., state excise, sales tax, entertainment tax, etc.). To
bring in uniformity at the state-level taxes, VAT was a necessary
step in India.
(iii) With the process of economic reforms, India moved towards market economy. And for this,
firstly India needed to have a single market. Without uniformity at the state level taxes
(uniform VAT) this was not possible.
(iv) Indian federal design has resulted in economically weaker states and stronger centre. As VAT
increases the total tax collection (experience of the world suggests so) it was fit to be
implemented at the state level.
(v) India has been a country of high level tax evasion. By implementing VAT method of indirect
tax collection, it becomes almost impossible to go for large scale tax evasion. To prove one‘s
level of value addition, the purchase invoice/receipt is a must which ultimately makes it
cross-check the level of production and sale in the economy. 15
(vi) If some of the state level taxes (which are many) are converted into state VAT the complexity
of taxation will also be minimised. And at the end, it is possible to merge some of the centre‘s
indirect taxes with it, i.e., arrival of the single VAT.
 Keeping all such things in mind, India started tax reform (Chelliah Committee and Kelkar
Committee) and a certain level of sucess has been achieved in this area which can boost our
motivation.
 In the year 1996, the central government started collecting its excise duty on the VAT method and the
tax was given a new name—the CENVAT.
 The next proposal was to merge the states excise duty (imposed on intoxicants only) and their
sales taxes into one tax—the state VAT or VAT.
 This could not take place due to states‘ lack of political will. Ultimately only sales taxes of the
states were changed to be named VAT and was started to be collected on the basis of the VAT
method (some states did not join it and some joined later).
Implementation Experience of VAT

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  The implementation experience of VAT in India has been very encouraging—the new tax system
hasbeen received well by all the stakeholders, the transition being quite smooth.
 The revenue performance of VAT—implementing states/UTs (25) has been encouraging the tax
revenue registered, an increase of 13.8 per cent over the annual growth rate of the last five years.
 Only 8 states claimed for VAT compensation from the Centre in 2005-06 which came down to only
5 in the fiscal 2006-07.

GOODS AND SERVICES TAX

 The Goods and Services Tax (GST) is a proposal of tax in India which will emerge after merging
many of the state and central level indirect taxes. Important points of the proposed GST are
as follows:
(i) It will be a tax collected on the VAT method—having all the benefits of a VAT kind of tax.
(ii) It will be imposed all over the country with the uniformity of rate and will replace multiple
central and state taxes (a single VAT it will be known). The taxes to be withdrawn or merged
into the GST are—
Central Taxes: CENVAT, service tax, sales tax and stamp duty.
State Taxes: State excise, sales tax, entry tax, lease tax, works contract tax, luxury tax, octroi,
turnover tax and cess.
(iii) The proposed tax has a single rate of 20 per cent of which centre and state will have a share
of 12 per cent and 8 per cent, respectively.
 The Union Budget 2006-07 repeated its commitment towards inplementation of GST. The
major challenges in the path of its implementation as per the experts are as follows:
(i) States are collecting VAT with five rates—0 per cent, 1 per cent, 4 per cent and 20 per cent.
The fifth rate is 12.5 per cent known as the RNR (revenue neutral rate).
Now the challenge is to convince the states to be satisfied with their share of only 8 per cent in the GST at
one hand and making it politically happen from the consumers point of view.
(ii) The next challenge is to decide the things like how and where to integrate central taxes and the
state taxes as VAT or as the GST.
(iii) What to do with the custom duty is also a matter of concern as there is a move to integrate it
with the GST at present.
Recent Attempts to Implement GST

 The Goods and Service Tax Bill or GST Bill, officially known as The Constitution (122nd
Amendment) Bill, 2014, would be a Value added Tax (VAT) to be implemented in India, from April
2016.

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  GST stands for ―Goods and Services Tax‖, and is proposed to be a comprehensive indirect tax levy on
manufacture, sale and consumption of goods as well as services at the national level.
 It will replace all indirect taxes levied on goods and services by the Indian Central and State
governments.
 It is aimed at being comprehensive for most goods and services.
 Some goods, namely crude petroleum, diesel, petrol, aviation turbine fuel, natural gas and alcohol
are not to come under the purview of the GST.
 The constitutional amendment bill also seeks to empower the President to set up within 60 days of the
passage of the legislation, a GST Council with the union Finance Minister as chairperson and
union Minister of State for Revenue and Finance Ministers of all the states as members.
 The GST Council is to work on the basis of consensus and make recommendations on issues like
GST rates, exemption lists, and threshold limits.
 Further, the bill provides for setting up of a GST dispute settlement authority, comprising
a chairperson and two members to resolve disputes arising out of deviations from the
recommendations of the GST Council either by the central or state governments.
 The draft Bill has since been referred to the Parliamentary Committee on Finance for
examinationAmong the other steps that are being taken for the introduction of the GST is the
establishment of a strong information technology (IT) infrastructure.
 For this purpose the government has set up an Empowered Group headed by Nandan Nilekani,
Chairman, Unique Identification Authority of India (UIDAI).
 Significant progress has been made in the conceptualisation and design of the GST Network
(GSTN), which is a common portal for the centre and states that will enable electronic processing
of the key business processes of registration, returns and payments. For this purpose, the
structure of these processes is in advanced stages of finalisation.
 The National Securities Depository Limited (NSDL) has been selected as technology partner for
incubating the National Information Utility that will establish and operate the IT backbone for the
GST. In this regard the NSDL has set up a pilot project in collaboration with eleven states prior to its
roll-out across the country.

ADDITIONAL EXCISE DUTY

 There is a tax in India known as the Additional Excise Duty (AED) imposed and collected by the
centre.
 Basically, this is not a form of excise duty. At the same time, though the centre collects it the total
corpus of collected tax is handed over to the states.
 On the request of states, the central government passed the Goods of Special Importance Act, 1957
which empowered the centre to collect the AED on tobacco, textile and sugar in lieu of states‘

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 sales tax on them so that these regionally produced goods (which are consumed nationally) have
uniform and affordable prices across the country.
 Once VAT is fully operational in the economy this responsibility will be handed over to the states (as
proposed) to be integrated with their VAT with the condition that none of these commodities will be
charged VAT exceeding 4 per cent.

CST REFORMS
 The Central Sale Tax (CST), being an origin—based non-rebatable tax, it is generally agreed,
isinconsistent with the concept of VAT.
 That is why it needs to be phased out; the CST reforms is a part
of the tax reforms in India.
 The critical issue involved in phasing out of CST is that of compensating
the states for revenue losses on account of such a phase out. Since phasing out of CST will entail
a revenue loss, states have been insisting on a mechanism to compensate them on a permanent
basis.
 The 4 per cent rate of the CST has to be phased out in stages with 1 per cent phase out in
one financial year and the states duly compensated through tax devolution. Because of phasing
out, it is now at 2 per cent.

SERVICE TAX
 The share of the services sector in the GDP of India has been going upward for the last decade.
 The introduction of service tax in 1994-95 by the Government of India has started paying the
governmenton its tax revenue front.
 Introduced to redress the asymmentric and distortionary treatment of goods
and services in the tax regime, the service tax has seen gradual expansion in the country.

VOLUNTARY COMPLIANCE ENCOURAGEMENT SCHEME

 Announced in the Union Budget 2013-14, the Service Tax Voluntary Compliance Encouragement
Scheme (VCES) is a one-time amnesty for those who have collected service tax but not deposited
the same with the government.
 Those service tax providers that have not filed service tax return since October 2007 can disclose
true liability and get an interest or penalty waive off.

COMMODITIES TRANSACTION TAX (CTT)

 The Union Budget 2013-14 has introduced (basically, reintroduced) the CTT, however, only
fornon-agricultural commodity futures at the rate of 0.01 per cent (which is equivalent to the rate
ofequity futures on which a Securities Transaction Tax is imposed in India).
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  Alongwith this,transactions in commodity derivatives have been declared to be made non-
speculative; and hence for traders in the commodity derivative segment, any losses arising from
such transactions can be set off against income from any other source (similar provisions are also
applicable for the securities market transactions).
 Like all financial transaction taxes, CTT aims at discouraging excessive speculation, which
is detrimental to the market and to bring parity between securities market and commodities market
such that there is no tax/regulatory arbitrage.
 Futures contracts are financial instruments and provide for
price risk management and price discovery of the underlying asset commodity / currency / stocks
/interest.
 It is, therefore, essential that the policy framework governing them is uniform across all the
contracts irrespective of the underlying assets to minimize the chances of regulatory arbitrage.
 The proposal of CTT also appears to have stemmed from the general policy of the government to
widen the tax base.
 Commodities Transaction Tax (CTT) is a tax similar to Securities Transaction Tax (STT), proposed
to be levied in India, on transactions done on the domestic commodity derivatives exchanges.
 Globally, commodity derivatives are also considered as financial contracts.
 Hence CTT can also be considered as a type of ‗financial transaction tax‘.
 The concept of CTT was first introduced in the Union Budget 2008-09. The government had
then proposed to impose a commodities transaction tax (CTT) of 0.017% (equivalent to the rate of
equity futures at that point of time).
 However, it was withdrawn subsequently as the market was nascent then and any imposition of
transaction tax might have adversely affected the growth of organised commodities derivatives
markets in India.
 This has helped Indian commodity exchanges to grow to global standards [MCX is the world‘s
No. 3 commodity exchange; globally, MCX is No. 1 in gold and silver, No. 2 in natural gas and
No. 3 in crude oil].

SECURITIES TRANSACTION TAX (STT)

 The STT is a type of ‗financial transaction tax‘ levied in India on transactions done on the
domestic stock exchanges.
 The rates of STT are prescribed by the Central government through its Budget from time to time. In
tax parlance, this is categorised as a direct tax.
 The tax came into effect from October 1, 2004.
 In India, STT is collected for the Government of India by the stock exchanges.

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  With charging of STT, long-term capital gains tax was made zero and short-term capital gains tax
was reduced to 10 per cent (subsequently, changed to 15 per cent since 2008).
 The STT framework was subsequently reviewed by the central government in the year 2005, 2006,
2008, 2012 and 2013. The STT rates were revised upwards in the year 2005 and 2006 while it
was reduced for certain segments in 2012 and 2013.
 The STT provisions were altered in the year 2008 such that for professional traders (brokers),
STT came to be treated as an expense which can be deducted from the income instead of
treating the same as an advance tax paid.
 [The 2004 STT provisions provided that the STT payments of professional traders, whose
‗business income‘ arising from purchase and sale of securities could be set off against their total tax
liability.]
 As on date, STT is not applicable in case of preference shares, Government securities, bonds,
debentures, currency derivatives, units of mutual fund other than equity oriented mutual fund,
and gold exchange traded funds and in such cases, tax treatment of short-term and long-term gains
shall be as per normal provisions of law.
 Transactions of the shares of listed companies on the floor of the stock exchange or otherwise,
mandated under the regulatory framework of SEBI, such as takeover, buyback, delisting offers, etc.
also does not come under STT framework.
 The off-market transactions of securities (which entails changes in ownership records at
depositories) also does not attract STT.
CAPITAL GAINS TAX
 a direct tax and applies on the sales of all ‗assets‘ if a profit (gain) has been made by the owner
of the asset - a tax on the ‗gains‘ one gets by selling assets. The tax has been classified into two -
(i) Short Term Capital Gain (STCG): It applies ‗if the Asset has been sold within 36 months of
owning it‘. In this case the ‗rate‘ of this tax is similar to the normal income tax slab. But theperiod
becomes‘ 12 months‘ in cases of shares, mutual funds, units of the UTI and ‗zero coupon bond‘ - in
this case the ‗rate‘ of this tax is 15 per cent.
(ii) Long Term Capital Gain (LTCG): It applies ‗if the asset has been sold after 36 months of
owning it‘. In this case the ‗rate‘ of this tax is 20 per cent. In cases of shares, mutual funds,
units of the UTI and ‗zero coupon bond‘ there is ‗exemption‘ (zero tax) from this tax
(provided that such transaction is subject to ‗Securities Transaction Tax‘).

INVESTMENT ALLOWANCE
 Announced in the Union Budget 2013-14, a tax break given to companies for high value investment
in plant and machineries, over and above depreciation benefits enjoyed by them.

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  A company investing Rs. 100 crore or more in plant and machinery during the April 2013 to March
2015 will be entitled to deduct an investment allowance of 15 per cent of the investment.
 This is expected to see enormous spill-over benefits to small and medium enterprises.
 The proposed investment allowance scheme should be seen a drain on the government‘s tax
collections - it may be seen as a kind of tax exemption.

COLLECTION RATES
 Given the large number of exemptions to rate of customs, the increase in value of imports does
not necessarily imply similar magnitude in customs revenue.
 Collection rates are an indicator of overall incidence of customs tariffs including countervailing
and special additional duties of imports.
 These are computed as the ratio of revenue collected from these duties to the aggregate value of
imports in a year (or period) and thus represent trade-weighted tariffs.
 A major reason for the fall in rates has been the lower levels of duties on many items including on
petroleum, oil, and lubricants (POL), which has significant import value and of course the impact of
the various exemptions.
Tax Expenditure and Budgetary Policies
 Tax Expenditure corresponds to relaxations given when tax burden becomes difficult for the
sustainability of a particular sector. Tax exemptions or incentives are given in the form of lower
rates of tax relative to normal rates.
 Tax expenditures are revenue losses attributable to tax provisions that often result from the use of
the tax system topromote social goals without incurring direct expenditures. Normally these
exemptions are generated for particular purposes as tax incentives. [Why we are talking about this
now : Because, UPSC asked a question in 2013 Mains as below : ―What is meaning of the term
tax-expenditure? Taking housing sector as an example, discuss how it influences budgetary
policies of the government.‖
Tax Expenditure and its importance in Indian Economy

 The term ‗tax expenditure‘ is associated with budget. Though many are familiar with the concept
of subsidies and its impact on Indian Economy, it seems not every one know the details of tax-
expenditure.
 Tax-expenditure more or less has the same impact as subsidies as a necessary evil.
 Tax expenditures can take many forms. Some result from tax provisions that reduce the present
value of taxable income through deferral allowances, or special exclusions, exemptions, or
deductions from gross income. Others affect a household‘s after-tax income more directly
through tax credits or preferential rates for specific activities.

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Why Tax Exemptions given are called Tax Expenditure?

 If government didn‘t give any tax exemptions, this deducted amount would have belonged to
government itself. Though Tax Expenditure are not direct spending by government, the concept of
tax expenditure is that, government is giving back money to achieve certain social goals, like
strengthening housing sector or industrial sector. But in actual sense, Government is not collecting
money to be re-distributed later, but gives away tax exemptions.
Tax Expenditure and Budgetary Policies in Housing Sector

1. Exemptions allowed for deduction of HRA (Income tax) and various other income tax deductions
and exemptions (Eg: Medical Premium).
2. Exemptions allowed for interest payment and principal repayment for housing loans.
3. Tax Expenditure in Union Budget 2013 : First home loan from a bank or housing finance
corporation upto Rs. 25 lakh entitled to additional deduction of interest upto Rs. 1 lakh.
4. NB: It should be noted that due to various policies of government, the number of persons who own
houses have increased. More over, the people can afford to spend on infrastructure as they don‘t
have to give taxes.
Tax Expenditure Budget

 The tax expenditure budget comprises the estimated revenue losses attributable to various
exclusions, exemptions, deductions, nonrefundable credits, deferrals, and preferential rates in the
tax code. These provisions reduce the income tax liabilities of individuals or businesses that
undertake certain types of activities.
Volume of Tax Expenditure and Subsidies

 So hope now it is clear that tax-expenditure corresponds to the revenue a government foregoes
through the provisions of tax laws that allow deductions, exclusions, or exemptions from the
taxpayers‘ taxable expenditure.
 The revenue foregone from corporate and personal income taxes, estate, and customs duties
amounts to near 6.5 per cent of GDP. As a share of revenue realised, the foregone revenue
accounts to near 80%. As is it is clear, this is by now means a meager amount.
 You might have heard opposition parties shouting about crony capitalism and excess favors done
to corporates. Yes, you can connect tax expenditure right here. And that may be one of the reasons
why UPSC asked this question. But UPSC was concerned only about Housing sector; so the
answer should also be written from that perspective, highlighting the positives and negatives.

14TH FINANCE COMMISSION

Rajesh Nayak
  The Commission was constituted on January 2, 2013 under the Chairmanship of Dr. Y. V. Reddy,
former RBI Governor with Prof. Abhijit Sen, Ms. Sushma Nath, Dr. M. Govinda Rao and Dr. Sudipto
Mundle as the other four members. The recommendations of the Commission will apply on the period
2015-20 and its report has to be submitted by October 31, 2014.
 The broad Terms of Reference and the matters to be taken into consideration by the Commission
are: 1. Tax Devolution & Grant related references
(i) the distribution between the union and states of the net proceeds of taxes which are to be,
or may be, divided between them under Chapter I, Part XII of the Constitution and the
allocation between the states of the respective shares of such proceeds;
(ii) the principles which should govern the grants-in-aid of the revenues of the states out of
the Consolidated Fund of India and the sums to be paid to the states which are in need of
assistance by way of grants-in-aid of their revenues under Article 275 of the Constitution
for purposes other than those specified in the provisos to Clause (1) of that article; and
(iii) measures needed to augment the Consolidated Fund of a state to supplement the
resources of the panchayats a nd municipalities in the state on the basis of the
recommendations made by the Finance Commission of the state. 2. To review the state of finances, deficit,
and debt levels of the union and states and suggest measures for maintaining a stable and sustainable fiscal
environment consistent with equitable growth including suggestions to amend the FRBMAs currently in
force. The Commission has been asked to consider and recommend incentives and disincentives for states
for observing the obligations laid down in the FRBMAs.
3. In Commission is required to consider -
• the resources of the central government and the demands on the resources of the central
government;
• the resources of the state governments and demands on such resources under different
heads, including the impact of debt levels on resource availability in debt-stressed
states;
• the objective of not only balancing the receipts and expenditure on revenue account of all
the states and the union but also generating surpluses for capital investment;
• the taxation efforts of the central government and each state government and the potential
for additional resource mobilization;
• the level of subsidies required for sustainable and inclusive growth and equitable
sharing of subsidies between the central and state governments;
• the expenditure on the non-salary component of maintenance and upkeep of capital assets
and the non-wage-related maintenance expenditure on Plan schemes to be completed by

Rajesh Nayak
March 31, 2015 and the norms on the basis of which specific amounts are recommended
for the maintenance of capital assets and the manner of monitoring such expenditure;
• the need for insulating the pricing of public utility services like drinking water,
irrigation, power, and public transport from policy fluctuations through statutory
provisions;
• the need for making public-sector enterprises competitive and market oriented; listing
and disinvestment; relinquishing of non-priority enterprises;
• the need to balance management of ecology, environment, and climate change
consistent with sustainable economic development; and
• the impact of the proposed goods and services tax on the finances of the centre and
states and the mechanism for compensation in case of any revenue loss.
5. To review the present public expenditure management systems and recommend, including -
• budgeting and accounting standards and practices;
• the existing system of classification of receipts and expenditure;
• linking outlays to outputs and outcomes; and
• best practices within the country and internationally.
6. To review the present arrangements of financing of Disaster Management with reference to
the funds constituted under the Disaster Management Act 2005 and make recommendations.
7. To indicate the basis on which it has arrived at its findings and make available the state-wise
estimates of receipts and expenditure.
 The Commission is required to generally take the base of population figures as of 1971 in all
cases where population is a factor for determination of devolution of taxes and duties and grants-
in-aid. However, the Commission may also take into account the demographic changes that have
taken place subsequent to 1971.

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Important Economic Concept
Part-I
1. Agricultural Census
Agricultural Census, which is conducted every five years in India. It is the largest countrywide
statistical operation undertaken by Ministry of Agriculture, for collection of data on structure of
operational holdings by different size classes and social groups. Primary ( fresh data) and secondary
(already published) data on structure of Indian agriculture are collected under this operation with the
help of State Governments. The first Agricultural Census in the country was conducted with
reference year 1970-71.
Agricultural Census is carried out as a Central Sector Scheme under which 100% financial assistance
is provided to States/Union Territoriess. Agricultural Census operation is carried out in three phases.
During Phase-I, a list of all holdings with data on area, gender and social group of the holder is
prepared with the help of listing schedule. During Phase-II detailed data on tenancy, land use,
irrigation status, area under different crops (irrigated and un-irrigated) are collected in holding
schedule. Phase-III, which is called as Input Survey, relates to collection of data of input use across
various crops, States and size groups of holdings, in addition to data on agriculture credit,
implements and machinery, livestock and seeds.
2. Agricultural Labourers
A person who works on another person's land for wages in money or kind or share is regarded as an
agricultural labourer. She or he has no risk in the cultivation, but merely works on another person's
land for wages. An agricultural labourer has no right of lease or contract on land on which she/he
works.

3. Agricultural Marketing Information Network (AGMARKNET)

Agricultural Marketing Information Network (AGMARKNET) was launched in March 2000 by the
Union Ministry of Agriculture. The Directorate of Marketing and Inspection (DMI), under the
Ministry, links around 7,000 agricultural wholesale markets in India with the State Agricultural
Marketing Boards and Directorates for effective information exchange. This e-governance portal
AGMARKNET, implemented by National Informatics Centre (NIC), facilitates generation and
transmission of prices, commodity arrival information from agricultural produce markets, and web-
based dissemination to producers, consumers, traders, and policy makers transparently and quickly.
The AGMARKNET website (http://www.agmarknet.nic.in) is a G2C e-governance portal that caters
to the needs of various stakeholders such as farmers, industry, policy makers and academic
institutions by providing agricultural marketing related information from a single window. The
portal has helped to reach farmers who do not have sufficient resources to get adequate market
information. It facilitates web- based information flow, of the daily arrivals and prices of
commodities in the agricultural produce markets spread across the country. The data transmitted
from all the markets is available on the AGMARKNET portal in 8 regional languages and English. It
displays Commodity-wise, Variety-wise daily prices and arrivals information from all wholesale
markets. Various types of reports can be viewed including trend reports for prices and arrivals for
important commodities.

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Directorate of Marketing and Inspection (DMI) has liaison with the State Agricultural Marketing
Boards and Directorates for Agricultural Marketing Development in the country. Agricultural
Produce Market Committee (APMC) displays the prices prevailing in the market on the notice
boards and broadcasts this information through All India Radio etc. This information is also supplied
to State & Central Government from important markets. The statistics of arrival, sales, prices etc. are
generally maintained by APMCs.
AGMARKNET is also expected to play a crucial role in enabling e-commerce in agricultural
marketing.
4. Agricultural Regions of India
There are five agricultural regions in the country viz ;

 Rice region: This extends from the eastern part to include a very large part o the north-
eastern and south-eastern India with another strip along the western coast.
 Wheat region: This extends to most of the northern, western and central India.
 Millet-Sorghum region: This covers Rajasthan, Madhya Pradesh and the Deccan Plateau
in the centre of the Indian peninsula.
 Temperate Himalayan Region: This region is spread over Kashmir, Himachal Pradesh,
Uttarakhand and some adjoining areas. Here potatoes are as important as a cereal crops (which are
mainly maize and rice) and the tree-fruits form a large part of agricultural production.
 Plantation crops region: In Assam and the hills of Southern India tea is produced. Coffee
is produced in the hills of the western peninsular India. Rubber is grown in Kerala and some of the
North-Eastern States like Tripura. Spices grown in Kerala, parts of Karnataka and Tamil Nadu.

5. Alternative Investment Funds (AIFs)

Anything alternate to traditional form of investments gets categorized as alternative investments.
Now, what is considered as traditional may vary from country to country. Generally, investments in
stocks or bonds or fixed deposits or real estates are considered as traditional investments. However,
even with respect to investments in stocks, if the investments are in the stocks of small and medium
scale enterprises (SMEs), it gets categorized as alternative investments in many jurisdictions (For
instance, the SME exchange is called as Alternative Investment Market (AIM) in UK). Generally,
the term AIF refers to private equity and hedge funds.

In India, alternative investment funds (AIFs) are defined in Regulation 2(1)(b) of Securities and
Exchange Board of India (Alternative Investment Funds) Regulations, 2012. It refers to any
privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or
a company or a body corporate or a Limited Liability Partnership(LLP) which are not presently
covered by any Regulation of SEBI governing fund management (like, Regulations governing
Mutual Fund or Collective Investment Scheme)nor coming under the direct regulation of any other
sectoral regulators in India-IRDA, PFRDA, RBI. Hence, in India, AIFs are private funds which are
otherwise not coming under the jurisdiction of any regulatory agency in India.

Thus, the definition of AIFs includes venture Capital Fund, hedge funds, private equity funds,

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commodity funds, Debt Funds, infrastructure funds, etc.,while, it excludes Mutual funds or
collective investment Schemes, family trusts, Employee Stock Option / purchase Schemes, employee
welfare trusts or gratuity trusts, „holding companies‟ within the meaning of Section 4 of the
Companies Act, 1956, securitization trusts regulated under a specific regulatory framework, and
funds managed by securitization company or reconstruction company which is registered with the
RBI under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002.

One AIF can float several schemes. Investors in these funds are large lyinstitutional, high net worth
individuals and corporates.
6. Annual Financial Statement
Annual Financial Statement is a document presented to the Parliament every year under Article 112
of the Constitution of India, showing estimated receipts and expenditures of the Government of India
for the coming year in relation to revised estimates for the previous year as also the actual amounts
for the year prior to it.
The receipts and disbursements are shown under three parts in which Government Accounts are to
be kept viz.,(i) Consolidated Fund, (ii) Contingency Fund and (iii) Public Account.
Under the Constitution, Annual Financial Statement has to distinguish expenditure on revenue
account from other expenditure. Government Budget, therefore, comprises of Revenue
Budget and Capital Budget.
The estimates of receipts and expenditure included in the Annual Financial Statement are for the
expenditure net of refunds and recoveries, as will be reflected in the accounts.
The estimates of receipts and disbursements in the Annual Financial Statement are shown according
to the accounting classification prescribed by Comptroller and Auditor General of
India under Article 150 of the Constitution, which enables Parliament and the public to make a
meaningful analysis of allocation of resources and purposes of Government expenditure.
Annual Financial Statement is essentially the Budget of the Government. In case of the Central
Government, the Budget is presented in two parts, viz., the Railway Budget pertains to Railway
Finance and the General Budget (or what is commonly known as Union Budget) relating to the
financial position of the Government of India, excluding Railways. The Railway Budget is presented
by the Railway Minister sometime in the third week of February. By convention, the General Budget
is presented to Lok Sabha by the Finance Minister on the last working day of February of each year.
A copy of the respective Budgets is simultaneously laid on the Table of Rajya Sabha.
However, these days, the term Union Budget includes not just the Annual Financial Statement but
also the policy documents associated with it like, Budget Speech, Finance Bill, Appropriation
Bill, Demand for grants, documents submitted under Fiscal Responsibility and Budget Management
Act like, macro-economic framework statement, medium term fiscal policy statement etc.
7. Appropriation
According to Article 114 of the Indian constitution, no money can be withdrawn from
the Consolidated Fund of India to meet specified expenditure except under an appropriation made by
Law. Similarly, State (sub-national) Governments can also draw from their Consolidated Funds only

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after an appropriation act is passed. Every year, after budgetary estimates are approved, an
Appropriation Bill is passed by the Parliament/state legislature and then it is presented to the
President/Governor. After the assent by the President/governor to the bill, it becomes an Act.
However, if during the course of the financial year, the funds so appropriated are found to be
insufficient, the Constitution provides for seeking approval from the Parliament or State Legislature
for supplementary grants.
Appropriation Accounts present the total amount of funds (original and supplementary) authorised
by the Parliament/State legislature in the budget vis-a-vis the actual expenditure incurred against
each head of expenditure. The Office of the Comptroller and Auditor General of India reports to the
Union and State Legislatures any discrepancies that occur between the amounts appropriated for a
particular head of expenditure and what was actually spent at the end of the financial year. These
reports provide an indication of unrealistic budget estimates made by various departments. Any
expenditure in excess of what was approved requires regularization by the Parliament/State
Legislature.
Some expenditure of Government (e.g. public debt repayments, expenditure incurred on the
Judiciary etc.) is not voted by the Legislature and such expenditure is „Charged‟ on Consolidated
Fund under Article 112 (3) of the Constitution and is called Charged Appropriation.
All other expenditure is required under Article 113 (2) of the Constitution to be voted by the
Legislature and is called voted grant.
8. ASHA (Accredited Social Health Activist)
ASHA is a woman grass root level health volunteer, who links households with health facilities. As
per norms, there should be one ASHA for every 1000 population.
She disseminates health related information and assists households to gain access to health care
facilities. She is paid on the basis of performance (incentive) for the task she undertakes.
9. Assigned Revenue
The term is used to refer to various tax/duty/cess/surcharge/levy etc., proceeds of which are
(traditionally) collected by State Government (on behalf of) local bodies viz.,
Panchayat/Municipality and (subsequently) adjusted with/assigned to them. Collection of such
revenue is governed by relevant Act(s) administered by Panchayat/Municipality.
Typical examples of assigned revenue include entertainment tax, surcharge on stamp duty, local
cess/surcharge on land revenue, lease amount of mines and minerals, sale proceeds of social forestry
plantations etc. State Finance Commissions recommend devolution of assigned revenue to local
bodies on objective criteria, which may be specified by them in specific context.
10. Association of State Road Transport Undertakings (ASRTU)
Association of State Road Transport Undertakings (ASRTU) came into existence on 13th August,
1965 with the objective of providing a forum for exchange of ideas on best practices of State Road
Transport Undertakings (SRTUs). ASRTU constitutes the backbone of mobility for the urban and
rural population across India. ASRTU plays an important role in promoting affordable mode of
public transport for socio-economic development of country. Public SRTUs are backbone of country

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and thus ASRTU is committed to provide all necessary help to them in their production, quality
monitoring and to address to their common problems.

11. Atal Pension Yojana (APY)

Atal Pension Yojana is a pension scheme for the unorganized sector that provides a defined
pension, depending on the contribution and the period of contribution. Government contributes 50%
of the beneficiaries‟ premium limited to Rs.1,000 each year, for five years, in the new accounts
opened before 31st December 2015.
The Scheme focuses on the unorganized sector where nearly 400 million employees representing
more than 80 per cent of all employees are engaged. Atal Pension Yojana would provide a fixed
minimum pension Rs.1000 to Rs.5000 per month starting from the age of 60. The amount of pension
will depend on the monthly contribution by the employee and the age at which the employee
subscribes to the scheme. In any case, the individual will have to subscribe under Atal Pension
Yojana for a minimum of 20 years.
The scheme is aimed at those who are not members of any statutory social security scheme and who
are not Income Tax payers.
The pension would also be available to the spouse on the death of the subscriber and thereafter, the
pension corpus would be returned to the nominee. The minimum age of joining APY is 18 years and
maximum age is 40 years. The benefit of fixed minimum pension would be guaranteed by the
Government.
The scheme was launched in simultaneous functions held at 115 venues across the country on 9 May
2015. The most significant part of this Scheme is co-contribution by government of Rs.1000/- per
annum or 50% of the total contribution whichever is lower, for the first 5 years if one joins the
scheme before the end of the first year of its launch, that is 31 December, 2015.
12. AYUSH
AYUSH signifies a combination of alternative system of Medicine, which was earlier known as
Indian System of Medicine. AYUSH includes Ayurveda, Yoga and Naturopathy, Unani, Siddha and
Homeopathy. The objective of AYUSH is to promote medical pluralism and to introduce strategies
for mainstreaming the indigenous systems of medicine. In India, at the Union Government level,
AYUSH activities are coordinated by Department of AYUSH under Ministry of Health & Family
Welfare. Most of these medical practices originated in India and outside, but got adopted in India in
the course of time.
Ayurveda is more prevalent in the states of Kerala, Maharashtra, Himachal Pradesh, Gujarat,
Karnataka, Madhya Pradesh, Rajasthan, Uttar Pradesh, Delhi, Haryana, Punjab, Uttarkhand, Goa and
Orissa.
The practice of Unani System could be seen in some parts of Andhra Pradesh, Karnataka, Jammu &
Kashmir, Bihar, Maharashtra, Madhya Pradesh, Uttar Pradesh, Delhi and Rajasthan.
Homoeopathy is widely practiced in Uttar Pradesh, Kerala, West Bengal, Orissa, Andhra Pradesh,
Maharashtra, Punjab, Tamil Nadu, Bihar, Gujarat and the North Eastern States and the Siddha
system is practiced in the areas of Tamil Nadu, Pondicherry and Kerala.

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In September 2009 Sowa Rigpa system of medicine was also recognized as a traditional system of
medicine. Sowa Rigpa, commonly known as „Amchi‟ is one of the oldest surviving system of
medicine in the world, popular in the Himalayan region of India. In India this system is practiced in
Sikkim, Arunachal Pradesh, Darjeeling (West Bengal), Lahoul and Spiti (Himachal Pradesh) and
Ladakh region of Jammu & Kashmir.
The Department of Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homoeopathy (AYUSH),
Ministry of Health and Family Welfare has been accorded the status of a Ministry with effect from
09.11.2014 by the Cabinet Secretariat.
National AYUSH Mission (NAM) launched on 15 September 2014 as part of 12th Plan envisages
better access to AYUSH services through increase in number of AYUSH Hospitals and
Dispensaries, ensuring availability of AYUSH drugs and trained manpower.
13. ‘Back-to-Back’ Loans
State Governments in India cannot access external sources of finance directly. The 12th Finance
Commission recommended the transfer of external assistance to State Governments in India by the
Union Government on a „Back-to-Back‟ basis. This recommendation was accepted by the
Government of India for general category states and the arrangement came into effect from April 1,
2005. For special category states ( Northeastern states, Uttarakhand, Himachal and J&K), external
borrowings are in the form of 90 per cent grant and 10 per cent loan from the Union Government.
Passing loans on „Back-to-Back‟ basis to State Governments implies that States would face identical
terms and conditions (including concessional interest rates, grace period and maturity profile,
commitment charges and amortization schedules) on account of their access to finance from bilateral
and multilateral sources, as is faced by the Union Government.
This arrangement entails exposure of States to uncertain movements in international rates of interest
(as multilateral agencies viz. IBRD benchmark their interest rates to a reference rate viz. the LIBOR)
and currency exchange rates. As per the „Back-to-Back‟ loan transfer arrangement, states would
have to face currency risk since principal repayments and interest payments on such loans to external
agencies are designated in foreign currencies. In case of adverse exchange rate movement(s) larger
rupee provisions may be required to meet debt service obligations that may negatively impact the
fiscal health of the state concerned.
14. Backwardness
As a consequence of amalgamation of regions at varying levels of socio- economic development &
different political and administrative structures, the modern state has inherited regional imbalances
that still persist. The backwardness of states is measured to understand the extent of these regional
imbalances. Some of the attempts to define or measure backwardness in India are mentioned below:
Measuring backwardness of Districts at the national level - 2003-04
Concept of Backwardness also came up in the context of a scheme for backward districts, called
Backward Districts Initiative – Rashtriya Sam Vikas Yojana (RSVY) – (A Tenth Plan Initiative).
The Rashtriya Sam Vikas Yojana (RSVY) was being implemented in 147 districts since 2003-04.
The list of districts covered under the RSVY may be seen here. The Scheme was aimed at focused
development programmes for backward areas which would help reduce imbalances and speed up

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development. The identification of backward districts within a State was made on the basis of an
index of backwardness comprising three parameters with equal weights to each:

 value of output per agricultural worker;

 agriculture wage rate; and
 percentage of SC/ST population of the districts.
This Scheme later (2006-07) got subsumed in the Backward Regions Grant Fund program, the
guidelines of which may be seen here. BRGF consists of two components - (a) Districts Component
covering 270 districts, and (b) State Component-which covers special plan for West Bengal, Bihar
and the Kalahandi Bolangir-Koraput (KBK) Region of Odisha and Bundelkhand packages for UP &
MP. The implementing Ministry for the BRGF districts component is the Ministry of Panchayati
Raj. This Scheme was also proposed for closure from December 2009 as most of the districts have
claimed their total allocation of Rs.45 crore each. As such there is no proposal under consideration
of the Government to extend RSVY to other districts of the country. However, a special
development package of Rs. 850.00 crore has been provided to the state of Andhra Pradesh from
BRGF (State component) during 2014-15.Pursuant to the recommendations of 14th Finance
Commission for higher untied tax devolution to states, the scheme followed a natural death since
2015-16. Hence, the ongoing projects under BRGF for addressing Intra-State inequality may be
supported by the States out of their own funds, including received under the recommendations of
14th Finance Commission.
However, the Parliamentary Standing Committee on Finance in its report in April 2015 (on
the Demand for Grants of Ministry of Finance) had disagreed with this view in their report and were
of the view that such subsuming of specific schemes designed with a special purpose / focus to uplift
living standards in backward and under-developed areas / regions with chronic poverty is not
desirable. According to the Committee, Central budgetary support and an element of hand-holding
by way of special central assistance is therefore still required to bring about social and economic
development in such areas, which are lagging far behind in socioeconomic indices and which also
face extraordinary challenges.In this regard the Committee desired that the recommendations of
Raghuram Rajan's Report on backwardness of States (Committee for Evolving a Composite
Development Index of States) may be considered and appropriately implemented.
Measuring backwardness of states - 2013
Government in May 2013, decided to constitute an Expert Committee under the chairmanship of Dr.
Raghuram Rajan to measure backwardness of the Indian States by evolving a Composite
Development Index of States for guiding devolution of funds from central government to such
backward states. The committee submitted its report in September 2013.
The Committee proposed a general method for allocating funds from the Centre to the states based
both on a state‟s development needs as well as its development performance. Towards this,
committee created a multi-dimensional index based on certain measures which correspond to the
multi dimensional approach to defining poverty outlined in the Twelfth Plan. Need is based on a
simple index of (under) development computed as an average of the following ten sub-components:

 monthly per capita consumption expenditure

 education

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 health
 household amenities
 poverty rate
 female literacy
 percent of SC-ST population
 urbanization rate
 financial inclusion
 connectivity
Improvements to a state‟s development index over time (that is, a fall in underdevelopment) is taken
as the measure of performance. Less developed states rank higher on the index, and would get larger
allocations based on the need criteria, with allocations increasing more than linearly to the most
underdeveloped states.
The Committee recommended that States that score 0.6 and above on the Index may be classified as
“Least Developed”; States that score below 0.6 and above 0.4 may be classified as “Less
Developed”; and States that score below 0.4 may be classified as “Relatively Developed”. The
“Least Developed” states effectively subsume what is now “special category” state.
Using the index, the Committee has identified the “Least Developed” states as Arunachal Pradesh,
Assam, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Meghalaya, Odisha, Rajasthan and Uttar
Pradesh. Government as on date has not taken any decision on the recommendations of the
Committee.
15. Banking Correspondent (BC)
Banking Correspondents (BCs) are individuals/entities engaged by a bank in India (commercial
banks, Regional Rural Banks (RRBs) and Local Area Banks (LABs)) for providing banking services
in unbanked / under-banked geographical territories. A banking correspondent works as an agent of
the bank and substitutes for the brick and mortar branch of the bank.
BCs engage in

 identification of borrowers;
 collection and preliminary processing of loan applications including verification of primary
information/data;
 creating awareness about savings and other products and education and advice on managing
money and debt counselling;
 processing and submission of applications to banks;
 promoting, nurturing and monitoring of Self Help Groups/ Joint Liability Groups/Credit
Groups/others;
 post-sanction monitoring;
 follow-up for recovery,
 disbursal of small value credit,
 recovery of principal / collection of interest
 collection of small value deposits

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 sale of micro insurance/ mutual fund products/ pension products/ other third party products
and
 receipt and delivery of small value remittances/ other payment instruments.

The banks in India may engage the following individuals/entities as BCs.

 Individuals like retired bank employees, retired teachers, retired government employees and
ex-servicemen, individual owners of kirana (small shops) / medical /Fair Price shops, individual
Public Call Office (PCO) operators, agents of Small Savings schemes of Government of
India/Insurance Companies, individuals who own petrol pumps, authorized functionaries of well-run
Self Help Groups (SHGs) which are linked to banks, any other individual including those operating
Common Service Centres (CSCs);
 NGOs/ Micro Finance Institutions set up under Societies/ Trust Acts or as Section 25
Companies ;
 Cooperative Societies registered under Mutually Aided Cooperative Societies Acts/
Cooperative Societies Acts of States/Multi State Cooperative Societies Act;
 Post Offices;
 Companies registered under the Indian Companies Act, 2013 with large and widespread
retail outlets
 Non-banking Finance Companies (NBFCs) were not allowed to be appointed as Business
Correspondents (BCs) by banks. However, since June 2014 banks have been permitted to engage
non-deposit taking NBFCs (NBFCs-ND) as BCs, subject to certain conditions:
While a BC can be a BC for more than one bank, at the point of customer interface, a retail outlet or
a sub-agent of a BC shall represent and provide banking services of only one bank.
The banks will be fully responsible for the actions of the BCs and their retail outlets / sub agents.
Banking Correspondent in India, in all sense of the term, is equivalent to what is known as
"Correspondent Banking" in Brazil (Generally, the term correspondent bank refers to a bank which
functions as an agent of another bank in a foreign jurisdiction. However, Brazil uses this term for
domestic agency services by individuals / entities). In some countries BC model is known as "Agent
Banking".
16. Base Effect
The base effect refers to the impact of the rise in price level (i.e. last year‟s inflation) in the previous
year over the corresponding rise in price levels in the current year (i.e., current inflation): if the price
index had risen at a high rate in the corresponding period of the previous year leading to a high
inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in
the Price index in the current year will lead to a relatively lower inflation rates. On the other hand, if
the inflation rate was too low in the corresponding period of the previous year, even a relatively
smaller rise in the Price Index will arithmetically give a high rate of current inflation.
17. Base Rate
The base rate, introduced with effect from 1st July 2011 by the Reserve Bank of India, is the new
benchmark rate for lending operations of banks. It is a tool which will help in bringing more
transparency in lending operations of banks.

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Base rate is defined as the minimum interest rate of a bank below which it is not viable to lend.It
replaces the benchmark prime lending rate (BPLR), the interest rate which commercial banks
charged their most credit worthy customer.
Base rate includes all those elements of the lending rates that are common across all categories of
borrowers.
Banks are free to choose any benchmark to arrive at the base rate. The interest on all categories of
loans is determined with respect to the base rate except the following loans; (a) DRI advances ( that
is Differential rate of interest scheme whereby banks offer financial assistance at concessional rates)
(b) loans to banks‟ own employees (c) loans to banks‟ depositors against their own deposits. Base
rate is to be reviewed at least once in a quarter and has to be disclosed to the public. Each bank
arrives at its base rate separately. Banks are free to choose any methodology to arrive at the base rate
which is consistent , appropriate and transparent.
18. Basic Road Statistics of India (BRSI)
The Basic Road Statistics of India is a premier publication on the road sector providing
comprehensive information on different categories of road in the country, at the National, State and
Local (municipalities and panchayat) levels. It is brought out regularly every year by Transport
Research Wing (TRW) of the Ministry of Road Transport & Highways. It is vital to have
comprehensive data on road infrastructure to assist in policy planning and investment decision. The
latest publication „Basic Road Statistics of India‟ provides detailed data spread over 11 Sections
comprising of a Section each on Road Length (Total and Surfaced) All India and State-wise,
National Highways, State Highways, Other Public Works Department Roads, Zilla Parishad Roads,
Village Panchayat Roads, CD/Panchayat Samiti Roads, Urban Roads, Project Roads, Plan Outlay
and Expenditure on Roads and Miscellaneous information on National Highways & PMGSY.
Annexed tables list out major terms and definitions relevant to the road sector.
19. Basic Port Statistics of India (BPSI)
The Basic Port Statistics of India is a premier publication which is brought out every year by
Transport Research Wing. It intends to provide comprehensive and analytical descriptions of the
different facets of the maritime transport activity. It highlights the volume and composition of
seaborne trade across the major ports (12) and minor ports (199) of India in the backdrop of global
and domestic macro developments. The major ports in India are administered by the central shipping
ministry while minor ports are administered by relevant department or ministries of the coastal
states.
20. Bid Rigging
Bid rigging is a widely known term across the world. Bidding, as a practice, is intended to enable the
procurement of goods or services on the most favourable terms and conditions. Invitation of bids is
resorted to both by Government (and Government entities) and private bodies (companies,
corporations, etc.). But the objective of securing the most favourable prices and conditions may be
negated if the prospective bidders collude or act in concert. Such collusive bidding called “bid
rigging” contravenes the very purpose of inviting tenders and is inherently anticompetitive. If bid
rigging takes place in Government tenders, it is likely to have severe adverse effects on its purchases
and on cost effectiveness of public spending and wastes public resources. It is therefore important
that the procurement process is highly competitive and not affected by practices such as collusion,

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bid rigging, fraud and corruption. All over the world, bid rigging or collusive bidding is treated with
severity in the law as reflected by the presumptive approach.
Collusive bidding or bid rigging may occur in various ways by which firms coordinate their bids on
procurement or project contracts. Origin of bid rigging is as old as system of procurement. However,
an apt codification on the same may be the Sherman Act, 1890 of the United States, which is
considered the first codified law to look into agreements leading to bid rigging. Governments are
most often the target of bid rigging. Bid rigging is one of the most widely prosecuted forms of
collusion. Bid rigging may take various forms such as bid suppression, complimentary bidding, bid
rotation, and sub contracting etc.
21. Bio-fuels
Bio-fuels are environment friendly fuels derived from renewable bio-mass resources. In India, a
definition of bio-fuels is provided in the National Bio-fuel Policy of 2009. As per that definition,
„biofuels‟ are those liquid or gaseous fuels produced from biomass resources and used in place of, or
in addition to, diesel, petrol or other fossil fuels for transport, stationary, portable and other
applications. In this context, 'biomass resources' refer to the biodegradable fraction of products,
wastes and residues from agriculture, forestry and related industries as well as the biodegradable
fraction of industrial and municipal wastes.
Three broad categories of bio-fuels are identified in India:
1. „bio-ethanol‟: ethanol produced from biomass such as sugar containing materials, like sugar cane,
sugar beet, sweet sorghum, etc.; starch containing materials such as corn, cassava, algae etc.; and,
cellulosic materials such as bagasse, wood waste, agricultural and forestry residues etc.;
2. „biodiesel‟: a methyl or ethyl ester of fatty acids produced from vegetable oils, both edible and
non-edible, or animal fat of diesel quality; and
3. other biofuels: biomethanol, bio CNG, biosynthetic fuels etc.
Bio-fuels provide a strategic advantage to promote sustainable development and to supplement
conventional energy sources in meeting the rapidly increasing requirements associated with high
economic growth for transportation fuels.
The Indian approach to bio-fuels is somewhat different from the current international approaches
since it is based solely on non-food feedstocks to be raised on degraded or wastelands that are not
suited to agriculture, thus avoiding a possible conflict of fuel vs. food security.
Further, the Ministry of Road Transport & Highways has started the initiative of promoting vehicles
which are fueled with clean fuels like Bio-Ethanol, Bio-CNG, Bio-Diesel, Electric Batteries, etc. The
specifications for test reference fuel for Bio-Ethanol fuel vehicles and emission for Bio-Ethanol Fuel
Vehicles, have been notified by the Ministry. In July 2015, the Ministry notified norms for the use of
Bio-CNG for testing and exhaust emission for vehicles running on Bio-CNG and the related norms.
With this notification, the vehicle manufacturers can manufacture, sell and get the vehicles fueled by
Bio-CNG in the country.
22. Broad Based Fund
Broad based fund means a fund established or incorporated outside India, which has at least 20
investors with no single individual investor holding more than 49 percent of the shares or units of the

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fund. If the broad based fund has institutional investor(s), then it is not necessary for the fund to have
20 investors. Further, if the broad based fund has an institutional investor who holds more than 49
percent of the shares or units in the fund, then the institutional investor must itself be a broad based
fund.
In India, the following entities proposing to invest on behalf of broad based funds, are eligible to be
registered as FIIs:
(1).Asset Management Companies (2).Investment Manager/Advisor (3).Institutional Portfolio
Managers (4).Trustee of a Trust and (5).Bank
24. Cabinet Committee
In a parliamentary democracy, a Cabinet Minister with the title of Prime Minister is the Executive
head of the Government, while the Head of State is a largely ceremonial monarch or president. The
Executive branch of the Government has sole authority and responsibility for the daily
administration of the State bureaucracy.
The Prime Minister selects the team of Ministers in the Cabinet and allocates portfolio. In most
cases, the Prime Minister sets up different Cabinet Committees with select members of the Cabinet
and assigns specific functions to such Cabinet Committees for smooth and convenient functioning of
the Government.
A Cabinet Committee can be either set up with a broad mandate or with a specific mandate. Many a
times, when an activity/agenda of the Government acquires prominence or requires special thrust, a
Cabinet Committee may be set up for focussed attention. In all areas delegated to the Cabinet
Committees, normally the decision of the Cabinet Committee in question is the decision of the
Government of the day. However, it is up to the Prime Minister to decide if any issue decided by a
Cabinet Committee should be re-opened or discussed in the full Cabinet.
The Parliament of India (Sansad / ) is the federal and supreme legislative body of India. It
consists of two houses – the Lower House – House of the People called Lok Sabha ( क )and
the Upper House- Council of States called Rajya Sabha.( ).
Though the political party /coalition that have the absolute majority ( i.e at least one seat more than
50 percent of total seats contested and decided) in Lok Sabha forms the Government, the Prime
Minister and the members of the Cabinet can be from either House of Parliament. In 1961,
the Government of India Transaction of Business Rules (TBR), 1961 were framed, which inter-alia
prescribed the procedure in which the Executive arm of the Government would conduct its business
in a convenient and streamlined manner.
In terms of the TBR, 1961, inter-alia, there shall be “Standing Committees of the Cabinet” as set out
in the First Schedule to the TBR, 1961, with the functions specified therein. The Prime Minister
may, from time to time, amend the Schedule by adding to or reducing the numbers of such
Committees or by modifying the functions assigned to them. Every Standing Committee shall
consist of such Ministers as the Prime Minister may from time to time specify. Conventionally,
while Ministers with Cabinet rank are named as „members‟ of the Standing Committees of the
Cabinet, Ministers of State, irrespective of their status of having „Independent Charge‟ of a

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Ministry/Department, and others „with rank of‟ a Cabinet Minister or Minister of State are named as
„special invitees‟.
The Second Schedule to TBR 1961, lists the items of Government business where the full Cabinet,
and not any Standing Committee of the Cabinet should take a decision. However, to the extent there
is a commonality between the cases enumerated in the Second Schedule and the cases set out in the
First Schedule, the Standing Committees of the Cabinet shall be competent to take a final decision in
the matter, except in cases where the relevant entries in the respective Schedules themselves
preclude the Committees from taking such decisions. Also, any decision taken by a Standing
Committee may be reviewed by the Cabinet.

25. Existing Cabinet Committees

As on 20th March 2013 there are 10 (ten) Standing Committees of the Cabinet. These are the
Appointments Committee of the Cabinet (ACC), the Cabinet Committee on Accommodation(CCA),
the Cabinet Committee on Economic Affairs (CCEA) , the Cabinet Committee on Parliamentary
Affairs, the Cabinet Committee on Political Affairs (CCPA), the Cabinet Committee on Prices
(CCP), the Cabinet Committee on Security (CCS), the Cabinet Committee on World Trade
Organisation Matters (CCWTO), the Cabinet Committee on Investment (CCI), and the Cabinet
Committee on Unique Identification Authority of India related issues (CCUID).
While three of the Cabinet Committees, the ACC, CCA and the Cabinet Committee on
Parliamentary Affairs deal with internal housekeeping and functioning of the Government, three
Cabinet Committees have very limited mandates, i.e, CCP is for regulating prices of essential
commodities, CCWTO is for matters relating to WTO, and CCUID is for matters relating to UID.
Prominent Cabinet Committees whose functioning is of general interest are the Cabinet Committee
on Economic Affairs (CCEA), the Cabinet Committee on Investment (CCI), the Cabinet Committee
on Political Affairs (CCPA), and the Cabinet Committee on Security (CCS).
The latest Cabinet Committee is that on investment. On 2 January 2013, the Government has set up
the Cabinet Committee on Investments (CCI) with the Prime Minister as the Chairman to expedite
decisions on approvals/clearances for implementation of projects. This is expected to improve the
investment environment by bringing transparency, efficiency and accountability in accordance of
various approvals and sanctions.

Reconstitution of Cabinet Committees in June 2014

On 10th June 2014, the new Government headed by Prime Minister Shri Narendra Modi decided to
discontinue the following four Standing Committees of the Cabinet:
1. Cabinet Committee on Management of Natural Calamities: The functions of this Committee will
be handled by the Committee under the Cabinet Secretary whenever natural calamities occur.
2. Cabinet Committee on Prices: The functions of this Committee will be handled by the Cabinet
Committee on Economic Affairs.
3. Cabinet Committee on World Trade Organisation Matters: The functions of this Committee will
be handled by the Cabinet Committee on Economic Affairs and, whenever necessary, by the full
Cabinet.

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4. Cabinet Committee on Unique Identification Authority of India related issues: Major decisions in
this area have already been taken and the remaining issues will be brought to the Cabinet Committee
on Economic Affairs.

On 19th June 2014 the Government reconstituted six Committees of the Cabinet i.e. Appointments
Committee of the Cabinet, Cabinet Committee on Accommodation, Cabinet Committee on
Economic Affairs, Cabinet Committee on Parliamentary Affairs, Cabinet Committee on Political
Affairs and Cabinet Committee on Security.
26. Capital Budget
Under Article 112 of the Constitution of India, the Annual Financial Statement has to distinguish
expenditure of the Government on revenue account from other expenditures. Government Budget,
therefore, comprises of Revenue Budget and Capital Budget.
Capital Budget consists of capital receipts and capital payments.
The capital receipts are loans raised by Government from public, called market loans, borrowings by
Government from Reserve Bank and other parties through sale of Treasury Bills, loans received
from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and
Union Territory Governments and other parties.
Capital payments consist of capital expenditure on acquisition of assets like land, buildings,
machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central
Government to State and Union Territory Governments, Government companies, Corporations and
other parties.
27. Cash based Accounting System Versus Accrual Accounting System
The Indian Government accounts are prepared on a cash based accounting system. This system
recognizes a transaction when cash is paid or received. However it does not give a realistic account
of government's financial position because it lacks an adequate framework for accounting for assets
and liabilities, and depicting consumption of resources. Moreover capital expenditure (expenditure
on the creation of new assets) under the cash system is brought to account only in the year in which a
purchase or disposal of an asset is made. This is not an effective way to track assets created out of
public money. The present system does not reflect accrued liabilities arising from the gap between
commitments and transactions of government on the one hand and payments made. The Twelfth
Finance Commission recommended introduction of accrual accounting in Government. Government
has accepted the recommendation in principle and asked Government Accounting Standards
Advisory Board (GASAB) in the office of the Comptroller and Auditor General of India to draw a
roadmap for transition from cash to accrual accounting system and to prepare an operational
framework for its implementation. So far twenty one State Governments have agreed in principle to
introduce accrual accounting.
28. Cash Reserve Ratio (CRR)
Cash Reserve Ratio refers to the fraction of the total Net Demand and Time Liabilities (NDTL) of a
Scheduled Commercial Bank held in India, that it has to maintain as cash deposit with the Reserve
Bank of India (RBI). The requirement applies uniformly to all banks in the country irrespective of an

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individual bank‟s financial situation or size. In contrast, certain countries e.g. China stipulates
separate reserve requirements for „large‟ and „small‟ banks.
As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector
banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash
balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. With effect
from December 28, 2002 all banks are required to maintain a minimum of 70 per cent of the required
average daily CRR on all days of the fortnight. Non Bank Financial Corporations (NBFCs) are
outside the purview of this reserve requirement.
Traditionally, the amount held to cater to the CRR requirement was stipulated to be no lower than 3
percent and no higher than 20 percent of the total NDTL held in India. However, the RBI
(amendment) Act, 2006 provides for removal of the floor and ceiling with respect to setting the CRR
and authorizes the RBI to set the ratio in keeping with the broad objective of maintaining monetary
stability in the economy.
Presently, banks are not paid any interest on behalf of the RBI for parking the required cash. If a
bank fails to meet its required reserve requirements, the RBI is empowered to impose apenalty by
charging a penal interest rate.
Historically, the CRR was mooted as a regulatory tool. However, over the years and especially after
the liberalization of the Indian economy in the early 1990s, with the economy experiencing
substantial inflows of capital exerting stress on the leverage of the central bank to manipulate
liquidity conditions in the domestic money market, the CRR assumed importance as one of the
important quantitative tools aiding in liquidity management. In contrast to the Liquidity Adjustment
Facility (LAF), which aids liquidity management on a daily basis via changes in repo and reverse-
repo rates, changes in the CRR is aimed at the same in the medium term.
A country that uses the CRR aggressively to control domestic liquidity and target the monetary roots
of inflation is China.
29. Central Plan Assistance
Financial assistance provided by Government of India to support State‟s Five Year/intervening
annual plans is called Central Plan Assistance (CPA) or Central Assistance (CA).

CPA or CA primarily comprises of the following:

CPA is provided, as per scheme of financing applicable for specific purposes, approved by Planning
Commission. It is released in the form of grants and/or loans in varying combinations, as per terms
& conditions defined by Ministry of Finance, Department of Expenditure.
Central Assistance in the form of ACA is provided also for various Centrally Sponsored
Schemes viz., Accelerated Irrigation Benefits Programme, Rashtriya Krishi Vikas Yojana etc. and
SCA is extended to states and UTs as additive to Special Component Plan (renamed Scheduled
Castes Sub Plan) and Tribal Sub Plan. Funds provided to States under Member of Parliament Local
Area Development Scheme @ Rs.5 crore per annum per MP also count as CA.

The term Plan Grants generally comprise of 'Block Grants‟ which consists of Normal Central
Assistance (NCA), Backward Regions Grant Fund (BRGF)- Scheme (State Component), Additional

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Central Assistance (ACA) for Externally Aided Projects (EAPs), Special Central Assistance (SCA),
Special Plan Assistance (SPA), etc.
Since 2015-16, pursuing the recommendations of the 14th Finance Commission, Some of the
schemes like NCA, SCA (untied), SPA, Additional Central Assistance for Other Projects (ACAOP),
Other ACA, SCA for Hill Areas Development Programme (HADP/WGDP), SCA under Backward
Regions Grant Fund (BRGF), National e-governance Plan (Mission mode project) and ACA for Left
wing Extremism (LWE) Affected Districts have been discontinued or subsumed under higher
devolution of taxes.
30. Central Sector and Centrally Sponsored Schemes
In India‟s developmental plan exercise we have two types of schemes viz; central sector and
centrally sponsored scheme. The nomenclature is derived from the pattern of funding and the
modality for implementation.
Under Central sector schemes, it is 100% funded by the Union government and implemented by the
Central Government machinery. Central sector schemes are mainly formulated on subjects from the
Union List.In addition, the Central Ministries also implement some schemes directly in States/UTs
which are called Central Sector Schemes but resources under these Schemes are not generally
transferred to States.
Under Centrally Sponsored Scheme (CSS) a certain percentage of the funding is borne by the States
in the ratio of 50:50, 70:30, 75:25 or 90:10 and the implementation is by the State Governments.
Centrally Sponsored Schemes are formulated in subjects from the State List to encourage States to
prioritise in areas that require more attention. Funds are routed either through consolidated fund of
States and or are transferred directly to State/ District Level Autonomous Bodies/Implementing
Agencies. As per the Baijal Committee Report, April, 1987, CSS have been defined as the schemes
which are funded directly by Central Ministries/Departments and implemented by States or their
agencies, irrespective of their pattern of financing, unless they fall under the Centre's sphere of
responsibility i.e., the Union List.
Conceptually both CSS and Additional Central Assistance (ACA) Schemes have been passed by the
Central Government to the State governments. The difference between the two has arisen because of
the historical evolution and the way these are being budgeted and controlled and release of funds
takes place. In case of CSS, the budgets are allocated under ministries concerned themselves and the
entire process of release is also done by them.
Subsequently, the 14th Finance Commission (FFC) substantially enhanced the share of the States in
the Central divisible pool from the current 32 % to 42 %, which is the biggest ever increase in
vertical tax devolution. Such tax devolution is untied and can be spent as desired by the States.
Consequent to this substantially higher devolution and resultant reduced fiscal space for the Center,
the Finance Minister, Shri Arun Jaitley, while presenting the Union Budget 2015-16, said that many
schemes on the State subjects were to be delinked from Central support. However, he said that
Centre decided to continue to contribute to such schemes representing national priorities, especially
those targeted at poverty alleviation. Further, the schemes mandated by legal obligations and those
backed by Cess collection would be fully provided for by the Central Government. Thus, Union
Budget 2015-16 changed the contours of the central sector and centrally sponsored schemes as
follows:

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 As per the Budget 2015-16, centre has decided to support fully those schemes which are
targeted to the benefits of socially disadvantaged group.
 In case of some Centrally Sponsored Schemes, the Centre-State funding pattern will
undergo a change with States to contribute higher share. Details of changes in sharing pattern will
have to be worked out by administrative Ministry/Department.
 In the Union Budget 2015-16, there are 31 Schemes to be fully sponsored by the Union
Government, 8 Schemes have been delinked from support of the Centre and 24 Schemes will now be
run with the changed sharing pattern.
31. Charged Expenditure
______________________________________________________________________________
In India's democratic system, the government cannot spend from the Consolidated Fund unless the
expenditure is voted in the lower house of Parliament or State Assemblies. However according to
Article 112 (3) and Article 202 (3) of the Constitution of India, the following expenditure does not
require a vote and is charged to the Consolidated Fund. They include salary, allowances and pension
for the President as well as Governors of States, Speaker and Deputy Speaker of the House of
People, the Comptroller General of India and Judges of the Supreme and High Courts. They also
include interest and other debt related charges of the Government and any sums required to satisfy
any court judgment pertaining to the Government.

32. Chit Funds / Chitty / Kuri/ Miscellaneous Non-banking Company

Chit funds are essentially saving institutions. They are of various forms and lack any standardised
form. Chit funds have regular members who make periodical subscriptions to the fund. The periodic
collection is given to some member of the chit funds selected on the basis of previously agreed
criterion. The beneficiary is selected usually on the basis of bids or by draw of lots or in some cases
by auction or by tender. In any case, each member of the chit fund is assured of his turn before the
second round starts and any member becomes entitled to get periodic collection again.
Chit funds are the Indian versions of Rotating Savings and Credit Associations found across the
globe.
Regulatory framework
Chit fund business is regulated under the Central Act of Chit Funds Act, 1982 and the Rules framed
under this Act by the various State Governments for this purpose. Central Government has not
framed any Rules of operation for them. Thus, Registration and Regulation of Chit funds are carried
out by State Governments under the Rules framed by them.
Functionally, Chit funds are included in the definition of Non- Banking Financial Companies by RBI
under the sub-head miscellaneous non-banking company(MNBC). But RBI has not laid out any
separate regulatory framework for them.
Cheating by Chit Fund company through fraudulent schemes is an offence under the Prize Chits and
Money Circulation Schemes (Banning) Act, 1978. The power to investigate and prosecute lies with
the State Governments.
For better identification of Chit Fund Companies, Rule 8(2)(b)(iii) of Companies (Incorporation)
Rules, 2014 framed under the Companies Act, 2013, provides that if the company‟s main business is

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that of a chit fund, its incorporation will not be allowed unless its name is indicative of that financial
activity, viz., Chit Fund
33. Clean Development Mechanism (CDM)
The Clean Development Mechanism (CDM) refers to a market mechanism for achieving greenhouse
gas emissions reduction and is defined in Article 12 of the Kyoto Protocol - an international treaty
for emissions reductions. CDM allows an industrialized/developed country with an emission-
reduction or emission-limitation commitment under the Kyoto Protocol (called as Annex I Party or
Annex B Party of the original Kyoto Protocol signed in 1997) to implement an emission-reduction
project in any of those developing countries (which may otherwise be not financially capable of
undertaking such projects), thereby earning them tradable Certified Emission Reduction (CER)
credits, each equivalent to one tonne of CO2. The saleable CERs earned from such projects can be
counted towards meeting the prescribed Kyoto targets.
CDM is one of the three market-based mechanisms set up under Kyoto Protocol, the other two being
- Joint Implementation and emissions trading or commonly called as carbon trading [which provides
for trading of (a) spare emission units available with any entity (savings from the assigned or
permissible emission levels), (b) CERs created from CDM activities, (c) an emission reduction
unit (ERU) generated by a Joint Implementation project and (d) removal units (RMU) created on the
basis of land use, land-use change and forestry (LULUCF) activities such as reforestation]
CDM helps developing countries to achieve development without compromising on sustainable
aspects while it gives developed countries a flexible mechanism for achieving emissions reductions.
On the other hand, JI helps developed countries to refashion their development strategies through
technology transfer.
34. Clean Energy Cess - Carbon Tax of India
Clean Energy Cess is a kind of carbon tax and is levied in India as a duty of Excise under section 83
(3) of the Finance Act, 2010 at the rate of Rs.100 per tonne on Coal, Lignite and Peat (goods
specified in the Tenth Schedule to the Finance Act, 2010) in order to finance and promote clean
environment initiatives, funding research in the area of clean environment or for any such related
purposes.
This was introduced, with effect from 1 July 2010, though the Union Budget 2010-11, on coal
produced in India or imported to India. This is in line with the principle of "polluter pays", which is
the basic guiding criteria for pollution management.
In many countries carbon taxes are levied also on other fossil fuels like petroleum, natural gas etc.
However, in India this is applied only on coal and its variants - lignite and peat. In any case,
subsequent to the global financial crisis of 2008, many countries have either abolished or reduced or
postponed their decisions on such carbon taxes.
The cess would apply to the gross quantity of raw coal, lignite or peat raised and dispatched from a
coal mine. No deduction from this quantity is be allowed for loss, if any, on account of washing of
coal or its conversion into any other product/form prior to its dispatch from the mine. At the same
time, cess would not be chargeable on washed coal or any other form provided the appropriate cess
has been paid at the raw stage. Thus, if appropriate cess has not been paid at the raw stage, then the
products would attract clean energy cess.

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Since Clean Energy Cess is being levied as a duty of excise, it would also apply to imported coal,
including washed coal by virtue of Section 3(1) of the Customs Tariff Act in the form of additional
duty of customs. Since imported coal would not satisfy the condition regarding payment of
appropriate cess at the raw stage, Clean Energy Cess would apply to all forms of imported coal.
In the State of Meghalaya, coal is mined under traditional and customary rights vested on the local
tribes. The mines operated by these tribes are not subjected to the provisions of laws that regulate the
operation of coal mines. Hence, full exemption from Clean Energy Cess is being provided to coal
produced in the State of Meghalaya under such rights.
Usage of the fund raised through Clean energy cess
The fund raised through the cess is being used for the National Clean Energy Fund for funding
research and innovative projects in clean energy technologies or renewable energy sources to reduce
dependence on fossil fuels. Thus, projects aiming at reduction of emissions with innovative
technologies from different sectors get considered under this funding mechanism.
The details of cess collected for each year is available in the Receipt Budget Document issued
alongside Union Budget under the Budget head 5.07.04 (under excise duty).
35. Collective Investment Scheme (CIS)
A Collective Investment Scheme (CIS), as its name suggests, is an investment scheme wherein
several individuals come together to pool their money for investing in a particular asset(s) and for
sharing the returns arising from that investment as per the agreement reached between them prior to
pooling in the money. The term has broader connotations and includes even mutual funds.
36. Commodities Transaction Tax (CTT)
Commodities transaction tax (CTT) is a tax similar to Securities Transaction Tax (STT), levied in
India, on transactions done on the domestic commodity derivatives exchanges.
Globally, commodity derivatives are also considered as financial contracts. Hence CTT can also be
considered as a type of financial transaction tax.
The concept of CTT was first introduced in the Union Budget 2008-09 (para 179 of the Budget
Speech).The Government had then proposed to impose a commodities transaction tax (CTT) of
0.017% (equivalent to the rate of equity futures at that point of time).
Like all financial transaction taxes, CTT aims at discouraging excessive speculation, which is
detrimental to the market andto bring parity between securities market and commodities market such
that there is no tax / regulatory arbitrage. (Futures contracts are financial instruments and provide for
price risk management and price discovery of the underlying asset (commodity / currency/ stocks /
interest). It is therefore essential that the policy framework governing is uniform across all the
contracts irrespective of the underlying to minimize the chances of regulatory arbitrage.) The
proposal of CTT also appears to have stemmed from the general policy of the Government to widen
the tax base.
37. Compensatory Afforestation
Compensatory Afforestation (CA) refers to afforestation and regeneration activities carried out as a
way of compensating for forest land diverted to non-forest purposes. Here "non-forest purpose"
means the breaking up or clearing of any forest land or a portion thereof for-

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 the cultivation of tea, coffee, spices, rubber, palms, oil-bearing plants, horticultural crops or
medicinal plants;
 any purpose other than reafforestation;
but does not include any work relating or ancillary to conservation, development and management of
forests and wildlife, namely, the establishment of check-posts, fire lines, wireless communications
and construction of fencing, bridges and culverts, dams, waterholes, trench marks, boundary marks,
pipelines or other like purposes.
CA is one of the most important conditions stipulated by the Central Government while approving
proposals for de-reservation or diversion of forest land for non-forest use. The compensatory
afforestation is an additional plantation activity and not a diversion of part of the annual plantation
programme.
Elements of Schemes for Compensatory Afforestation
The scheme for compensatory afforestation should contain the following details:-

 Details of equivalent non-forest or degraded forest land identified for raising compensatory
afforestation.
 Delineation of proposed area on a suitable map.
 Agency responsible for afforestation.
 Details of work schedule proposed for compensatory afforestation.
 Cost structure of plantation, provision of funds and the mechanism to ensure that the funds
will be utilised for raising afforestation.
 Details of proposed monitoring mechanism.
38. Concession Agreement
In India, the term concession agreement is often used in the context of public private
partnership projects (PPP).
The contractual arrangement entered between a public entity and a private entity in a PPP project,
whereby the obligations of both the parties are clearly specified, is called a concession agreement.
39. Consolidated Fund of India
This term derives its origin from the Constitution of India.
Under Article 266 (1) of the Constitution of India, all revenues ( example tax revenue from personal
income tax, corporate income tax, customs and excise duties as well as non-tax revenue such as
licence fees, dividends and profits from public sector undertakings etc. ) received by the Union
government as well as all loans raised by issue of treasury bills, internal and external loans and all
moneys received by the Union Government in repayment of loans shall form a consolidated fund
entitled the 'Consolidated Fund of India' for the Union Government.
Similarly, under Article 266 (1) of the Constitution of India, a Consolidated Fund Of State ( a
separate fund for each state) has been established where all revenues ( both tax revenues such as
Sales tax/VAT, stamp duty etc..and non-tax revenues such as user charges levied by State
governments ) received by the State government as well as all loans raised by issue of treasury bills,
internal and external loans and all moneys received by the State Government in repayment of loans
shall form part of the fund.

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The Comptroller and Auditor General of India audits these Funds and reports to the Union/State
legislatures when proper accounting procedures have not been followed.
40. Consumer Price Index
Consumer Price Index is a measure of change in retail prices of goods and services consumed by
defined population group in a given area with reference to a base year. This basket of goods and
services represents the level of living or the utility derived by the consumers at given levels of their
income, prices and tastes. The consumer price index number measures changes only in one of the
factors; prices. This index is an important economic indicator and is widely considered as a
barometer of inflation, a tool for monitoring price stability and as a deflator in national accounts.
Consumer price index is used as a measure of inflation in around 157 countries. The dearness
allowance of Government employees and wage contracts between labour and employer is based on
this index. The formula for calculating Consumer Price Index is Laspeyre‟s index which is measured
as follows;
41. Consumer Price Index(Urban) and Consumer Price Index(Rural)
The CPI(IW) and CPI(Al & RL) pertain to specific segment of population. Since these indices do
not cover all segments of population, it is difficult to ascertain the true variations in the price level .
To overcome this problem, a new index with a wider coverage is now being computed, CPI(Urban)
and CPI(Rural) by Central Statistics Office under Ministry of Statistics and Programme
Implementation.
42. Consumer Price Index for Industrial Workers CPI(IW)
This index is the oldest among the CPI indices as its dissemination started as early as in 1946. The
history of compilation and maintenance of Consumer Price Index for Industrial workers owes its
origin to the deteriorating economic condition of the workers post first world war which resulted in
sharp increase in prices. As a consequence of rise in prices and cost of living, the provincial
governments started compiling Consumer Price Index. The estimates were however not satisfactory.
In pursuance of the recommendation of Rau Court of enquiry, the work of compilation and
maintenance was taken over by government in 1943. Since 1958-59, the compilation of CPI(IW) has
been started by Labour Bureau ,an attached office under Ministry of Labour & Employment.
Consumer Price Index Numbers for Industrial workers measure a change over time in prices of a
fixed basket of goods and services consumed by Industrial Workers. The target group is an average
working class family belonging to any of the seven sectors of the economy- factories, mines,
plantation, motor transport, port, railways and electricity generation and distribution ..
43. Contingency Fund of India
This term derives its origin from the Constitution of India.
The Contingency Fund of India established under Article 267 (1) of the Constitution is in the nature
of an imprest (money maintained for a specific purpose) which is placed at the disposal of the
President to enable him/her to make advances to meet urgent unforeseen expenditure, pending
authorization by the Parliament. Approval of the legislature for such expenditure and for withdrawal
of an equivalent amount from the Consolidated Fund is subsequently obtained to ensure that the
corpus of the Contingency Fund remains intact. The corpus for Union Government at present is Rs

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500 crore (Rs 5 billion) and is enhanced from time to time by the Union Legislature. The Ministry of
Finance operates this Fund on behalf of the President of India.
Similarly, Contingency Fund of each State Government is established under Article 267(2) of the
Constitution – this is in the nature of an imprest placed at the disposal of the Governor to enable
him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the State
Legislature. Approval of the Legislature for such expenditure and for withdrawal of an equivalent
amount from the Consolidated Fund is subsequently obtained, whereupon the advances from the
Contingency Fund are recouped to the Fund. The corpus varies across states and the quantum is
decided by the State legislatures.
44. Core inflation
Core Inflation is also known as underlying inflation, is a measure of inflation which excludes items
that face volatile price movement, notably food and energy. In other words, Core Inflation is nothing
but Headline Inflation minus inflation that is contributed by food and energy commodities. To
understand the concept in a better way we can say that food and fuel prices may go up in the short
run due to some disturbance in the agriculture sector or oil economy. However, over the long term
they tend to revert back to their normal trend growth. On the other hand, prices of other commodities
do not fluctuate as regularly as food and fuel – as such increase in their prices could be taken
relatively to be much more of a permanent nature. If this is so, then it follows logically for Central
Banks to target only core inflation, as it reflects the demand side pressure in the economy. In
practice too, the Reserve Bank of India (RBI) and Central Banks around the World always keep an
eye on the core inflation. Whenever core inflation rises, Central Banks increase their key policy rates
to suck excess liquidity from the market and vice versa. It is, therefore, a preferred tool for framing
long-term policy.
45. Cropping seasons of India- Kharif & Rabi
The agricultural crop year in India is from July to June. The Indian cropping season is classified into
two main seasons-(i) Kharif and (ii) Rabi based on the monsoon. The kharif cropping season is from
July –October during the south-west monsoon and the Rabi cropping season is from October-March
(winter). The crops grown between March and June are summer crops. Pakistan and Bangladesh are
two other countries that are using the term „kharif‟ and „rabi‟ to describe about their cropping
patterns. The terms „kharif‟ and „rabi‟ originate from Arabic language where Kharif means autumn
and Rabi means spring.
The kharif crops include rice, maize, sorghum, pearl millet/bajra, finger millet/ragi (cereals), arhar
(pulses), soyabean, groundnut (oilseeds), cotton etc. The rabi crops include wheat, barley, oats
(cereals), chickpea/gram (pulses), linseed, mustard (oilseeds) etc.
46. Debt Consolidation and Relief Facility (DCRF)
The Twelfth Finance Commission (TFC) had recommended a Debt Consolidation and Relief Facility
(DCRF) during its award period (01.04.2005 to 31.03.2010) to States.
This facility provided for (i) Consolidation of central loans from Ministry of Finance contracted till
31.3.2004 and outstanding as on 31.3.2005 for a fresh tenure of twenty years at an interest rate of
7.5% per annum and (ii) Debt waiver to states based on their fiscal performance. The facility is
subject to the condition that states enact their Fiscal Responsibility and Budgetary Management

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(FRBM) Acts as recommended by the Commission. Under the scheme, twenty-six states out of
twenty eight states (except Sikkim and West Bengal), which had enacted their Fiscal Responsibility
and Budget Management Acts, had availed of the facility of consolidation of their loans. Those
states which had improved their fiscal performance could also get their eligible debt waived.
The Thirteenth Finance Commission (FC-XIII) has extended the DCRF, limited to consolidation of
their loans only, to the states of Sikkim and West Bengal during 2010-15, provided these states put
in place their FRBM Acts as stipulated by FC-XIII. Sikkim and West Bengal have now enacted their
Fiscal Responsibility Legislations.
47. Deemed Export Benefit Scheme
Deemed Export Scheme, which has been in operation for more than two decades, is largely an Indian
concept. Deemed Exports refers to those transactions in which goods supplied do not leave country,
and payment for such supplies is received either in Indian rupees or in foreign exchange. The
Deemed export benefit include rebate on duty chargeable on imports or excisable material used in
the manufacture of goods which are supplied to the eligible projects.
„Deemed Export Benefit‟ Scheme benefits are availed of by units in Power, Petroleum refinery,
fertilizer and Nuclear Power Projects. They are also availed by supply of goods to projects financed
by multi-lateral or bilateral agencies.
The policy aims to create a level playing field for the domestic industry vis-à-vis direct import by
providing duty free inputs or exemption/refund of duty paid on goods manufactured in India.
Deemed Export Scheme is primarily an instrument for import substitution. It helps in creating
manufacturing capability, value addition and employment opportunities in country
48. Deficit Measurement in India
There are different measures of deficits in macroeconomics and each type of deficit measure carries
a different macroeconomic meaning. The broad measures of deficit (which have been and/or are
being) reported by the government in India, may be classified, either in terms of the „nature of
transactions or on the basis of the „means of financing‟ them.
The chart below elucidates a list of different types of deficits that have been and are being used in
India.
I. Meaning of different measures of deficit
(a) Fiscal Deficit Gross Fiscal Deficit is defined as the excess of total expenditure of the government
over the total non-debt creating receipts.
Fiscal deficit can be either „gross‟ or „net‟. The Central government makes capital disbursements as
loans to the different segments of the economy. In the developing countries, a large part goes as
loans to other sectors-States and local Governments, public sector enterprises and the like. Net fiscal
deficit can be arrived at by deducting net domestic lending from gross fiscal deficit .

(b) Budget Deficit Also referred to as simply „budget deficit‟ is that part of the government‟s deficit
which is financed through short-term borrowings. These short-term borrowings may be from the RBI
or from other sources.

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Normally, short-term borrowings from the RBI are through the net issuance of short-term treasury
bills (that is, ad-hoc and ordinary treasury bills) and by running-down the central government‟s cash
balances held by the RBI.
(c) Monetized deficit Also known as the „net reserve bank credit to the government‟, it is that part of
the government deficit which is financed solely by borrowing from the RBI.
Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is
the sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing
from the RBI) and rupee coins held exclusively by the RBI, net of Government‟s deposits with the
RBI.
This is different from the Traditional Budget deficit in two ways-

1. Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI
entities whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI.
2. Traditional Budget deficit includes only short-term sources of finance whereas Monetized
deficit includes long-term securities also.
3. (d) Primary Deficit Gross Primary deficit is defined as gross fiscal deficit minus net interest
payments. Net primary deficit, is gross primary deficit minus net domestic lending.
4. (e) Revenue deficit Revenue deficit is defined as the difference between revenue
expenditure and revenue receipts.
5. (f) Effective revenue Deficit Introduced in 2011-12, it is defined as revenue deficit minus
that revenue expenditure (in the form of grants), which goes into the creation of Capital Assets.
(g) Other measures of deficit Apart from these, there are various other types of measures of deficit
that are widely used internationally, like the Consolidated Public Sector Deficit, which is the
excess of expenditure over revenue for all the government entities; Operational Deficit, which is
the „inflation-corrected‟ deficit and is defined as Consolidated Public Sector Deficit minus inflation
rate times the debt stock; Structural deficit which removes the effects of temporary movements in
the variables from their long-run values, thereby providing an idea of the long-run position of the
country after removing the impact of temporary shocks; and others.
49. Depository Receipts
A Depository Receipt (DR) is a financial instrument representing certain securities (eg. shares,
bonds etc.) issued by a company/entity in a foreign jurisdiction. Securities of a firm are deposited
with a domestic custodian in the firm‟s domestic jurisdiction, and a corresponding “depository
receipt” is issued abroad, which can be purchased by foreign investors. DR is a
negotiable security (which means an instrument transferrable by mere delivery or by endorsement
and delivery) that can be traded on the stock exchange, if so desired.
DRs constitute an important mechanism through which issuers can raise funds outside their home
jurisdiction. DRs are issued for tapping foreign investors who otherwise may not be able to
participate directly in the domestic market. It is perceived as the beginning point of connecting with
the foreign investors (i.e. a stage before the actual listing the shares /securities in a foreign stock
exchange) or a way of introducing the company to a foreign investor. For investors, depository
receipt is a way of diversifying the risk, by getting exposure to a foreign market, but without the

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exchange rate risk as they are foreign currency denominated. Further, they feel more safe to invest
from their home location.
Depending on the location in which these receipts are issued they are called as ADRs or American
Depository Receipts (if they are issued in USA on the basis of the shares/securities of the domestic
(say Indian) company), IDR or Indian Depository Receipts (if they are issued in India on the basis
of the shares/securities of the foreign company; Standard Chartered issued the first IDR in India) or
in general as GDR or Global Depository Receipt.
Thus, ADR or GDR are issued outside India by a foreign depository on the back of an Indian
security deposited with a domestic Indian custodian in India (means a custodian or keeper of
securities- an Indian depository, a depository participant, or a bank- and having permission from the
securities market regulator, SEBI, to provide services as custodian).
„Depository Receipt’ means a foreign currency denominated instrument, whether listed on an
international exchange or not, issued by a foreign depository in a permissible jurisdiction on the
back of eligible securities issued or transferred to that foreign depository and deposited with a
domestic custodian and includes ‘global depository receipt’ as defined in section 2(44) of the
Companies Act, 2013.”
As per the Companies Act, 2013 "Global Depository receipt" means any instrument in the form of a
depository receipt created by a foreign depository outside India and authorised by a company
making an issue of such depository receipts while the "Indian Depository Receipt” means any
instrument in the form of a depository receipt created by a domestic depository in India and
authorised by a company incorporated outside India;
In India any company - whether private limited or public limited or listed or unlisted - can issue
DRs. However listed DRs enjoy some tax benefits.
ADR /GDR issues based on shares of a company are considered as part of Foreign Direct Investment
(FDI) in India, though it is an indirect way of holding shares.
Types of DRs
DRs are generally classified as under:

 Sponsored: Where the Indian issuer enters into a formal agreement with the foreign
depository for creation or issue of DRs. A sponsored DR issue can be further classified as:
 Capital Raising: The issuer issues new securities which are deposited with a domestic
custodian. The foreign depository then creates DRs abroad for sale to foreign investors. This
constitutes a capital raising exercise, as the proceeds of the sale of DRs go to the Indian issuer.
 Non-Capital Raising: In a non-capital raising issue, no fresh underlying securities are
issued. Rather, the issuer gets holders of its existing securities to deposit these securities with a
domestic custodian, so that DRs can be issued abroad by the foreign depository. This is not a capital
raising exercise for the Indian issuer, as the proceeds from the sale of the DRs go to the holders of
the underlying securities.
 Unsponsored: Unsponsored DRs are where there is no formal agreement between the
foreign depository and the Indian issuer. Any person other than the Indian issuer may, without any
involvement of the issuer, deposit the securities with a domestic custodian in India. A foreign
depository then issues DRs abroad on the back of such deposited securities. This is not a capital

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raising exercise for the Indian issuer, as the proceeds from the sale of the DRs go to the holders of
the underlying securities.
Based on whether a DR is traded in an organised market or in the over the counter (OTC) market,
the DRs can be classified as listed or unlisted.

 Listed: Listed DRs are traded on organised exchanges. The most common example of this
are American Depository Receipts (ADRs) which are traded on the New York Stock Exchange
(NYSE).
 Unlisted: Unlisted DRs are traded over the counter (OTC) between parties. Such DRs are
not listed on any formal exchange.
International experience
The most common DR programs internationally are:

 ADRs: DRs issued in United States of America (US) by foreign firms are usually referred to
as ADRs. These are further classified based on the detailed rules under the US securities laws. The
classification is based on applicable disclosure norms and consists of:
 Level 1: These programs establish a trading presence in the US but cannot be used for
capital raising. They may only be traded on OTC markets, and can be unsponsored.
 Level 2: These programs establish a trading presence on a national securities exchange in
the US but cannot be used for capital raising.
 Level 3: These programs can not only establish a trading presence on a national securities
exchange in the US but also help raise capital for the foreign issuer.
 Rule 144A: This involves sale of securities by a non-US issuer only to Qualified
Institutional Buyers (QIBs) in the US.
 Global Depository Receipts (GDRs): GDR is a collective term for DRs issued in non-US
jurisdictions and includes the DRs traded in London, Luxembourg, Hong Kong, Singapore.
Regulatory Regime for Depository Receipts in India
In India, the issue of Depository receipts were regulated by the “The Issue of Foreign Currency
Convertible Bonds and Ordinary Share (through Depository Receipt Mechanism) Scheme 1993
issued by the Ministry of Finance. The 1993 Scheme was formulated at a time when India‟s capital
markets were substantially closed to foreign capital and the domestic financial system was not well
developed. In the last two decades, the equity market has developed sophisticated market
infrastructure with active participation by both domestic and foreign investors and capital controls
have been eased substantially. In this period many aspects of the Indian legal and regulatory system
have evolved with substantial changes. These developments warranted a fresh look at the Scheme
governing the issue of Depository Receipts (DRs). Accordingly, based on the recommendations of
the MS Sahoo committee, Hon‟ble Finance Minister had announced in the 2014-15 Budget
Speech that he propose to “Liberalize the ADR/GDR regime to allow issuance of depository receipts
on all permissible securities”. Accordingly “The Depository Receipts Scheme, 2014" was formulated
and implemented from December 15, 2014.
50. Dumping

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When goods are exported to another country at a price which is less than what it is sold for in the
home country or when the export price is less than the cost of production in the home country, then
those goods have been dumped.
Home Market Price – Export Sales Price = Margin of dumping
The Department of Commerce in the Union Ministry of Commerce and Industry has an Anti-
dumping Unit which investigates cases where the domestic industry (domestic producers) provide
evidence that dumping has taken place by producers abroad. They also defend cases where
allegations of dumping are brought against Indian exporters by foreign governments.
There is a well-established process which is followed where questionnaires are sent to all
stakeholders and evidence is collected in a time-bound fashion to either prove or disprove that
dumping has taken place.
If the good is alleged to be dumped from a non-market country ( a country where there are
considerable distortions to the market through government subsidies ) then the Anti –dumping cell
will calculate what the “normal” price of the product should be in the home market. The normal
price will reflect the market price of the product had it been produced in the exporting country
without these subsidies. If necessary, the price of such a commodity in a similar market ( say a
neighbouring country at the same level of development as the exporting country) will be considered
as the normal price.
If there is evidence of dumping then the Government of India will levy an anti-dumping duty on that
commodity for a period of five years and will review the need for continuation of duty thereafter.
51. E-Biz
eBiz is one of the integrated services projects and part of the 31 Mission Mode Projects
(MMPs) under the National E-Governance Plan (NEGP) of the Government of India launched in
2006.
It aims to create a business and investor friendly ecosystem in India by making all business and
investment related regulatory services across Central, State and local governments available on a
single portal. Process of applying for Industrial License & Industrial Entrepreneur Memorandum are
made online on 24X7 basis through eBiz Portal.In February 2015 eleven Central Government
Services were added to eBiz portal. These services are required for starting a business in the country
- four services from Ministry of Corporate Affairs, two services of Central Board of Direct Taxes,
two services of Reserve Bank of India and one service each from Directorate General of Foreign
Trade, Employees‟ Provident Fund Organisation and Petroleum & Explosives Safety Organisation.
Prior to e-biz, a business-user availed these services either from the portal of respective
Ministry/Department or by physical submission of forms. With the integration of these services on
eBiz portal, he/she can avail all these services 24*7 online end-to-end i.e., online submission of
forms, attachments, payments, tracking of status and also obtain the license/permit from eBiz portal.
As on date, a total of 14 Central Services have been integrated through the e-Biz Platform.
The focus of eBiz is to improve the business environment in the country by enabling fast and
efficient access to Government-to-Business (G2B) services through an online portal. This will help
in reducing unnecessary delays in various regulatory processes required to start and run businesses.

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The vision of eBiz is to be the entry point for all individuals, businesses and organizations (local and
international) who would like to do business or have any existing business in India by creating a
one-stop-shop of convenient and efficient online G2B services to the business community, by
reducing the complexity in obtaining information and services related to starting businesses in India,
and dealing with licenses and permits across the business life-cycle.
This project aims at creating an investor-friendly business environment in India by making all
regulatory information – starting from the establishment of a business, through its ongoing
operations, and even its possible closure - easily available to the various stakeholders concerned. In
effect, it aims to develop a transparent, efficient and convenient interface, through which the
government and businesses can interact in a timely and cost effective manner, in the future.
eBiz is being implemented by Infosys Technologies Limited (Infosys) under the guidance and aegis
of Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry,
Government of India.
52. E-gold/ silver / metals
“e-gold” refers to electronic mode of holding gold and is essentially a financial instrument traded in
spot exchanges in India that enables its investors to invest their funds into gold in smaller
denominations and hold it in „demat‟ form” (i.e, in electronic form). Investors buying E-Gold and E-
Silver can liquidate the same or convert into physical gold. Such e-contracts are also available for a
few metals like copper, zinc, platinum, lead etc.
For eg. the contract specifications for e-gold at the spot exchange -National Spot Exchange
Limited (NSEL) may be seen here.
Such commodity contracts are also meant for retail investors who prefer investing in commodity
stocks with a view to gain benefits from the volatility in the respective commodities.
53. Eco-mark
Eco-mark is a voluntary labelling scheme for easily identifying environment friendly products. The
Eco-mark scheme defines as an environmentally friendly product, any product which is made, used
or disposed of in a way that significantly reduces the harm it would otherwise cause the
environment. The definition factors in all aspects of the supply chain, taking a cradle-to-grave
approach, which includes raw material extraction, manufacturing and disposal.
What sets eco-mark apart from other labels is that not only does the product have to meet strict
environmental requirements, but it also has to meet strict quality requirements.
The scheme is one of India‟s earliest efforts in environmental standards, launched in 1991, even
before the 1992 Rio Summit in which India participated. The scheme was launched by theMinistry
of Environment and Forests, and is administered by the Bureau of Indian Standards (BIS), which
also administers the Indian Standards Institute (ISI) mark quality label, a requirement for any
product to gain the Eco-mark label.
54. Effective Revenue deficit
Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. While revenue
deficit is the difference between revenue receipts and revenue expenditure, the present accounting
system includes all grants from the Union Government to the state governments/Union

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territories/other bodies as revenue expenditure, even if they are used to create assets. Such assets
created by the sub-national governments/bodies are owned by them and not by the Union
Government. Nevertheless they do result in the creation of durable assets.
According to the Finance Ministry, such revenue expenditures contribute to the growth in the
economy and therefore, should not be treated as unproductive in nature.
In short, Effective Revenue Deficit is the difference between revenue deficit and grants for creation
of capital assets. Effective Revenue Deficit signifies that amount of capital receipts that are being
used for actual consumption expenditure of the Government.
Effective revenue deficit has now become a new fiscal parameter and same is targeted to be
eliminated by the 31st of March 2015 and keep it at that level in the future, as per the Amendments
made in 2012 to Fiscal Responsibility and Budget Management Act.
However, the 14th Finance Commission observed that the concept of effective revenue deficit is not
recognised in the standard government accounting process. Under the Constitution, there are only
two categories of expenditure- expenditure on the revenue account and other expenditure which is
broadly expressed as capital expenditure. Hence, according to the Commission, the artificial carving
out of the revenue account deficit into effective revenue deficit to bring out that portion of grants
which is intended to create capital asset at the recipient level leads to an accounting problem and
raises the moral hazard issue of creative budgeting. The Commission recommend that the Union
Government should consider making an amendment to the FRBM Act to omit the definition of
effective revenue deficit from 1 April 2015.
55. Equalization
The concept of „equalization‟ is considered to be a guiding principle for fiscal transfers as it
promotes equity as well as efficiency in resource use. Equalization transfers aim at providing
citizens of every state a comparable standard of service provided their revenue effort is also
comparable. In other words, equalization transfers neutralize deficiency in fiscal capacity but not in
revenue effort. Under such an approach, transfers are determined on normative criteria in contrast to
gap filling based on projected historical trend of revenue and expenditure.
Twelfth Finance Commission made use of the concept and recommended „Equalisation Grants‟ to
achieve partial equalization of expenditure of services in two sectors, namely education and health
across different states. Since full equalisation of expenditure would have required steep step up in
grants, the Commission restricted itself to partial equalization. The grants were fixed on the basis of
two-stage normative measure of equalisation. In the first stage, states with low expenditure
preference (i.e. states which had lower expenditure on education/health as proportion of total
revenue expenditure) were identified and benchmarked to average expenditure on education/health
(as proportion of adjusted total revenue expenditure) incurred by respective groups, i.e., special and
general category states. In the second stage, states which had lower per capita expenditure than the
group average, even after adjustment made in first stage, were identified and grants to the extent of
15 per cent of the difference between per capita expenditure of the state on health and average per
capita expenditure of the group and to the extent of 30 percent of the difference between per capita
expenditure of the state on health and average per capita expenditure of the group were provided.
56. Escrow Account

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An escrow account in simple terms is a third party account. It is a separate bank account to hold
money which belongs to others and where the money parked will be released only under fulfilment
of certain conditions of a contract. The term escrow is derived from the French term “escroue”
meaning a scrap of paper or roll of parchment, an indicator of the deed that was held by a third party
till a transaction is completed. An escrow account is an arrangement for safeguarding the seller
against its buyer from the payment risk for the goods or services sold by the former to the latter. This
is done by removing the control over cash flows from the hands of the buyer to an independent
agent. The independent agent, i.e, the holder of the escrow account would ensure that the
appropriation of cash flows is as per the agreed terms and conditions between the transacting parties.
Escrow account has become the standard in various transactions and business deals. In India escrow
account is widely used in public private partnership projects in infrastructure. RBI has also permitted
Banks (Authorised Dealer Category I) to open escrow accounts on behalf of Non Resident
corporates for acquisition / transfer of shares/ convertible shares of an Indian company.
57. Finance Bill or Finance Act
Finance Bill is a secret bill introduced every year in Lok Sabha (Lower chamber of the Parliament)
immediately after the presentation of the Union Budget, to give effect to the financial proposals of
the Government of India for the immediately following financial year. Rule 219 of the Rules of
Procedure of Lok Sabha defines a Finance Bill to also include a Bill that gives effect to
supplementary (additional) financial proposals for any period.
The Finance Bill is presented at the time of presentation of the Annual Financial Statement before
Parliament, in fulfillment of the requirement of Article 110 (1)(a) of the Constitution, detailing the
imposition, abolition, remission, alteration or regulation of taxes proposed in the Budget. It is
through the Finance Act that amendments are made to the various Acts like Income Tax Act 1961,
Customs Act 1962 etc.
In short, Finance Bill can be considered as an umbrella Act. However, being an Act of the
Parliament, the various chapters of Finance Act independently also exist and is hence enforceable.
For instance, a Commodity Transaction Tax was imposed through Chapter VII of the Finance Act of
the year 2013. Similarly the service tax was introduced throughChapter V of the Finance Act of
1994.
When the proposals are introduced to the Parliament it is called as a Finance Bill. Once it is passed
by the Parliament and assented to by the President, Finance Bill becomes the Finance Act for that
year. (For instance, Union Budget 2015-16 for the Financial Year starting from April 2015 to March
2016, would be presented in February 2015 and would be accompanied by Finance Act, 2015
indicating the year (2015) in which the Act is passed.)
In election years there would usually be two Finance Bills – one by the outgoing Government
presented alongwith its interim budget or votes on account and another by the new Government
which is titled as Finance Bill (No. 2) of that year.
Finance Bill Vs Appropriation Bill
While the Finance Bill generally seeks approval of the Parliament for raising resources through
taxes, cess etc., an Appropriation Bill seeks Parliament's approval for the withdrawal from
the Consolidated Fund of India to meet the approved expenditures of the Government. For more
details on Appropriation Bill see here.

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Both Finance Bill and Appropriation Bill are money bills.
Finance Bill Vs Money Bill
A Finance Bill is a Money Bill but not all money bills are Finance Bills. Under Article 110(1) of the
Constitution a money bill is defined as follows…
110(1)…a Bill is deemed to be a Money Bill if it contains only provisions dealing with all or any of
the following matters, namely:
(a) the imposition, abolition, remission, alteration or regulation of any tax;
(b) the regulation of the borrowing of money or the giving of any guarantee by the Government of
India, or the amendment of the law with respect to any financial obligations undertaken or to be
undertaken by the Government of India;
(c) the custody of the Consolidated Fund or the Contingency Fund of India, the payment of moneys
into or the withdrawal of moneys from any such fund;
(d) the appropriation of moneys out of the Consolidated Fund of India;
(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India
or the increasing of the amount of any such expenditure;
(f) the receipt of money on account of the Consolidated Fund of India or the public account of
India or the custody or issue of such money or the audit of the accounts of the Union or of a State;
or
(g) any matter incidental to any of the matters specified in sub-clauses (a) to (f).
(2.) A Bill is not deemed to be Money Bill by reason only that it provides for the imposition of fines
or other pecuniary penalties, or for the demand or payment of fees for licences or fees for services
rendered, or by reason that it provides for the imposition, abolition, remission, alteration or
regulation of any tax by any local authority or body for local purposes….
Finance Bill is generally limited to Article 110(1)(a) & (g) - the imposition, abolition, remission,
alteration or regulation of any tax and any matter incidental thereto.
More about money bills may be seen in the Legislative Procedures of Lok Sabha and Rajya Sabha.
Features of Money Bills (including a Finance Bill)
Essentially Money bill including a Finance Bill has the following features:

 It can be introduced only in the Lok Sabha (lower chamber of the Parliament)
 The bill is placed in Rajya Sabha (Upper chamber of the Parliament) thereafter and Rajya
Sabha can return the Bill with or without its recommendations.
 In any case, the Bill has to be returned within a period of 14 days from the date of its receipt
by Rajya Sabha. Otherwise it is deemed to have been passed by both Houses at the expiration of the
said period in the form in which it was passed by Lok Sabha.
 If the bill is returned to Lok Sabha without recommendation, a message to that effect is
reported by the Secretary-General to the Lok Sabha if in session, or published in the Bulletin for the
information of the members of the Parliament, if it is not in session. The Bill shall then be presented
to the President for his assent.
 If the bill is returned to the Lok Sabha with amendments it has to be laid on the Table of the
House and taken up for consideration.

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 However, Lok Sabha is not bound to accept these amendments. Lok Sabha, under Article
109 of the Constitution, has the option to accept or reject all or any of the recommendations made by
Rajya Sabha. In any case, Lok Sabha has to inform Rajya Sabha about the status of their
recommendations, as to whether they have been accepted or not. It is not that Lok Sabha does not
accept any of the recommendations of Rajya Sabha. For instance, in the Income Tax Bill, 1961,
Rajya Sabha did recommend a number of amendments of substantial character, all of which were
agreed to by Lok Sabha.
 If Lok Sabha accepts any amendments as recommended by the Rajya Sabha, the Bill shall
be deemed to have been passed by both the Houses of the Parliament „with the amendments
recommended by the Rajya Sabha and accepted by the Lok Sabha‟ and a message to that effect has
to be sent to the Rajya Sabha.
 If Lok Sabha does not accept the recommendations of the Rajya Sabha, the Bill shall be
deemed to have been passed by both the Houses in the form in which it „was passed by the Lok
Sabha without any of the amendments recommended by the Rajya Sabha‟.
 In all other bills final passing of the bill happens at Rajya Sabha. In case of money bills,
final passing happens at Lok Sabha and then it is sent to the President for his assent.
 Unlike other bills, the President cannot return the Money Bill with his recommendations to
the Lok Sabha for reconsideration.
A defeat of Money bill in Lok Sabha is deemed political/parliamentary defeat of the government of
the day. Speaker has unquestionable powers to decide if a Bill is a Money Bill or not. It cannot be
questioned in any court. Rajya Sabha (Upper chamber of the Parliament)‟s dissent on a Money Bill
is of no political significance, as the Lok Sabha has overriding powers on Money Bills. Finance Bill
or any money bill cannot be referred to even joint Committees of the two Houses of the
Parliament (to resolve differences between the two Houses), as is in the case of other bills.
The Standing Committee of the Parliament also cannot scrutinize a Money Bill.
A Finance bill, being a money bill is normally passed without much debate as against the usual
procedurally lengthy and informed debates for other bills inside Parliament, and outside in standing
committees or among the experts and stake-holders and in the media. Hence, Finance Bill route is
generally not adopted to introduce important policy amendments with far reaching consequences, for
which usually a separate bill is preferred.
Can Finance Bill contain non-tax proposals?
Finance Bill/Act normally deals with income tax, customs, service tax, central excise, cess and
related aspects and is intended to help implement the Budget. Of late, Finance Bills are also used to
introduce one or two amendments in certain Acts such as UTI Act or FRBM Act, Securities
Contracts Regulation Act, Forward Contracts Regulation Act, Foreign Exchange Management Act,
Prevention of Money Laundering Act, etc. Such amendments are usually presented under the
Miscellaneous Chapter of the Finance Bill.
Finance Bill, 2015 came under criticism for incorporation of many policy amendments (like setting
up of a Public Debt Management Agency, Repeal of Government Securities Act, Amendments to
RBI Act etc to shift regulatory jurisdiction over various segments of the financial markets ) which
did not technically qualify to be in the Finance Bill. Many members of the Parliament demanded that
the bill be withdrawn and a new bill be introduced. Some argued that the inclusion of non-taxation
proposals in the Finance Bill, which is a Money Bill, would curtail the power of Rajya Sabha to

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amend those provisions. Consequent to this, Government withdrew some of those controversial
policy amendments from the Finance Bill, 2015. The debate in Lok Sabha on 30 April 2015 and the
Ruling of the Speaker in this regard may be seen.
Hon‟ble Speaker clarified that as per Rule 219 of the Rules of Procedure of Lok Sabha, the primary
object of a Finance Bill is to give effect to the financial proposals of the Government. At the same
time, this Rule does not rule out the possibility of inclusion of non-taxation proposals. Therefore, a
Finance Bill may contain non-taxation proposals also. But the fact is that a well-established practice
of Lok Sabha has been not to include non-taxation proposals in not only a Finance Bill but also other
Bills containing taxation proposals unless it is imperative to include such proposals on constitutional
or legal grounds. Therefore, Speaker ruled that every effort should be made to separate taxation
measures from other matters unless it is impossible on constitutional or legal grounds or some such
unavoidable reasons, to do so in a particular case.
Finance Bill Vs Financial Bill
Finance Bill is different from a “Financial Bill” which is defined under article 117(1) of the
Constitution. Money bills including Finance Bills are a subset of “Financial Bills”.
Whereas a Money Bill deals solely with matters specified in article 110(1) (a) to (g) of the
Constitution, a Financial Bill does not exclusively deal with all or any of the matters specified in the
said article. It may contain some other provisions also.
Financial Bills can be divided into two categories.

 In the first category are Bills which contain provisions attracting article 110(1)(a) to (f)
of the Constitution. They are categorized as Financial Bills under article 117(1) of the Constitution.
It is a Bill which has characteristics both of a Money Bill and an ordinary Bill. As in the case of a
Money Bill, firstly, it cannot be introduced in Rajya Sabha, and secondly, it cannot be introduced
except on the recommendations of the President. Except these two points of difference, a Financial
Bill in all other respects is just like any other ordinary Bill. That is other restrictions in regard to
Money Bills do not apply to this category of Bills. Financial Bill under article 117(1) of the
Constitution can be referred to a Joint Committee of the Houses.
 In the second category are those Bills which contain provisions which on enactment would
involve expenditure from the Consolidated Fund of India. Such Bills are categorised as Financial
Bills under article 117 (3) of the Constitution. Such Bills can be introduced in either House of
Parliament. However, recommendation of the President is essential for consideration of these Bills
by either House and unless such recommendation is received, neither House can pass the Bill. Such
Bills are more in the nature of ordinary Bills rather than the Money Bills and Financial Bills
mentioned earlier. The only point of difference between this category of Financial Bills and the
ordinary Bills is that such a Financial Bill, if enacted and brought into operation, involves
expenditure from the Consolidated Fund of India and cannot be passed by either House of
Parliament unless the President has recommended to that House the consideration of the Bill. In all
other respects this category of Bills is, just like ordinary Bills, so that such a Financial Bill can be
introduced in Rajya Sabha, amended by it or a joint sitting can be held in case of disagreement
between the Houses over such a Bill. There is, in other words, no limitation on the power of Rajya
Sabha in respect of such Financial Bills.
58. Financial Inclusion

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Access to safe, easy and affordable credit and other financial services by the poor and vulnerable
groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating
growth and reducing income disparities and poverty. In view of this, Financial Inclusion has been
identified as a key dimension of the overall strategy of “Towards Faster and More Inclusive Growth”
envisaged in the eleventh Five Year Plan (2007-12).
Defining financial inclusion is considered crucial from the viewpoint of developing a conceptual
framework and identifying the underlying factors that lead to low level of access to the financial
system. Review of literature suggests that there is no universally accepted definition of financial
inclusion.
Sometimes, it is easier to define a phenomenon, by stating what it is not, i.e., define financial
exclusion (rather than inclusion). Financial inclusion is generally defined in terms of exclusion from
the financial system. A target group is considered as financially excluded if they do not have access
to mainstream formal financial services such as banking accounts, credit cards, insurance, payment
services, etc.
Government of India had constituted a committee in 2006 under the chairmanship of Dr. C.
Rangarajan to study the pattern of exclusion from access to financial services across region, gender
and occupational structure and to identify the barriers confronted by vulnerable groups in accessing
credit and financial services and recommend the steps needed for financial inclusion. The committee
submitted its report in January 2008. The committee has given a working definition of financial
inclusion as;
“Financial inclusion may be defined as the process of ensuring access to financial services and
timely and adequate credit where needed by vulnerable groups such as weaker sections and low
income groups at an affordable cost.”
The various financial services identified by the Rangarajan Committee include credit, savings,
insurance and payments and remittance facilities. The full report of the Committee may be seen here.

The Committee on Financial Sector Reforms headed by Dr. Raghuram Rajan in its Report - A
Hundred Small Steps, proposed a paradigm shift in the way Government see inclusion. Instead of
seeing the issue primarily as expanding credit, which puts the cart before the horse, the Committee
urged a refocus to seeing it as expanding access to financial services, such as payments services,
savings products, insurance products, and inflation-protected pensions. According to the committee,
financial Inclusion, broadly defined, refers to universal access to a wide range of financial services at
a reasonable cost. These include not only banking products but also other financial services such as
insurance and equity products.
The essence of financial inclusion is in trying to ensure that a range of appropriate financial services
is available to every individual and enabling them to understand and access those services.
In order to achieve a comprehensive financial inclusion, a slew of initiatives have been taken by
Government of India, RBI and NABARD. Some of the important initiatives include; SHG-Bank
Linkage programme, opening of No Frills Accounts, mobile banking, Kisan Credit Cards
(KCC) Pradhan Mantri Jan Dhan Yojna etc.

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Benefits of Financial Inclusion
Financial inclusion enables good financial decision making through financial literacy and qualified
advice as also access to financial services for all, particularly the vulnerable groups such as weaker
sections, minorities, migrants, elderly, micro entrepreneurs and low income groups at an affordable
cost so as to enable them to
a) manage their finances on day to day basis confidently, effectively and securely;
b) Plan for the future to protect themselves against short term variations in income and expenditure
and for wealth creation and gaining from financial sector developments; and
c) deal with financial distress effectively thereby reducing their vulnerability to the unexpected.
The United Nations Capital Development Fund (UNCDF) investing in LDCs sees financial
inclusion, financial services for poor and low-income people and micro and small enterprises as an
important and integral component of the financial sector, each with its own comparative advantages,
and each presenting the market with a business opportunity.
Despite the marked progress made in the direction of financial inclusion, the problem of exclusion
still persist. For achieving the current policy stance of “inclusive growth” the focus on financial
inclusion is not only essential but a pre-requisite. And for achieving comprehensive financial
inclusion, the first step is to achieve credit inclusion for the disadvantaged and vulnerable sections of
our society.
59. Financial Closure
Financial closure is defined as a stage when all the conditions of a financing agreement are fulfilled
prior to the initial availability of funds. Financial closure is attained when all the tie ups with
banks/financial institutions for funds are made and all the conditions precedent to initial drawing of
debt is satisfied.
In a Public Private Partnership (PPP) project, financial closure indicates the commencement of the
Concession Period. The date on which financial closure is achieved is the appointed date which is
deemed to be the date of commencement of concession period.
In order to give a uniform interpretation for the term financial closure, Reserve Bank of India has
provided the following definition. For Greenfield projects, financial closure has been defined as "a
legally binding commitment of equity holders and debt financiers to provide or mobilise funding for
the project. Such funding must account for a significant part of the project cost which should not be
less than 90 per cent of the total project cost securing the construction of the facility".
60. Fiscal Consolidation
Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national
levels) to reduce their deficits and accumulation of debt stock.
Key deficits of government are the revenue deficit and the fiscal deficit. The gains from the
economic reforms introduced in India in early nineties could not be sustained for a much longer
period. Deficits were widening and by 1999-2000 the combined fiscal deficit (of centre and states)
almost reached levels of the crisis year „1990-91‟. Sustainability of debt too was becoming a major
issue. In December 2000, Government of India introduced the Fiscal Responsibility and Budget

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Management (FRBM) Bill in the Parliament as it was felt that institutional support in the form of
fiscal rules would help in setting the agenda for the future fiscal consolidation programme. The
Twelfth Finance Commission recommended in November 2004 that state governments too enact
their fiscal responsibility legislations. However, states like Karnataka, Kerala, Punjab, Tamil Nadu
and Uttar Pradesh had already enacted their fiscal responsibility legislation even before the
Commission recommended so.
61. Fiscal Responsibility and Budget Management (FRBM) Act
Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the
Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability,
better coordination between fiscal and monetary policy, and transparency in fiscal operation of the
Government.
The Government notified FRBM rules in July 2004 to specify the annual reduction targets for fiscal
indicators. The FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with
annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue
deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by
2008-09. It is the responsibility of the government to adhere to these targets. The Finance Minister
has to explain the reasons and suggest corrective actions to be taken, in case of breach.
FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for
the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to
generate revenue surplus in the subsequent years. The Act binds not only the present government but
also the future Government to adhere to the path of fiscal consolidation. The Government can move
away from the path of fiscal consolidation only in case of natural calamity, national security and
other exceptional grounds which Central Government may specify.
Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby,
making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of
the Central Government securities by the RBI after 2006, preventing monetization of government
deficit. The Act also requires the government to lay before the parliament three policy statements in
each financial year namely Medium Term Fiscal Policy Statement; Fiscal Policy Strategy Statement
and Macroeconomic Framework Policy Statement.
To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to
states through conditional debt restructuring and interest rate relief for introducing Fiscal
Responsibility Legislations (FRLs). All the states have implemented their own FRLs.
Background
Indian economy faced with the problem of large fiscal deficit and its monetization spilled over to
external sector in the late 1980s and early 1990s. The large borrowings of the government led to
such a precarious situation that government was unable to pay even for two weeks of imports
resulting in economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and
fiscal consolidation emerged as one of the key areas of reforms. After a good start in the early
nineties, the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98.
The Government introduced FRBM Act,2003 to check the deteriorating fiscal situation.
Implementation

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The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and states.
The States have achieved the targets much ahead the prescribed timeline. Government of India was
on the path of achieving this objective right in time. However, due to the global financial crisis, this
was suspended and the fiscal consolidation as mandated in the FRBM Act was put on hold in 2007-
08.The crisis period called for increase in expenditure by the government to boost demand in the
economy. As a result of fiscal stimulus, the government has moved away from the path of fiscal
consolidation. However, it should be noted that strict adherence to the path of fiscal consolidation
during pre crisis period created enough fiscal space for pursuing counter cyclical fiscal policy.
62. Foreign Portfolio Investor (FPI)
In India, the term “Foreign Portfolio Investor” refers to FIIs or their sub-accounts, or qualified
foreign investors (QFIs) who are permitted to hold upto 10% stake in a company.
Origin
The term FPI was defined to align the nomenclature of categorizing investments of foreign investors
in line with international practice. FPI stands for those investors who hold a short term view on the
company, in contrast to Foreign Direct Investors (FDI). FPIs generally participate through the stock
markets and gets in and out of a particular stock at much faster frequencies. Short term view is
associated often with lower stake in companies. Hence, globally FPIs are defined as those who hold
less than 10% in a company. In India, the hitherto existing closest possible definition to an FPI
was Foreign Institutional Investor.
Features of FPI
Portfolio Investment by any single investor or investor group cannot exceed 10% of the equity of an
Indian company, beyond which it will now be treated as FDI.
FIIs, Sub-Accounts and QFIs are merged together to form the new investor class, namely Foreign
Portfolio Investors, with an aggregate investment limit of 24% which can be raised by the Company
up to the applicable sectoral cap.
All existing FIIs and Sub Accounts can continue to buy, sell or otherwise deal in securities under the
FPI regime.
All existing Qualified Foreign Investors (QFIs) may continue to buy, sell or otherwise deal in
securities only till the period of one year from the date of notification of the FPI Regulation. In the
meantime, they have to obtain FPI registration.
Non-Resident Indians (NRIs) and Foreign Venture Capital Investors (FVCI) are excluded from the
purview of this definition.
Designated Depository Participants (DDPs) authorized by SEBI (as per prescribed norms) would
henceforth register FPIs on behalf of SEBI subject to fulfillment of KYC (Know Your Customer)
and due diligence norms. DDPs carry out necessary due diligence and obtain appropriate
declarations and undertakings before registering an entity as FPI. The DDPs are either Authorized
Dealer Category-1 bank authorized by Reserve Bank of India, or Depository Participant or a
Custodian of Securities registered with SEBI. Existing SEBI approved Qualified Depository
Participant who were registering the QFIs, but not meeting the DDP eligibility criteria, can operate
as DDP only for a period of one year.

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63. Foreign Institutional Investor (FII)
Foreign Institutional Investor (FII) means an institution established or incorporated outside India
which proposes to make investment in securities in India. They are registered as FIIs in accordance
with Section 2 (f) of the SEBI (FII) Regulations 1995. FIIs are allowed to subscribe to new securities
or trade in already issued securities. This is just one form of foreign investments in India, as may be
seen here:

However, FII as a category does not exist now. It was decided to create a new investor class called
"Foreign Portfolio Investor" (FPI) by merging the existing three investor classes viz. FIIs,Sub
Accounts and Qualified Foreign Investors. Accordingly, SEBI (Foreign Portfolio Investors)
Regulations, 2014 were notified on January 07, 2014 followed by certain other enabling notifications
by Ministry of Finance and RBI. In order to ensure the seamless transition from FII regime to FPI
regime, it was decided to commence the FPI regime with effect from June 1, 2014 so that the
requisites systems and procedures are in place before migration to the new FPI regime.

With the new FPI regime, which has commenced from 1 June 2014, it has now been decided to
dispense with the mandatory requirement of direct registration with SEBI and a risk based
verification approach has been adopted to smoothen the entry of foreign investors into the Indian
securities market.
FPIs have been made equivalent to FIIs from the tax perspective, vide central government
notification dated 22nd January 2014.
Who can get registered as FII?
Following foreign entities / funds are eligible to get registered as FII:

1. Pension Funds
2. Mutual Funds
3. Investment Trusts
4. Banks
5. Insurance Companies / Reinsurance Company
6. Foreign Central Banks
7. Foreign Governmental Agencies
8. Sovereign Wealth Funds
9. International/ Multilateral organization/ agency
10. University Funds (Serving public interests)
11. Endowments (Serving public interests)
12. Foundations (Serving public interests)
13. Charitable Trusts / Charitable Societies (Serving public interests)

Thus it may be seen that sovereign wealth funds (SWFs) are also regulated under FII
regulations only, and no separate regulation exists for SWFs. Further, following entities proposing
to invest on behalf of broad based funds, are also eligible to be registered as FIIs:

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 1. Asset Management Companies
2. Investment Manager/Advisor
3. Institutional Portfolio Managers
4. Trustee of a Trust
5. Bank

Foreign individuals can register as sub-accounts of FII to make investments in Indian securities.
What FIIs can do?
A Foreign Institutional Investor may invest only in the following:-

i. securities in the primary and secondary markets including shares, debentures and warrants
of companies unlisted, listed or to be listed on a recognised stock exchange in India; and
ii. units of schemes floated by domestic mutual funds including Unit Trust of India, whether
listed on a recognised stock exchange or not
iii. units of scheme floated by a collective investment scheme
iv. dated Government Securities
v. derivatives traded on a recognised stock exchange
vi. commercial paper
vii. Security receipts
viii. Indian Depository Receipt
64. Forward Markets Commission (FMC)
The Forward Markets Commission (FMC) is a statutory body set up under the Forward Contracts
(Regulation) Act, 1952. It functions under the administrative control of the Department of Economic
Affairs, Ministry of Finance since September 2013. (Before this, FMC used to function under
Department of Consumer Affairs, Ministry of Consumer Affairs, Food & Public Distribution, Govt.
of India. Vide Gazette Notification S.O. No. 2694 dated 6 September 2013 the work related to
Forward Markets Commission, Futures trading and The Forward Contracts (Regulation) Act of 1952
were shifted to Department of Economic Affairs (DEA) from Department of Consumer Affairs
(DCA).) FMC has its headquarters at Mumbai and one regional office at Kolkata. The Commission
comprises of a Chairman, and two Members. It is organized into five administrative divisions to
carry out various tasks. However, subsequent to the passing ofFinance Act 2015, FMC ceased to
exist and the responsibility of regulating commodity markets have been given to the securities
market regulator, SEBI
Forward Markets Commission provides regulatory oversight in order to ensure financial integrity
(i.e. to prevent systematic risk of default by one major operator or group of operators), market
integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply
conditions) and to protect & promote interest of consumers /non-members. The Forward Markets
Commission performs the role of a market regulator. After assessing the market situation and taking
into account the recommendations made by the Board of Directors of the Commodity Exchange, the
Commission approves the rules and regulations of the Exchange in accordance with which trading is
to be conducted. It accords permission for commencement of trading in different contracts, monitors

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market conditions continuously and takes remedial measures wherever necessary by imposing
various regulatory measures.
Merging of FMC with SEBI
In the Union Budget 2015-16, it was proposed that FMC be merged with the securities market
regulator - Securities and Exchange Board of India (SEBI). Amendments to the relevant Acts were
carried out through Chapter VIII of the Finance Act of 2015. With the passing of Finance Act 2015,
the Forward Contracts Regulation Act stands repealed.
65. GDP deflator
The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated
by dividing nominal GDP by real GDP and then multiplying by 100. Nominal GDP is the market
value of goods and services produced in an economy, unadjusted for inflation (It is the GDP
measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in
real output (It is the GDP measured at constant prices).
GDP Deflator = Nominal GDP x 100
Real GDP
Importance of GDP Deflator
There are other measures of inflation too like Consumer Price Index (CPI) and Wholesale Price
Index (or WPI); however GDP deflator is a much broader and comprehensive measure. Since Gross
Domestic Product is an aggregate measure of production, being the sum of all final uses of goods
and services (less imports), GDP deflator reflects the prices of all domestically produced goods and
services in the economy whereas, other measures like CPI and WPI are based on a limited basket of
goods and services, thereby not representing the entire economy (the basket of goods is changed to
accommodate changes in consumption patterns, but after a considerable period of time). Another
important distinction is that the basket of WPI (at present) has no representation of services sector.
The GDP deflator also includes the prices of investment goods, government services and exports,
and excludes the price of imports. Changes in consumption patterns or the introduction of new goods
and services or structural transformation are automatically reflected in the deflator which is not the
case with other inflation measures.
However WPI and CPI are available on monthly basis whereas deflator comes with a lag (yearly or
quarterly, after quarterly GDP data is released). Hence, monthly change in inflation cannot be
tracked using GDP deflator, limiting its usefulness.
66. Goods and Services Tax
Goods and Services Tax (GST) refers to the single unified tax created by amalgamating a large
number of Central and State taxes presently applicable in India. The latest constitution Amendment
Bill of December 2014 made in this regard, proposes to insert a definition of GST in Article 366 of
the constitution by inserting a sub-clause 12A. As per that, GST means any tax on supply of goods,
or services, or both, except taxes on supply of the alcoholic liquor for human consumption. And
here, services are defined to mean anything other than goods.
Implementation of GST is one of the major indirect tax reforms in India and is expected to be put in
place by April 2016.

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Context & Genesis of GST
Currently, fiscal powers between the Centre and the States are clearly demarcated in the Constitution
of India with almost no overlap between the respective domains. The Centre has the powers to levy
tax on the manufacture of goods (except alcoholic liquor for human consumption, opium, narcotics
etc.) while the States have the powers to levy tax on the sale of goods. In the case of inter-State
sales, the Centre has the power to levy a tax (the Central Sales Tax) but, the tax is collected and
retained entirely by the States. As for services, it is the Centre alone that is empowered to levy
service tax. Since the States are not empowered to levy any tax on the sale or purchase of goods in
the course of their importation into or exportation from India, the Centre levies and collects this tax
as additional duties of customs. This duty counterbalances excise duties, sales tax, State value added
tax (VAT) and other taxes levied on the like domestic product. Introduction of the GST would
require amendments in the Constitution so as to concurrently empower the Centre and the States to
levy and collect the GST.
The tax unification process has been going on in India for some time now. There have been efforts to
improve upon the Central excise duty and States sales tax regime starting with the introduction of
MODVAT in 1986. CENVAT which replaced MODVAT, at the central level, is a valued added tax
that provided credit on tax paid on inputs and it was an improvement over Central excise duty. At
state level, the state VAT was an improvement over sales tax regime. However, there have been
some problems associated with the present taxation system like; the CENVAT is confined only to
the manufacturing stage and it has not included several Central taxes. Similarly, the State VAT is
paid on the value of goods that includes the CENVAT already paid. It is thereby a “tax on tax”.
There is also burden of Central Sales Tax (CST) on the inter-state movement of goods. Further,
„setting-off‟ service tax has been a difficult proposition especially at the state level and taxes like
luxury tax, entertainment tax etc. are still out of the purview of State level VAT. The GST is thus an
overarching and overhauling effort in the Indian taxation system to unify the process and reduce the
multiplicity of taxes.
The idea of moving towards the GST was first mooted by the then Union Finance Minister Shri P.
Chidambaram in his Budget for 2006-07. Initially, it was proposed that GST would be introduced by
1st April, 2010. The Empowered Committee of State Finance Ministers (EC) which had formulated
the design of State VAT was requested to come up with a roadmap and structure for the GST. Joint
Working Groups of officials having representation of the States as well as the Centre were set up to
examine various aspects of the GST and draw up reports specifically on exemptions and thresholds,
taxation of services and taxation of inter-State supplies. Based on discussions within and between it
and the Central Government, the EC released its First Discussion Paper (FDP) on the GST in
November, 2009. This spells out the features of the proposed GST and has formed the basis for
discussion between the Centre and the States so far.
The GST implementation took a lot of time as some States have been apprehensive about
surrendering their taxation jurisdiction while others wanted to be adequately compensated.
In the Union Budget 2014-15 the Finance Minister indicated that the debate whether to introduce a
Goods and Services Tax (GST) must now come to an end. Following the Budget presentation in July
2014, the Constitution Amendment Bill was placed in the Parliament in December 2014.

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 Advantages of GST
Adam Smith, father of economics, has laid down four canons of taxation which are equality,
certainty, convenience and economy. A tax can be tested on these four criteria. The Good and
Services Tax (GST) qualifies for these four canons in a better manner. By amalgamating various
taxes into a single tax, GST would mitigate cascading or double taxation (tax upon tax situations) in
a major way and pave the way for a common national market. If the benefits are passed on fully, for
consumers, this would mean 25%-30% reduction in the prices they pay, as tax burden on goods
comes down[1]. This can reduce the overall costs of production and hence, introduction of GST
would also make Indian products more competitive in the domestic and international markets, with
beneficial effects on economic growth. According to the implementing agency, Central Board of
Excise and Customs (CBEC), this tax, because of its transparent character, would be easier to
administer. Union Budget 2014-15 admitted that GST will streamline the tax administration, avoid
harassment of the business and result in higher revenue collection, both for the Centre and the States.
GST also helps in better tax collections, better tax compliance, less cases of tax evasion and
litigation, more transparency, less harassment and corruption, according to Union Finance Minister,
Shri Arun Jaitly.

Salient Features of GST as proposed in India

The salient features of GST are as under:

i. GST comes under the broad spectrum of what is known as Value Added Tax which
provides for input credits and taxes only the value addition that happened in the process of
production / provision of service.
ii. GST would be applicable on supply of goods or services as against the present concept of
tax on the manufacture or on sale of goods or on provision of services.
iii. GST would be a destination based tax as against the present concept of origin based tax. i.e,
tax is imposed at the point of consumption.
iv. It would be a dual GST with the Centre and the States simultaneously levying it on a
common base. The GST, to be levied by the Centre would be called Central GST (CGST) and that to
be levied by the States would be called State GST (SGST). This is to protect the fiscal federalism of
this country as both the levels of government have the constitutional mandate to levy and collect
specific taxes. SGST would be applicable only if both the buyer and seller are located within the
state. CGST does not have any such restriction regarding location.
v. The Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all
inter-State supply of goods and services. There will be seamless flow of input tax credit from one
State to another. Proceeds of IGST will be apportioned among the States.
vi. CGST and SGST would be levied at rates to be mutually agreed upon by the Centre and the
States.
vii. Credit of CGST paid on inputs may be used only for paying CGST on the output and the
credit of SGST paid on inputs may be used only for paying SGST. In other words, the two streams
of input tax credit cannot be mixed except in specified circumstances of inter-State sales.

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viii. All goods and services, except alcoholic liquor for human consumption, will be brought
under the purview of GST (To include alcoholic liquor, which is a major source of revenue for the
states, another constitution amendment would be required). Crude Petroleum and some petroleum
products have also been Constitutionally brought under GST. However, it is provided that petroleum
and petroleum products shall not be subject to the levy of GST till notified at a future date on the
recommendation of the GST Council. The present taxes levied by the States and the Centre on
petroleum and petroleum products, i.e., Sales Tax/VAT, CST and Excise duty only, will continue to
be levied in the interim period.
ix. Tobacco and tobacco products would be subject to GST. In addition, the Centre could
continue to levy Central Excise duty and the States can levy sales tax / VAT.
x. Exports would be zero-rated.
xi. Import of goods or services would be treated as inter-State supplies and therefore, would be
subject to IGST in addition to the applicable customs duties.
xii. The list of exempted goods and services is attempted to be kept to a minimum and it would
be harmonized for the Centre and the States as far as possible.
xiii. A common threshold exemption would apply to both CGST and SGST. Dealers with a
turnover below it would be exempt from tax. A compounding option (i.e.to pay tax at a flat rate
without credits) would be available to small dealers below a certain threshold. The threshold
exemption and compounding provision would be optional.
xiv. GST rates will be uniform across the country. However, to give some fiscal autonomy to the
States and Centre, there will a provision of a narrow tax band over and above the floor rates of
CGST and SGST.
xv. It is proposed to levy a non-vatable additional tax of not more than 1% on supply of goods
in the course of inter-State trade or commerce, except on those goods which are specifically
exempted by the Central Government. This tax will be for a period not exceeding 2 years, or further
such period as recommended by the GST Council. This additional tax on supply of goods will be
assigned to the States from where such supplies originate. (Since GST is a destination based tax
where the consuming state would receive the revenue, this provision has been built in to compensate
the producer / manufacturing states, like say in case of petroleum products whose production
constitutes a substantial portion of revenue for a few states)
xvi. The laws, regulations and procedures for levy and collection of CGST and SGST would be
harmonized to the extent possible.
xvii. A Goods & Services Tax Council which will be a joint forum of the Centre and the States
will be created. This Council would function under the Chairmanship of the Union Finance Minister
and will have Ministers in charge of Finance/Revenue or Minister nominated by each of the States &
UTs with Legislatures, as members. Members have differential voting powers with votes of the
central government having 1/3rd weightage and rest 2/3rd with states. Decisions can be taken only if
it has more than 3/4th majority (i.e. Votes in Favour = 1/3 *Votes in favour by Center + [(2/3 *
1/No. of states present and Voting)*Votes in favour by States]). Such decisions will be immune from
the deficiencies in the constitution of the GST council or appointment of its members or any
procedural irregularity. The Council will make recommendations to the Union and the States on
important issues like
1. taxes, cesses and surcharges levied by the Union, States and local bodies which may
be subsumed in the GST

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 2. the goods and services that may be subjected to or exempted from GST
3. apportioning of the revenue between center and states in case of IGST
4. Framing of model GST laws
5. deciding the principles that govern the determination of place of supply, based on
GST laws
6. decision on threshold limits of turnover below which goods and services may be
exempted from GST,
7. creating special provisions for states like Jammu& Kashmir, North Eastern States
including Assam, and hilly states like Himachal Pradesh and Uttarakhand,
8. decision on the date on which GST will be levied on crude petroleum, high speed
diesel, petrol, natural gas, and ATF.
9. tax rates including the floor rates and bands, special rates /rates for a specified period
to raise additional resources during a natural calamity or disaster
10. framing dispute resolution modalities.
xviii. GST levied and collected by Union Govt. except the tax apportioned with states in case of
IGST shall also be distributable between Union and States as per the recommendations of the
Finance Commission.
xix. Union Government cannot impose surcharges (which usually goes to the consolidated fund
of India) on articles which are covered under GST laws.
xx. Centre will compensate States for loss of revenue arising on account of implementation of
the GST for a period up to five years. (The compensation will be on a tapering basis, i.e., 100% for
first three years, 75% in the fourth year and 50% in the fifth year).

Taxes subsumed in GST

GST would replace the following taxes currently levied and collected by the Centre:

1. Central Excise duty

2. Excise Duty levied under the Medicinal and Toilet Preparations (Excise Duties) Act 1955,
3. Additional Excise Duties (Goods of Special Importance)
4. Additional Excise Duties (Textiles and Textile Products)
5. Additional Customs Duty (commonly known as Countervailing duties or CVD)
6. Special Additional Duty of Customs (SAD)
7. Service Tax
8. Cesses and surcharges in so far as they relate to the supply of goods and services
9. Taxes on the sale or purchase of newspapers and on advertisements published therein.
State taxes that would be subsumed within the GST are:

1. State VAT/ Sales Tax

2. Central Sales Tax (levied by the Center and collected by the States)

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3. Luxury Tax
4. Octroi
5. Entry Tax i.e, taxes on the entry of goods into a local area for consumption, use or sale
therein. (other than those in lieu of octroi)
6. Purchase Tax
7. Entertainment Tax which are not levied by the local bodies; i.e. panchayats, municipalities
and District councils of autonomous districts can impose taxes on entertainment and amusements
8. Taxes on general advertisements
9. Taxes on lotteries, betting and gambling
10. State cesses and surcharges insofar as they relate to supply of goods or services
GST does not subsume stamp duties and custom duties.

Constitution Amendment Bills of 2011 & 2014

The assignment of concurrent jurisdiction to the Centre and the States for the levy of GST would
require a unique institutional mechanism that would ensure that decisions about the structure, design
and operation of GST are taken jointly by the two. For it to be effective, such a mechanism also
needs to have Constitutional force.
To address all these and other issues, the Constitution (115th Amendment) Bill was introduced in the
Lok Sabha on 22.03.2011. The Bill was referred to the Parliamentary Standing Committee on
Finance for examination and based on its report, certain official amendments were prepared.
Subsequent to general elections and formation of a new Government, the Union Cabinet under Prime
Minister Shri Narendra Modi approved on 17th December, 2014 the proposal for replacing the
earlier bill of the erstwhile government with a similar bill alongwith some more amendments -The
Constitution (122nd Amendment) (GST) Bill, 2014- to facilitate the introduction of GST. The Union
Finance Minister Shri Arun Jaitley introduced the said Bill in the Lok Sabha on 19th December
2014.
Constitution Amendment Bill confers concurrent powers to Parliament and the state Legislatures to
make laws governing GST.

Way forward
The Constitution Amendment Bill needs to be passed by a two-third majority in both Houses of
Parliament and subsequent ratification by at least half of the State Legislatures. After passage of the
Bill by both Houses of Parliament, ratification by State legislatures and receipt of assent by the
President, the process of enactment would be complete.
Suitable legislation for the levy of GST (Central GST Bill and State GST Bills) drawing powers
from the Constitution can be introduced in Parliament or the State Legislatures only after the
enactment of the Constitution Amendment Bill. Unlike the Constitutional Amendment, the GST
Bills would need to be passed by a simple majority. Obviously, the levy of the tax can commence
only after the GST law has been enacted by the respective legislatures. Also, unlike the State VAT,
the date of commencement of this levy would have to be synchronized across the Centre and the

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 States. This is because the IGST model cannot function unless the Centre and all the States
participate simultaneously.

Implementation Progress
Every Union Budget since its introduction of the idea in 2006-07 has been expressing the
Government's commitments to go ahead with the GST implementation. GST is expected to be
implemented by April 2016.
The Central Board of Excise and Customs (CBEC) is involved with the drafting of GST law and
procedures, particularly the CGST and IGST law, which will be exclusive domain of the Central
Government. CBEC also addresses the implementation challenges. A GST Cell has been created
within CBEC which functions under the Joint Secretary TRU –II.

In 2013, four Committees were constituted by the Empowered Committee of State Finance Ministers
(EC) to deal with the various aspects of work relating to the introduction of GST. The Committees
are:

i. The Committee on the Problem of Dual Control, Threshold and Exemptions in GST
Regime;
ii. The Committee on Revenue Neutral Rates for State GST & Central GST and Place of
Supply Rules (A Sub-Committee has been constituted to examines issues relating to the Place of
Supply Rules);
iii. The Committee on IGST & GST on Imports (A Sub- Committee was set up to examine
issues pertaining to IGST model);
iv. The Committee to draft model GST Law (Three Sub-Committees were constituted to draft
various aspects of the model law).
The GST law is still evolving and the dialogue continues between the Centre and the States on
related issues. A number of procedural, legal and administrative issues relating to GST are under
active discussions in various Committees / Sub-committees constituted by the EC and in various
Groups constituted by the CBEC.
67. Green GDP
Green GDP is a term used generally for expressing GDP after adjusting for environmental damage.
The System of National Accounts (SNA) is an accounting framework for measuring the economic
activities of production, consumption and accumulation of wealth in an economy during a period of
time. When information on economy's use of the natural environment is integrated into the system of
national accounts, it becomes green national accounts or environmental accounting.
The process of environmental accounting involves three steps viz. Physical accounting; Monetary
valuation; and integration with national Income/wealth Accounts. Physical accounting determines
the state of the resources, types, and extent (qualitative and quantitative) in spatial and temporal
terms. Monetary valuation is done to determine its tangible and intangible components. Thereafter,

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the net change in natural resources in monetary terms is integrated into the Gross Domestic Product
in order to reach the value of Green GDP.
The process envisaged by Ministry of Environment and Forest does not require any change in the
core System of National Accounts (SNA), and is achieved by establishing linkages between the two
through a system of satellite accounts (called Satellite accounts as it adds new information to core
accounts). For example, Environmental Satellite Accounts link measures of emissions, material use,
costs of remediation and environmental taxes to measures of economic activity. Satellite accounts
are a framework that enables attention to be focused on a certain field or aspect of economic and
social life. They are produced in the context of national accounts but are more flexible as they allow
concepts, definitions, accounting rules and classifications to be changed, where it improves analysis.
68. Grievances Against Misleading Advertisements (GAMA)
Grievances Against Misleading Advertisements (GAMA) is a dedicated online web portal
established by Department of Consumer Affairs, Government of India in March 2015 to enable
consumers to register their grievances on misleading advertisements which makes claims that are
dubious or unverified. GAMA serves as a central registry for complaints against misleading
advertisements.

Any consumer in any part of the country can register on this site and can lodge a complaint against
misleading advertisements. A well-defined protocol then ensures that the complaints are taken up
with the relevant authorities in the state or the central government concerned and appropriate action
taken. The portal also enables the consumer to be informed of the action taken. The portal will be
linked to all state authorities concerned, select voluntary consumer organizations in the country and
the sector regulators in the Government of India.
69. Gross Budgetary Support (GBS)
The Gross Budgetary Support (GBS) is an important component of the Central Plan of the
Government of India.
The Government's support to the Central plan is called the Gross Budgetary Support. The GBS
includes the tax receipts and other sources of revenue raised by the Government. In the recent years
the GBS has been slightly more than 50% of the total Central Plan. The Planning Commission
aggregates and puts forward the demand by various administrative Ministries in a consolidated form
to the Finance Ministry for the budgetary support required from the Government. This demand is
vetted and then approved by the Finance Ministry. The share of the GBS in Central Plan has been
rising since 2008-09.
70. Gross Value Added (GVA) at basic prices and GVA at Factor Costs
Gross Value Added (GVA) Vs. GDP
Gross value added (GVA) is defined as the value of output less the value of intermediate
consumption. Value added represents the contribution of labour and capital to the production
process. When the value of taxes on products (less subsidies on products) is added, the sum of value
added for all resident units gives the value of gross domestic product (GDP). Thus, Gross Domestic
Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without

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discounting for capital consumption or depreciation) in all the sectors of that economy during the
said year after adjusting for taxes and subsidies.
Introduction of GVA at basic prices in India
In India, GDP is estimated by Central Statistical Office (CSO). Under the Fiscal Responsibility and
Budget Management Act 2003 and Rules thereunder, Ministry of Finance uses the GDP numbers (at
current prices) to peg the fiscal targets. For this purpose, Ministry of Finance makes their own
projections about GDP for the coming two years while specifying future fiscal targets.
In the revision of National Accounts statistics done by Central Statistical Organization (CSO)
in January 2015, it was decided that sector-wise wise estimates of Gross Value Added (GVA) will
now be given at basic prices instead of factor cost. In simple terms, for any commodity the basic
price is the amount receivable by the producer from the purchaser for a unit of a product minus
any tax on the product plus any subsidy on the product. However, GVA at basic prices will include
production taxes and exclude production subsidies available on the commodity. On the other hand,
GVA at factor cost includes no taxes and excludes no subsidies and GDP at market prices include
both production and product taxes and excludes both production and product subsidies.
The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP at market prices
and GVA at basic prices is shown below:

GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product subsidies

Gross value added at basic prices is defined as output valued at basic prices less intermediate
consumption valued at purchasers‟ prices. Here the GVA is known by the price with which the
output is valued. From the point of view of the producer, purchasers‟ prices for inputs and basic
prices for outputs represent the prices actually paid and received. Their use leads to a measure of
gross value added that is particularly relevant for the producer.
Gross value added at producers’ prices is defined as output valued at producers‟ prices less
intermediate consumption valued at purchasers‟ prices. In the absence of VAT, the total value of the
intermediate inputs consumed is the same whether they are valued at producers‟ or at purchasers‟
prices, in which case this measure of gross value added is the same as one that uses producers‟ prices
to value both inputs and outputs. It is an economically meaningful measure that is equivalent to the
traditional measure of gross value added at market prices. However, in the presence of VAT, the
producer‟s price excludes invoiced VAT, and it would be inappropriate to describe this measure as
being at “market” prices.
By definition, the value of output at producers‟ prices exceeds that at basic prices by the amount, if
any, of the taxes on products, less subsidies on products so that the two associated measures of gross
value added must differ by the same amount.
Gross value added at factor cost is not a concept used explicitly in the SNA. However, it can easily
be derived from either of GVA at basic prices or GVA at producer's price by subtracting the value of
any taxes on production and adding subsidies on production, payable out of gross value added as
defined. For example, the only taxes on production remaining to be paid out of gross value added at
basic prices consist of “other taxes on production” which are not charged per unit. These consist

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mostly of current taxes (or subsidies) on the labour or capital employed in the enterprise, such as
payroll taxes or current taxes on vehicles or buildings. Gross value added at factor cost can thus be
derived from gross value added at basic prices by subtracting other taxes on production and adding
subsidies on production.
Deriving GDP from the GVA
From these various concepts of GVA, one can arrive at an estimate of GDP in the following manner:

a. GDP = the sum of the gross value added at producers‟ prices, plus taxes on imports, less
subsidies on imports, plus non-deductible VAT.
b. GDP = the sum of the gross value added at basic prices, plus all taxes on products, less all
subsidies on products.
c. GDP = the sum of the gross value added at factor cost plus all taxes on products, less all
subsidies on products, plus all other taxes on production, less all other subsidies on production.
71. Guillotine
Each year, after the Budget is presented in the floor of the Lok Sabha by the Finance Minister, the
House has the opportunity to discuss the financial proposals contained in it. The process of
deliberations on the Budget sets off with a general discussion followed by the Vote on Account,
debating and voting on the Demands for Grants and finally, consideration and passing of the
Appropriation and Finance Bills.
Guillotine refers to the exercise vide which the Speaker of the House, on the very last day of the
period allotted for discussions on the Demands for Grants, puts to vote all outstanding Demands for
Grants at a time specified in advance. The aim of the exercise is to conclude discussions on financial
proposals within the time specified.
All outstanding Demands for Grants must be voted by the House without discussions once the
guillotine is invoked.
Once the pre-specified time for invoking the guillotine is reached, the member who is in possession
of the house at that point in time, is requested by the Speaker to resume his or her seat following
which Demands for Grants under discussion are immediately put to vote. Thereafter, all outstanding
Demands are guillotined.
Invoking the guillotine ensures timely passage of the Finance Bill and the conclusion of debates and
discussions on the year‟s Budget.
72. Headline inflation
In general, reflects the rate of change in prices of all goods and services in an economy over a period
of time. Every country has its own set of commodity basket to track inflation. While some countries
use Wholesale Price Index (WPI) as their official measure of inflation and some others use the
Consumer Price Index (CPI). The International Monetary Fund (IMF) statistics reveals that, while 24
countries use WPI as the official measure to track inflation, 157 countries use CPI. Conceptually
these two measures of inflation stress different stages of price realization as well as composition:
while WPI measures the change in price level at wholesale market, CPI measures the change in price
level at retail level.

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In India, headline inflation is measured through the WPI – which consists of 676 commodities
(services are not included in WPI in India). It is measured on year-on-year basis i.e., rate of change
in price level in a given month vis a vis corresponding month of last year. This is also known as
point to point inflation.
Apart from WPI, CPI is also computed to capture inflation in India. In particular, four categories of
CPI are computed – for Industrial Workers (CPI-IW), Urban Non-Manual Employees (CPI-UNME),
Agricultural Labourers (CPI-AL) and Rural Labourers (CPI-RL). However, WPI is considered as the
preferred measure of headline inflation due to its wider coverage. To overcome this lacuna, the
Central Statistical Organization (on 18th February 2011) has introduced a new series of CPI (with
2010=100 as the base year), which would be calculated for all-India as well as States/UTs – with
separate categorization for rural, urban and combined (rural + urban).
73. Hindu rate of growth
The term „secular‟ rate of growth (which connotes long term trend growth) is well established in
literature of development economics. (It is also used in the sense of a religious belief, practice and
process of the State). In distinctive contrast, „Hindu‟ rate of growth was coined to refer to the
phenomenon of sluggishness in growth rate of Indian economy (3.5 per cent observed persistently
during 1950s through 1980s).
The term, which owes to Professor Raj Krishna, Member, Planning Commission, captured popular
imagination and was used synonymously to describe inadequacy of India‟s growth performance.
However, of late, the term has lost its relevance and appeal as economic reforms and liberalization in
India since 1990s manifested in tripling of growth rate of Indian economy from this paltry level.
74. Import Tariffs, Open General License, Restricted List and Negative List
Import Tariff: A tariff is any tax or fee collected by a government. An import tariff is a tax imposed
on goods to be imported. Though tariff is used in a non-trade context, it is commonly applied to a tax
on imported goods.
There are two broad ways in which tariffs are normally levied namely, specific tariffs and ad
valorem tariffs. A specific tariff is levied as a fixed charge per unit of imports. Whereas an ad
valorem tariff is levied as a fixed percentage of the value of the imported items/commodity.
Open General License (OGL): As per ITC (HS) classification, there is no terminology called Open
General License (OGL). However, in India, during the EXIM policies of 70s and 80s the freely
imported/exported items were still used to be monitored based on the licence issued under OGL.
Today OGL is no more required. All these items and the sensitive import items are monitored
by Directorate General of Commercial Intelligence and Statistics (DGCI&S), Kolkata, without
the need of a separate licence. As on date, importability or the exportability of items in India is
classified into three categories namely, (a) Prohibited items, (b) Restricted items including items
reserved for STEs or requiring permission etc., and (c) Freely importable.
Restricted List and Negative List: In the context of export and import, negative list normally
implies the list of items which are not permitted to be freely imported or exported. However, in the
context of Free Trade Agreement (FTA), the "negative list" would mean that barring the services and
goods listed, everything else could be taxed, making the exempted goods and services cheaper. In
other words, item on which no concessions (no reduction in import tariffs) would be allowed.

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Therefore, an articulated negative list will clearly bring out the intentions of the policy makers as to
what precisely is outside the tax concession net.
75. Index of Eight Core Industries
The Office of the Economic Adviser (OEA) in the Department of Industrial Policy and Promotion
(DIPP), Government of India compiles and releases the production index of core industries.

The rationale of the Index of Core Industries

The Central Statistics Office (CSO) of the Government of India brings out monthly Index of
Industrial Production (IIP). Industrial Production in the IIP comprises three distinct groups of
industry, (a) Mining, (b) Manufacturing and (c) Electricity. The quick estimate of IIP pertaining to a
month is released after approximately six weeks (on 12th of the Month, or if 12th is a Gazetted
Holiday, on the previous working day).
The Eight Core Industries are Coal, Cement, Electricity, Crude Oil, Refineryproducts, Steel,
Fertilizers and Natural Gas, which have the following weights in IIP.
The Index of Eight Core Industries is released on the last day of the month following the month for
which the Index pertain. If the last day of the month is a Gazetted Holiday, then it is released on the
next working day. The Index of Eight Core Industries released about two weeks prior to the IIP
release provides an advance indication of performance of more than one third of the IIP basket.
76. Inflation Targeting In India
Inflation targeting is a monetary policy strategy used by Central Banks for maintaining price level at
a certain level or within a range. It indicates the primacy of price stability as the key objective of
monetary policy. The argument for price stability stems from the fact that rising prices create
uncertainties in decision making, adversely affecting savings and encouraging speculative
investments. Inflation targeting brings in more predictability and transparency in deciding monetary
policy. If the central banks could ensure price stability, households and companies can plan ahead,
negotiating wages on the basis of expecting low and stable inflation. Various advanced economies
including United States, Canada and Australia have been using inflation targeting as a strategy in
their monetary policy framework. The case for inflation targeting has been made in India as the
country has been experiencing a high level of inflation till recently.
The Reserve Bank of India and Government of India signed a Monetary Policy Framework
Agreement on 20th February 2015. As per terms of the agreement, the objective of monetary policy
framework would be primarily to maintain price stability, while keeping in mind the objective of
growth. The monetary policy framework would be operated by the RBI. RBI would aim to contain
consumer price inflation within 6 percent by January 2016 and within 4 percent with a band of (+/-)
2 percent for all subsequent years.
The central bank would be seen as failing to meet the targets, if retail inflation is more than 6 per
cent for three consecutive quarters from 2015-16 and less than 2 per cent for three
consecutive quarters from 2016-17. If this happens, RBI will have to explain the reason for its
failure to meet as well as give a timeframe within which it will achieve it. RBI will publish the
operating targets as well as operating procedure for the monetary policy though which the target for

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the monetary policy will be achieved. The RBI will also be required to bring a document every six
months to explain the sources of inflation and forecast for inflation for next 6-18 months.
RBI has been using headline CPI (Combined) inflation as the nominal anchor for monetary policy
stance from April 2014 onwards.
77. Infrastructure Investment Trust (InvITs)
Infrastructure Investment Trusts (InvITs) are mutual fund like institutions that enable investments
into the infrastructure sector by pooling small sums of money from multitude of individual investors
for directly investing in infrastructure so as to return a portion of the income (after deducting
expenditures) to unit holders of InvITs, who pooled in the money.
For these purposes, Infrastructure is as defined by Ministry of Finance vide its notification
dated October 07, 2013 and would include any amendments/additions made thereof.
InvITs can invest in infrastructure projects, either directly or through a special purpose vehicle
(SPV). In case of Public Private Partnership (PPP) projects, such investments can only be through
SPV.
InvITs are regulated by the securities market regulator in India- Securities and Exchange Board of
India (SEBI).
SEBI notified SEBI (Infrastructure Investment Trusts) Regulations, 2014 on September 26, 2014,
providing for registration and regulation of InvITs in India. The objective of InvIT is to facilitate
investment into the infrastructure sector in India.
InvITs are very much similar to the Real Estate investment Trusts (REITs) in structure and
operations. InvITs are modified REITs designed to suit the specific circumstances in India.
Types of InviTs
Two types of InvITs have been allowed, one which is allowed to invest mainly in completed and
revenue generating infrastructure projects and other which has the flexibility to invest in
completed/under-construction projects. While the former has to undertake a public offer of its units,
the latter has to opt for a private placement of its units. Both the structures are required to be listed.
78. Infrastrucuture Debt Funds (IDFs)
The term Debt Fund is generally understood as an investment pool which invests in debt securities of
companies. However, an Infrastructure Debt Fund (IDF) registered in India refers to a company or a
Trust constituted for the purpose of investing in the debt securities of infrastructure companies
or public private partnership projects.
Thus in contrast to the general understanding of the term, IDF does not refer to a Scheme floated by
a mutual fund or such other organizations but to the Company or Trust who is investing in debt
securities. An IDF can float various Schemes for financing infrastructure projects.

Purpose
IDF is a distinctive attempt to address the issue of sourcing long term debt for infrastructure projects
in India. Union Finance Minister in his Budget speech for 2011-12 had announced setting up of IDFs
to accelerate and enhance the flow of long term debt in infrastructure projects. IDFs are meant to

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1. supplement lending for infrastructure projects
2. provide a vehicle for refinancing the existing debt of infrastructure projects presently
funded mostly by commercial banks

Structure& Regulation
These Funds can be established by Banks, Financial Institutions and Non- banking Financial
Companies (NBFCs).

IDFs can be set up either as a company or as a trust. A trust based IDF would normally be a Mutual
Fund (MF) that would issue units while a company based IDF would normally be a form of NBFC
that would issue bonds. Further, a trust based IDF (MF) would be regulated by SEBI; and an IDF set
up as a company (NBFC) would be regulated by RBI.
79. Internal and Extra Budgetary Resources (IEBR)
IEBR is an important part of the Central plan of the Government of India and constitutes the
resources raised by the PSUs through profits, loans and equity.
80. Jhum (Shifting) Cultivation
Jhum (Shifting) cultivation is a primitive practice of cultivation in States of North Eastern Hill
Region of India and people involved in such cultivation are called Jhumia. The practice involves
clearing vegetative/forest cover on land/slopes of hills, drying and burning it before onset of
monsoon and cropping on it thereafter. After harvest, this land is left fallow and vegetative
regeneration is allowed on it till the plot becomes reusable for same purpose in a cycle. Meanwhile,
the process is repeated in a new plot designated for Jhum cultivation during next year. Initially, when
Jhum cycle was long and ranged from 20 to 30 years, the process worked well. However, with
increase in human population and increasing pressure on land, Jhum cycle reduced progressively (5-
6 years) causing problem of land degradation and threat to ecology of the region at large.
Watershed Development Project in Shifting Cultivation Areas (WDPSCA) was taken up in seven
States of North Eastern Region with 100% SCA as per directions of National Development Council
(NDC) in 1994-95. Recently, under National Afforestation Programme, problem of jhum cultivation
was given special focus. Mid-term appraisal of Eleventh Five Year Plan mentions that as per report
of Ministry of Rural Development, only 6.5 per cent of households have been reportedly engaged in
shiting cultivation in the country. The percentage of area under jhum cultivation is 9.5 in North-
Eastern region, while it is 0.5 per cent for central tribal belt.
81. Kisan Vikas Patra (KVP)
Kisan Vikas Patra (KVP) is a saving instrument launched by the Government for individual savers,
wherein invested money doubled during the maturity period. This savings scheme was first launched
by the Government on 1 April, 1988 and was distributed through post offices. It was discontinued in
2011 and later reintroduced in 2014.
KVP is considered a part of the National Small Savings Fund. (for details on the accounting of the
funds thus collected, please see the write up on National Small Savings Fund). In Hindi, Kisan
stands for farmers, Vikas for development and Patra for certificate.

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However, as the name might suggest, this is not a scheme intended only for farmers nor is the raised
money used only for farmers' development. In fact, the Scheme does not distinguish between rural or
urban investors. Rather, it had an urban bias. Further, the money raised through KVP is invested in
central and state government securities, thus financing the respective Governments indirectly.
In KVP, a single holder type certificate was issued to an adult for himself or on behalf of a minor, or
jointly to two adults. When introduced initially, it was available in denominations of INR. 100/-,
500/-, 1000/-, 5000/-, 10,000/-, in all Post Offices and INR. 50,000/- in all Head Post Offices.
Further, there was no limit on investment under KVP. In addition, it was easily transferrable like
a bearer instrument. It had longer maturity than a term deposit and had higher interest rate than a
government security of a comparable maturity. The maturity period of the scheme, when launched,
was 5 ½ years and the money invested doubled on maturity. However, KVP is not a tax saving
instrument as it does not offer any income tax exemption.
The scheme was very popular among the investors and the percentage share of gross collections
secured in KVP was in the range of 9% to 29% against the total collections received under all
National Savings Schemes in the country. Gross collections under the scheme in the year 2010-11
were Rs. 21631.16 crores which was 9% of the total gross collections during the year.
However, the Committee set up for comprehensive review of National Small Savings Fund (NSSF)
headed by Smt. Shyamala Gopinath, Deputy Governor, Reserve Bank of India which submitted
its report in June 2011 had recommended discontinuation of Kisan Vikas Patra. Committee observed
as follows:
"The continued popularity of both KVP and National Savings Certificate (NSC) among the urban
population who are not all small savers could be prompted by an incentive to avoid tax. As
compared to NSC, KVP is more popular as it is a bearer-like certificate due to its ease of transfer. It
also has an in built liquidity due to the regulated premature closure facility offered in the scheme.
The absence of Tax deduction at Source (TDS) and ceiling on investment, tax benefits on NSC and
higher than market rate of return have posed considerable fiscal costs to the Government. The
deposits under both KVP and NSC can be pledged as a security with financial intermediaries,
including banks. The Rakesh Mohan Committee had recommended that both these instruments are
quite expensive in terms of the effective cost to the Government and felt that these instruments should
be discontinued to ensure an equitable and harmonious tax treatment across the full spectrum of
medium term savings schemes. The Committee endorses this recommendation. In view of the recent
developments on Anti money laundering (AML)/Combating the Financing of Terrorism (CFT) front,
the Committee recommends that KVP should be discontinued."
Committee had also recommended to examine the reasons for large number of irregularities, such as
opening of irregular accounts and issue of NSCs and KVPs to the persons firms, institutions, trust,
etc, and to suggest remedial measures to curb such irregularities.
Accordingly, the Scheme was discontinued from 01.12.2011. In the year of its closure, the scheme
secured gross collections of Rs. 7575.95 crores (April 2011 to November 2011). In 2011, it yielded
around 8.41% and money used to double in 8 years and 7 months.
However, in view of the popular demand and to revitalize Small Savings, the Finance Minister vide
para 27 of his Budget Speech of 2014-15 (July) announced that Kisan Vikas Patra (KVP) will be
reintroduced. This was implemented with effect from 18 November 2014.

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The major concern regarding KVP has been addressed now as KYC norms (Know your client
norms) regarding all National Savings Schemes (NSS) are now applicable in post offices and banks
w.e.f. January, 2012.
The re-launched Kisan Vikas Patra (KVP) will be available to the investors in the denomination of
Rs. 1000, 5000, 10,000 and 50,000, with no upper ceiling on investment. The certificates can be
issued in single or joint names and can be transferred from one person to any other person / persons,
multiple times. The facility of transfer from one post office to another anywhere in India and of
nomination will be available. As in the case of previous issue, the certificate can also be pledged as
security to avail loans from the banks and in other case where security is required to be deposited.
Though, initially the certificates will be sold through post offices, it is intended to make it available
to the investing public through designated branches of nationalized banks, in contrast to the original
KVP.
As in the previous issue, Kisan Vikas Patras have unique liquidity feature, where an investor can, if
he so desires, encash his certificates after the lock-in period of 2 years and 6 months and thereafter in
any block of six months on pre-determined maturity value. The investment made in the certificate
will double in 100 months (8 years and 4 months).
Reintroduction of Kisan Vikas Patra (KVP) was to provide a safe and secure investment avenue to
the investors so as to help in augmenting the savings rate in the country. The scheme is also aimed at
safeguarding investors from fraudulent schemes, considering the number of ponzi schemes that have
surfaced particularly after the closure of KVP. With a maturity period of 8 years 4 months, the
collections under the scheme will be available with the Govt. for a fairly long period to be utilized in
financing developmental plans of the Centre and State Governments.
82. Kisan Credit Card
Kisan Credit Card is a pioneering credit delivery innovation for providing adequate and timely credit
to farmers under single window. It is a flexible and simplified procedure, adopting whole farm
approach, including short-term, medium-term and long-term credit needs of borrowers for
agriculture and allied activities and a reasonable component for consumption needs.
Credit card and pass book or credit card cum pass book provided to eligible farmers facilitate
revolving cash credit facility. Any number of drawals and repayments within a limit, which is fixed
on the basis of operational land holding, cropping pattern and scale of finance can be made. Each
drawal has to be repaid within a maximum period of 12 months and the Card is valid for 3 to 5 years
subject to annual review. Conversion/reschedulement of loans is permissible in case of damage to
crops due to natural calamities. Crop loans disbursed under KCC Scheme for notified crops are
covered under Rashtriya Krishi Bima Yojana (National Crop Insurance Scheme), to protect farmers
against loss of crop yield caused by natural calamities, pest attacks etc.
83. Kudumbashree
Kudumbashree ( which means prosperity of the family) is one of the largest women-empowering
projects in the country and is a model for implementing various poverty implementing programmes
at the local self government level in Kerala. The programme has 37 lakh members and covers more
than 50% of the households in Kerala. The three pillars of this programme are micro
credit, entrepreneurship and empowerment of women. Kudumbashree perceives poverty not just
as the deprivation of money, but also as the deprivation of basic rights.

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Kudumbashree was conceived as a joint programme of the Government of Kerala and NABARD
and is implemented through Community Development Societies (CDSs) of poor women, serving as
the community wing of Local Governments.
Kudumbashree is formally registered as the "State Poverty Eradication Mission" (SPEM), a society
registered under the Travancore Kochi Literary, Scientific and Charitable Societies Act 1955. It has
a governing body chaired by the State Minister of LSG. There is a state mission with a field officer
in each district. This official structure supports and facilitates the activities of the community
network across the state.
A major problem in Kerala is the problem of Waste Management and Kudumbashree is actively
involved in solid waste management in cities in Kerala. Kudumbashree is also involved in a variety
of initiatives such as holistic health, rehabilitation of destitute families, special schools etc.
84. Liquidity Adjustment Facility (LAF)
Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money
through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in
liquidity.LAF consists of repo and reverse repo operations. Repo or repurchase option is a
collaterised lending i.e. banks borrow money from Reserve bank of India to meet short term needs
by selling securities to RBI with an agreement to repurchase the same at predetermined rate and
date. The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore
inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by
lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse
repo operation therefore absorbs the liquidity in the system. The collateral used for repo and reverse
repo operations comprise of Government of India securities. Oil bonds have been also suggested to
be included as collateral for Liquidity adjustment facility
Liquidity adjustment facility has emerged as the principal operating instrument for modulating short
term liquidity in the economy. Repo rate has become the key policy rate which signals the monetary
policy stance of the economy.
85. Local Governance system in rural India (Panchayati Raj) and the 73rd amendment of the
Constitution
Institutions of local governance in the rural areas of India are referred to as Panchayats.
History
The history of legalized or institutionalized Panchayats (initiated by the British in different parts of
India in the later part of the 19th century) is not very old. However, the spirit, in which this is viewed
in independent India, is believed to be ancient. In the early ages, when the emperors‟ rule hardly
reached remote corners of the kingdom, villages were generally isolated and communication systems
primitive, village residents gathered under the leadership of village elders or religious leaders to
discuss and sort out their problems. This practice of finding solutions to local problems collectively,
has found mention in ancient texts like Kautilya‟s “Arthshastra” and in subsequent years, in Abul
Fazal‟s “Ain-E-Akbari and are still prevalent in different forms all over the country.
Rural local governments during the British rule were not given enough functions, authority, or
resources. Those were not truly representative and often dominated by government functionaries.

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Mention of local governments in the Indian Constitution, as it was adopted in 1950, can be found in
the chapter on Directive Principles of State Policy, which stated that the states should enact
appropriate laws for constituting Panchayats enabling them to function as local governments. In
1957 a committee headed by Balawant Rai Mehta was set up to assess the success of the Community
Development Programmes and National Extension Services launched in 1951 and 1952 (as well as
other programmes) during the first five year plan. One of the most significant recommendations of
the Committee was the observation that in order to make various development initiatives meaningful
by ensuring that the benefits reach the targeted beneficiaries, revival of Panchayats were necessary.
The Committee felt that it was possible only for the Panchayats to involve the primary stakeholders,
the people, with developmental activities.
In the wake of this recommendation many states enacted new Panchayat Acts thereby substituting
the old ones inherited from the British. It is in such a manner that the first generation of Panchayats
came into being in the country, with two tiers in some states, three tiers in many and even four tiers
in a few. First generation Panchayats, which were apolitical, were not very successful for a variety of
reasons. Most important of them were: ambiguous laws about exact roles, functions and authority,
insufficient manpower and a general lack of resources.
However, on the recommendation of the Ashok Mehta Committee (1977), most of the states
provided for political participation in Panchayat elections. This, coupled with decisions of several
states‟ to involve Panchayats in the developmental initiatives and delivery of various services to the
rural people, made the Panchayats somewhat active and vibrant. Examples of West Bengal, Kerala
and Karnataka can be referred to in this respect.
Admittedly, even after this Panchayats did not evolve as people‟s institutions and largely failed to
deliver what were expected of them. L.M. Singhvi Committee in 1985 opined that in order to make
the Panchayats effective, such institutions should be declared as units of local governments and there
should be Constitutional mandate on state governments to ensure that the Panchayats function as
such.
The 73rd Amendment of the Constitution, 1992
1992 was the most significant year in the history of Panchayats in India as the 73rd amendment of
the Constitution (amendment of Article 243) was passed by the Indian Parliament that declared
Panchayats as institutions of self government. (The 74th amendment done at the same time relate to
urban local bodies). These amendments came into force from April 24 1993. The major features of
the 73rd amendment can be enumerated as under:

 There should be three tiers of Panchayats (District Panchayats, Block Panchayats i.e.
intermediary Panchayats and Village or Gram Panchayats) in states with over 25 lakh of population.
States with less than this population will have only two tiers omitting the intermediary tier.
 Panchayats declared as institutions of self governments (signifying that the status of
Panchayats is same in their respective areas, as that of the Union Government at the national and
State Governments at the state level).
 States were mandated to devolve functions relating to 29 subjects (including agriculture,
land reforms, minor irrigation, fisheries, cottage and small scale industries, rural communication,
drinking water, poverty alleviation programmes etc.) to the Panchayats.

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 Panchayats were mandated to prepare plan(s) for economic development and social justice
and implement them.
 States were asked to constitute a State Finance Commission every five years to determine
the Panchayats‟ share of state‟s financial resources as a matter of entitlement (just as the Central
Finance Commission determines how resources of the Central government should be shared between
the union and state governments).
 Panchayat bodies must have proportionate representation of Scheduled Caste, Scheduled
Tribes and women. Such reservation should also apply in the cases of Chairpersons and Deputy
Chairpersons of these bodies.
 There shall be State Election Commission in each state which shall conduct elections to the
local bodies in every five years.
(Note: This amendment is not applicable in some special areas and in the states like Nagaland,
Mizoram, etc. and in areas where regional councils exist).
Amendment of the Constitution necessitated large scale amendments in the Panchayat Acts of
individual states, though in states like West Bengal almost all the requirements of the Constitutional
amendment were already provided for in the Panchayat Act.
Almost all the states are presently having three tiers of Panchayats. At the lowest level is the Gram
Panchayat (GP, headed by Pradhan/Sarpanch/Mukhia). The intermediary level Panchayat is called
Block Panchayat/Panchayat Samiti/Taluka Panchayat (PS, headed by President/Sabhapati). At the
district level there is the District Panchayat/Zilla Parishad/Zilla Panchayat (ZP headed by
Chairman/ Sabhadhipati).
86. Macro-economic Framework Statement
The Macro-economic Framework Statement is a statement presented to the Parliament at the time of
Union Budget under Section 3(5) of the Fiscal Responsibility and Budget Management Act,
2003 and the rules made thereunder and contains an assessment of the growth prospects of the
economy with specific underlying assumptions.
It contains an assessment regarding the expected GDP growth rate, fiscal balance of the Central
Government and the external sector balance of the economy.
The statement is submitted annually.
87. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) of 2005
This is a rural wage employment programme in India. It provides for a legal guarantee of at least 100
days of unskilled wage employment in a financial year to rural households whose adult members are
willing to engage in unskilled manual work at a pre-determined minimum wage rate.
The objectives of the Act are:

 to enhance the livelihood security of the rural poor by generating wage employment
opportunities; and
 to create a rural asset base which would enhance productive ways of employment, augment
and sustain rural household income.

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MGNREGA was initially implemented as National Rural Employment Guarantee Act (NREGA) in
200 selected backward districts in India on February 2, 2006. It was extended to an additional 130
districts with effect from April 1, 2007. Later, the remaining 285 districts were covered from April 1,
2008. The National Rural Employment Guarantee (Amendment) Act, 2009 renamed NREGA as
MGNREGA.
Section 4(1) of MGNREGA mandates the design and implementation of State-specific Rural
Employment Guarantee Schemes (REGS) to give effect to the provisions made in MGNREGA.
Section 6(1) empowers the Central Government to specify the wage rates for MGNREGA
beneficiaries. So far, the wage rates have been modified three times, the latest being on January 14,
2011 where the base minimum wage rate of Rs. 100 was indexed to inflation.
MGNREGA is unique in not only ensuring at least 100 days of employment to the willing unskilled
workers, but also in ensuring an enforceable commitment on the implementing machinery i.e., the
State Governments, and providing a bargaining power to the labourers. The failure of provision for
employment within 15 days of the receipt of job application from a prospective household will result
in the payment of unemployment allowance to the job seekers.
The implementation of MGNREGA largely depends on the active participation of three-tier
decentralized self governance units called Panchayat institutions. The panchayats are required to
estimate labour demand, identify works and demarcate work sites, prioritize works, prepare
village/block/district level development plans in advance for the continuous and smooth planning
and the execution of this wage employment programme. The Panchayats are responsible for
processing the registration of job seekers, issuance of job cards, receipts of applications for
employment, allotment of jobs, identification of work sites, planning, allocation and execution of
works, payment of wages and commencement of social audit, transparency and accountability check
at the grass-root level.
The implementation of MGNREGA has influenced the wage structure in rural areas as the minimum
wages for agricultural labourers across States have witnessed an upward trend between 2006 and
2010. The Act has broadened the occupational choices available to the agricultural workers within
their locality, thereby impacting rural-urban migration.
88. Mahatma Gandhi Pravasi Surksha Yojna (MGPSY)
Mahatma Gandhi Pravasi Surksha Yojna (MGPSY) is a scheme launched by Ministry of Overseas
Indian Affairs (MOIA) for providing social security in the form (a) pension, (b) savings for return
and resettlement and (c) life insurance to unskilled / semi-skilled overseas Indian workers (with
below matriculation education).
The Scheme commenced on a pilot basis in Kerala on 1st May 2012,for overseas workers
in 17 Emigrant Check Required (ECR) countries -ie., those countries where social security needs of
foreign workers are less /not addressed.The Scheme is named after the father of nation – Mahatma
Gandhi.
This Scheme combines the three existing voluntary savings schemes functioning under the
jurisdiction of three financial sector regulators –Pension Fund Regulatory Development
Authority(PFRDA),Securities and Exchange Board of India (SEBI) and Insurance Regulatory
Development Authority (IRDA).

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In detail, MGPSY provides for:

1. Pension from the age of 60 through investment in a PFRDA regulated pension scheme -
NPS Lite; Withdrawal in NPS Lite is not permitted before attaining the age of 60 years, subject
tothe exit policy of PFRDA.
2. Savings for return & resettlement (R&R) through investment in the UTI Monthly Income
Scheme (MIS) run by the SEBI regulated mutual fund Unit Trust of India(UTI);Subscriber can
withdraw this amount on return to India or can remain invested;
3. Freelife insurance cover against natural /accidental death and disability during the period of
coverage under JanashreeBimaYojana (JBY) run by the IRDA regulated insurance firm - Life
Insurance Corporation of India(LIC).
Government of India, from the budget of Ministry of Overseas Indian Affairs contributes to the
Scheme in the following manner:-

1. Government contributes Rs.1,000 per annum for male MGPSY beneficiary and 2000 per
annum for female MGPSY beneficiary, if they save between Rs.1,000 and Rs.12,000 per year in
NPS-Lite.
2. Government contributes Rs.900 towards Return and Resettlement (R&R) of the overseas
Indian workers (whether male or female)if they save Rs.4,000 or more per annum in R&R Scheme
of UTI-AMC.
3. A free contribution of Rs. 100 is made by the Government for providing insurance coverage
to all MGPSY beneficiaries.
4. Government will co- contribute for a period of five financial years or till the worker return
to India, whichever is earlier.
MGPSY is a voluntary scheme with subscriber joining this scheme on his/her own discretion.
MGPSY offers all the three Partner schemes in the form of a package and not in isolation. That is,
subscribers have to opt in all three partner schemes if he wishes to subscribe in MGPSY and
registration in MGPSY will stand cancelled if subscriber fails to get registered in any of the three
sub schemes.
Minimum contribution under R&R scheme is Rs 1000 and in NPS lite, it is Rs 100. (i.e, an MGPSY
beneficiary has to pay a minimum of Rs. 1100 at the time of enrollment) However, government‟s co-
contribution occurs only if the beneficiaries save per annum, Rs. 1000or more for NPS-Lite and Rs.
4000 or more for R&R Scheme.
If the worker fails to contribute at any point of time later-on, the savings accumulated in subscriber‟s
MGPSY account will remain secure and will remain invested in NPS-Lite and UTI-MIS in his/her
own name. There is no penalty by MOIA in the event of no contribution from subscriber. However,
subscriber will not get any kind of co-contributory benefit from MOIA if s/he does not contribute but
will still be covered under Insurance.
1) Pravasi refers to Non-resident; Suraksha refers to security; Yojna refers to Scheme / Plan
2) The term of social security can be described as follows:”… the protection which society provides
for its members, through a series of public measures, against the economic and social distress that
otherwise would be caused by the stoppage or substantial reduction of earnings resulting from

RAJESH NAYAK
sickness, maternity, employment injury, unemployment, invalidity, old age and death; the provision
of medical care; and the provision of subsidies for families with children…” (ILO, 1984, p.3). This
definition corresponds to the nine classical branches of social security laid down in the ILO Social
Security (Minimum Standards) Convention, 1952 (No.102):
1.Medical care
2.Sickness benefit
3.Unemployment benefit
4.Old-age benefit
5.Employment injury benefit
6.Family benefit
7.Maternity benefit
8.Invalidity benefit and
9.Survivors‟ benefit.

3) Emigration Act, 1983 provides that no citizen of India shall migrate unless he obtains emigration
clearance from Protector of Emigrants. Similarly, it has been recognized that certain countries
(currently 17) do not have strict laws regulating the entry and employment of foreign nationals. They
also do not provide avenues for grievance redressal. Thus they have been categorized as Emigration
Check Required (ECR) countries. Hence, all persons, having ECR endorsed passports and going to
any of the 17 ECR countries for taking up employment require emigration clearance. However, ECR
passport holders going to any ECR country for purposes other than employment do not require
emigration clearance.
4) Aggregators are intermediaries identified and approved by PFRDA, to perform subscriber
interface functions under their pension Scheme -NPS-Lite. Aggregator shall perform the functions
relating to registration of subscribers, undertaking Know Your Customer (KYC) verification,
receiving contributions and instructions from subscribers and transmission of the same to designated
NPS Lite intermediaries
89. Mandi
Mandi in Hindi language means market place. Traditionally, such market places were for food and
agri-commodities. However, over time the coverage of mandis got widened to include trading hubs
for grains, vegetables, timber, gems and diamonds; almost every tradable was included. Mandis for
animals like cattle, goats, horses, mules, camels and buffaloes, and poultry are often organised as
fairs. Thus the word mandi assumes the contours of a catch-all market place where anything is
bought and sold.
In a still predominantly rural India, mandis form part of the life-line infrastructure for the people. In
most of the states/provinces in India, the Agricultural Produce Marketing
Committee(APMC) operates the wholesale market for agri-products. Wholesale markets are
segregated depending on the type of commodity handled: for instance, for grains, pulses, vegetables,
potato and onion, spices and condiments, fruits. The growing disenchantment with the functioning of
APMCs has led to relaxation of the APMC Rules and the emergence of direct marketing in agri-
commodities. These are often called farmers markets: inthe state of Andhra Pradesh they are called
„Rythu bazaar‟ and in Tamil Nadu „Uzhavar Sandhai‟ .These markets enable the farmer to sell his

RAJESH NAYAK
produce directly to the consumers without the middlemen in the APMCs. Minimising intermediation
and the creation of a national common market are long cherished policy goals of the government.

Tezi mandi or Futures markets

India is known for commodity forward and futures markets that existed for centuries though
standardised, regulated futures trading has a history of over a century only. Unregulated futures
markets are often called Satta Bazar.
Futures markets are auction markets in which participants buy and sell futures contracts for delivery
on a specified future date. Trading used to be carried out through open outcry- yelling and hand
signals- in a trading pits .However, since the early 2000s most of the commodity futures exchanges
have migrated to the new technology platform of online or electronic trading. The commodity
futures markets are regulated by the Forward Markets Commission. Through the Finance Act,
2015, Forward Markets Commission has been merged with the securities market regulator - SEBI.
90. Marginal Standing Facility
Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI)
in its Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from
the central bank over and above what is available to them through the LAF window.

MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for
banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging
through government securities, which has lower rate of interest in comparison with the MSF. The
MSF would be a penal rate for banks and the banks can borrow funds by pledging government
securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI
with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and
to enable smooth monetary transmission in the financial system.

MSF represents the upper band of the interest corridor and reverse repo as the lower band and the
repo rate in the middle. To balance the liquidity, RBI intend to use the sole independent "policy rate"
which is the repo rate and the MSF rate automatically gets adjusted to a fixed per cent above the
repo rate (MSF was originally intended to be 1% above the repo rate).
Banks can borrow through MSF on all working days except Saturdays, between 3.30 and 4 30 p.m.
in Mumbai where RBI has its headquarters. The minimum amount which can be accessed through
MSF is Rs.1 crore and in multiples of Rs.1 crore. ( Rs 1 crore = Rs 10 million). The application for
the facility can be submitted electronically also by the eligible scheduled commercial banks. The
banks used the facility for the first time in June 2011 and borrowed Rs.1 billion via the MSF.
91. Market Stabilization Scheme (MSS)
This scheme came into existence following a MoU between the Reserve Bank of India (RBI) and the
Government of India (GoI) with the primary aim of aiding the sterilization operations of the RBI.
Historically, the RBI had been sterilizing the effects of significant capital inflows on domestic
liquidity by offloading parts of the stock of Government Securities held by it. It is pertinent to recall,
in this context, that the assets side of the RBI‟s Balance Sheet (July 1 to June 30) includes Foreign

RAJESH NAYAK
Exchange Reserves and Government Securities while liabilities are primarily in the form of High
Powered Money (consisting of Currency with the public and Reserves held in the RBI by the
Banking System). Thus, any rise in Foreign Exchange Reserves resulting from the intervention of
the RBI in the Foreign Exchange Markets (with the intention, say, to maintain the exchange rate on
the face of huge capital inflows) entails a corresponding rise in High Powered Money. The Money
Supply in the economy is linked to High Powered Money via the money multiplier. Therefore, on
the face of large capital inflows, to keep the liabilities side constant so as to not raise the Supply of
Money, corresponding reduction in the stock of Government Securities by the RBI is necessary.
The MSS was devised since continuous resort to sterilization by the RBI depleted its limited stock of
Government Securities and impaired the scope for similar interventions in the future. Under this
scheme, the GoI borrows from the RBI (such borrowing being additional to its normal borrowing
requirements) and issues Treasury-Bills/Dated Securities that are utilized for absorbing excess
liquidity from the market. Therefore, the MSS constitutes an arrangement aiding in liquidity
absorption, in keeping with the overall monetary policy stance of the RBI, alongside tools like the
Liquidity Adjustment Facility (LAF) and Open Market Operations (OMO).
The securities issued under MSS, termed as Market Stabilization Scheme (MSS) Securities/Bonds,
are issued by way of auctions conducted by the RBI and are done according to a specified ceiling
mutually agreed upon by the GoI and the RBI. They possess all the attributes of existing Treasury-
Bills/Dated Securities and are included as a part of the country‟s „internal Central Government debt‟.
The amount raised under the MSS does not get credited to the Government Account but is
maintained in a separate cash account with the RBI and are used only for the purpose of
redemption/buy back of Treasury-Bills/Dated Securities issued under the scheme.
Treasury-Bills/Securities issued under MSS are matched by equivalent cash balances that are held by
the Government with the RBI. Such payments are not made from the MSS account just as receipts
due to premium or accrued interest on these Securities are not credited to it.
92. Masala Bonds
"Masala Bonds" are the 10 year off-shore rupee bonds issued by International Finance Corporation
(IFC), a member of the World Bank group, in the international capital market in November 2014, to
raise funds for supporting private sector infrastructure development initiatives in India. Masala
bonds are listed in London Stock Exchange.
Masala bonds, like any other off-shore bonds, are intended for those foreign investors who want to
take exposure to Indian assets, yet constrained from doing it directly in the Indian market or prefer to
do so from their offshore locations. The settlement of the bonds will be in US dollars but since they
are pegged to the Indian currency -rupee-, investors will directly take the currency risk or exchange
rate risks. Settlement is done in US dollars because of the limited convertibility of rupee.
The term "masala" stands for Indian spices, which gives Indian cuisine its characteristic flavour, and
helped India gain a place in the global trade map. IFC, established in 1956 and owned by 184
member countries, is the largest global development institution focused exclusively on the private
sector companies and financial institutions in developing countries.
Masala bonds were issued on 10 November 2014 under IFC‟s $2 billion offshore rupee program and
yields 6.3%. IFC issued the bonds in London, a premier financial center and the investment banker,

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J.P. Morgan was the sole arranger for the bond. The vast majority of investors in masala bonds are
European insurance companies. Proceeds from this 10-year, 10 billion Indian rupee bond (equivalent
to $163 million) will be used to support a forthcoming infrastructure bond issuance by Axis Bank,
back in India. Thus, Masala bonds pave the way for more foreign investment to help meet India‟s
private sector development needs.
Masala bonds are the first rupee bonds listed on the London Stock Exchange. They are the longest-
dated bonds in the offshore rupee markets, building on earlier offshore rupee issuances by IFC at
three-, five-, and seven-year maturities. However, these earlier bond issuances were not issued under
the nomenclature of masala bonds. As on date, the present issue of masala bonds is a one-time issue.
Hence, subsequent issuances of the off shore rupee bonds by IFC may also not be under this
nomenclature.
Yet by usage of the term, Masala Bonds are similar to dimsum bonds -bonds issued outside China
but denominated in Chinese currency. But they are different from samurai bonds which are Yen
(Japanese currency)-denominated bond issued in Tokyo by a non-Japanese company and subject to
Japanese regulations.
Offshore bonds have its own set of advantages and disadvantages for both the issuer and the investor
as well as for the economy. Competition from offshore markets may induce improvements in
domestic bonds markets such as strengthening of domestic market infrastructure, improving investor
protection and removing tax distortions that hinder domestic market development etc. Against these
benefits come the risks associated with financial openness and sudden shifts in capital flows, and the
risk that offshore markets may draw liquidity away from the domestic market.
93. Medium-term Expenditure Framework (MTEF) Statement
The Medium-term Expenditure Framework Statement is a statement presented to the Parliament
under Section 3 of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003and sets
forth a three-year rolling target for the expenditure indicators with specification of underlying
assumptions and risks involved.
The statement provides an estimate of expenditure commitments for various items viz. Education,
Health, Rural Development, Energy, Subsidies and Pension etc. While formulating the MTEF
Statement, information on expenditure commitments spread across the various central ministries on
salaries (including grants-in-aid for salaries) and pensions, grants-in-aid for creation of capital assets,
major programme, interest payment, defense expenditure and major subsidies etc. and other
commitments of Government, will be considered. To take an example, in MTEF, salary component
which now appears scattered amongst the various Demand for Grants of central Ministries would be
aggregated and projected into the future. Expenditure commitments are shown separately for
Revenue and Capital expenditure. " Grants-in-aid for creation of capital assets" and its projection are
also depicted as a part of Revenue expenditure.
The objective of the MTEF is to provide a closer integration between budget and the FRBM
Statements. This Statement is presented separately in the session next to the session in which Union
Budget is presented, i.e. normally in the Monsoon Session.
MTEF, inter alia, contain:

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a) The expenditure commitment of the government on major policy changes involving new services,
new instrument of service, new schemes and programmes;
b) The explicit contingent liabilities, which are in the form of stipulated annuity payments over a
multi-year time-frame;
c) The detailed break-up of grants for creation of capital assets.
94. Medium-term Fiscal Policy (MTFP) Statement
The Medium-term Fiscal Policy Statement (MTFP) is a statement presented to the Parliament under
Section 3(2) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which sets
out three-year rolling targets for five specific fiscal indicators in relation to GDP at market prices,
namely, (i) Revenue Deficit (ii) effective revenue deficit, (iii) Fiscal Deficit, (iv) Tax to GDP ratio
and (v) Total outstanding Debt as percentage of GDP at the end of the year.
MTFP is a document which lays down the projected fiscal aggregates to arrive at the fiscal targets as
prescribed in Fiscal Responsibility and Budget Management (FRBM) Act/Rules (say, keeping
revenue deficit at zero and fiscal deficit at 3%) over the coming three year period.
The Statement includes the underlying assumptions, an assessment of sustainability relating to
balance between revenue receipts and revenue expenditure and the use of capital receipts including
market borrowings for generation of productive assets.
Background
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted with a view to
provide a legislative framework for reduction of deficit, and thereby debt, of the Government to
sustainable levels over a medium term so as to ensure inter-generational equity in fiscal management
and long term macro-economic stability. FRBM Act requires the government to lay before the
parliament four policy statements in each financial year namely, Medium Term Fiscal Policy
Statement, Fiscal Policy Strategy Statement, Macroeconomic Framework Policy Statement
and Medium Term Expenditure Framework (MTEF).

The FRBM framework provides a medium term perspective to fiscal management. For instance, the
FRBM framework requires the Government to reduce the deficits to a prescribed level in a
prescribed time following a laid out fiscal consolidation roadmap. Accordingly, Government is
required to place a medium term fiscal framework in the parliament, laying down the projected fiscal
aggregates to meet the fiscal targets as prescribed in Act/Rules. The Act also mandates the
Government to spell out the strategy that it decides to adopt to meet the projected fiscal plan. While
the Medium Term Fiscal Policy (MTFP) lays down the fiscal constraints of the Government in
medium term, Medium Term Expenditure Framework (MTEF) lays down the expenditure
commitments for various sectors over a 3 years rolling framework.
In terms of principles of Public Expenditure Management Handbook of World Bank issued in 1998,
the MTFP can be considered as one of the steps to arrive at Medium term Expenditure Framework.
95. Member of Parliament Local Area Development Scheme (MPLADS)
MPLADS is a Plan Scheme fully funded by Government of India. Under the scheme, each Member
of Parliament (MP) has the choice to suggest to the District Collector works to the tune of Rs.5 crore

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per annum to be taken up in her/his constituency, as per eligibility. Rajya Sabha MP can recommend
works in one or more districts in the State from where she/he has been elected. Nominated Members
of Lok Sabha and Rajya Sabha may select any one or more districts from any one State in the
Country for implementation of work(s) of their choice under the scheme.
Ministry of Statistics & Programme Implementation (MOS&PI) has issued guidelines on Scheme
Concept, implementation, and monitoring http://mplads.nic.in/. Progress of works being
implemented under the scheme is monitored by MOS&PI on regular basis.
96. Mezzanine Financing
Mezzanine financing is defined as a financial instrument which is a mix of debt & equity finance. It
is a debt capital that gives the lender the rights to convert to an ownership or equity interest in the
company. Mezzanine finance is listed as an asset on company‟s balance sheet. As it is treated as
equity in a company‟s balance sheet, it allows the company to access other traditional sources of
finance. In the hierarchy of creditors, mezzanine finance is subordinate to senior debt but ranks
higher than equity. The return on mezzanine finance is higher in relation to debt finance but lower
than equity finance. It is also available quickly to the borrower with little or no collateral. The
concept of mezzanine financing is just catching up in India. Mezzanine financing is used mainly for
small and medium enterprises, infrastructure and real estate. ICICI Venture's Mezzanine Fund was
the first fund in India to focus on mezzanine finance opportunities.
97. Micro Units Development Refinance Agency (MUDRA) Bank
Micro Units Development Refinance Agency (MUDRA) Bank is a refinance institution for micro-
finance institutions. As on date, MUDRA is conceived not only as a refinance institution and but
also as a regulator for the micro finance institutions (MFIs).
The MUDRA Bank would primarily be responsible for –
1) Laying down policy guidelines for micro/small enterprise financing business
2) Registration of MFI entities
3) Regulation of MFI entities
4) Accreditation /rating of MFI entities
5) Laying down responsible financing practices to ward off indebtedness and ensure proper client
protection principles and methods of recovery
6) Development of standardized set of covenants governing last mile lending to micro/small
enterprises
7) Promoting right technology solutions for the last mile
8) Formulating and running a Credit Guarantee scheme for providing guarantees to the loans which
are being extended to micro enterprises
9) Creating a good architecture of Last Mile Credit Delivery to micro businesses under the scheme
of Pradhan Mantri Mudra Yojana
Union Budget 2015-16 has proposed to create MUDRA with a corpus of Rs. 20,000 crore made
available from the shortfalls of Priority Sector Lending. In addition, there is a credit guarantee

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corpus of Rs.3,000 crore for guaranteeing loans being provided to the micro enterprises. MUDRA
Bank will refinance Micro-Finance Institutions through a Pradhan Mantri Mudra Yojana.
MUDRA Bank will operate through regional level financing institutions who in turn will connect
with last mile lenders such as Micro Finance Institutions (MFIs), Small Banks, Primary Credit
Cooperative Societies, Self Help Groups (SHGs), NBFC (other than MFI) and such other lending
institutions.
In lending, MUDRA proposes to give priority to enterprises set up by the under-privileged sections
of the society particularly those from the scheduled caste / tribe (SC/ST) groups, first generation
entrepreneurs and existing small businesses. There are estimated to be some 5.77 crore small
business units in India, mostly individual proprietorship, which run small manufacturing, trading or
service businesses. 62% of these are owned by SC/ST/OBC as stated in the Union Budget speech of
2015-16.
MUDRA Bank will be set up through an enactment of law and it will take some time. To begin with,
the same is being operationalised as a subsidiary of Small Industries Development Bank of India
(SIDBI). It was launched on 8 April 2015.
98. Mid-Term Appraisal of Five Year Plans
The time duration for implementing a Five Year Plan as the nomenclature suggests is five years. As
the third year of implementation of the plan draws to a close, the process for evaluating three years
of implementation of the five-year plan and to recommend corrective measures for the remaining
two years of the plan starts. To ascertain the performance meetings are held with the implementing
officers at the Central and State level, subject experts are invited to give their views and data on
implementation is collected from the States after which the MTA document is finalised. Major mid-
course corrections usually does not take place. Minor interventions that come to the notice of the
Central Ministry are addressed then and there. Every Central Ministry holds
annual/biannual/quarterly conferences with their State counterparts to ascertain the progress of
implementation of the various schemes. These inputs are also made available for preparation of the
Mid-Term Appraisal document. The Mid-Term Appraisal document is made available in the public
domain after approval by the National Development Council.
99. Minimum Export Price
Minimum Export Price (MEP) is the price below which an exporter is not allowed to export the
commodity from India. MEP is imposed in view of the rising domestic retail / wholesale price or
production disruptions in the country. MEP is a kind of quantitative restriction to trade. As per a
2005 study by OECD, around 14 of the WTO members had adopted a Minimum Export Price
Policy.
Government fixes MEP for the selected commodities with a view to arrest domestic price rise and
augment domestic supply. This is intended to be imposed for short durations and is removed when
situations change. The removal of MEP helps farmers / exporters in realising better and
remunerative prices and would also help in earning valuable foreign exchange for the country.
For instance, minimum Export Prices (MEP) of US$ 450/MT on Potato was imposed on 26th June,
2014 to augment domestic supplies in view of rising retail and wholesale prices in domestic markets.
This continued till 20th February, 2015, for almost 8 months, uptill surplus supply of potato in the

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domestic markets and consequent rapid fall in price (In domestic and retail) led to its removal by
Department of Commerce vide another Gazette Notification.
Generally, MEP imposition is restricted to essential commodities like potatoes, Onions, rice, edible
oils etc.
100. Minimum Support Prices
Minimum Support Price (MSP) is a form of market intervention by the Government of India to
insure agricultural producers against any sharp fall in farm prices. The minimum support prices are
announced by the Government of India at the beginning of the sowing season for certain crops on
the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall
in price during bumper production years. The minimum support prices are a guarantee price for their
produce from the Government. The major objectives are to support the farmers from distress sales
and to procure food grains for public distribution. In case the market price for the commodity falls
below the announced minimum price due to bumper production and glut in the market, govt.
agencies purchase the entire quantity offered by the farmers at the announced minimum price.
Minimum support prices are currently announced for 24 commodities including seven cereals
(paddy, wheat, barley, jowar, bajra, maize and ragi); five pulses (gram, arhar/tur, moong, urad and
lentil); eight oilseeds (groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum,
safflower seed and nigerseed); copra, raw cotton, raw jute and virginia flu cured (VFC) tobacco.
Such minimum support prices are fixed at incentive level, so as to induce the farmers to make capital
investment for the improvement of their farm and to motivate them to adopt improved crop
production technologies to step up their production and thereby their net income. In the absence of
such a guaranteed price, there is a concern that farmers may shift to other crops causing shortage in
these commodities.
101. Money Bill
Money Bill refers to a bill (draft law) introduced in the Lower Chamber of Indian Parliament (Lok
Sabha) which generally covers the issue of receipt and spending of money, such as tax laws, laws
governing borrowing and expenditure of the Government, prevention of black money etc.
Eg. of Money bills are Finance Bills and Appropriation Bills, Income Tax Act, 1961, The
Undisclosed Foreign Income And Assets (Imposition Of Tax) Bill, 2015 etc .
The term “money bill” hence, connotes certain characteristics of the proposed bill.
Under Article 110(1) of the Constitution of India a money bill is defined as follows…
110(1)…a Bill is deemed to be a Money Bill if it contains only provisions dealing with all or any of
the following matters, namely:
(a) the imposition, abolition, remission, alteration or regulation of any tax;
(b) the regulation of the borrowing of money or the giving of any guarantee by the Government of
India, or the amendment of the law with respect to any financial obligations undertaken or to be
undertaken by the Government of India;

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(c) the custody of the Consolidated Fund or the Contingency Fund of India, the payment of moneys
into or the withdrawal of moneys from any such fund;
(d) the appropriation of moneys out of the Consolidated Fund of India;
(e) the declaring of any expenditure to be expenditure charged on the Consolidated Fund of India or
the increasing of the amount of any such expenditure;
(f) the receipt of money on account of the Consolidated Fund of India or the public account of
India or the custody or issue of such money or the audit of the accounts of the Union or of a State;
or
(g) any matter incidental to any of the matters specified in sub-clauses (a) to (f).
(2.) A Bill is not deemed to be Money Bill by reason only that it provides for the imposition of
fines or other pecuniary penalties, or for the demand or payment of fees for licences or fees for
services rendered, or by reason that it provides for the imposition, abolition, remission, alteration or
regulation of any tax by any local authority or body for local purposes….
Features of Money Bills
Essentially a Money bill has the following features:

 It can be introduced only in the Lok Sabha (lower chamber of the Parliament)
 The bill is placed in Rajya Sabha (Upper chamber of the Parliament) thereafter and Rajya
Sabha can return the Bill with or without its recommendations.
 In any case, the Bill has to be returned within a period of 14 days from the date of its receipt
by Rajya Sabha. Otherwise it is deemed to have been passed by both Houses at the expiration of the
said period in the form in which it was passed by Lok Sabha.
 If the bill is returned to Lok Sabha without recommendation, a message to that effect is
reported by the Secretary-General to the Lok Sabha if in session, or published in the Bulletin for the
information of the members of the Parliament, if it is not in session. The Bill shall then be presented
to the President for his assent.
 If the bill is returned to the Lok Sabha with amendments it has to be laid on the Table of the
House and taken up for consideration.
 However, Lok Sabha is not bound to accept these amendments. Lok Sabha, under Article
109 of the Constitution, has the option to accept or reject all or any of the recommendations made by
Rajya Sabha. In any case, Lok Sabha has to inform Rajya Sabha about the status of their
recommendations, as to whether they have been accepted or not. It is not that Lok Sabha does not
accept any of the recommendations of Rajya Sabha. For instance, in the Income Tax Bill, 1961,
Rajya Sabha did recommend a number of amendments of substantial character, all of which were
agreed to by Lok Sabha.[1]
 If Lok Sabha accepts any amendments as recommended by the Rajya Sabha, the Bill shall
be deemed to have been passed by both the Houses of the Parliament „with the amendments
recommended by the Rajya Sabha and accepted by the Lok Sabha‟ and a message to that effect has
to be sent to the Rajya Sabha.
 If Lok Sabha does not accept the recommendations of the Rajya Sabha, the Bill shall be
deemed to have been passed by both the Houses in the form in which it „was passed by the Lok
Sabha without any of the amendments recommended by the Rajya Sabha‟.

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 In all other bills final passing of the bill happens at Rajya Sabha. In case of money bills,
final passing happens at Lok Sabha and then it is sent to the President for his assent.
 Unlike other bills, the President cannot return the Money Bill with his recommendations to
the Lok Sabha for reconsideration.
A defeat of Money bill in Lok Sabha is deemed political/parliamentary defeat of the government of
the day. Speaker has unquestionable powers to decide if a Bill is a Money Bill or not. It cannot be
questioned in any court. Rajya Sabha (Upper chamber of the Parliament)‟s dissent on a Money Bill
is of no political significance, as the Lok Sabha has overriding powers on Money Bills. Money bill
cannot be referred to even joint Committees of the two Houses of the Parliament (to resolve
differences between the two Houses), as is in the case of other bills. The Standing Committee of the
Parliament also cannot scrutinize a Money Bill.
102. Minority Communities
Minority Community is a community notified so by the Central Government as per clause (c) of
Section 2 of the National Commission for Minorities Act, 1992 (19 of 1992).
Accordingly, the following five communities e.g. Muslim, Christian, Sikhs, Buddhists and
Zoroastrians (Parsis) have been declared as minority communities, vide Ministry of Welfare
Notification dated 23.10.1993. Jain has also been declared as Minority Community recently.
Population of minority communities can be obtained from Census of India – which provides
statistical information on different characteristics of the people of India.
The word minority has been devised to ensure a more focused approach towards issues relating to
the minorities and to facilitate the formulation of overall policy and review of the regulatory
framework and development programmes also towards the benefit of the minority communities.The
Union Ministry of Minority Affairs was created on 29th January, 2006 with these objectives in mind.
The Act also provides for a National Commission for Minorities which was set up on 17th May 1993
to perform the following functions.

1. evaluate the progress of the development of Minorities under the Union and States.
2. monitor the working of the safeguards provided in the Constitution and in laws enacted by
Parliament and the State Legislatures.
3. make recommendations for the effective implementation of safeguards for the protection of
the interests of Minorities by the Central Government or the State Governments.
4. look into specific complaints regarding deprivation of rights and safeguards of the
Minorities and take up such matters with the appropriate authorities.
5. cause studies to be undertaken into problems arising out of any discrimination against
Minorities and recommend measures for their removal.
6. conduct studies, research and analysis on the issues relating to socio-economic and
educational development of Minorities.
7. suggest appropriate measures in respect of any Minority to be undertaken by the Central
Government or the State Governments.
8. make periodical or special reports to the Central Government on any matter pertaining to
Minorities and in particular the difficulties confronted by them.

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 103. National Clean Energy Fund (NCEF)
The National Clean Energy Fund (NCEF) is a fund created in 2010-11 using the carbon tax - clean
energy cess - for funding research and innovative projects in clean energy technologies of public
sector or private sector entities, upto the extent of 40% of the total project cost. Assistance is
available as a loan or as a viability gap funding, as deemed fit by the Inter-Ministerial group, which
decides on the merits of such projects.
The Fund is designed as a non lapsable fund under Public Accounts and with its secretariat in Plan
Finance II Division, Department of Expenditure, Ministry of Finance.
Creation of NCEF was announced in the Union Budget 2010-11.
An Inter-Ministerial Group, chaired by the Finance Secretary in Ministry of Finance (and comprising
of Secretaries of Departments of Expenditure and Revenue at Ministry of Finance, Principal
Scientific Advisor to the Government of India, a representative of Planning Commission and a
Representatives of Ministry sponsoring the proposal and other Ministries concerned with that
specific proposal) recommends projects eligible for funding under NCEF. Upon recommendation by
NCEF, the final approval is given by the Minister of the concerned nodal Ministry (which initially
approved and decided to take the project submitted by the public or private entity to NCEF) if the
project cost is below Rs. 150 Crore; by Minister of Finance and the Minister of the concerned nodal
Ministry if the project cost is between Rs. 150 Crore and 300 crore; and by the Cabinet Committee
on Economic Affairs if the project cost is above Rs. 300 Crore.
104. National Investment and Infrastructure Fund (NIIF)
National Investment and Infrastructure Fund (NIIF) is a fund created for enhancing infrastructure
financing in the country. NIIF, proposed to be set up as a Trust, would raise debt to invest in the
equity of infrastructure finance companies such as Indian Rail Finance Corporation
(IRFC) and National Housing Bank (NHB). The idea is that these infrastructure finance companies
can then leverage this extra equity, manifold. In that sense, NIIF is a banker of the banker of the
banker.
The fund is yet to be constituted. Its creation was announced in the Union Budget 2015-16.
105. National Investment Fund (NIF)
The cabinet Committee on Economic Affairs (CCEA) on 27th January, 2005 had approved the
constitution of a National Investment Fund (NIF). The Purpose of the fund was to receive
disinvestment proceeds of central public sector enterprises and to invest the same to generate
earnings without depleting the corpus. The earnings of the Fund were to be used for selectedCentral
social welfare Schemes. This fund was kept outside the consolidated fund of India.

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Important Economic Concepts-Part-II
Source: Arthapedia.in
 National Skill Certification and Monetary Reward Scheme (STAR)

The National Skill Certification and Monetary Reward Scheme, that is branded as STAR (Standard Training
Assessment and Reward) for promotional purposes, is a scheme launched by the Government in 2013 to
motivate the youth of India to acquire a vocational skills and envisages a monetary reward that will in essence
financially help those who wish to acquire a new skill or upgrade their skills to a higher level.

Salient Features of the Scheme

All trainings will be specifically oriented for developing skills in specific growth sectors. The Scheme will
provide monetary incentives [in the range of Rs. 7500 to Rs. 15,000 each trainee depending on the nature and
duration of training] on successful completion of market-driven skill training to approximately ten lakh( 1
million) youth in a span of one year from the date of implementation of the Scheme.

The entire fund [of Rs. 1000 crore] will be shouldered by the Ministry of Finance, Government of India, and
will be affected through direct bank transfer to the beneficiaries’ accounts linked through AADHAR.
Appropriate consideration will be provided to the economically backward sections.
The monetary reward is strictly dependent on obtaining a certificate that will be issued by qualified assessors
after necessary tests have been passed. The skills are also benchmarked to National Occupational Standards that
have been developed by NSDC with the support of the Sector Skill Councils.
Implementation
The Scheme will be implemented through a Public Public Partnership mode. National Skill Development
Corporation (NSDC), a PPP institution, will be the implementing agency for this Scheme. National Skill
Development Fund (NSDF) -a 100% government-owned trust, which work in sync to fulfill the NSDC’s
strategic objectives- will do the oversight and monitor the implementation of the Scheme.
Ministry of Rural Development is contemplating to utilise this platform to skill at least one youth from each
family which had availed of 100 day employment under the under the rural job guarantee scheme - MGNREGA

National Skill Development Mission

The National Skill Development Mission was announced in the Budget Speech of 2015-16 and it aims to
consolidate the skilling initiatives spread across several Ministries and to standardize procedures and outcomes
across 31 Sector Skill Councils. For instance, currently, over 70-odd Skill Development Programmes (SDPs)
are being implemented by Government of India, each with its own norms for eligibility criteria, duration of
training, cost of training, outcomes, monitoring and tracking mechanism etc.
The Mission provides a strong institutional framework at the Centre and States for implementation of skilling
activities in the country.
Generally a "mission mode" project implies a project that has clearly defined objectives, scopes,
implementation timelines and milestones, as well as measurable outcomes and service levels.
Policy framework behind National Skill Development Mission
Recognizing the imperative need for skill development, National Skill Development Policy was first formulated
in 2009. The existing policy was reviewed in 2014-15 to take account of its progress in implementation and
emerging trends in the national and international environment. The new policy- National Skill Development and
Entrepreneurship policy of 2015 supersedes the policy of 2009 and would form the backbone of National Skill
Development Mission.
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The objective of this policy is to meet the challenge of skilling at scale (skilling large number of persons at the
same time) with speed, standard (quality) and sustainability. It aims to provide an umbrella framework to all
skilling activities being carried out within the country, to align them to common standards and link skilling with
demand centres. In addition to laying down the objectives and expected outcomes, the policy also identifies the
various institutional frameworks for reaching the expected outcomes.
Approach adopted in the policy: As per the Policy, Skills development is considered as the shared
responsibility of government, employers and individual workers, with NGOs, community based organizations,
private training organizations and other stakeholders playing a critical role.
The policy links skills development to improved employability and productivity to pave the way forward for
inclusive growth in the country. The skill strategy is complemented by specific efforts to promote
entrepreneurship to create enough opportunities for skilled workforce.
“Skill India programmes” goes alongside the “Make in India” campaign – i.e, enhancing the supply of skilled
labourers to encourage producers to undertake their manufacturing initiatives in India.
The new Policy has four thrust areas:

 It addresses key obstacles to skilling, including low aspirational value, lack of integration with
formal education, lack of focus on outcomes, low quality of training infrastructure and trainers, etc.
 Further, the Policy seeks to align supply and demand for skills by bridging existing skill gaps,
promoting industry engagement, operationalising a quality assurance framework, leverage technology and
promoting greater opportunities for apprenticeship training.
 Equity is also a focus of the Policy, which targets skilling opportunities for socially/geographically
marginalised and disadvantaged groups. Skill development and entrepreneurship programmes for women are a
specific focus of the Policy.
 In the entrepreneurship domain, the Policy seeks to educate and equip potential entrepreneurs,
both within and outside the formal education system. It also seeks to connect entrepreneurs to mentors,
incubators and credit markets, foster innovation and entrepreneurial culture, improve ease of doing business and
promote a focus on social entrepreneurship.
Organisational Structure of National Skill Development Mission
As per the Cabinet decision on 2 July 2015, the National Skill Development Mission has a three-tiered, high
powered decision making structure.

 Governing Council: At its apex, the Mission’s Governing Council, chaired by the Prime Minister,
will provide overall guidance and policy direction.
 Steering Committee: The Steering Committee, chaired by Minister in Charge of Skill
Development, will review the Mission’s activities in line with the direction set by the Governing Council.
 Mission Directorate: The Mission Directorate, with Secretary, Skill Development as Mission
Director, will ensure implementation, coordination and convergence of skilling activities across Central
Ministries/Departments and State Governments.

National Action Plan on Climate Change (NAPCC)

The Action Plan was released on 30th June 2008. It effectively pulls together a number of the government’s
existing national plans on water, renewable energy, energy efficiency agriculture and others – bundled with
additional ones – into a set of eight missions. The Prime Minister’s Council on Climate Change is in charge of
the overall implementation of the plan. The plan document elaborates on a unique approach to reduce the stress

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of climate change and uses the poverty-growth linkage to make its point. Emphasizing the overriding priority of
maintaining high economic growth rates to raise living standards, the plan “identifies measures that promote
development objectives while also yielding co-benefits for addressing climate change effectively.” It says these
national measures would be more successful with assistance from developed countries, and pledges that India’s
per capita greenhouse gas emissions “will at no point exceed that of developed countries even as we pursue our
development objectives.”

Plan in a Nutshell
The guiding principles of the plan are:

 Inclusive and sustainable development strategy to protect the poor

 Qualitative change in the method through which the national growth objectives will be achieved i.e. by
enhancing ecological sustainability leading to further mitigation
 Cost effective strategies for end use demand side management
 Deployment of appropriate technologies for extensive and accelerated adaptation, and mitigation of
green house gases
 Innovative market, regulatory and voluntary mechanisms to promote Sustainable Development
 Implementation through linkages with civil society, local governments and public-private partnerships
 International cooperation, transfer of technology and funding
National Missions
The core of the implementation of the Action plan are constituted by the following eight missions, that will be
responsible for achieving the broad goals of adaptation and mitigation, as applicable.

 National Solar Mission: The NAPCC aims to promote the development and use of solar energy for
power generation and other uses with the ultimate objective of making solar competitive with fossil-based
energy options. The plan includes: Specific goals for increasing use of solar thermal technologies in urban
areas, industry, and commercial establishments; a goal of increasing production of photo-voltaic to 1000
MW/year; and a goal of deploying at least 1000 MW of solar thermal power generation. Other objectives
include the establishment of a solar research centre, increased international collaboration on technology
development, strengthening of domestic manufacturing capacity, and increased government funding and
international support.
 National Mission for Enhanced Energy Efficiency: Current initiatives are expected to yield savings
of 10,000 MW by 2012. Building on the Energy Conservation Act 2001, the plan recommends: Mandating
specific energy consumption decreases in large energy-consuming industries, with a system for companies to
trade energy-savings certificates; Energy incentives, including reduced taxes on energy-efficient appliances; and
Financing for public-private partnerships to reduce energy consumption through demand-side management
programs in the municipal, buildings and agricultural sectors.
 National Mission on Sustainable Habitat: To promote energy efficiency as a core component of
urban planning, the plan calls for: Extending the existing Energy Conservation Building Code; A greater

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emphasis on urban waste management and recycling, including power production from waste; Strengthening the
enforcement of automotive fuel economy standards and using pricing measures to encourage the purchase of
efficient vehicles; and Incentives for the use of public transportation.
 National Water Mission: With water scarcity projected to worsen as a result of climate change, the
plan sets a goal of a 20% improvement in water use efficiency through pricing and other measures.
 National Mission for Sustaining the Himalayan Ecosystem: The plan aims to conserve biodiversity,
forest cover, and other ecological values in the Himalayan region, where glaciers that are a major source of
India’s water supply are projected to recede as a result of global warming.
 National Mission for a “Green India”: Goals include the afforestation of 6 million hectares of
degraded forest lands and expanding forest cover from 23% to 33% of India’s territory.
 National Mission for Sustainable Agriculture: The plan aims to support climate adaptation in
agriculture through the development of climate-resilient crops, expansion of weather insurance mechanisms,
and agricultural practices.
 National Mission on Strategic Knowledge for Climate Change: To gain a better understanding of
climate science, impacts and challenges, the plan envisions a new Climate Science Research Fund, improved
climate modeling, and increased international collaboration. It also encourages private sector initiatives to
develop adaptation and mitigation technologies through venture capital funds.
The NAPCC also describes other ongoing initiatives, including:

 Power Generation: The government is mandating the retirement of inefficient coal-fired power
plants and supporting the research and development of IGCC and supercritical technologies.
 Renewable Energy: Under the Electricity Act 2003 and the National Tariff Policy 2006, the central
and the state electricity regulatory commissions must purchase a certain percentage of grid-based power from
renewable sources.
 Energy Efficiency: Under the Energy Conservation Act 2001, large energy consuming industries are
required to undertake energy audits and an energy labeling program for appliances has been introduced.
Implementation
Ministries with lead responsibility for each of the missions are directed to develop objectives, implementation
strategies, timelines, and monitoring and evaluation criteria, to be submitted to the Prime Minister’s Council on
Climate Change. The Council will also be responsible for periodically reviewing and reporting on each
mission’s progress. To be able to quantify progress, appropriate indicators and methodologies will be developed
to assess both avoided emissions and adaptation benefits.
National Food Processing Mission
India cannot afford any waste of food grains, milk, poultry, fish, fruits and vegetables due to lack of adequate
processing facilities. Ministry of Food Processing Industries has launched a new scheme called National
Mission on Food Processing (NMFP) during 12th Plan (2012-13) for implementation through States / UTs. The
basic objective of NMFP is to promote the growth of food processing industries in the country, by creating a
National Mission at the Centre and State Missions in the various States/UTS. Better planning, supervision and
monitoring of various schemes is expected through this decentralised approach. Food procesors in the private

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sector and co-operative sector will be encouraged and incentivised to increase capital outlay, use new
technology , upgrade skills etc. Self help groups will be encouraged to become viable commercial entities. The
other objectives are to raise the standards of food safety and hygiene to the globally accepted norms; to facilitate
food processing industries to adopt HACCP and ISO certification norms; to augment farm gate infrastructure,
supply chain logistic, storage and processing capacity and to provide better support system to organized food
processing sector. State food processing missions have been created to implement the schemes.

National Food Security Mission (NFSM)

The National Food Security Mission (NFSM) was launched in 2007-08 with a view to enhancing the production
of rice, wheat, and pulses by 10 million tonnes, 8 million tonnes, and 2 million tonnes respectively by the end of
the Eleventh Plan (viz. March 2012). The Mission aims to increase production through area expansion and
productivity; create employment opportunities; and enhance the farm-level economy (i.e. farm profits) to
restore confidence of farmers. The approach is to bridge the yield gap in respect of these three crops through
dissemination of improved technologies and farm management practices while focusing on districts which have
high potential but relatively low level of productivity at present.
The NFSM has three components (i) National Food Security Mission - Rice (NFSM-Rice); (ii) National Food
Security Mission - Wheat (NFSM-Wheat); and National Food Security Mission - Pulses (NFSM Pulses).
To achieve the envisaged objectives, the Mission is mandated to adopt following strategies:

 Speedy implementation of programmes through active engagement of all the stakeholders at various
levels.
 Promotion and extension of improved technologies i.e., seed, Integrated Nutrient Management including
micronutrients (like iron, cobalt, copper etc), soil amendments, Integrated Pest Management (IPM) and
resource conservation technologies along with capacity building of farmers.
 Flow of fund would be closely monitored to ensure that interventions reach the target beneficiaries on
time.
 The proposed interventions would be integrated with the targets fixed for each identified district in the
existing District Plan (formulated as a part of national Five Year Plans).
 Constant monitoring and concurrent evaluation for assessing the impact of the interventions for a result
oriented approach by the implementing agencies.
The NFSM is presently being implemented in 476 identified districts of 17 States of the country. 20 million
hectares of rice, 13 million hectares of wheat and 4.5 million hectares of pulses are included in these districts
that roughly constitute 50% of cropped area for wheat and rice. For pulses, an additional 20% cropped area
would be created. Total financial implications for the NFSM will be Rs.48824.8 million during the XI Plan
(2007-08 – 2011-12). Beneficiary farmers will contribute 50% of cost of the activities / work to be taken up at
their / individual farm holdings.
National Small Savings Fund
Small Saving schemes have been always an important source of household savings in India. Small savings
instruments can be classified under three heads. These are: (i) postal deposits [comprising savings account,
recurring deposits, time deposits of varying maturities and monthly income scheme(MIS)]; (ii) savings
certificates [(National Small Savings Certificate VIII (NSC) and Kisan Vikas Patra (KVP)]; and (iii) social
security schemes [(public provident fund (PPF) and Senior Citizens‘ Savings Scheme(SCSS)].

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A “National Small Savings Fund” (NSSF) in the Public Account of India has been established with effect from
1.4.1999. A new sub sector has been introduced called “National Small Savings Fund” in the list of Major and
Minor Heads of Government Accounts. All small savings collections are credited to this Fund. Similarly, all
withdrawals under small savings schemes by the depositors are made out of the accumulations in this Fund. The
balance in the Fund is invested in Central and State Government Securities. The investment pattern is as per
norms decided from time to time by the Government of India.
The Fund is administered by the Government of India, Ministry of Finance (Department of Economic Affairs)
under National Small Savings Fund (Custody and Investment) Rules, 2001, framed by the President under
Article 283(1) of the Constitution. The objective of NSSF is to de-link small savings transactions from the
Consolidated Fund of India and ensure their operation in a transparent and self-sustaining manner. Since NSSF
operates in the public account, its transactions do not impact the fiscal deficit of the Centre directly. As an
instrument in the public account, the balances under NSSF are direct liabilities and constitute a part of the
outstanding liabilities of the Centre. The NSSF flows affect the cash position of the Central Government.
Nidhi(Mutual Benefit Society)
Nidhi in the Indian context / language means “treasure”. However, in the Indian financial sector it refers to
any mutual benefit society notified by the Central / Union Government as a Nidhi Company. They are created
mainly for cultivating the habit of thrift and savings amongst its members.
The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known
under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds and Mutual Benefit
Company.
Nidhis are more popular in South India and are highly localized single office institutions.They are mutual
benefit societies, because their dealings are restricted only to the members; and membership is limited to
individuals. The principal source of funds is the contribution from the members. The loans are given to the
members at relatively reasonable rates for purposes such as house construction or repairs and are generally
secured. The deposits mobilized by Nidhis are not much when compared to the organized banking sector.

Regulatory framework
Nidhi’s are companies registered under section 620A of the Companies Act, 1956(Section 406 of the
new Companies Bill 2012, as passed by Lok Sabha) and is regulated by Ministry of Corporate
Affairs (MCA).Even though Nidhis are regulated by the provisions of the Companies Act, 1956, they are
exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations
within members. The detailed rules of operation for Nidhi companies have been put in place with effect from 1
April 2014 vide notification dated 31 March 2014.
Nidhis are also included in the definition of Non- Banking Financial companies or (NBFCs) which operate
mainly in the unorganized money market. However, since 1997, NBFCs have been brought increasingly under
the regulatory ambit of the Indian Central Bank, RBI. Non-banking financial entities partially or wholly
regulated by the RBI include:

 NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), investment (1C)
(including primary dealers (PDs)) and residuary non-banking (RNBC) companies;
 mutual benefit financial company (MBFC), i.e. nidhi company;
 mutual benefit company (MBC), i.e. potential nidhi company; i.e., A company which is working on the
lines of a Nidhi company but has not yet been so declared by the Central Government; has minimum net
owned fund(NOF) of Rs.10 lakh, has applied to the RBI for certificate of registration and also to

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 Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened
directions/ regulations of RBI/DCA.
 miscellaneous non-banking company (MNBC), i.e. chit fund company.

Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in matters relating
to their deposit acceptance activities. However, in recognition of the fact that these Nidhis deal with their
shareholder-members only,RBI has exempted the notified Nidhis from the core provisions of the RBI Act and
other directions applicable to NBFCs. As on date (February 2013) RBI does not have any specified regulatory
framework for Nidhis.
“Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings and functioning
for the mutual benefit of members by receiving deposits only from individuals enrolled as members and by
lending only to individuals, also enrolled as members, and which functions as per Notification and Guidelines
prescribed by the DCA. The word Nidhi shall not form part of the name of any company, firm or individual
engaged in borrowing and lending money without incorporation by DCA and such contravention will attract
penal action.”
Non-Resident Indian Deposits (NRI Deposits)
Foreign Exchange Management (Deposit) Regulations, 2000 permits Non-Resident Indians (NRIs) to have
deposit accounts with authorized dealers and with banks authorized by the Reserve Bank of India (RBI). These
accounts include:

1. Foreign Currency Non-Resident (Bank) account (FCNR(B) account)

2. Non-Resident External account (NRE account)
3. Non-Resident Ordinary Rupee account (NRO account)
FCNR(B) accounts can be opened by NRIs and Overseas Corporate Bodies (OCBs) with an authorized dealer.
The accounts can be opened in the form of term deposits. Deposits of funds are allowed in Pound Sterling, US
Dollar, Japanese Yen and Euro. Rate of interest applicable to these accounts are in accordance with the
directives issued by RBI from time to time.
NRE accounts can be opened by NRIs and OCBs with authorized dealers and with banks authorized by RBI.
These can be in the form of savings, current, recurring or fixed deposit accounts. Deposits are allowed in any
permitted currency. Rate of interest applicable to these accounts are in accordance with the directives issued by
RBI from time to time.
NRO accounts can be opened by any person resident outside India with an authorized dealer or an authorized
bank for collecting their funds from local bonafide transactions in Indian Rupees. When a resident becomes an
NRI, his existing Rupee accounts are designated as NRO. These accounts can be in the form of current, savings,
recurring or fixed deposit accounts.
There were two more NRI deposit accounts in operation, viz. Non-Resident (Non-Repatriable) Rupee Deposit
Account and Non-Resident (Special) Rupee Account. An amendment to Foreign Exchange Management
(Deposit) Regulations, in 2002, discontinued the acceptance of deposits in these two accounts from 1st April
2002 onwards.
Repatriation of funds in FCNR(B) and NRE accounts is permitted. Hence, deposits in these accounts are
included in India’s external debt outstanding. While the principal of NRO deposits is non-repatriable, current
income and interest earning is repatriable. Account-holders of NRO accounts are permitted to annually remit an
amount up to US$ 1 million out of the balances held in their accounts. Therefore, deposits in NRO accounts too
are included in India’s external debt.
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 NORKA
A large number of Indians work abroad and remit much of their earnings back into the country to take care of
their families or to acquire assets. Kerala is a state where non residents contribute significantly to the state’s
resources. Keeping this important revenue channel in mind, the Government of Kerala launched the department
of Non-resident Keralites' Affairs (NORKA) in 1996 to redress the grievances of Non-resident Keralites.
NORKA is the first of its kind formed in an Indian state.
NORKA makes efforts to solve the grievances raised in petitions for remedial action on threats to the lives and
property of those who are left at home, tracing of missing persons abroad, compensation from sponsors,
harassment from sponsors, cheating by recruiting agents, educational facilities for children of NRKs,
introduction of more flights, etc. It provides assistance to stranded Keralites through follow up action initiated
on all the petitions.
NORKA has established NORKA Roots that acts as an interface between the Non-Resident Keralites and the
Government of Kerala. Some important objectives are creation of a heritage village for parents of non residents,
cultural exchange programmes, promotion of Malayalam language, employment mapping, maintaining a data
base etc.
Out of pocket expenditure
Households, in general, avail healthcare services from public as well as private health care facilities, depending
on their accessibility and affordability to these facilities. In Public Health Institutions, Government incurs
expenditure for providing healthcare infrastructure as well as payment of salaries for medical staff, while in
private sector hospitals, the service providers charge directly from households for their services. Although the
services provided by Public Health Institutions, particularly Primary Health Centres / Government hospitals are
accessible to the public, mostly free of cost, in practice, there are various instances, where households have to
pay ‘out of pocket expenditure’. The expenses that the patient or the family pays directly to the health care
provider, without a third-party (insurer, or State) is known as ‘Out of Pocket Expenditure’ (OOP). These
expenses could be medical as well as non-medical expenditure. Out of Pocket Medical expenditure could be
payments towards doctor’s fees, medicine, diagnostics, operations, charges for blood, ambulance services etc,
while non-medical expenditure include money spent towards travelling expenses, lodging charges of escort,
attendant charges, etc.
Out-of-pocket expenditure (OOP) on healthcare forms a major barrier to health seeking behaviour. The poor
sections do not have any form of financial protection and are forced to make OOP payments when they fall sick.
Often, these households have to resort to borrowings or sell assets to meet this expenditure. In literature,
Catastrophic Out of Pocket Expenditure is defined as that level of out of pocket expenditure which exceeds
some fixed proportion of household income or household’s capacity to pay. As per National Health Accounts
(NHA) of India (2004-05), 71.13% of Total Health Expenditure in India is considered to be ‘Out of Pocket
Expenditure’ by the individuals / households. NHA takes into account only ‘out of pocket’ towards medical
expenditure.
Participatory Notes (PNs)
A Participatory Note (PN or P-Note) in the Indian context, in essence, is a derivative instrument issued in
foreign jurisdictions, by a SEBI registered Foreign Institutional Investor (FII) or its sub-accounts or one of its
associates, against underlying Indian securities. The underlying Indian security instrument may be equity, debt,
derivatives or may even be an index. Further, a basket of securities from different jurisdictions can also be
constructed in which a portion of the underlying securities is Indian securities or indices.
PNs are also known as Overseas Derivative Instruments, Equity Linked Notes, Capped Return Notes, and
Participating Return Notes etc. In January 2014 when the Indian securities market regulator,SEBI issued the
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new Regulations for Foreign Portfolio Investors, participatory notes got formally defined under the tag
"Offshore Derivative Instrument" (ODIs) in Section 2(1)(j) of the said regulation. As per this definition,
participatory notes or ODIs are issued by selected foreign portfolio investors (which is a broad category also
including FIIs. Hence, Regulation excludes certain category of Foreign portfolio investors, like individuals,
from issuing the PNs) against securities held by it that are listed or proposed to be listed on any recognized
stock exchange in India.
The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN.
Thus the investors in PNs derive the economic benefits of investing in the security without actually holding it.
They benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the
value of the underlying Indian security. The PN holder also does not enjoy any voting rights in relation to
security/shares referenced by the PN.
Regulation of PNs
PNs are market instruments that are created and traded overseas. Hence, Indian regulators cannot ban the issue
of PNs. However, they can only be regulated, and they are indeed being regulated by the securities market
regulator in India, SEBI. When a PN is traded on an overseas exchange, the regulator in that jurisdiction would
be the authority to regulate that trade.
Participatory Notes have been used by FIIs since FIIs were permitted to invest in the Securities Market. They
were not specifically dealt with under the regulations until 2003. According to Regulation 15(A) of
the Securities and Exchange Board of India (SEBI) Regulations, 1995, which was inserted later in 2004 and
further amended in 2008 with the objective of tightening regulations in this regard, PNs can be issued only to
those entities which are regulated by the relevant regulatory authority in the countries of their incorporation and
are subject to compliance of "Know Your Client" norms. Down-stream issuance or transfer of the instruments
can also be made only to a regulated entity. Further, the FIIs who issue PNs against underlying Indian securities
are required to report the issued and outstanding PNs to SEBI in a prescribed format.
In addition, SEBI can call for any information from FIIs under Regulation 20(A) of the SEBI (FII) Regulations
concerning off-shore derivative instruments issued by it, as and when and in such form as SEBI may require.
In order to monitor the investment through these instruments, SEBI, vide circular dated October 31, 2001,
advised FIIs to submit information regarding issuance of derivative instruments by them, on a monthly basis.
These reports require the communication of details such as name and constitution of the subscribers to PNs,
their location, nature of Indian underlying securities etc.
FIIs cannot issue PNs to non-resident Indians (NRIs) and those issuing PNs are required to give an undertaking
to the effect.
SEBI has also mandated that Qualified Foreign Investors shall not issue PNs.
SEBI in consultation with the Government had decided in October 2007, to place certain restrictions on the
issue of Participatory Notes (PNs) by FIIs and their sub-accounts. This decision was taken with a view to
moderate the surge in foreign capital inflows into the country and to address the know-your-client concerns for
the PN holders. However, it was found that such restrictions were ineffective. Therefore, SEBI in October 2008
reviewed its earlier decision and decided to remove these restrictions in the light of the above factors. Rather
more attention is given to effective disclosures.
Poverty, Poverty Line, Below and Above poverty line (APL, BPL)
In India, Planning Commission estimates the number and proportion of people living below the poverty line at
national and State levels, separately for rural and urban areas. It makes poverty estimates based on a large
sample survey of household consumption expenditure carried out by the National Sample Survey Organization
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(NSSO) after an interval of approximately five years. The Commission has been estimating the poverty line and
poverty ratio since 1997 on the basis of the methodology spelt out in the report of the Expert Group on
'Estimation of Number and Proportion of Poor' (popularly known as Lakdawala Committee Report).
Poverty is a social as well as a multidimensional phenomenon. According to the World Bank, “poverty is
pronounced deprivation in wellbeing.” Amartya Sen in his capability approach perhaps gave the broadest
meaning to well-being. According to him well-being comes from a capability to function in society. Poverty
arises when people lack key capabilities due to inadequate income or education, or poor health, or insecurity, or
low self-confidence, or a sense of powerlessness, or the absence of rights such as freedom of speech.
The Human Development Report (2010) pioneered the Multidimensional Poverty Index (MPI) which is
grounded in the capability approach and an innovative effort to complement the income based poverty indices.
It includes an array of dimensions from participatory exercises among poor communities and an emerging
international consensus. The MPI shows the share of population that is multidimensionally poor adjusted by the
intensity of deprivation in terms of living standards, health and education.
Pradhan Mantri Jan-Dhan Yojna (PMJDY)
Pradhan Mantri Jan-Dhan Yojna (PMJDY) is a programme for financial inclusion to cover all unbanked
households in India, whether in urban or rural area, and aims at providing affordable financial services like
savings & deposit accounts, banking services, remittance, credit, insurance, pension etc. Financial
inclusion broadly means the delivery of financial services at affordable costs to sections of disadvantaged and
low-income groups. The Scheme was announced by the Prime Minister- Shri Narendra Modi - in his
independence day speech on 15 August, 2014 and was launched by him on 28 August 2014. (In Hindi, Pradhan
Mantri stands for Prime Minister, Jan for people, Dhan means money /wealth and yojna means plan or scheme)
The mission mode objective of the PMJDY consists of 6 pillars. During the 1st year of implementation
under Phase I (15 August, 2014- 14 August, 2015), three Pillars namely

1. universal access to banking facilities

2. financial literacy Programme and
3. endowing basic banking accounts after satisfactory operation for six months, with
 an overdraft facility of Rs. 5000 at a rate of interest of 12% per annum,
 RuPay Debit card with inbuilt accident insurance cover of Rs 1 lakh and
 issuance of Kisan Credit Card (KCC) as RuPay Kisan Card, will be implemented.
To get benefit of Accidental Insurance Cover of Rs. 1 lakh, RuPay Debit Card must be used at least once in 45
days and this is available to beneficiaries in the age group of 18-70. Electronic Transfer of subsidies (direct
benefit transfer) under various schemes of Government would also be enabled.
Phase II of PMJDY, beginning from 15 August 2015 upto 15 August, 2018 will address

1. creation of Credit Guarantee Fund for coverage of defaults in overdraft A/Cs

2. micro insurance and
3. Unorganized sector Pension schemes like Swavlamban. In addition, in this phase coverage of
households in hilly, tribal and difficult areas would be carried out. This is the phase where the hitherto
uncovered areas comes in. Moreover, this phase would focus on coverage of remaining adults in the households
and students.

Life insurance cover of Rs.30000/- will be available to all account-holders (with Rupay Card) in the age group

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of 18-59 who are the breadwinners of the family and are opening a bank account for the first time, except
Government servants (both retired and serving) and their family members, income tax payees, and beneficiaries
of Aam Admi Bima Yojana (another life insurance scheme).
Overdraft facility upto Rs.5000/- will be available to only one person in the family (preferably lady of the
house).
In case people are already holding bank accounts, they need not open another bank account to avail of benefits
under PMJDY. However, accident cover benefits are available through the RuPay Card. Hence, the existing
account holders need to submit an application to the concerned branch to enable them to get a RuPay Debit
Card in order to avail of the benefits of insurance / accident covers under PMJDY. Micro credit limit of Rs.
5000/- as overdraft, can also be extended in existing bank accounts on application, depending on the satisfactory
conduct of the account.
For the implementation of the Scheme, RBI has enabled creation of small accounts, whereby people who do not
have officially valid documents or Aadhaar Numbers can still get bank accounts opened by submitting 2 copies
of signed photographs at the bank branch. However, these accounts will be called small accounts and shall
normally be valid for 12 months and shall be continued subject to showing of proof that he/she has applied for
any of the officially valid document within 12 months of opening of such ‘Small Account’’. These accounts
have certain limitations such as balance at any point of time should not exceed Rs. 50,000/-, total credit in one
year should not exceed Rs. 1 lakh and total withdrawal should not exceed Rs. 10,000/- in a month.
PMJDY also aims at providing Mobile Banking, offering basic banking facilities like money transfer, bill
payments, balance enquiries, merchant payments etc. on a simple GSM based mobile phone, without the need to
download application on a phone as required at present in the Immediate Payment Service (IMPS) based Mobile
Banking. Transactions can be performed on basic phone handsets. Charges, as applicable by the Telecom
Operator (not more than Rs.1.50 per transaction as mandated by TRAI) may be applicable.
PMJDY is a scheme that brings together all other previous initiatives in this regard - like Kisan credit card,
Business correspondent model of expanding financial access, micro insurance, micro pension (Swavlamban)
etc. - with a wider scope and targeting both rural as well as urban households.
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is an insurance scheme for the age group of 18-50
covering both natural and accidental death risk of Rs. 2 lakh for a premium of Rs. 330 per year (less than Rs.
1/day). i.e. it will cover all the savings account holders of the age group 18-50 for death due to any cause.
This scheme is offered through LIC of India or other Life Insurance companies that are willing to offer life
insurance on similar terms.
The scheme was launched in simultaneous functions held at 115 venues across the country on 9 May 2015. This
is different from the Pradhan Mantri Suraksha Bima Yojna (PMSBY) scheme launched on the same day
covering all the savings account holders of the age group 18 to 70 for accidental disability or death of Rs.2 Lakh
for a premium of just Rs. 12 per year (i.e. Rs 1/month as premium).
Pradhan Mantri Suraksha Bima Yojna (PMSBY)
Pradhan Mantri Suraksha Bima Yojna (PMSBY) is an insurance scheme covering accidental death risk of
Rs.2 Lakh for a premium of just Rs. 12 per year (i.e. Rs 1/month as premium). It will cover all the savings
account holders of the age group 18 to 70 for accidental disability or death.
Under PMSBY, the risk coverage will be Rs. 2 lakh for accidental death and full disability and Rs. 1 lakh for
partial disability.

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Public sector general insurance companies or other general insurance companies that are willing to offer
insurance coverage to individuals on similar terms would offer and administer this scheme. The scheme is
delivered through banks including regional rural banks as well as cooperative banks.
The scheme was launched in simultaneous functions held at 115 venues across the country on 9 May 2015. This
Scheme is different from the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)launched on the same
day, which cover both natural and accidental death risk of Rs. 2 lakh for a premium of Rs. 330 per year for the
age group of 18-50 (less than Rs. 1/day).
Price Stabilisation Fund (PSF)
Price Stabilisation Fund (PSF) refers to any fund constituted for the purpose of containing extreme volatility in
prices of selected commodities. The amount in the fund is generally utilised for activities aimed at bringing
down/up the high/low prices say for instance, procurement of such products and distribution of the same as and
when required, so that prices remain in a range.
Many countries use such dedicated funds for stabilisation of major petroleum product prices, particularly if they
are importers. Some countries use such funds for stabilising not just commodity prices but a variety of key
macroeconomic variables such as the exchange rate (which is nothing but the price of the domestic currency
expressed in terms of an external currency), benchmark stock indices etc. The operational details of such funds
vary from country to country.
India first created a price stabilisation fund for some export oriented plantation crops in 2003, and this ceased to
exist in 2013. Another fund was created in 2015 for perishable agricultural and horticultural commodities, but
initially limited to support potato and onion prices only.
PSF mechanism is apart from the Minimum Support Price (MSP) based initiatives already existing in the
country for certain agricultural goods. The MSP system has some price tempering properties, but it is from the
perspective of the growers / farmers and becomes operative when prices fall below the cost of production. The
output thus procured by the Government at MSP is later distributed at affordable rates through the public
distribution system.
Another parallel to PSF are the Consumer Federations (known commonly as Consumerfeds) which undertake
distribution of consumer goods at reasonable and affordable rates. They undertake bulk procurement of
consumer goods, essential goods, medicines etc. (including their imports if required), and supply to affiliated
and/or other Co-operatives Societies and arrange for proper storage, packing, grading and transport of such
goods. While tempering the prices of such goods, these entities save the public from the exploitation by retail /
middleman and continually operate throughout the year irrespective of the movement in the market prices of
these goods. Some consumerfeds establish and run manufacturing and processing units for production of
consumer goods in collaboration with other entities or directly by itself.
In contrast to MSP and consumer fed operations, a PSF is generally conceived to be operative in both directions
of price movement, subject to prices crossing some threshold level.
Price stabilisation Fund announced in 2015
A Price Stabilization Fund of Rs. 500 Crore for agricultural commodities was announced in the Union Budget
2014-15 with a view to mitigate volatility in the prices of agricultural produce.
Accordingly, the Government of India, on 27 March 2015, approved the creation of a Price Stabilization Fund
(PSF) with a corpus of Rs.500 crores as a Central Sector Scheme, to support market interventions for price
control of perishable agri-horticultural commodities during 2014-15 to 2016-17. Initially the fund is proposed to
be used for market interventions for onion and potato only.

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Procurement of these commodities will be undertaken directly from farmers or farmers’ organizations at farm
gate/mandi and made available at a more reasonable price to the consumers. Losses incurred, if any, in the
operations will be shared between the Centre and the States. Hence, the PSF Scheme of 2015 is focused more at
consumers.
PSF Scheme provides for advancing interest free loan to State Governments/Union Territories (UTs) and
Central agencies to support their working capital and other expenses they might incur on procurement and
distribution interventions for such commodities. Hence, the actual utilisation of the fund depends on the
willingness of the state governments / union territories to avail of such loans for these purposes. Further, the
actual detection of the period when support is required and the deployment of price support measures are left to
the states.
For this purpose, the States will have to set up a ‘revolving fund’ (a fund which is constantly replenished and
not limited by the fiscal year considerations) to which Centre and State will contribute equally (50:50). The
ratio of Centre-State contribution to the State level corpus in respect of North-East States will, however, be
75:25. Central Agencies will set up their revolving fund entirely with the advance from the Centre.
The Price Stabilization Fund will be managed centrally by a Price Stabilization Fund Management Committee
(PSFMC) which will approve all proposals from State Governments and Central Agencies. The PSF will be
maintained as a Central Corpus Fund by Small Farmers Agribusiness Consortium (SFAC), a society promoted
by Ministry of Agriculture for linking agriculture to private businesses and investments and technology. SFAC
will act as Fund Manager. Funds from this Central Corpus will be released in two streams, one to the State
Governments/UTs as a onetime advance to each State/UT based on its first proposal and the other to the Central
Agencies. The Central Corpus Fund has already been established by SFAC in 2014-15.
The one time advance to the States/UTs based on their first proposal along with matching funds from the
State/UT will form a State/UT level revolving fund, which can then be used by them for all future market
interventions to control prices of onions and potatoes based on approvals by State Level Committee set up
explicitly for this purpose.
Public Debt
Article 292 of the Indian Constitution states that the Government of India can borrow amounts specified by the
Parliament from time to time. Article 293 of the Indian Constitution mandates that the State Governments in
India can borrow only from internal sources. Thus the Government of India incurs both external and internal
debt, while State Governments incur only internal debt.
As per the recommendations of the 12th Finance Commission, access to external financing by the States for
various projects is facilitated by the Central Government, which provides the sovereign guarantee for these
borrowings. From April 1, 2005, all general category states borrow from multi-lateral and bilateral agencies (
World Bank, ADB etc.) on a back-to-back basis viz. the interest cost and the risk emanating from currency and
exchange rate fluctuations are passed on to States. In the case of special category states ( North-eastern states,
Himachal, Uttarakhand and J&K), external borrowings of state governments are given by the Union
Government as 90 per cent loan and 10 per cent grant.
This note explains the coverage of the ‘Public Debt’ of the Central Government of India.
In India, total Central Government Liabilities constitutes the following three categories;
[i] Internal Debt.
[ii] External Debt.
[iii] Public Account Liabilities.

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Public Debt in India includes only Internal and External Debt incurred by the Central Government. Internal
Debt includes liabilities incurred by resident units in the Indian economy to other resident units, while External
Debt includes liabilities incurred by residents to non-residents.
The major instruments covered under Internal Debt are as follows:

 Dated Securities: Primarily fixed coupon securities of short, medium and long term maturity which
have a specified redemption date. These are the single-most important component of financing the fiscal deficit
of the Central Government (around 91 % in 2010-11) with average maturity of around 10 years.

 Treasury-Bills: Zero coupon securities that are issued at a discount and redeemed in face value at
maturity. These are issued to address short term receipt-expenditure mismatches under the auction program of
the Government. These are primarily issued in three tenors, 91,182 and 364 day.

 14 Day Treasury Bills.

 Securities issued to International Financial Institutions: Securities issued to institutions viz. IMF,
IBRD, IDA, ADB, IFAD etc. for India’s contributions to these institutions etc.

 Securities issued against ‘Small Savings’: All deposits under small savings schemes are credited to
the National Small Savings Fund (NSSF). The balance in the NSSF (net of withdrawals) is invested in special
Government securities.

 Market Stabilization Scheme (MSS) Bonds: Governed by a MoU between the GoI and the RBI,
MSS was created to assist the RBI in managing its sterilization operations. GoI borrows under this scheme from
the RBI, while proceeds from such borrowings are maintained in a separate cash account with the latter and is
used only for redemption of T-bills /dated securities raised under this scheme.

Public Debt Management of the Union Government in India

Objectives of Public Debt Management in India
The overall objective of the Central Government’s debt management policy, as laid out by the Central
Government's status paper in November 2010 is to “meet Central Government’s financing needs at the lowest
possible long term borrowing costs and also to keep the total debt within sustainable levels. Additionally, it
aims at supporting development of a well-functioning and vibrant domestic bond market”.
Apart from this declared objectives, timely availability of resources for Government is ensured in a non-
disruptive manner for the market. Various institutional arrangements are also put in place accordingly.
India is not formally using the IMF / World Bank Medium Term Debt Strategy and Debt Sustainability
Analysis. Many countries across the globe follow / target Medium Term Public Debt Strategy specifying the
debt targets to be met and the strategies for achieving the same. In India, such a framework / document is not in
existence. However, in the Medium Term Fiscal Policy Statement laid before the Parliament, a two year target
for outstanding liabilities is incorporated. In the Fiscal Policy Strategy Statement laid before the Parliament,
Government outlines the prudent debt management strategies so as to ensure that the public debt remains within
sustainable limits and does not crowd out private borrowing for investment.

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 As per the Fiscal Policy Strategy Statement of 2012-13 the public debt management policy of the Government
is driven by the principle of gradual reduction of public debt to GDP ratio. This is with the objective of further
reducing the debt servicing risk and to create fiscal space for developmental expenditure. On the financing side,
the Government policy focuses on the following principles

i. greater reliance on domestic borrowings over external debt,

ii. preference for market borrowings over instruments carrying administered interest rates,
iii. consolidation of the debt portfolio and
iv. development of a deep and wide market for Government securities to improve liquidity in secondary
market.
Finance Minister in his Budget Speech for 2010-11 had indicated his intention to bring out a status paper giving
detailed analysis of the government’s debt situation and a road map for curtailing the overall public debt.
Accordingly, a paper was brought out in November 2010, titled Government Debt: Status and Road Ahead with
detailed analysis on status of Central Government debt. At the same time, it also charts out a well calibrated
roadmap for reduction in the overall debt as percentage of GDP for the general government during the period
2010-11 to 2014-15.
Public Debt Management Agency (PDMA)
Public Debt Management Agency (PDMA) is a specialized independent agency that manages the internal and
external liabilities of the Central Government in a holistic manner and advises on such matters in return for a
fee. In other words, PDMA is the Investment Banker or Merchant Banker to the Government. PDMA manages
the issue, reissue and trading of Government securities, manages and advises the Central Government on
its contingent liabilities and undertakes cash management for the central government including issuing and
redeeming of short term securities and advising on its cash management.
PDMA was proposed to be established in India through the Finance Bill, 2015. As a corollary of the decision to
create a PDMA, the RBI or the Central Bank in India was given the task of inflation targeting under a monetary
policy framework agreement. However, the creation of PDMA was put on hold due to the difference of opinion
on the matter and the relevant clauses were dropped from the Finance Bill, 2015 while the latter was passed.
PDMA is considered to be set up with the objective of "minimising the cost of raising and servicing public
debt over the long-term within an acceptable level of risk at all times, under the general superintendence of the
central government". This will guide all of its key functions, which include managing the public debt, cash and
contingent liabilities of Central Government, and related activities.
Need for PDMA
The need for PDMA was felt due to the following reasons:

 Fragmented jurisdiction in public debt management: Before the creation of PDMA, the central Bank
or RBI used to manage the market borrowing programmes of Central and State Governments. On the other
hand, external debt was managed directly by the Central Government. Establishing a debt management office
would consolidate all debt management functions in a single agency and bring in holistic management of the
internal and external liabilities.
 Some functions that are crucial to managing public debt were not carried out. For instance, no
agency used to undertake cash and investment management and information relating to contingent and other
liabilities were not consolidated. Hence, there was no comprehensive picture of the liabilities of the Central
Government, which impeded informed decision making regarding both domestic and foreign borrowing.

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 An autonomous PDMA can be the catalyst for wider institutional reform, including building a
government securities market, and bring in transparency about public debt.
 It is considered as an internationally accepted best practice that debt management should be
disaggregated from monetary policy, and taken out of the realm of the central bank. Most advanced economies
have dedicated debt management offices. Several emerging economies, including Brazil, Argentina, Colombia,
and South Africa, have restructured debt management in recent years and created an independent agency for the
same. The sources of these conflict of interest in RBI managing the Government debt, as listed out in the 2008
report of the Government are as under:
 There is a severe conflict of interest between setting the short term interest rate (i.e. the task
of monetary policy) and selling bonds for the government. If the Central Bank tries to be an effective debt
manager, it would lean towards selling bonds at high prices, i.e. keeping interest rates low. This leads to an
inflationary bias in monetary policy.
 Where the Central Bank also regulates banks, as in India, there is a further conflict of
interest. If the Central Bank tries to do a good job of discharging its responsibility of selling bonds, it has an
incentive to mandate that banks hold a large amount of government paper. This bias leads to flawed banking
regulation and supervision, so as to induce banks to buy government bonds, particularly long-dated government
bonds. Having a pool of captive buyers undermines the growth of a deep, liquid market in government
securities, with vibrant trading and speculative price discovery. This, in turn, hampers the development of the
corporate bond market - the absence of a benchmark sovereign yield curve makes it difficult to price corporate
bonds.
 If the Central Bank administers the operating systems for the government securities markets,
as the RBI currently does, this creates another conflict, where the owner/ administrator of these systems is also a
participant in the market.
Features of PDMA as outlined in the Finance Bill, 2015
Structure & Administration

 PDMA is a body corporate to be run on the grants or loans received from the Central Government
and from other sources as may be prescribed by the central government.
 PDMA is headed by a chief executive officer (CEO) and he has powers of only general direction and
control in respect of all administrative matters of PDMA.
 PDMA can set advisory councils if it wishes to do so
 PDMA is empowered to create by-laws
 The Board of Directors include nominee directors of the Central Government and RBI.
 Being an agency of the Government, the Central Government has the right to terminate the services
of a Member of the Board even before the expiry of her tenure on grounds of moral turpitude, unsound mind,
insolvency and for abuse of position.
 Further, Central Government is empowered to issue directions on Policy to PDMA and latter is
bound by that.
 Members and employees of the PDMA or any other person who has been delegated any function by
PDMA shall be deemed to be "public servants" within the meaning of Section 21 of the Indian Penal Code.
 PDMA can establish offices either in India or abroad

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 Accounts of PDMA are audited by the Comptroller and Auditor General of India (CAG) and the
CAG audited report and annual report are to be laid in Parliament.
 Legal protection is given for actions taken in good faith
 PDMA is given exemption from all kinds of taxes for all its operations
Functions

 collecting and publishing information about public debt, including borrowings by the central
government.
 issue of government securities (in demat or electronic form) and maintenance and management of
the registry of holders (which would actually be maintained by the Depositories) and making payments to them;
However, the terms and conditions of G-Secs would be prescribed to the PDMA and hence, central government
would be liable to meet the obligations arising from the financial transactions authorized by it and undertaken
by the PDMA.
 purchasing, re-issuing and trading in G-Secs
 Managing Contingent liabilities of the Central Government including developing ways for its
measurement, reduction in quantum and cost of such liabilities.
 advising central Government on its contingent liabilities
 Undertaking Cash management of the Central Government including acquiring information about its
cash assets, predicting the future cash requirements and issuing and redeeming such short term securities
required to meet the cash requirements etc.
 Advising central Government on management of cash assets
Relationship of RBI with central Government after the removal of debt management functions (as
contained in Finance Bill 2015)
The Constitution of India gives the executive branch of the Government the powers to borrow upon the security
of the Consolidated Fund of India. Reserve Bank as an agent of the Government (both Union and the States)
implemented the borrowing program. The Reserve Bank draws the necessary statutory powers for debt
management from Section 21 of the Reserve Bank of India Act, 1934. While the management of Union/Central
Government's public debt is an obligation for the Reserve Bank, the Reserve Bank undertakes the management
of the public debts of the various State Governments by agreement. The procedural aspects in debt management
operations were governed by the Government Securities Act, 2006 and rules framed under the Act. The debt
management functions comprised of formulation of a calendar for primary issuance, deciding the desired
maturity profile of the debt, size and timing of issuance, designing the instruments and methods of raising
resources, etc. taking into account government's needs, market conditions, and preferences of various segments
while ensuring that the entire strategy is consistent with the overall macro-economic policy objectives. Reserve
Bank also undertakes the conduct of auctions and manages the registry and depository functions.
All these functions will be transferred to PDMA in respect of the central government. As per the Finance Bill
2015 RBI was required by law to provide all necessary information and assistance to the effective functioning
of PDMA.
With the creation of PDMA, RBI is given the explicit task of inflation targeting and reducing its earlier focus on
multiple objectives like growth, financial stability, monetary management, debt management etc.
RBI may still be managing the borrowing requirements of the state governments as per the agreement it has
entered into with them earlier.
Though debt management is taken out of RBI, it would continue to function as the banker to the Government.
As a banker to the Government, the RBI would perform the same functions for the Government as a

RAJESH NAYAK
commercial bank performs for its customers. It would maintain accounts of the Government; receive deposits
from, and make advances to the Government; provide foreign exchange resources to the Government for
repaying external debt or purchasing foreign goods or making other payments.
Contrary views: why central bank should continue to do debt management functions in India
Creation of a PDMA was a matter of intense debate in India. Many, at some phase even RBI, believed that debt
management functions should be continued with RBI for the following reasons.

 Historically RBI had been managing the debt at a lower cost while keeping the interest rate in line
with the requirements of the economy.
 Theoretical formulations can conjecture conflicts of interest; the validity of assumptions need to be
tested by evaluation of experience/performance and on that count, conflict of interest cannot be established with
regard to Reserve Bank.
 The FRBM Act, 2003 which precluded the Reserve Bank from participating in the primary auction
of the Government bonds has resolved the conflict of interest with the monetary policy. Monetary signalling in
India is now done by the repo rate (policy rate) under the liquidity adjustment facility (LAF) and not the bond
yields. On the other hand, Government’s ownership of majority stake in public sector banks (which own 70 per
cent of banking sector assets) could be a source of conflict of interest with its role as debt manager, either
directly or through an agency controlled by it.
 Commercial Banks hold more G-Secs than what is warranted under Statutory Liquidity Ratio
(SLR). In India, at present, SLR is more of a prudential requirement than a captive quota for G-Secs.
 The size and dynamics of government market borrowing has a much wider influence on interest rate
movements and systemic liquidity. An autonomous PDMA, driven by specific objectives exclusively focusing
on debt management alone, may not be able to manage this complex task involving various trade-offs. It may
even be compelled to issue more short term debts and enlarge the space for foreign investors making economy
more vulnerable to the risk of capital flight.
 The significant impact of the Government borrowing on the broader interest rate structure in the
economy and, therefore, on the monetary transmission process in financial markets, makes it a critical
component of the macroeconomic management framework. Overall coordination by RBI hence becomes
important.
 It may not be true that what has been practiced in some other countries would come true for India.
The institutional arrangements for debt management must take into view the country specific context and
requirements. The experience of debt management offices in the Euro area (especially Greece, Portugal and
Ireland) has been less than satisfactory and has resulted in creating financial instability in the entire Euro Zone.
Qualified Foreign Investors (QFIs)
The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign
individuals, groups or associations, or resident, however, restricted to those from a country that is a member
of Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF
and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral
Memorandum of Understanding (MMOU).
QFI scheme was introduced by Government of India in consultation with RBI and SEBI in the year 2011,
through a Union Budget announcement.
The objective of enabling QFIs is to deepen and infuse more foreign funds in the Indian capital market and to
reduce market volatility as individuals are considered to be long term investors, as compared to institutional
investors.

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QFIs are allowed to make investments in the following instruments by opening a demat account in any of the
SEBI approved Qualified Depository Participant (QDP):

 Equity and Debt schemes of Indian mutual funds,

 Equity shares listed on recognized stock exchanges,
 Equity shares offered through public offers
 Corporate bonds listed/to be listed on recognized stock exchanges
 G-Securities, T-Bills and Commercial Papers
QFIs do not include FIIs/Sub-accounts/ Foreign Venture Capital Investor (FVCI).

Need and context for allowing QFIs

Uptill 2011, foreign investors, including foreign nationals, institutions, funds and other entities, invested into
India:

 Either as FII/ sub-account of an FII

 Or, by buying into an offshore exchange listed fund (ETF)-which has a back to back cover into an
FII /sub-account
 Or, through instruments such as Participatory Notes issued by FII against an Indian security-stock or
Index.
 Or by investing in Depository receipts issued by Indian companies such as ADR /GDR
Benefits of QFI Scheme
QFIs access to equity market is expected to broad base the market while enhancing the capital flows into India.
More importantly, since QFIs are the diversified set of heterogeneous investors, QFIs participation is expected
to help dampen the volatility in Indian equity market that arises due to sudden inflows or off-loading done by
FIIs. The direct participation route offered through the QFI scheme was expected to reduce the transaction cost
and complexity hitherto persisting due to large number of intermediaries. It would also bring in better
transparency while reducing the need for usingparticipatory notes route. QFIs access to Equity market is also
expected to help harnessing the investment potential remaining untapped in various sectors.

Present Status of QFIs

QFIs, have now been merged in to Foreign Portfolio Investors (FPI), when the FPI regulations were introduced
in 2014.
The existing QFIs may continue to buy, sell or deal in securities for a period of one year from the date of
commencement of FPI Regulations i.e. till January 06, 2015 or until it obtains a certificate of registration as
FPI, whichever is earlier.
Rajiv Gandhi Equity Savings Scheme (RGESS)
Rajiv Gandhi Equity Saving Scheme (RGESS), is a tax saving scheme announced in the Union Budget 2012-
13 (para 35) and expanded in the subsequent budget 2013-14 (vide para 61 & 144), designed exclusively for the
first time retail / individual investors in securities market, who invest up to Rs. 50,000 in a year and whose
annual income is below Rs. 12 lakh (around US$ 22333). The investor would get a 50% deduction of the
amount invested from the taxable income for that year. This benefit is available for the first three consecutive
years for the new investor. Thus the investor can invest a total of Rs. 1.5 lakh in equity / RGESS eligible mutual
fund Schemes and can claim a deduction of Rs. 75000 spread over three years.
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The Scheme is named after the former Prime Minister of India Shri. Rajiv Gandhi. The broad provisions of the
Scheme and the income tax benefits under it have already been incorporated as a new Section -80CCG- of the
Income Tax (IT) Act, 1961, as amended by the Finance Act, 2012 . This means that the allowed tax deduction
will be over and above the Rs. 1.5 Lakh limit permitted under Section 80 C of the IT Act, making it thus
attractive for the middle class investors.
Objective of the Scheme
The Scheme intends to encourage the flow of savings and improve the depth of domestic capital markets, as
stated in the Budget Speech by the then Finance Minister Shri Pranab Mukherjee. However, it also aims to
promote an ‘equity culture’ in India. This is also expected to widen the retail investor base in the Indian
securities markets and further the goal of financial stability and financial inclusion.

Investment Options under the Scheme

Under the Scheme, those stocks listed under the BSE 100 or CNX 100, or those of public sector undertakings
which are Navratnas, Maharatnas and Miniratnas would be eligible. Follow-on Public Offers (FPOs) of the
above companies would also be eligible under the Scheme. IPOs of PSUs, which are getting listed in the
relevant financial year and whose annual turnover is not less than Rs. 4000 cr for each of the immediate past
three years, would also be eligible.
Rashtriya Krishi Vikas Yojana
The RKVY (National Agriculture Development Programme/Rashtriya Krishi Vikas Yojana) was devised by the
Ministry of Agriculture with the aim of achieving 4% annual growth in the agriculture sector during the
Eleventh Plan period (2007-08 to 2011-12). The main objective of the Scheme is to incentivize States to
increase public investment in Agriculture and allied sectors by providing 100% Central Government grants for
State Agricultural Plans. The States, under RKVY, are required to prepare the Agriculture Plans for their
districts based on agro-climatic conditions, availability of technology and natural resources.
The Scheme is an incentive scheme; wherein there are no automatic allocations. The eligibility of a state for the
RKVY is contingent upon the state maintaining or increasing the State Plan expenditure for Agricultural and
Allied sectors. Each state needs to ensure that the baseline share of agriculture in its total State Plan expenditure
is at least maintained, and upon its doing so, it will be able to access the RKVY funds. The base line would be a
moving average and the average of the previous three years will be taken into account for determining the
eligibility under the RKVY, after excluding the funds already received.
Rashtriya Swasthya Bima Yojana (RSBY)
RSBY is a cashless Smart Card based health insurance scheme for BPL families in the unorganised sector
launched in 2007-08 and became fully operational in April 2008. It provides health insurance cover of Rs.
30,000/- for a family of five on a floater basis covering all pre-existing diseases, hospitalization expenses,
maternity benefit etc. The ambit of the scheme has been expanded to include MGNREGA workers, railway
porters, construction workers etc. The premium under the scheme is borne by the Central and the State
Government in the ratio of 75:25 (90:10 in case of J&K and NE States). The beneficiary pays Rs. 30 at the time
of enrollment. The uniqueness of the scheme lies in the fact that it provides inter-operability throughout the
country to facilitate use by migrant labour.
RSBY has made available state of the art health facility to the poorest of the poor who can choose between
public and private health service provider. The ILO and UNDP have selected the scheme as one of the eighteen
successful social protection floor schemes in the world. A number of delegations from countries like

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Bangladesh, Nigeria, Ghana, Vietnam, Cambodia, Nepal and Maldives have visited India to study the scheme
and some have even taken a decision to implement a variant in their own country.
The Unorganized workers social Security Act, 2008 came into operation w.e.f 31 December 2008 and it
encompasses ten social security schemes benefitting the unorganized workers including the RSBY.
In pursuance of a policy decision of the Government, the Labour and Employment Ministry who was hitherto
handling the RSBY scheme transferred the same to the Ministry of Health and Family Welfare with effect from
1 April 2015.
Regulatory Impact Analysis (RIA)
The OECD defines Regulatory Impact Analysis (RIA) as "a systemic approach to critically assessing the
positive and negative effects of proposed and existing regulations and non-regulatory alternatives".
RIA is an empirical methodology aimed at designing targeted regulations to achieve reasonable policy aims
with the minimum burden on those affected. The technique involves analytically examining potential impacts
arising from government action and communicating this information to decision makers in terms of positive
(benefits) or negative (costs) effects. This allows decision markers to consider the full range of benefits and
costs that will be associated with the proposed regulatory change and take informed policy decision.
Need for RIA
Economic and financial regulations aim to achieve social goals, provide consumer protection and help improve
economic performance by promoting competition. However, they do end up creating unintended and often
unavoidable barriers to trade and could be considered as unnecessary burdens to business. Thus, whenever a
new regulation in put in place or an existing regulation is reviewed, it is desirable to assess and understand the
alternatives available, the costs of compliance and enforcement, potential impact of new or changed regulation
and whether it would achieve the desired objectives. In essence, to ensure the welfare of the regulated some
relevant questions on these lines need to be posed and answered to make any new regulation or revised
regulation a success.
RIA is a tool that helps do this. RIA facilitates understanding of the impact of regulatory actions and enables
integration of multiple policy objectives, improves transparency and consultation, and enhances accountability
of governments and regulators. It not only brings the actions of decision-makers under public scrutiny and
highlights how their decisions impact society as a whole, but also mandates greater information sharing by
them.
The methods used by policymakers to reach decisions on regulation have been classified into five categories, by
the OECD, viz., expert, consensus, political, benchmarking and empirical. RIA is part of the empirical approach
to decision-making. RIA meets the following criteria for good policy-making, according to the OECD:

1. Improve understanding of benefits and costs of regulatory action: RIA is an evidence-based

approach to decision-making, and often draws on economic empirical evidence in assessing benefits and costs.
2. Integrate multiple policy objectives: RIA can be used as an integrating framework to identify and
compare the linkages and impacts between economic, social and environmental regulatory changes.
3. Improve transparency and consultation: RIA is closely linked to processes of public consultation,
which enhances the transparency of the RIA process, provides quality control for impact analysis, and improves
the information provided to decision-makers.
4. Improve government/regulators’ accountability: RIA can improve the involvement and
accountability of decision-makers by reporting on the information used in decision-making and demonstrating
how the decision impacts on society.

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 Rupay Debit Card
RuPay Debit Card is an indigenous domestic debit card introduced in May 2014 by National Payment
Corporation of India (NPCI) - a section 25 company set up by RBI and 10 commercial banks in India. This card
is accepted at all ATMs (for cash withdrawal) and at most of the point of sale (PoS) machines (for making
cashless payment for purchases) in the country. It is the Indian version of Visa or MasterCard. As part
of Pradhan Mantri Jan-Dhan Yojna (PMJDY), RuPay card is distributed and it also provides accidental
insurance cover upto Rs.1 lakh without any charge to the customer (However NPCI pays the premium @ Rs.
0.47/card). To get benefit of Accidental Insurance Cover, RuPay Debit Card must be used at least once in 45
days.

“RuPay” is coined from two terms - Rupee and Payment.

RuPay has been conceived to fulfill RBI’s vision to offer a domestic, open-loop, multilateral system which will
allow all Indian banks and financial institutions in India to participate in electronic payments (including e-
commerce). Transaction and customer data related to RuPay card transactions will reside in India. Since the
transaction processing will happen domestically, it would lead to lower cost of clearing and settlement for each
transaction and hence is suited for targeting under-penetrated/untapped consumers segments in rural areas that
do not have access to banking and financial services.
RuPay cards are considered more economical for banks to offer it to their customers. It offers complete inter-
operability between various payments channels and products. NPCI currently offers varied solutions across
platforms including ATMs, mobile technology, cheques etc. and is nurturing RuPay cards across these
platforms. RuPay e-Commerce solution was launched on 21 June, 2013. RuPay is well poised to support
issuance of credit and prepaid cards by banks in India and thereby supporting the growth of retail electronic
payments in India.
Rupee Denominated Debt
Rupee denominated debt refers to that part of India’s total external debt that is denominated in India’s domestic
currency, the Rupee.
In contrast to foreign currency denominated external debt, in case of rupee denominated debt the currency
risk (the risk arising from appreciation or depreciation of the nominal exchange rate) is borne by the creditor
and not by the borrower. The contractual liability (principal and interest that is designated to be paid by the
borrower as agreed upon in the debt contract) is settled in foreign currency. Accordingly, the borrower always
pays back the foreign currency equivalent of the rupee denomination valued at the spot exchange rate prevailing
at that point in time. Thus, if the domestic currency appreciates vis-à-vis the foreign currency, the creditor
stands to gain vis-à-vis the borrower since he receives more dollars per unit of Rupee.
In India rupee denominated debt comprises the following categories;
(a) Rupee Debt; Includes the outstanding defense and civilian state credits extended to India by the erstwhile
Union of Soviet Socialist Republics (USSR). The repayment is primarily through exports of goods to Russia.
(b) Rupee denominated Non-Resident Indian (NRI) Deposits including the Non-Resident (External) Rupee
Account (NR(E)RA) and Non-Resident Ordinary Rupee (NRO) account.
(c) Foreign Institutional Investors (FII) investment in Government Treasury-Bills and dated securities (with
such investments subject to a ceiling of US$ 10 billion annually); and
(d) FII investment in corporate debt securities (with such investments subject to a ceiling of US$ 40 billion
annually).

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The Quarterly Reports on India’s external debt published by the Ministry of Finance and the RBI as well as the
Annual Status Report on India’s external debt (published by the Ministry of Finance) available in the
website http://www.finmin.nic.in contain information on India’s rupee denominated external debt.
At end-March 2011, 19.5 percent of India’s total external debt and 12.4 percent of India’s sovereign external
debt is denominated in rupees. The difference in the two figures is accounted for by the fact that the former
encompasses all the four categories ((a) to (d)) listed above while the latter takes into account only (a) and (c).
Sagar mala
Sagar mala is an initiative floated by the Government of India to evolve a model of port led development which
will transform India’s coastline as gateways of India’s prosperity. The concept of Sagar mala was first
announced in 2003. However it didn’t take off. The concept has been reintroduced now and the Ministry of
Shipping is the nodal point for implementing the project. (In Hindi, Sagar refers to Ocean and mala refers to
garland /necklace)
The initiative aims at integrating three things-the development of ports, industrial clusters and hinterland and
efficient evacuation systems through road, rail, inland and coastal waterways. The Sagar mala initiative,
therefore, focuses on

 Modernisation of port infrastructure- transforming the existing ports to world class ports and
development of new ports;
 Efficient evacuation system by improving hinterland linkages through rail, road and water; and
 Encouraging coastal economic development by promoting port based SEZs and ancillary industries.
To realise the objectives of Sagar Mala, two broad strategies have been outlined: development of coastal
economic regions and promotion of coastal shipping.
A coastal economic region will be identified as a region along the length of the state’s coast (300-500 km) and
10-30 km inland and into the sea. This is to widen the span of economic activity in the region. Sagar mala
envisages formation of ten coastal economic regions along the coastline.
Policy initiatives are also outlined for encouragement of coastal shipping by provision of green channel,
incentives for use and simplification of procedures.
Sagar mala initiative would encourage coastal shipping and inland waterways as main carriers of people and
goods which is very essential to improve India’s sea borne traffic. With a coastline of 7,500 km, India’s
seaborne traffic is only 950 million tonnes whereas China has a seaborne traffic of 9 billion tonnes with a
coastline of 15,000km.
A detailed note on Sagar mala has been floated by the Ministry of Shipping which can be viewed here.

Implementation
The Union Cabinet chaired by the Prime Minister, Shri Narendra Modi gave its ‘in-principle’ approval for the
concept and institutional framework of Sagarmala Project on 25 March 2015.A National Sagarmala Apex
Committee (NSAC) is envisaged for overall policy guidance and high level coordination, and to review various
aspects of planning and implementation under the chairmanship of the Minister of Shipping, with Cabinet
Ministers from stakeholder Ministries and Chief Ministers/Ministers incharge of ports of maritime states as
members. Sagarmala Coordination and Steering Committee (SCSC) will be constituted under the chairmanship
of the Cabinet Secretary and with Secretaries of the respective stakeholder Ministries as members to provide
coordination between various ministries, state governments and agencies connected with implementation and
review the progress of implementation of the National Perspective Plan, Detailed Master Plans and projects.
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This Committee will also examine financing options available for the funding of projects, the possibility of
public-private partnership in project financing/construction/ operation.
At the Central level, Sagarmala Development Company (SDC) will be set up under the Companies Act, 1956 to
assist the State level/zone level Special Purpose Vehicles (SPVs), as well as SPVs to be set up by the ports, with
equity support for implementation of projects to be undertaken by them.
Sansad Adarsh Gram Yojana (SAGY)
Sansad Adarsh Gram Yojana (SAGY) is a village development project launched by Government of India in
October 2014, under which each Member of Parliament will take the responsibility of developing physical and
institutional infrastructure in three villages by 2019. The goal is to develop three Adarsh Grams or model
villages by March 2019, of which one would be achieved by 2016. Thereafter, five such Adarsh Grams (one per
year) will be selected and developed by 2024. (Sansad refers to Parliament, Adarsh refers to model, Gram refers
to village and Yojna means Scheme)
The Project was launched on the occasion of birth anniversary of Lok Nayak Jai Prakash Narayan and is
inspired by the principles and values of Mahatma Gandhi. It aims to provide rural India with quality access to
basic amenities and opportunities.
The Scheme has a holistic approach towards development. It envisages integrated development of the selected
village across multiple areas such as agriculture, health, education, sanitation, environment, livelihoods etc. Far
beyond mere infrastructure development, SAGY aims at instilling and nurturing values of national pride,
patriotism, community spirit, self-confidence people’s participation, dignity of women, etc. in the people.
The scheme is implemented through Members of Parliament (MPs) with District Collector being the nodal
officer. The MP would be free to identify a suitable gram panchayat for being developed as Adarsh Gram, other
than his/her own village or that of his/her spouse. Gram Panchayat, which has a population of 3000-5000 in
plain areas and 1000-3000 in hilly, tribal and difficult areas, would be the basic unit for development.
A village development plan would be prepared for every identified gram panchayat with special focus on
enabling every poor household to come out of poverty. The constituency fund, MPLADS, would be available to
fill critical financing gaps. The outcomes include 100% immunization, 100% institutional delivery, reduced
infant mortality rate, maternal mortality rate, reduction in malnutrition among children etc.
If each MP adopts three villages, the scheme will be able to develop 2,379 gram panchayats over the next five
years. (The Lok Sabha has 543 MPs and the Rajya Sabha 250, of which 12 are nominated. There are 2,65,000
gram panchayats in India. )
Prior to this, a scheme called Pradhan Mantri Adarsh Gram Yojana (PMAGY) was launched in March, 2010 on
a pilot basis, for the integrated development of 1000 villages each with more than 50% scheduled caste (SC)
population. Under this Scheme, each village would be able to avail gap funding of Rs.10 lakh over and above
the allocations under Rural Development and Poverty Alleviation Schemes. The scheme was being
implemented in five States of the Country viz Assam (100-villages), Bihar (225-villages), Himachal Pradesh
(225-villages), Rajasthan (225-villages) and Tamil Nadu (225-villages). The expected time-frame for
implementation of the pilot phase was 3 years. Expansion of the scheme was to be based on successful
implementation of the pilot phase. PMAGY also focuses on basic needs- housing, sanitation, water supply,
electricity, communications, banking, infrastructure connectivity, health care, nutrition etc. and aims for
convergence of existing programs in these sectors.
Sarathi
Sarathi is a software package introduced in 2011 by National Informatics Centre and Ministry of Road
Transport & Highways for the creation of a complete computerized database of driving licenses, conductors’
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licenses, driving school licenses and fees. Since State Transport Departments adhere to State-specific
regulations, besides Central Motor Vehicle Rules, Sarathi has been customized State-wise.
Sarathi envisages improved information availability of licenses, improved service delivery and access, plugging
revenue leakages and enhancing transparency in the system. For the citizens, Sarathi offers a system of online
license application submission and processing, application status tracking, fees payment and online renewal of
licenses.
The database of Sarathi can be a useful tool for curbing traffic offences. This, in turn, would reduce the socio-
economic cost of road accidents in India which has been estimated at 3 per cent of Gross Domestic Product by
Planning Commission (Page 963, Tenth Five Year Plan, Volume II).
Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a type of financial transaction tax levied in India on transactions done on
the domestic stock exchanges. The rates of STT are prescribed by the Central / Union Government through
its Budget from time to time. In tax parlance, this is categorised as a direct tax.
The STT came into effect from October 1, 2004 pursuant to the enactment of the Finance Act, 2004 and
notification of Securities Transaction Tax Rules, 2004 by the Government of India.
With charging of STT, long term capital gains tax was made zero and short term capital gains tax was reduced
to 10% (subsequently, changed to 15% since 2008). (See Income Tax Department’s tax payers’ information
series on capital gains tax)
The STT framework was subsequently reviewed by the Central Government in the year 2005, 2006, 2008,
2012and 2013. The STT rates were revised upwards in the year 2005 and 2006 while it was reduced for certain
segments in 2012 and 2013.The STT provisions were altered in the year 2008 such that for professional traders
(brokers),STT came to be treated as an expense which can be deducted from the income instead of treating the
same as an advance tax paid. (The 2004 STT provisions provided that the STT payments of professional traders,
whose “business income” arising from purchase and sale of securities could be set off against their total tax
liability.)
As on date, STT is not applicable in case of preference shares, Government securities, bonds, debentures,
currency derivatives, units of mutual fund other than equity oriented mutual fund, and gold exchange traded
funds and in such cases, tax treatment of short-term and long-term gains shall be as per normal provisions of
law. Transactions of the shares of listed companies on the floor of the stock exchange or otherwise, mandated
under the regulatory framework of SEBI, such as takeover, buyback, delisting offers etc also does not come
under STT framework. The off-market transactions of securities (which entails changes in ownership records at
depositories) also does not attract STT.
In India, STT is collected for government of India by the stock exchanges.
Skewflation
Economists usually distinguish between inflation and a relative price increase. ‘Inflation’ refers to a sustained,
across-the-board price increase, whereas ‘a relative price increase’ is a reference to an episodic price rise
pertaining to one or a small group of commodities. This leaves a third phenomenon, namely one in which there
is a price rise of one or a small group of commodities over a sustained period of time, without a traditional
designation. ‘Skewflation’ is a relatively new term to describe this third category of price rise.
In India, food prices rose steadily during the last months of 2009 and the early months of 2010, even though the
prices of non-food items continued to be relatively stable. As this somewhat unusual phenomenon stubbornly
persisted, and policymakers conferred on how to bring it to an end, the term ‘skewflation’ made an appearance

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in internal documents of the Government of India, and then appeared in print in the Economic Survey 2009-
10, Government of India, Ministry of Finance.
The skewedness of inflation in India in the early months of 2010 was obvious from the fact that food price
inflation crossed the 20% mark in multiple months, whereas wholesale price index (WPI) inflation never once
crossed 11%. It may be pointed out that the skewflation has gradually given way to a lower-grade generalized
inflation, with the economy in the middle of 2011 inflating at around 9% with food and non-food price
increases roughly at the same level.
Given that other nations have faced similar problems, the use of this term picked up quickly, with
the Economist magazine (January 24, 2011), in an article entitled ‘Price Rises in China: Inflated Fears,’
wondering if China was beginning to suffer from an Indian-style skewflation.
The distinction between these different kinds of inflation is important because they call for different kinds of
policy response from the government. Usually, a high inflation, and in particular core inflation, is taken as a
sign of aggregate demand outstripping aggregate supply and is met with monetary and fiscal policy tightening.
On the other hand, a relative price increase is often treated as the market’s natural response to exogenous
demand and supply shocks and many economists would argue that they are best left with no government
intervention. Such relative-price signals are the market’s way of informing consumers and producers what to
consume less and what to produce more. To impair these signals does more damage than good.
In terms of policy, skewflation does not fall into either of the above categories neatly. Given that it is sector
specific, it is not evident that it calls for monetary or fiscal policy action. On the other hand, given its sustained
nature, it is not possible for government to ignore it, since cause stress to consumers.
It is possible to argue that a small amount of skewflation, for instance, up to 2% per annum, centred in the food
and non-tradeable sector, is a natural concomitant of high growth in an emerging economy (see Economic
Survey 2010-11, Government of India, Ministry of Finance). This is because, as we know from the study of
empirical patterns, the purchasing power parity of poor nations tends to catch up with industrialized nations
during periods of rapid growth in the former countries. So a small skewflation, usually of up to 2%, may be
natural for an economy growing rapidly. However, if such inflation rises to higher levels, government is forced
to think of a policy cocktail, consisting of aggregate demand tightening, along with measures to improve the
production and supply of goods.
Smart City
The concept of Smart City emerged in India with the launch of “Smart City Mission” in 2015 as part of
fulfilling the announcement made in Union Budget 2014-15. The Budget outlined the vision of developing 'one
hundred Smart Cities', as satellite towns of larger cities and by modernizing the existing mid-sized cities.
In a nutshell, smart cities are those cities which harness the potential of technology in developing city
infrastructure and in enhancing the quality of life for city dwellers. No precise definition for smart city has been
developed but a set of core features have been identified.

 adequate water supply,

 assured electricity supply,
 sanitation, including solid waste management,
 efficient urban mobility and public transport,
 affordable housing, especially for the poor,
 robust IT connectivity and digitalization,
 good governance, especially e-Governance and citizen participation,

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 sustainable environment,
 safety and security of citizens, particularly women, children and the elderly, and
 health and education.
Some of its other features are mixed use of land, transit oriented development (i.e., developing commercial and
residential plots in the same area to reduce use of vehicles or to increase the use of public transport), last mile
connectivity through para transport (autos, disabled friendly vehicles etc.) housing solutions for the poor,
pedestrian / cyclist friendly design of streets, preservation of open spaces and ecological balances, green
buildings which reduce energy consumption, mobile and e-governance etc.
The smart city proposal can be linked to other development schemes like Atal Mission for Rejuvenation and
Urban Transformation of 500 cities AMRUT, Swachh Bharat Mission (SBM), National Heritage City
Development and Augmentation Yojana (HRIDAY), Digital India, Skill development, Housing for All,
construction of Museums funded by the Culture Department and other programs connected to social
infrastructure such as Health, Education and Culture.
For North Eastern and Himalayan States, the area proposed to be developed will be one-half of what is
prescribed for any of the alternative models - retrofitting, redevelopment or greenfield development.
The Mission relies on visionary leadership of local governments, public-private partnership and citizen
participation.
Selection of 100 Smart Cities: Smart City aspirants are selected through a ‘City Challenge Competition’. Each
state has to shortlist a certain number of smart city aspirants as per the norms (based on population and number
of statutory towns in the state) and prepare smart city proposals as per their imagination for further evaluation
by Center for grant of funds. This is intended to link financing with the ability to vision and develop a city.
Implementation: An Apex Committee (AC), headed by the Secretary, MoUD and comprising representatives
of related Ministries and organisations and stakeholders will approve the Proposals for Smart Cities Mission,
monitor their progress and release funds.
Smart City Action Plans will be implemented by Special Purpose Vehicles (SPV) to be created for each city and
state governments will ensure steady stream of resources for SPVs.
Sovereign Guarantee
Sovereign Guarantee is a promise by the Government to discharge the liability of a third person in case of his
default.
Sovereign Guarantees are contingent liabilities of the Central and State Governments that come into play on the
occurrence of an event covered by the guarantee.
The guarantee cover of the Government of India (GoI) is limited only to the payment of principal and normal
interest in case of default. GoI is not be liable to pay any penal interest/any other charges. Further, in view of
the quasi-sovereign nature of the borrowings, it is stipulated that the interest payable should compare with yield
on G-securities of comparable maturity with a small spread. The guarantee once given would not be transferable
to any other agency. In case of default, the lending agency has to invoke the Guarantee within a time limit of 45
to 90 days of the default. In case the guarantee is not invoked within that stipulated period, the guarantee would
cease to exist for that portion of the tranche/loan/liability for which guarantee has not been invoked.
Legal Provisions
Article 292 of the Constitution of India extends the executive power of the Union to the giving of guarantees on
the security of the Consolidated Fund of India, within such limits, if any, as may be fixed by Parliament. Similar
powers are given to States under Article 293.

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The Fiscal Responsibility and Budget Management Act, 2003 and the Rules made thereunder prescribe a limit
of 0.5% of GDP for guarantees to be given in any financial year beginning with the financial year 2004-05. If
this limit is exceeded owing to unforeseen circumstances, the Finance Minister is required to make a statement
in both Houses of Parliament explaining the deviation including whether the deviation is substantial and relates
to the actual or the potential budgetary outcomes and the remedial measures that the Central Government
proposes to take in the matter.
Objectives
The sovereign guarantee is normally extended for the purpose of achieving the following objectives:-

 To improve viability of projects or activities with significant social and economic benefits,
undertaken by government or non-government entities under Public Private Partnerships;
 To enable public sector companies to raise resources at lower interest charges or on more favourable
terms;
 To fulfill the requirement in cases where sovereign guarantee is a precondition for concessional
loans from bilateral/multilateral agencies to sub-sovereign borrowers.

Special National Investment Fund

Special National Investment Fund is a fund maintained outside the Consolidated Fund of India to transfer the
shares of certain listedloss making central public sector enterprises (CPSEs) which were found to be non-
compliant with the Rule that minimum 10% of the shares issued be held by the public (which means non-
promoter entities) to be eligible to remain listed on stock exchanges of the country.
In structure, it mimics the original concept of National Investment Fund(NIF) created for receiving the
disinvestment proceeds of central public sector enterprises. The difference stems from the fact that only shares
are transferred here and not receipts from the sale of shares of CPSEs. Further special NIF is aimed only at loss
making CPSEs.
Salient Features of the Fund
Unlike the National Investment Fund (NIF), which is now a part of the “public accounts” of Government of
India, the special NIF would be kept outside the consolidated fund of India, as was the case originally for NIF.
The number of shares that is required to make the non-compliant companies compliant with the minimum
public shareholding limit will be transferred to the Special National Investment Fund out of Government of
India shareholding on irrevocable basis without any consideration.
The Special NIF would be managed by independent professional fund managers as was originally the case with
NIF.
The shares so transferred to the fund will be sold in the capital market gradually over a period of 5 years by the
fund managers. The modalities of the sale and price will be decided by the existingEmpowered Group of
Ministers (EGoM) on the subject. The funds realized from the sale of shares would be used for social sector
schemes of the Government.
Special Category States
Special Category States (SCS) have some common characteristics like hilly and difficult terrain, low
population density and /or sizable share of tribal population, strategic location along borders with neighbouring
countries, economic and infrastructural backwardness and non-viable nature of state finances etc., which
necessitates special considerations while framing policy. States under this category have a low resource base

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and are not in a position to mobilize resources for their developmental needs even though their per capita
income may appear high.
They are special in the sense that they have special socio-economic, geographical problems, high cost of
production with less availability of useful resources and hence low economic base for livelihood activities. A
number of these states were constituted out of former small Union Territories, or districts of some other states,
necessarily involving creation of overheads and administrative infrastructure that was out of proportion to their
resource base.
National Development Council (NDC) has accorded 11 states, out of 28 states, the status of "Special Category
States" to target the fund flow for better balanced growth. They are seven States of North-Eastern region
(Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura), Sikkim, Jammu &
Kashmir, Himachal Pradesh and Uttarakhand. Other states are referred as General Category States (GCS).

Fiscal Position of these states: The SCS are highly dependent on the central grants from the Union
Government for meeting their financial requirements. These states show a revenue surplus position because any
expenditure that they make on creating assets out of grants from the centre is not treated as revenue expenditure.
This is contrary to the existing accounting standards which treats all expenditure from grants as revenue
expenditure.
Manipur, Nagaland, Sikkim and Uttarakhand have a fiscal deficit which is higher than 3 per cent but less than 6
per cent ) of their GSDP and the 13th Finance Commission has indicated that they have to make efforts to
reduce the fiscal deficit to 3 per cent by 2013-14. Jammu and Kashmir and Mizoram have higher fiscal deficits
and require concerted efforts at reducing their debt stock to achieve targets set by the 13th Finance Commission.
The other states Arunachal, Meghalaya, Assam, Tripura and Himachal have a fiscal deficit which is less than 3
per cent of GSDP and therefore need to maintain their position to achieve the targets set out by the 13th Finance
Commission.
Although the 12th Finance Commission recommended that all states (including special category states) should
be permitted to borrow from the open market at market rates, the special dispensation given to special category
states continues for external loans. In the case of the externally aided projects to SCS, the Union Government
treats 90 per cent of the amount borrowed as a grant and only the remaining 10 per cent is a loan. (For the
general category states, externally aided projects are funded on a back-to-back basis).
Special Component Plan (SCP) and Tribal Sub Plan (TSP)
Special Component Plan (SCP) and Tribal Sub-Plan (TSP) were initiated by government as intervention
strategies during seventies to cater exclusively to Scheduled Castes (SC) and Scheduled Tribes (ST)
respectively. Such plans are meant to ensure benefits to these special groups by guaranteeing funds from all
related development sectors both at State and Centre in proportion to the size of their respective population.
Government of India also extends Special Central Assistance (SCA) to states and UTs as additive to SCP and
TSP. (Ministry of Social Justice & Empowerment provides 100% grant under Central Sector Scheme of SCA to
SCP as additive to SCP to States/UTs).
The nomenclature of SCP has since been changed to Scheduled Castes Sub-Plan (SCSP) on the lines of TSP.
The strategy of SCSP consists in important interventions through planning process for social, educational and
economic development of Scheduled Castes and also for improvement in their working and living conditions.
TSP approach envisages integrated development of tribal areas wherein all programmes irrespective of source
of funding operate in unison to achieve the goal of bringing (tribal) area at par with rest of the State and
improve quality of life of tribals. It is geared towards taking up family oriented income generating schemes,

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elimination of exploitation, human resource development through education & training and infrastructure
development. TSP programmes are financed from (a) TSP funds from State /U.T Plans and Central
Ministries/Departments, (b) Special Central Assistance (SCA) to TSP (c) Grants under Article 275 (1) of the
Constitution to States/U.Ts (d) Funds through Central Sector Schemes/ Centrally Sponsored Schemes and (f)
Institutional Finance.
Guidelines issued by Planning Commission for formulation, implementation and monitoring of SCP and TSP
emphasize, inter-alia, on earmarking funds towards SCP and TSP in proportion to population of SC and ST
respectively, creating dedicated unit for proper implementation and separate budget-head/sub-heads for making
funds non divertible and approval for plans of Central Ministries/Departments/State Governments being
conditional on adherence to implementation of SCP and TSP. Ministry of Social Justice & Empowerment and
Ministry of Tribal Affairs periodically review and monitor SCP and TSP respectively.
Special Economic Zone (SEZ)
The first Export Processing Zone (EPZ) was set up in 1959 at Shannon, in Ireland. India is one of the first
countries in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting
export. India was inspired by China for setting up of SEZ. Asia’s First EPZ was set up in Kandla in 1965.
Government of India first introduced the concept of SEZ in the export import policy 2000 with a view to
provide an internationally competitive and hassle free environment for exports. SEZ refers to a specially
demarcated territory usually known as ‘deemed foreign territory’ with tax holidays, exemption from duties for
export and import, world level economic and social infrastructure for production and augmentation of export
activities within the territory along with facilities like abundant and relatively cheap labour, strategic location
and market access etc. http://sezindia.nic.in/about-introduction.asp
Spot Contracts / Markets
The term “spot contracts” are used in India in the context of identifying the regulatory jurisdiction for exchange
traded securities / commodities. The term is defined in both Securities Contracts (Regulation) Act 1956 (in
short SCRA) and Forward Contracts (Regulation) Act 1952 (in short FCRA) in order to exempt them from the
purview of regulations.

Spot contracts are also known as Ready delivery Contracts.

Under the FCRA, a ready delivery contract is one, which provides for the delivery of goods and the payment of
price therefore, either immediately or within such period not exceeding 11 days after the date of the contract,
subject to such conditions as may be prescribed by the Central Government. A ready delivery contract is
required by law to be fulfilled by giving and taking the physical delivery of goods. In market parlance, the ready
delivery contracts are commonly known as "spot" or "cash" contracts. This definition is used by FCRA for
defining the forward contracts on which Forward Markets Commission has been given regulatory powers. Thus,
FCRA defines a commodity derivative / forward contract as “a contract for delivery of goods which is not a
ready delivery contract".

SCRA defines a “spot delivery contract” in its Section 2(i) as a contract which provides for,— (a) actual
delivery of securities and the payment of a price therefor either on the same day as the date of the contract or on
the next day, (the actual period taken for the dispatch of the securities or the remittance of money therefore
through the post is excluded from the computation of the period if the parties to the contract do not reside in the
same town or locality); (b) transfer of the securities by the depository from the account of one person to another.

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A spot market is a place where sellers and buyers meet face-to-face and conclude a sale with settlement mostly
in cash. The grain & vegetable market on the road side is an example. This kind of arrangement provides both
seller and buyer an opportunity to do their trade at the negotiated price.
Swayam Sidha Scheme
It is a flagship programme of the Ministry of Women and Child Development (WCD), Government of India. It
is an integrated women empowerment programme (IWEP) initiated in 2001 by merging Mahila Samriddhi
Yojana and recasting Indira Mahila Yojana (IMY was the first Self Help Group based women’s empowerment
programme of Ministry of WCD launched in 1995-96) and including other sectoral programmes meant for
women empowerment. The objectives of the scheme include empowerment through creation of confidence and
awareness among members of SHGs regarding women’s status, health, nutrition, education, sanitation and
hygiene, legal rights, economic upliftment and other social, economic and political issues; strengthening and
institutionalizing the savings habit among rural women and their control over economic resources; improving
access of women to micro credit; involvement of women in local level planning; and convergence of services of
Department of Women and Child Development and other Departments. The long term objective of the scheme
is to achieve an all round empowerment of women, both social and economic empowerment. Direct access to
and control over resources through income generating activities would be the main purpose of women SHGs
under Swayam Sidha.
The most important component of the programme is the formulation, implementation and monitoring of block-
specific composite projects for 4-5 years. The groups thus formed should be on a self sustaining mode by the
end of 5 years. To mobilize and sustain the groups, community involvement is necessary. Towards this,
innovative schemes are undertaken by State Governments and the Central Government to engage the
community and bring about convergence of schemes.
Swayam Sidha has resulted in tremendous improvement in the socio-economic status of rural poor women and
it has helped in providing skill enhancement to the poor women for income generating activities. The evaluation
report of an external agency in 2005 indicated that women in Swayam Sidha Blocks have strengthened their
social standing in society and the awareness of social evils like alcoholism, dowry & female feticide is visible.
Economic status of women has definitely improved after joining the SHGs. Number of women members in
Panchayat levels has increased and some of them have been elected to local bodies.
The Scheme ended in March 2008. Govt. of India has desired that the State Governments should hand hold the
Self Help Groups formed under the Swayamsidha scheme till the launch the second phase of the programme.
Swavalamban
This is a social security scheme to popularize voluntary long-term retirement saving among low-income earners
in the unorganised sector. These low-income earners in the unorganised sector do not usually realize the
potential benefits of long-term retirement saving due to either low current income or financial illiteracy. To
encourage the people from the unorganised sector to voluntarily save for their retirement, Central Government
in its Budget Speech (FY 2010-11) introduced a scheme to contribute Rs.1,000 per year to each NPS account
opened in the year 2010-11, where the unorganized income earner contributes an equivalent amount. This
scheme was initially planned to run till 2013-14. "Swavalamban” is available for persons who join National
Pension Scheme, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per
annum during the financial year 2010-11. In the Budget Speech (FY 2011-12) the scheme has been extended till
2016-17. The exit norms were also relaxed allowing exit at the age of 50 years instead of 60 years, or a
minimum tenure of 20 years, whichever occurs later. In the first year of operation ( FY 2010-11) the number of
beneficiaries reached 3,03,698.

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There are at least five mutual advantages for Government and low-income earners in the unorganised sector,
which supports future continuance of Swavalamban on fiscally prudent parameters. First, the government co-
contribution is directly sent through electronic transfer eliminating leakages. This ensures a long-term
retirement savings are invested in different assets with the potential of fetching adequate retirement income
stream for low-income earners in the unorganised sector. Second, the more an eligible person saves , upto the
maximum amount of Rs 12,000 specified per annum, the more he is entitled to get from the Government as a
co-contribution and this is an in-built incentive will help him to save more. . An incentive of Rs. 1000 can
prompt households to save 1x to 12x, theoretically. At present, an analysis of country-wise data shows that for
every Rupee 1 allocated by the Government for this scheme, there has been a corresponding savings of 1.34. As
more awareness of this scheme takes place, the savings of the eligible people are likely to be many times the
amount put aside by Government. In other words, there is an in-built multiplier effect. Third, this pool of
savings strengthens the options for funding long-term investment. This means this pool of long-term savings of
a twenty year tenure could be used to finance long-term projects, infrastructure, for example. Fourth, at present
Government spends a lot of budgetary funds on social welfare of the elderly. In due course, Swavalamban can
reduce the requirement for such schemes as all savers under this scheme are less likely to need further social
security. Not the least, in strict economic terms, this makes more better fiscal sense than lowering taxes since
any increase in disposable income from tax cuts tends to go towards consumption rather than result in increased
savings.
Similar to ‘Swavalamban’ there is a KiwiSaver scheme operational in New Zealand since 2007. This scheme
however is mandatory to all those who are employed for a period of one month or more, with an optional exit
possible during trial period 14days to 56 days.
Currently, all formal sector employees covered by the Employees Provident Fund Organization are also covered
by the Employees’ Pension Scheme, 1995 under which the Government of India contributes 1.16% of their
wages (subject to a monthly cap of Rs.6500) towards their pension. Therefore, ‘Swavalamban’ in National
Pension System generates similar benefits to unorganised sector employees, and has potential for reducing
poverty among older strata of population after the next twenty years or so, without causing undue stress on the
budget.
Tax Expenditures
Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in
the collection of taxes. Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity
cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers. Tax expenditures indicate
how much more revenue could have been collected by the Government if not for such measures. In other words,
it shows the extent of indirect subsidy enjoyed by the tax payers in the country.
Tax expenditures or the revenue forgone are sanctioned in the tax laws. A statement of the same, (as far as
Federal / Union / Central Government is concerned) is presented to the Parliament at the time of Union Budget
by way of a separate budget document titled “Statement of Revenue Foregone”. It lists the revenue impact of
tax incentives or tax subsidies that are part of the tax system of the Central Government. This document also
estimates the revenue to be foregone during the proposed financial year on the basis of the revenue foregone
figures of the previous financial year.
The estimates and projections in the Statement of Revenue Forgone indicate the potential revenue gain that
would be realized by removing exemptions, deductions and such similar measures. The estimates are based on a
short-term impact analysis. They are developed assuming that the underlying tax base would not be affected by
removal of such measures. As the behaviour of economic agents, overall economic activity or other
Government policies could change along with the elimination of such measures, the actual revenue implications
could be different to that extent.
RAJESH NAYAK
The cost of each tax concession is determined separately, assuming that all other tax provisions remain
unchanged. Many of the tax concessions do, however, interact with each other. Therefore, the interactive impact
of tax incentives could turn out to be different from the revenue foregone calculated by adding up the estimates
and projections for each provision.
The assumptions and methodology adopted to estimate the revenue foregone on account of different tax
incentives are indicated at the relevant places in the Revenue Forgone Statement.
Tax expenditures or revenue foregone statement was laid before Parliament for the first time during Budget
2006-07 by way of Annex-12 of the Receipts Budget 2006-07. This gave credence to the Government’s
intention of bringing about transparency in the matter of tax policy and tax expenditures. The practice has been
continuing since then and is submitted as a separate document since 2007-08.

RAJESH NAYAK
 ALL ABOUT GOVERNMENT SECURITY AND IMPORTANT TERSM USED IN MARKET TERMINOLOGY

1. What is a Government Security?

1.1 A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the
Government‟s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one
year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the
Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated
securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and,
hence, are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, National
Saving Certificates (NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.).
They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.

a. Treasury Bills (T-bills)

1.2 Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India
and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no
interest. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face
value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-. The
return to the investors is the difference between the maturity value or the face value (that is Rs.100) and the issue price (for calculation
of yield on Treasury Bills please see answer to question no. 26). The Reserve Bank of India conducts auctions usually every
Wednesday to issue T-bills. Payments for the T-bills purchased are made on the following Friday. The 91 day T-bills are auctioned on
every Wednesday. The Treasury bills of 182 days and 364 days tenure are auctioned on alternate Wednesdays. T-bills of of 364 days
tenure are auctioned on the Wednesday preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a
non-reporting Fridays. The Reserve Bank releases an annual calendar of T-bill issuances for a financial year in the last week of March
of the previous financial year. The Reserve Bank of India announces the issue details of T-bills through a press release every week.

b. Cash Management Bills (CMBs)

1.3 Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-term instrument, known as
Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic
character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face
value at maturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the
Government. The announcement of their auction is made by Reserve Bank of India through a Press Release which will be issued one
day prior to the date of auction. The settlement of the auction is on T+1 basis. The non-competitive bidding scheme (referred to in
paragraph number 4.3 and 4.4 under question No. 4) has not been extended to the CMBs. However, these instruments are tradable and
qualify for ready forward facility. Investment in CMBs is also reckoned as an eligible investment in Government securities by banks
for SLR purpose under Section 24 of the Banking Regulation Act, 1949. First set of CMBs were issued on May 12, 2010.

c. Dated Government Securities

1.4 Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face
value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.

The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of Government securities and
deals with the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon
securities.

The nomenclature of a typical dated fixed coupon Government security contains the following features - coupon, name of the issuer,
maturity and face value.
 Fixed Rate Bonds – These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds are
issued as fixed rate bonds.

Floating Rate Bonds – Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at pre-announced
intervals (say, every six months or one year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the
Government of India so far,the base rate is the weighted average cut-off yield of the last three 364- day Treasury Bill auctions
preceding the coupon re-set date and the spread is decided through the auction. Floating Rate Bonds were first issued in September
1995 in India.

For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, thus maturing on July 2, 2017. The base rate on
the bond for the coupon payments was fixed at 6.50% being the weighted average rate of implicit yield on 364-day Treasury Bills
during the preceding six auctions. In the bond auction, a cut-off spread (markup over the benchmark rate) of 34 basis points (0.34%)
was decided. Hence the coupon for the first six months was fixed at 6.84%.

i. Zero Coupon Bonds – Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a
discount to the face value. The Government of India issued such securities in the nineties, It has not issued zero coupon bond after that.
ii. Capital Indexed Bonds – These are bonds, the principal of which is linked to an accepted index of inflation with a view to
protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997.
These bonds matured in 2002. The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein payment of
both, the coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale Price Index). In the proposed structure,
the principal will be indexed and the coupon will be calculated on the indexed principal. In order to provide the holders protection
against actual inflation, the final WPI will be used for indexation.
iii. Bonds with Call/ Put Options – Bonds can also be issued with features of optionality wherein the issuer can have the option to
buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond.
6.72%GS2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionality on the bond could be
exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the
right to buyback the bond (call option) at par value (equal to the face value) while the investor has the right to sell the bond (put option)
to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007.
iv. Special Securities - In addition to Treasury Bills and dated securities issued by the Government of India under the market
borrowing programme, the Government of India also issues, from time to time, special securities to entities like Oil Marketing
Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies.
These securities are usually long dated securities carrying coupon with a spread of about 20-25 basis points over the yield of the dated
securities of comparable maturity. These securities are, however, not eligible SLR securities but are eligible as collateral for market
repo transactions. The beneficiary oil marketing companies may divest these securities in the secondary market to banks, insurance
companies / Primary Dealers, etc., for raising cash.
v. Steps are being taken to introduce new types of instruments like STRIPS (Separate Trading of Registered Interest and
Principal of Securities). Accordingly, guidelines for stripping and reconstitution of Government securities have been issued. STRIPS
are instruments wherein each cash flow of the fixed coupon security is converted into a separate tradable Zero Coupon Bond and
traded. For example, when Rs.100 of the 8.24%GS2018 is stripped, each cash flow of coupon (Rs.4.12 each half year) will become
coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash flows are traded separately
as independent securities in the secondary market. STRIPS in Government securities will ensure availability of sovereign zero coupon
bonds, which will facilitate the development of a market determined zero coupon yield curve (ZCYC). STRIPS will also provide
institutional investors with an additional instrument for their asset- liability management. Further, as STRIPS have zero reinvestment
risk, being zero coupon bonds, they can be attractive to retail/non-institutional investors. The process of stripping/reconstitution of
Government securities is carried out at RBI, Public Debt Office (PDO) in the PDO-NDS (Negotiated Dealing System) at the option of
the holder at any time from the date of issuance of a Government security till its maturity. All dated Government securities, other than
floating rate bonds, having coupon payment dates on 2nd January and 2nd July, irrespective of the year of maturity are eligible for
Stripping/Reconstitution. Eligible Government securities held in the Subsidiary General Leger (SGL)/Constituent Subsidiary General
Ledger (CSGL) accounts maintained at the PDO, RBI, Mumbai. Physical securities shall not be eligible for stripping/reconstitution.
Minimum amount of securities that needs to be submitted for stripping/reconstitution will be Rs. 1 crore (Face Value) and multiples
thereof.
d. State Development Loans (SDLs)

1.7 State Governments also raise loans from the market. SDLs are dated securities issued through an auction similar to the auctions
conducted for dated securities issued by the Central Government (see question 3 below). Interest is serviced at half-yearly intervals and
the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State
Governments qualify for SLR. They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible
entities from the RBI under the Liquidity Adjustment Facility (LAF).

1.8 Do SDLs carry any credit risk?

The SDLs do not carry any credit risk. In this regard, they are similar to securities issued by the Government of India (GoI). This can
also be seen from the fact that the risk weights assigned to the investments in SDLs by the commercial banks is zero for the calculation
of CRAR under the Basel III capital regulations as in the case of GoI securities.

2. Why should one invest in Government securities?

2.1 Holding of cash in excess of the day-to-day needs of a bank does not give any return to it. Investment in gold has attendant
problems in regard to appraising its purity, valuation, safe custody, etc. Investing in Government securities has the following
advantages:

 Besides providing a return in the form of coupons (interest), Government securities offer the maximum safety as they carry the
Sovereign‟s commitment for payment of interest and repayment of principal.
 They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping.
 Government securities are available in a wide range of maturities from 91 days to as long as 30 years to suit the duration of a
bank's liabilities.
 Government securities can be sold easily in the secondary market to meet cash requirements.
 Government securities can also be used as collateral to borrow funds in the repo market.
 The settlement system for trading in Government securities, which is based on Delivery versus Payment (DvP), is a very
simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities
simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
 Government security prices are readily available due to a liquid and active secondary market and a transparent price
dissemination mechanism.
 Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural
Banks, Provident Funds are also required to hold Government securities as indicated below:

A. Primary (Urban) Co-operative Banks

2.2 Section 24 of the Banking Regulation Act 1949, (as applicable to co-operative societies) provides that every primary (urban)
cooperative bank shall maintain liquid assets, which at the close of business on any day, should not be less than 25 percent of its
demand and time liabilities in India (in addition to the minimum cash reserve requirement). Such liquid assets shall be in the form of
cash, gold or unencumbered Government and other approved securities. This is commonly referred to as the Statutory Liquidity Ratio
(SLR) requirement.

2.3 All primary (urban) co-operative banks (UCBs) are presently required to invest a certain minimum level of their SLR holdings in
the form of Government and other approved securities as indicated below:

a. Scheduled UCBs have to hold 25 per cent of their SLR requirement in Government and other approved securities.
b. Non-scheduled UCBs with Demand and Time Liabilities (DTL) more than Rs. 25 crore have to hold 15 per cent of their SLR
requirement in Government and other approved securities.
c. Non-scheduled UCBs with DTL less than Rs. 25 crore have to hold 10 per cent of their SLR requirements in Government and
other approved securities.
B. Rural Co-operative Banks

2.4 As per Section 24 of the Banking Regulation Act 1949, the State Co-operative Banks (SCBs) and the District Central Co-operative
Banks (DCCBs) are required to maintain in cash, gold or unencumbered approved securities, valued at a price not exceeding the current
market price, an amount which shall not, at the close of business on any day, be less than 25 per cent of its demand and time liabilities
as part of the SLR requirement. DCCBs are allowed to meet their SLR requirement by maintaining cash balances with their respective
State Co-operative Bank.

C. Regional Rural Banks (RRBs)

2.5 Since April 2002, all the RRBs are required to maintain their entire Statutory Liquidity Ratio (SLR) holdings in Government and
other approved securities. The current SLR requirement for the RRBs is 24 percent of their Demand and Time Liabilities (DTL).

2.6 Presently, RRBs have been exempted from the 'mark to market' norms in respect of their SLR-securities. Accordingly, RRBs have
been given freedom to classify their entire investment portfolio of SLR-securities under 'Held to Maturity' and value them at book
value.

D. Provident funds and other entities

2.7 The non-Government provident funds, superannuation funds and gratuity funds are required by the Central Government, effective
from January 24, 2005, to invest 40 per cent of their incremental accretions in Central and State Government securities, and/or units of
gilt funds regulated by the Securities and Exchange Board of India (SEBI) and any other negotiable security fully and unconditionally
guaranteed by the Central/State Governments. The exposure of a trust to any individual gilt fund, however, should not exceed five per
cent of its total portfolio at any point of time. The investment guidelines for non-government PFs have been recently revised in terms
of which investments up to 55% of the investible funds are permitted in a basket of instruments consisting of Central Government
securities, State Government securities and units of gilt funds, effective from April 2009.

3. How are the Government Securities issued?

3.1 Government securities are issued through auctions conducted by the RBI. Auctions are conducted on the electronic platform called
the NDS – Auction platform. Commercial banks, scheduled urban co-operative banks, Primary Dealers (a list of Primary Dealers with
their contact details is given in Annex 2), insurance companies and provident funds, who maintain funds account (current account) and
securities accounts (SGL account) with RBI, are members of this electronic platform. All members of PDO-NDS can place their bids in
the auction through this electronic platform. All non-NDS members including non-scheduled urban co-operative banks can participate
in the primary auction through scheduled commercial banks or Primary Dealers. For this purpose, the urban co-operative banks need to
open a securities account with a bank / Primary Dealer – such an account is called a Gilt Account. A Gilt Account is a dematerialized
account maintained by a scheduled commercial bank or Primary Dealer for its constituent (e.g., a non-scheduled urban co-operative
bank).

3.2 The RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar which contains
information about the amount of borrowing, the tenor of security and the likely period during which auctions will be held. A
Notification and a Press Communique giving exact particulars of the securities, viz., name, amount, type of issue and procedure of
auction are issued by the Government of India about a week prior to the actual date of auction. RBI places the notification and a Press
Release on its website (www.rbi.org.in) and also issues an advertisement in leading English and Hindi newspapers. Information about
auctions is also available with the select branches of public and private sector banks and the Primary Dealers.

4. What are the different types of auctions used for issue of securities?

Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed by the Government. With the
introduction of auctions, the rate of interest (coupon rate) gets fixed through a market based price discovery process.
 4.1 An auction may either be yield based or price based.

i. Yield Based Auction: A yield based auction is generally conducted when a new Government security is issued. Investors bid
in yield terms up to two decimal places (for example, 8.19 per cent, 8.20 per cent, etc.). Bids are arranged in ascending order and the
cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is taken as the coupon rate for
the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are
rejected. An illustrative example of the yield based auction is given below:

Yield based auction of a new security

 Maturity Date: September 8, 2018

 Coupon: It is determined in the auction (8.22% as shown in the illustration below)
 Auction date: September 5, 2008
 Auction settlement date: September 8, 2008*
 Notified Amount: Rs.1000 crore

* September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1
cycle.

Details of bids received in the increasing order of bid yields

Amount of bid Cummulative amount Price* with
Bid No. Bid Yield
(Rs. crore) (Rs.Cr) coupon as 8.22%
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87
The issuer would get the notified amount by accepting bids up to 5. Since the bid number
6 also is at the same yield, bid numbers 5 and 6 would get allotment pro-rata so that the
notified amount is not exceeded. In the above case each would get Rs. 50 crore. Bid
numbers 7 and 8 are rejected as the yields are higher than the cut-off yield.
*Price corresponding to the yield is determined as per the relationship given under YTM
calculation in question 24.

ii. Price Based Auction: A price based auction is conducted when Government of India re-issues securities issued earlier.
Bidders quote in terms of price per Rs.100 of face value of the security (e.g., Rs.102.00, Rs.101.00, Rs.100.00, Rs.99.00, etc., per
Rs.100/-). Bids are arranged in descending order and the successful bidders are those who have bid at or above the cut-off price. Bids
which are below the cut-off price are rejected. An illustrative example of price based auction is given below:

Price based auction of an existing security 8.24% GS 2018

 Maturity Date: April 22, 2018

 Coupon: 8.24%
 Auction date: September 5, 2008
 Auction settlement date: September 8, 2008*
 Notified Amount: Rs.1000 crore

* September 6 and 7 being holidays, settlement is done on September 8, 2008 under T+1 cycle.
 Details of bids received in the decreasing order of bid price
Amount of bid Implicit
Bid no. Price of bid Cumulative amount
(Rs. Cr) yield
1 100.31 300 8.1912% 300
2 100.26 200 8.1987% 500
3 100.25 250 8.2002% 750
4 100.21 150 8.2062% 900
5 100.20 100 8.2077% 1000
6 100.20 100 8.2077% 1100
7 100.16 150 8.2136% 1250
8 100.15 100 8.2151% 1350
The issuer would get the notified amount by accepting bids up to 5. Since the bid number
6 also is at the same price, bid numbers 5 and 6 would get allotment in proportion so that
the notified amount is not exceeded. In the above case each would get Rs. 50 crore. Bid
numbers 7 and 8 are rejected as the price quoted is less than the cut-off price.

4.2 Depending upon the method of allocation to successful bidders, auction could be classified as Uniform Price based and Multiple
Price based. In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same
rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them. On the other hand, in a Multiple Price auction, the
successful bidders are required to pay for the allotted quantity of securities at the respective price / yield at which they have bid. In the
example under (ii) above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i.e., Rs.100.20.
On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the price he/ she has bid, i.e., bidder
1 at Rs.100.31, bidder 2 at Rs.100.26 and so on.

4.3 An investor may bid in an auction under either of the following categories:

i. Competitive Bidding : In a competitive bidding, an investor bids at a specific price / yield and is allotted securities if the price / yield
quoted is within the cut-off price / yield. Competitive bids are made by well informed investors such as banks, financial institutions,
primary dealers, mutual funds, and insurance companies. The minimum bid amount is Rs.10,000 and in multiples of Rs.10,000
thereafter. Multiple bidding is also allowed, i.e., an investor may put in several bids at various price/ yield levels.

ii. Non-Competitive Bidding : With a view to providing retail investors, who may lack skill and knowledge to participate in the
auction directly, an opportunity to participate in the auction process, the scheme of non-competitive bidding in dated securities was
introduced in January 2002. Non-competitive bidding is open to individuals, HUFs, RRBs, co-operative banks, firms, companies,
corporate bodies, institutions, provident funds, and trusts. Under the scheme, eligible investors apply for a certain amount of securities
in an auction without mentioning a specific price / yield. Such bidders are allotted securities at the weighted average price / yield of the
auction. In the illustration given under 4.1 (ii) above, the notified amount being Rs.1000 crore, the amount reserved for non-competitive
bidding will be Rs.50 crore (5 per cent of the notified amount as indicated below). Non-competitive bidders will be allotted at the
weighted average price which is Rs.100.26 in the given illustration. The participants in non-competitive bidding are, however, required
to hold a gilt account with a bank or PD. Regional Rural Banks and co-operative banks which hold SGL and Current Account with the
RBI can also participate under the scheme of non-competitive bidding without holding a gilt account.

4.4 In every auction of dated securities, a maximum of 5 per cent of the notified amount is reserved for such non-competitive bids. In
the case of auction for Treasury Bills, the amount accepted for non-competitive bids is over and above the notified amount and there is
no limit placed. However, non-competitive bidding in Treasury Bills is available only to State Governments and other select entities
and is not available to the co-operative banks. Only one bid is allowed to be submitted by an investor either through a bank or Primary
Dealer. For bidding under the scheme, an investor has to fill in an undertaking and send it along with the application for allotment of
securities through a bank or a Primary Dealer. The minimum amount and the maximum amount for a single bid is Rs.10,000 and Rs.2
crore respectively in the case of an auction of dated securities. A bank or a Primary Dealer can charge an investor up to maximum of 6
paise per Rs.100 of application money as commission for rendering their services. In case the total applications received for non-
 competitive bids exceed the ceiling of 5 per cent of the notified amount of the auction for dated securities, the bidders are allotted
securities on a pro-rata basis.

4.5 Non-competitive bidding scheme has been introduced in the State Government securities (SDLs) from August 2009. The aggregate
amount reserved for the purpose in the case of SDLs is 10% of the notified amount (Rs.100 Crore for a notified amount of Rs.1000
Crore) and the maximum amount an investor can bid per auction is capped at 1% of the notified amount (as against Rs.2 Crore in
Central Government securities). The bidding and allotment procedure is similar to that of Central Government securities.

5. What are the Open Market Operations (OMOs)?

OMOs are the market operations conducted by the Reserve Bank of India by way of sale/ purchase of Government securities to/ from
the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is
excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity
conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

5 (b) What is meant by buyback of Government securities?

Buyback of Government securities is a process whereby the Government of India and State Governments buy back their existing
securities from the holders. The objectives of buyback can be reduction of cost (by buying back high coupon securities), reduction in
the number of outstanding securities and improving liquidity in the Government securities market (by buying back illiquid securities)
and infusion of liquidity in the system. Governments make provisions in their budget for buying back of existing securities. Buyback
can be done through an auction process or through the secondary market route, i.e., NDS/NDS-OM.

6. What is Liquidity Adjustment Facility (LAF)?

LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks (excluding RRBs) and primary dealers to
avail of liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the
collateral of Government securities including State Government securities. Basically LAF enables liquidity management on a day to
day basis. The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos – please refer to paragraph
numbers 30.4 to 30.8 under question no. 30 for details) with RBI being the counter-party to all the transactions. The interest rate in
LAF is fixed by the RBI from time to time. Currently the rate of interest on repo under LAF (borrowing by the participants) is 6.25%
and that of reverse repo (placing funds with RBI) is 5.25%. LAF is an important tool of monetary policy and enables RBI to transmit
interest rate signals to the market.

7. How and in what form can Government Securities be held?

7.1 The Public Debt Office (PDO) of the Reserve Bank of India, Mumbai acts as the registry and central depository for the Government
securities. Government securities may be held by investors either as physical stock or in dematerialized form. From May 20, 2002, it is
mandatory for all the RBI regulated entities to hold and transact in Government securities only in dematerialized (SGL) form.
Accordingly, UCBs are required to hold all Government securities in demat form.

a. Physical form: Government securities may be held in the form of stock certificates. A stock certificate is registered in the
books of PDO. Ownership in stock certificates can not be transferred by way of endorsement and delivery. They are transferred by
executing a transfer form as the ownership and transfer details are recorded in the books of PDO. The transfer of a stock certificate is
final and valid only when the same is registered in the books of PDO.
b. Demat form: Holding government securities in the dematerialized or scripless form is the safest and the most convenient
alternative as it eliminates the problems relating to custody, viz., loss of security. Besides, transfers and servicing are electronic and
hassle free. The holders can maintain their securities in dematerialsed form in either of the two ways:
i. SGL Account: Reserve Bank of India offers Subsidiary General Ledger Account (SGL) facility to select entities who
can maintain their securities in SGL accounts maintained with the Public Debt Offices of the Reserve Bank of India.
ii. Gilt Account: As the eligibility to open and maintain an SGL account with the RBI is restricted, an investor has the
option of opening a Gilt Account with a bank or a Primary Dealer which is eligible to open a Constituents' Subsidiary General Ledger
Account (CSGL) with the RBI. Under this arrangement, the bank or the Primary Dealer, as a custodian of the Gilt Account holders,
would maintain the holdings of its constituents in a CSGL account (which is also known as SGL II account) with the RBI. The
servicing of securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and maintenance of the securities.
Receipt of maturity proceeds and periodic interest is also faster as the proceeds are credited to the current account of the custodian bank
/ PD with the RBI and the custodian (CSGL account holder) immediately passes on the credit to the Gilt Account Holders (GAH).

7.2 Investors also have the option of holding Government securities in a dematerialized account with a depository (NSDL / CDSL,
etc.). This facilitates trading of Government securities on the stock exchanges.

8. How does the trading in Government securities take place?

8.1 There is an active secondary market in Government securities. The securities can be bought / sold in the secondary market either (i)
Over the Counter (OTC) or (ii) through the Negotiated Dealing System (NDS) or (iii) the Negotiated Dealing System-Order Matching
(NDS-OM).

i. Over the Counter (OTC)/ Telephone Market

8.2 In this market, a participant, who wants to buy or sell a government security, may contact a bank / Primary Dealer / financial
institution either directly or through a broker registered with SEBI and negotiate for a certain amount of a particular security at a certain
price. Such negotiations are usually done on telephone and a deal may be struck if both counterparties agree on the amount and rate. In
the case of a buyer, like an urban co-operative bank wishing to buy a security, the bank's dealer (who is authorized by the bank to
undertake transactions in Government Securities) may get in touch with other market participants over telephone and obtain quotes.
Should a deal be struck, the bank should record the details of the trade in a deal slip (specimen given at Annex 3) and send a trade
confirmation to the counterparty. The dealer must exercise due diligence with regard to the price quoted by verifying with available
sources (See question number 14 for information on ascertaining the price of Government securities). All trades undertaken in OTC
market are reported on the secondary market module of the NDS, the details of which are given under the question number 15.

ii. Negotiated Dealing System

8.3 The Negotiated Dealing System (NDS) for electronic dealing and reporting of transactions in government securities was introduced
in February 2002. It facilitates the members to submit electronically, bids or applications for primary issuance of Government
Securities when auctions are conducted. NDS also provides an interface to the Securities Settlement System (SSS) of the Public Debt
Office, RBI, Mumbai thereby facilitating settlement of transactions in Government Securities (both outright and repos) conducted in
the secondary market. Membership to the NDS is restricted to members holding SGL and/or Current Account with the RBI, Mumbai.

8.4 In August, 2005, RBI introduced an anonymous screen based order matching module on NDS, called NDS-OM. This is an order
driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders
already placed by other participants. NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI
(Please see answer to the question no.19 about CCIL). Direct access to the NDS-OM system is currently available only to select
financial institutions like Commercial Banks, Primary Dealers, Insurance Companies, Mutual Funds, etc. Other participants can access
this system through their custodians, i.e., with whom they maintain Gilt Accounts. The custodians place the orders on behalf of their
customers like the urban co-operative banks. The advantages of NDS-OM are price transparency and better price discovery.

8.5 Gilt Account holders have been given indirect access to NDS through custodian institutions. A member (who has the direct access)
can report on the NDS the transaction of a Gilt Account holder in government securities. Similarly, Gilt Account holders have also
been given indirect access to NDS-OM through the custodians. However, currently two gilt account holders of the same custodian are
not permitted to undertake repo transactions between themselves.

iii. Stock Exchanges

 8.6 Facilities are also available for trading in Government securities on stock exchanges (NSE, BSE) which cater to the needs of retail
investors.

9. Who are the major players in the Government Securities market?

Major players in the Government securities market include commercial banks and primary dealers besides institutional investors like
insurance companies. Primary Dealers play an important role as market makers in Government securities market . Other participants
include co-operative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Institutional Investors (FIIs) are
allowed to participate in the Government securities market within the quantitative limits prescribed from time to time. Corporates also
buy/ sell the government securities to manage their overall portfolio risk.

10. What are the Do's and Don’ts prescribed by RBI for the Co-operative banks dealing in Government securities?

While undertaking transactions in securities, urban co-operative banks should adhere to the instructions issued by the RBI. The
guidelines on transactions in government securities by the UCBs have been codified in the master circular UBD.BPD. (PCB). MC.No
12/16.20.000/2010-11 dated July 1, 2010 which is updated from time to time. This circular can also be accessed from the RBI website
under the Notifications – Master circulars section (http://rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3686). The important
guidelines to be kept in view by the UCBs relate to formulation of an investment policy duly approved by their Board of Directors,
defining objectives of the policy, authorities and procedures to put through deals, dealings through brokers, preparing panel of brokers
and review thereof at annual intervals, and adherence to the prudential ceilings fixed for transacting through each of the brokers, etc.

11. How are the dealing transactions recorded by the dealing desk?

11.1 For every transaction entered into by the trading desk, a deal slip should be generated which should contain data relating to nature
of the deal, name of the counter-party, whether it is a direct deal or through a broker (if it is through a broker, name of the broker),
details of security, amount, price, contract date and time and settlement date. The deal slips should be serially numbered and verified
separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the deal slip should be
immediately passed on to the back office (it should be separate and distinct from the front office) for recording and processing. For
each deal, there must be a system of issue of confirmation to the counter-party. The timely receipt of requisite written confirmation
from the counter-party, which must include all essential details of the contract, should be monitored by the back office. With The need
for counterparty confirmation of deals matched on NDS-OM will not arise, as NDS-OM is an anonymous automated order matching
system. However, in case of trades finalized in the OTC market and reported on NDS, confirmations have to be submitted by the
counterparties in the system i.e., NDS. Also, please see question no. 15.

11.2 Once a deal has been concluded through a broker, there should not be any substitution of the counter-party by the broker.
Similarly, the security sold / purchased in a deal should not be substituted by another security under any circumstances. A maker-
checker framework should be implemented to prevent any individual misdemeanor. It should be ensured that the same person is not
carrying out the functions of maker (one who inputs the data) and checker (one who verifies and authorizes the data) on the system.

11.3 On the basis of vouchers passed by the back office (which should be done after verification of actual contract notes received from
the broker / counter party and confirmation of the deal by the counter party), the books of account should be independently prepared.

12. What are the important considerations while undertaking security transactions?

The following steps should be followed in purchase of a security:

i. Which security to invest in – Typically this involves deciding on the maturity and coupon. Maturity is important because this
determines the extent of risk an investor like an UCB is exposed to – higher the maturity, higher the interest rate risk or market risk. If
the investment is largely to meet statutory requirements, it may be advisable to avoid taking undue market risk and buy securities with
shorter maturity. Within the shorter maturity range (say 5-10 years) it would be safer to buy securities which are liquid, that is,
securities which trade in relatively larger volumes in the market. The information about such securities can be obtained from the
 website of the CCIL (http://www.ccilindia.com/OMMWCG.aspx), which gives real-time secondary market trade data on NDS-OM.
Since pricing is more transparent in liquid securities, prices for these securities are easily obtainable thereby reducing the chances of
being misled/misinformed on the price in these cases. The coupon rate of the security is equally important for the investor as it affects
the total return from the security. In order to determine which security to buy, the investor must look at the Yield to Maturity (YTM) of
a security (please refer to Box III under para 24.4 for a detailed discussion on YTM). Thus, once the maturity and yield (YTM) is
decided, the UCB may select a security by looking at the price/yield information of securities traded on NDS-OM or by negotiating
with bank or PD or broker.
ii. Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the safest because it is a live and anonymous
platform where the trades are disseminated as they are struck and where counterparties to the trades are not revealed. In case the trades
are conducted on the telephone market, it would be safe to trade directly with a bank or a PD. In case one uses a broker, care must be
exercised to ensure that the broker is registered on NSE or BSE or OTC Exchange of India. Normally, the active debt market brokers
may not be interested in deal sizes which are smaller than the market lot (usually Rs.5 crore). So it is better to deal directly with bank /
PD or on NDS-OM, which also has a screen for odd-lots. Wherever a broker is used, the settlement should not happen through the
broker. Trades should not be directly executed with any counterparties other than a bank, PD or a financial institution, to minimize the
risk of getting adverse prices.
iii. How to ensure correct pricing – Since investors like UCBs have very small requirements, they may get a quote/price, which is
worse than the price for standard market lots. To be sure of prices, only liquid securities may be chosen for purchase. A safer
alternative for investors with small requirements is to buy under the primary auctions conducted by RBI through the non-competitive
route. Since there are bond auctions about twice every month, purchases can be considered to coincide with the auctions. Please see
question 14 for details on ascertaining the prices of the Government securities.

13. Why does the price of Government security change?

The price of a Government security, like other financial instruments, keeps fluctuating in the secondary market. The price is determined
by demand and supply of the securities. Specifically, the prices of Government securities are influenced by the level and changes in
interest rates in the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the market, etc.
Developments in other markets like money, foreign exchange, credit and capital markets also affect the price of the Government
securities. Further, developments in international bond markets, specifically the US Treasuries affect prices of Government securities in
India. Policy actions by RBI (e.g., announcements regarding changes in policy interest rates like Repo Rate, Cash Reserve Ratio, Open
Market Operations, etc.) can also affect the prices of Government securities.

14. How does one get information about the price of a Government security?

14.1 The return on a security is a combination of two elements (i) coupon income – that is, interest earned on the security and (ii) the
gain / loss on the security due to price changes and reinvestment gains or losses.

14.2 Price information is vital to any investor intending to either buy or sell Government securities. Information on traded prices of
securities is available on the RBI website http://www.rbi.org.in under the path Home → Financial Markets Watch → Government
securities market → NDS. This will show a table containing the details of the latest trades undertaken in the market along with the
prices. Additionally, trade information can also be seen on CCIL website http://www.ccilindia.com/OMHome.aspx. This page can also
be accessed from the RBI website through the link provided. In this page, the list of securities and the summary of trades is displayed.
The total traded amount (TTA) on that day is shown against each security. Typically liquid securities are those with the largest amount
of TTA. Pricing in these securities is efficient and hence UCBs can choose these securities for their transactions. Since the prices are
available on the screen they can invest in these securities at the current prices through their custodians. Participants can thus get real-
time information on traded prices and make informed decision while buying / selling government securities.

15. How are the Government securities transactions reported?

15.1 Transactions undertaken between market participants in the OTC/telephone market are expected to be reported on the NDS
platform within 15 minutes after the deal is put through over telephone. All OTC trades are required to be mandatorily reported on the
secondary market module of the NDS for settlement. Reporting on NDS is a four stage process wherein the seller of the security has to
initiate the reporting followed by confirmation by the buyer. This is further followed by issue of confirmation by the seller‟s back office
on the system and reporting is complete with the last stage wherein the buyer‟s back office confirms the deal. The system architecture
incorporates maker-checker model to preempt individual mistakes as well as misdemeanor.

15.2 Reporting on behalf of entities maintaining gilt accounts with the custodians is done by the respective custodians in the same
manner as they do in case of their own trades i.e., proprietary trades. The securities leg of these trades settle in the CSGL account of the
custodian. Once the reporting is complete, the NDS system accepts the trade. Information on all such successfully reported trades flow
to the clearing house i.e., the CCIL.

15.3 In the case of NDS-OM, participants place orders (price and quantity) on the system. Participants can modify / cancel their orders.
Order could be a bid for purchase or offer for sale of securities. The system, in turn will match the orders based on price and time
priority. That is, it matches bids and offers of the same prices with time priority. The NDS-OM system has separate screen for the
Central Government, State Government and Treasury bill trading. In addition, there is a screen for odd lot trading for facilitating
trading by small participants in smaller lots of less than Rs. 5 crore (i.e., the standard market lot). The NDS-OM platform is an
anonymous platform wherein the participants will not know the counterparty to the trade. Once an order is matched, the deal ticket gets
generated automatically and the trade details flow to the CCIL. Due to anonymity offered by the system, the pricing is not influenced
by the participants‟ size and standing.

16. How do the Government securities transactions settle?

Primary Market

16.1 Once the allotment process in the primary auction is finalized, the successful participants are advised of the consideration amounts
that they need to pay to the Government on settlement day. The settlement cycle for dated security auction is T+1, whereas for that of
Treasury bill auction is T+2. On the settlement date, the fund accounts of the participants are debited by their respective consideration
amounts and their securities accounts (SGL accounts) are credited with the amount of securities that they were allotted.

Secondary Market

16.2 The transactions relating to Government securities are settled through the member‟s securities / current accounts maintained with
the RBI, with delivery of securities and payment of funds being done on a net basis. The Clearing Corporation of India Limited (CCIL)
guarantees settlement of trades on the settlement date by becoming a central counter-party to every trade through the process of
novation, i.e., it becomes seller to the buyer and buyer to the seller.

16.3 All outright secondary market transactions in Government Securities are settled on T+1 basis. However, in case of repo
transactions in Government securities, the market participants will have the choice of settling the first leg on either T+0 basis or T+1
basis as per their requirement.

17. What is shut period?

„Shut period‟ means the period for which the securities can not be delivered. During the period under shut, no settlements/ delivery of
the security which is under shut will be allowed. The main purpose of having a shut period is to facilitate servicing of the securities
viz., finalizing the payment of coupon and redemption proceeds and to avoid any change in ownership of securities during this process.
Currently the shut period for the securities held in SGL accounts is one day. For example, the coupon payment dates for the security
6.49% CG 2015 are June 8 and December 8 of every year. The shut period will fall on June 7 and December 7 for this security and
trading in this security for settlement on these two dates is not allowed.

18. What is Delivery versus Payment (DvP) Settlement?

Delivery versus Payment (DvP) is the mode of settlement of securities wherein the transfer of securities and funds happen
simultaneously. This ensures that unless the funds are paid, the securities are not delivered and vice versa. DvP settlement eliminates
the settlement risk in transactions. There are three types of DvP settlements, viz., DvP I, II and III which are explained below;

i. DvP I – The securities and funds legs of the transactions are settled on a gross basis, that is, the settlements occur transaction by
transaction without netting the payables and receivables of the participant.

ii. DvP II – In this method, the securities are settled on gross basis whereas the funds are settled on a net basis, that is, the funds payable
and receivable of all transactions of a party are netted to arrive at the final payable or receivable position which is settled.

iii. DvP III – In this method, both the securities and the funds legs are settled on a net basis and only the final net position of all
transactions undertaken by a participant is settled.

Liquidity requirement in a gross mode is higher than that of a net mode since the payables and receivables are set off against each other
in the net mode.

19. What is the role of the Clearing Corporation of India Limited (CCIL)?

The CCIL is the clearing agency for Government securities. It acts as a Central Counter Party (CCP) for all transactions in Government
securities by interposing itself between two counterparties. In effect, during settlement, the CCP becomes the seller to the buyer and
buyer to the seller of the actual transaction. All outright trades undertaken in the OTC market and on the NDS-OM platform are cleared
through the CCIL. Once CCIL receives the trade information, it works out participant-wise net obligations on both the securities and
the funds leg. The payable / receivable position of the constituents (gilt account holders) is reflected against their respective custodians.
CCIL forwards the settlement file containing net position of participants to the RBI where settlement takes place by simultaneous
transfer of funds and securities under the „Delivery versus Payment‟ system. CCIL also guarantees settlement of all trades in
Government securities. That means, during the settlement process, if any participant fails to provide funds/ securities, CCIL will make
the same available from its own means. For this purpose, CCIL collects margins from all participants and maintains „Settlement
Guarantee Fund‟.

20. What is the ‘When Issued’ market?

'When Issued', a short term of "when, as and if issued", indicates a conditional transaction in a security notified for issuance but not yet
actually issued. All "When Issued" transactions are on an "if" basis, to be settled if and when the security is actually issued. 'When
Issued' transactions in the Central Government securities have been permitted to all NDS-OM members and have to be undertaken only
on the NDS-OM platform. „When Issued‟ market helps in price discovery of the securities being auctioned as well as better distribution
of the auction stock.

Net present value (NPV) or net present worth (NPW) is defined as the present value of net cash flows. It is a standard method for
using the time value of money to appraise long-term projects.

29. What are the risks involved in holding Government securities? What are the techniques for mitigating such risks?

Government securities are generally referred to as risk free instrumentsas sovereigns are not expected to default on their payments.
However, as is the case with any financial instrument, there are risks associated with holding the Government securities. Hence, it is
important to identify and understand such risks and take appropriate measures for mitigation of the same. The following are the major
risks associated with holding Government securities.

29.1 Market risk – Market risk arises out of adverse movement of prices of the securities that are held by an investor due to changes in
interest rates. This will result in booking losses on marking to market or realizing a loss if the securities are sold at the adverse prices.
Small investors, to some extent, can mitigate market risk by holding the bonds till maturity so that they can realize the yield at which
the securities were actually bought.
29.2 Reinvestment risk – Cash flows on a Government security includes fixed coupon every half year and repayment of principal at
maturity. These cash flows need to be reinvested whenever they are paid. Hence there is a risk that the investor may not be able to
reinvest these proceeds at profitable rates due to changes in interest rate scenario.

29.3 Liquidity risk – Liquidity risk refers to the inability of an investor to liquidate (sell) his holdings due to non availability of buyers
for the security, i.e., no trading activity in that particular security. Usually, when a liquid bond of fixed maturity is bought, its tenor gets
reduced due to time decay. For example, a 10 year security will become 8 year security after 2 years due to which it may become
illiquid. Due to illiquidity, the investor may need to sell at adverse prices in case of urgent funds requirement. However, in such cases,
eligible investors can participate in market repo and borrow the money against the collateral of the securities.

30. What is Money Market?

30.1 While the Government securities market generally caters to the investors with a long term investment horizon, the money market
provides investment avenues of short term tenor. Money market transactions are generally used for funding the transactions in other
markets including Government securities market and meeting short term liquidity mismatches. By definition, money market is for a
maximum tenor of up to one year. Within the one year, depending upon the tenors, money market is classified into:

i. Overnight market - The tenor of transactions is one working day.

ii. Notice money market – The tenor of the transactions is from 2 days to 14 days.
Iii. Term money market – The tenor of the transactions is from 15 days to one year.

What are the different money market instruments?

30.2 Money market instruments include call money, repos, Treasury bills, Commercial Paper, Certificate of Deposit and Collateralized
Borrowing and Lending Obligations (CBLO).

Call money market

30.3 Call money market is a market for uncollateralized lending and borrowing of funds. This market is predominantly overnight and is
open for participation only to scheduled commercial banks and the primary dealers.

Repo market

30.4 Repo or ready forward contact is an instrument for borrowing funds by selling securities with an agreement to repurchase the said
securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed.

30.5 The reverse of the repo transaction is called „reverse repo‟ which is lending of funds against buying of securities with an
agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the funds lent.

30.6 It can be seen from the definition above that there are two legs to the same transaction in a repo/ reverse repo. The duration
between the two legs is called the „repo period‟. Predominantly, repos are undertaken on overnight basis, i.e., for one day period.
Settlement of repo transactions happens along with the outright trades in government securities.

30.7 The consideration amount in the first leg of the repo transactions is the amount borrowed by the seller of the security. On this,
interest at the agreed „repo rate‟ is calculated and paid along with the consideration amount of the second leg of the transaction when
the borrower buys back the security. The overall effect of the repo transaction would be borrowing of funds backed by the collateral of
Government securities.

30.8 The money market is regulated by the Reserve Bank of India. All the above mentioned money market transactions should be
reported on the electronic platform called the Negotiated Dealing System (NDS).
30.9 As part of the measures to develop the corporate debt market, RBI has permitted select entities (scheduled commercial banks
excluding RRBs and LABs, PDs, all-India FIs, NBFCs, mutual funds, housing finance companies, insurance companies) to undertake
repo in corporate debt securities. This is similar to repo in Government securities except that corporate debt securities are used as
collateral for borrowing funds. Only listed corporate debt securities that are rated „AA‟ or above by the rating agencies are eligible to
be used for repo. Commercial paper, certificate of deposit, non-convertible debentures of original maturity less than one year are not
eligible for the purpose. These transactions take place in the OTC market and are required to be reported on FIMMDA platform within
15 minutes of the trade for dissemination of information. They are also to be reported on the clearing house of any of the exchanges for
the purpose of clearing and settlement.

Collateralised Borrowing and Lending Obligation (CBLO)

30.10 CBLO is another money market instrument operated by the Clearing Corporation of India Ltd. (CCIL), for the benefit of the
entities who have either no access to the inter bank call money market or have restricted access in terms of ceiling on call borrowing
and lending transactions. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from
one day to ninety days (up to one year as per RBI guidelines). In order to enable the market participants to borrow and lend funds,
CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the
Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain
Current account with RBI.

30.11 Membership to the CBLO segment is extended to entities who are RBI- NDS members, viz., Nationalized Banks, Private Banks,
Foreign Banks, Co-operative Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, etc. Associate
Membership to CBLO segment is extended to entities who are not members of RBI- NDS, viz., Co-operative Banks, Mutual Funds,
Insurance companies, NBFCs, Corporates, Provident/ Pension Funds, etc.

30.12 By participating in the CBLO market, CCIL members can borrow or lend funds against the collateral of eligible securities.
Eligible securities are Central Government securities including Treasury Bills, and such other securities as specified by CCIL from time
to time. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL based on which CCIL fixes the
borrowing limits. CCIL matches the borrowing and lending orders submitted by the members and notifies them. While the securities
held as collateral are in custody of the CCIL, the beneficial interest of the lender on the securities is recognized through proper
documentation.

Commercial Paper (CP)

30.13 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates, primary
dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella
limit fixed by the Reserve Bank of India are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a
maximum up to one year from the date of issue.

Certificate of Deposit (CD)

30.14 Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Banks can issue CDs
for maturities from 7 days to one a year whereas eligible FIs can issue for maturities 1 year to 3 years.

31. What are the role and functions of FIMMDA?

31.1 The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of Scheduled Commercial
Banks, Public Financial Institutions, Primary Dealers and Insurance Companies was incorporated as a Company under section 25 of the
Companies Act,1956 on June 3rd, 1998. FIMMDA is a voluntary market body for the bond, money and derivatives markets. FIMMDA
has members representing all major institutional segments of the market. The membership includes Nationalized Banks such as State
Bank of India, its associate banks and other nationalized banks; Private sector banks such as ICICI Bank, HDFC Bank, IDBI Bank;
Foreign Banks such as Bank of America, ABN Amro, Citibank, Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance
Companies like Life Insurance Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance
Company and all Primary Dealers.

31.2 The FIMMDA represents market participants and aids the development of the bond, money and derivatives markets. It acts as an
interface with the regulators on various issues that impact the functioning of these markets. It also undertakes developmental activities,
such as, introduction of benchmark rates and new derivatives instruments, etc. FIMMDA releases rates of various Government
securities that are used by market participants for valuation purposes. FIMMDA also plays a constructive role in the evolution of best
market practices by its members so that the market as a whole operates transparently as well as efficiently.

Glossary of Important Terms And Commonly Used Market Terminology

Accrued Interest

The accrued interest on a bond is the amount of interest accumulated on a bond since the last coupon payment. The interest has been
earned, but because coupons are paid only on coupon dates, the investor has not gained the money yet. In India day count convention
for G-Secs is 30/360.

Bid Price/ Yield

The price/yield being offered by a potential buyer for a security.

Big Figure

When the price is quoted as Rs.102.35, the portion other than decimals (102) is called the big figure.

Competitive Bid

Competitive bid refers to the bid for the stock at the price stated by a bidder in an auction.

Coupon

The rate of interest paid on a debt security as calculated on the basis of the security‟s face value.

Coupon Frequency

Coupon payments are made at regular intervals throughout the life of a debt security and may be quarterly, semi-annual (twice a year)
or annual payments.

Discount

When the price of a security is below the par value, it is said to be trading at discount. The value of the discount is the difference
between the FV and the Price. For example, if a security is trading at Rs.99, the discount is Rs.1.

Duration(Macaulay Duration)

Duration of a bond is the number of years taken to recover the initial investment of a bond. It is calculated as the weighted average
number of years to receive the cash flow wherein the present value of respective cash flows are multiplied with the time to that
respective cash flows. The total of such values is divided by the price of the security to arrive at the duration. Refer to Box IV under
question 27.
Face Value

Face value is the amount that is to be paid to an investor at the maturity date of the security. Debt securities can be issued at varying
face values, however in India they typically have a face value of Rs.100. The face value is also known as the repayment amount. This
amount is also referred as redemption value, principal value (or simply principal), maturity value or par value.

Floating-Rate Bond

Bonds whose coupon rate is re-set at predefined intervals and is based on a pre-specified market based interest rate.

Gilt/ Government Securities

Government securities are also known as gilts or gilt edged securities. “Government security” means a security created and issued by
the Government for the purpose of raising a public loan or for any other purpose as may be notified by the Government in the Official
Gazette and having one of the forms mentioned in The Government Securities Act, 2006.

Market Lot

Market lot refers to the standard value of the trades that happen in the market. The standard market lot size in the Government
securities market is Rs. 5 crore in face value terms.

Maturity Date

The date when the principal (face value) is paid back. The final coupon and the face value of a debt security is repaid to the investor on
the maturity date. The time to maturity can vary from short term (1 year) to long term (30 years).

Non-Competitive Bid

Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without having
to quote the yield or price in the bid. The allotment to the non-competitive segment will be at the weighted average rate that will
emerge in the auction on the basis of competitive bidding. It is an allocating facility wherein a part of total securities are allocated to
bidders at a weighted average price of successful competitive bid. (Please also see paragraph no.4.3 under the question no.4).

Odd Lot

Transactions of any value other than the standard market lot size of Rs. 5 crore are referred to as odd lot. Generally the value is less
than the Rs. 5 crore with a minimum of Rs.10,000/-. Odd lot transactions are generally done by the retail and small participants in the
market.

Par

Par value is nothing but the face value of the security which is Rs. 100 for Government securities. When the price of a security is equal
to face value, the security is said to be trading at par.

Premium

When the price of a security is above the par value, the security is said to be trading at premium. The value of the premium is the
difference between the price and the face value. For example, if a security is trading at Rs.102, the premium is Rs.2.

Price
The price quoted is for per Rs. 100 of face value. The price of any financial instrument is equal to the present value of all the future
cash flows. The price one pays for a debt security is based on a number of factors. Newly-issued debt securities usually sell at, or close
to, their face value. In the secondary market, where already-issued debt securities are bought and sold between investors, the price one
pays for a bond is based on a host of variables, including market interest rates, accrued interest, supply and demand, credit quality,
maturity date, state of issuance, market events and the size of the transaction.

Primary Dealers

In order to accomplish the objective of meeting the government borrowing needs as cheaply and efficiently as possible, a group of
highly qualified financial firms/ banks are appointed to play the role of specialist intermediaries in the government security market
between the issuer on the one hand and the market on the other. Such entities are generally called Primary dealers or market makers. In
return of a set of obligations, such as making continuous bids and offer price in the marketable government securities or submitting
reasonable bids in the auctions, these firms receive a set of privileges in the primary/ secondary market.

Real Time Gross Settlement (RTGS) system

RTGS system is a funds transfer mechanism for transfer of money from one bank to another on a “real time” and on “gross” basis.
This is the fastest possible money transfer system through the banking channel. Settlement in “real time” means payment transaction is
not subjected to any waiting period. The transactions are settled as soon as they are processed. “Gross settlement” means the transaction
is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of
the Reserve Bank of India, the payment is taken as final and irrevocable.

Repo Rate

Repo rate is the return earned on a repo transaction expressed as an annual interest rate.

Repo/Reverse Repo

Repo means an instrument for borrowing funds by selling securities of the Central Government or a State Government or of such
securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an agreement to
repurchase the said securities on a mutually agreed future date at an agreed price which includes interest for the fund borrowed.

Reverse Repo means an instrument for lending funds by purchasing securities of the Central Government or a State Government or of
such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities, with an
agreement to resell the said securities on a mutually agreed future date at an agreed price which includes interest for the fund lent.

Residual Maturity

The remaining period until maturity date of a security is its residual maturity. For example, a security issued for an original term to
maturity of 10 years, after 2 years, will have a residual maturity of 8 years.

Secondary Market

The market in which outstanding securities are traded. This market is different from the primary or initial market when securities are
sold for the first time. Secondary market refers to the buying and selling that goes on after the initial public sale of the security.

Tap Sale

Under Tap sale, a certain amount of securities is created and made available for sale, generally with a minimum price, and is sold to the
market as bids are made. These securities may be sold over a period of day or even weeks; and authorities may retain the flexibility to
increase the (minimum) price if demand proves to be strong or to cut it if demand weakens. Tap and continuous sale are very similar,
except that with Tap sale the debt manager tends to take a more pro-active role in determining the availability and indicative price for
tap sales. Continuous sale are essentially at the initiative of the market.

Treasury Bills

Debt obligations of the government that have maturities of one year or less is normally called Treasury Bills or T-Bills. Treasury Bills
are short-term obligations of the Treasury/Government. They are instruments issued at a discount to the face value and form an integral
part of the money market.

Underwriting

The arrangement by which investment bankers undertake to acquire any unsubscribed portion of a primary issuance of a security.

Weighted Average Price/ Yield

It is the weighted average mean of the price/ yield where weight being the amount used at that price/ yield. The allotment to the non-
competitive segment will be at the weighted average price/yield that will emerge in the auction on the basis of competitive bidding.

Yield

The annual percentage rate of return earned on a security. Yield is a function of a security‟s purchase price and coupon interest rate.
Yield fluctuates according to numerous factors including global markets and the economy.

Yield to Maturity (YTM)

Yield to maturity is the total return one would except to receive if the security is being held until maturity. Yield to maturity is
essentially the discount rate at

which the present value of future payments (investment income and return of principal) equals the price of the security.

Yield Curve

The graphical relationship between yield and maturity among bonds of different maturities and the same credit quality. This line shows
the term structure of interest rates. It also enables investors to compare debt securities with different maturities and coupons.

Government Securities - Investment Opportunities for Provident Funds

Why G-secs?

Provident funds, by their very nature, need to invest in risk free securities that also provide them a reasonable return. Government
securities, also called the gilt edged securities or G-secs, are not only free from default risk but also provide reasonable returns and,
therefore, offer the most suitable investment opportunity to provident funds.

What are G-secs?

The Government securities comprise dated securities issued by the Government of India and state governments as also, treasury bills
issued by the Government of India.Reserve Bank of India manages and services these securities through its public debt offices located
in various places as an agent of the Government.

Treasury Bills
Types

Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They are thus useful in managing short-term
liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-
day. There are no treasury bills issued by State Governments.

Amount

Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount
and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS).

Auctions

While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-bills are auctioned every alternate week on
Wednesdays.

Type of Day of Day of

T-bills Auction Payment*
91-day Wednesday Following Friday
182-day Wednesday of non-reporting week Following Friday
364-day Wednesday of reporting week Following Friday

* If the day of payment falls on a holiday, the payment is made on the day after the holiday.

Payment

Payment by allottees at the auction is required to be made by debit to their/ custodian‟s current account.

Participation

Provident funds can participate in all T-bill auctions either as competitive bidders or as non-competitive bidders. Participation as non-
competitive bidders would mean that provident funds need not quote the price at which they desire to buy these bills. The Reserve
Bank allots bids to the non-competitive bidders at the weighted average price of the competitive bids accepted in the auction.
Allocations to non-competitive bidders are in addition to the amount notified for sale. In other words, provident funds do not face any
uncertainty in purchasing the desired amount of T-bills from the auctions.

Where to purchase from?

T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system.
Non-competitive bids are routed through the respective custodians or any bank or PD which is an NDS member.

Dated Securities

Government paper with tenor beyond one year is known as dated security. At present, there are Central Government dated securities
with a tenor up to 30 years in the market.

Auction/Sale

Dated securities are sold through auctions. Fixed coupon securities are sometimes also sold on tap that is kept open for a few days. Of
late, the issuance of Central/state Government dated securities are being done through auctions.
Announcement

A half yearly calendar is issued in case of Central Government dated securities, indicating the amounts, the period within which the
auction will be held and the tenor of the security, which is made available on Reserve Bank‟s website. The Government of India and
the Reserve Bank also issue a press release to announce the sale, a few days (normally a week) before the auction. The press release is
widely reported in the print media and wire agencies. The government of India also issues an advertisement in the leading financial
newspapers.

Amount

Subscriptions can be for a minimum amount of Rs.10,000 and in multiples of Rs.10,000.

Where are the sales held?

Auctions are conducted electronically on PDO-NDS system. The bids are submitted by the members on PDO-NDS system both on
their own behalf as well as on behalf of their clients Provident funds can submit their bids competitive/non-competitive to their
respective custodian or to any bank/PD who is an NDS member.

Payment

The payment by successful bidders is made on the issue date, as specified in the auction notification, usually the working day following
the auction day.

State Government Securities

These are securities issued by the state governments and are also known as State Development Loans (SDLs). The issues are also
managed and serviced by the Reserve Bank of India.

The tenor of state government securities is normally ten years. State government securities are available for a minimum amount of
Rs.10,000 and in multiples of Rs.10,000. These are available at a fixed coupon rate. The auctions for State Government securities are
held electronically on PDO-NDS module.

Availability of G-secs

Apart from purchasing government securities in the primary issuance, i.e. through auctions/sales, all types of government paper can
also be purchased from the secondary market. Primary Dealers also purchase and sell securities. Provident Funds can bid under Non-
competitive bidding facility in primary auction of G-Secs under which they can place a single bid of up to Rs. two crore (face value)
(minimum Rs. 10,000/-) through their custodian (bank/PD). The allotment is made at the weighted average cut-off yield/price of the
competitive bids accepted in the auction.