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A Complete Solution to
Indian Economy and
Economic Development
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CH-NO CHAPTER NAME PAGE NO
1 INDIAN ECONOMY- BEFORE AND AFTER 1
INDEPENDENCE
2 MONEY 26
3 BANKING IN INDIA 55
4 FINANCIAL MARKETS 128
5 INSURANCE IN INDIA 150
6 FINANCIAL INCLUSION 166
7 BUDGET AND TAXATION 177
8 BALANCE OF PAYMENT 244
9 EXCHAGE RATE SYSTEM 262
10 INTERNATIONAL ORGANIZATIONS 276
11 AGRICULTURE 304
12 MANUFACTURING AND INDUSTRIES 330
13 ECONOMIC PLANNING 357
14 ECONOMIC INDICATORS 361
15 INFRASTRUCTURE 389
16 INCLUSIVE GROWTH 433

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 CH-1 INDIAN ECONOMY- BEFORE AND AFTER
INDEPENDENCE
▪ India had been conquered several times before the
British conquest, but the invaders like Portugese,
etc. settled in India.
▪ The differences of the British conquest lies in the
fact that it led to the emergence of a new political
and economic system whose interests were rooted
in a foreign soil and whose policies were guided
solely by their own interest.
▪ The main motive of the Britishers was to exploit the
Indian resources for their advantages. They shifted
the trade with the rest of the world. They established
the developed system of railways, telegraphs and
legal system.
▪ The British concentrated that the Indian economy,
trade and commerce and industrialization should
not flourished, and made it stagnant in the
developmental process.
▪ In 1600, Indian GDP per capita was 60% of
British GDP per capita. But Indian per capita
GDP declined absolutely and relatively as shown in
figure below.
▪ The Great Divergence began partly due to India’s
decline and partly due to British Growth. Indian
living standards declined in the 18th century and
stagnated in the 19th century.
▪ Aim of the British colonial rule in India - To
reduce the country to being a feeder economy for
Great Britain’s own rapidly expanding modern
industrial base.
▪ British Economic policies - concerned more with
the protection and promotion of the economic
interests of Britain than with the development of the
Indian economy.
▪ A fundamental
change in the
structure of the
Indian economy
- India was
transformed into
a net supplier of raw materials and consumer of
finished industrial products from Britain.
▪ The colonial government never made any sincere
attempt to estimate national and per capita income
of India.
▪ Notable estimators were - Dadabhai Naoroji
(Poverty and Un-British Rule in India), William
Digby, Findlay Shirras, V.K.R.V. Rao (considered
very significant) and R.C. Desai

INDUSRTIAL AGRICULTURAL
SECTOR SECTOR

OCCUPATIONAL
FOREIGN TRADE
STRUCTURE

INDIAN ECONOMY - PRE INDEPENDENCE

ERA (BEFORE 1947) PRE-
DEMOGRAPHIC
TREND INDEPENDENCE INFRASTRUCTURE

▪ India had an independent economy before the ECONOMY

advent of British rule.
▪ India was particularly well known for its
handicraft industries in the fields of cotton and
silk textiles, metal and precious stone works etc.
AGRICULTURE SECTOR

1
▪ Agrarian Economy - Indian economy under the
British rule was fundamentally agrarian i.e. about
85 percent of the country’s population lived mostly
in villages and derived livelihood directly or
indirectly from agriculture.
▪ Stagnated agriculture sector - Reason being over-
crowded with involvement of maximum
population leading to a very low agricultural
productivity, in absolute terms.
▪ However, the sector experienced some growth due
to the expansion of the aggregate area under
cultivation.
▪ Pertaining to systems of land settlement, the profit
accruing out of the agriculture sector went to the
zamindars instead of the cultivators with no
zamindars initiating to strive for the development of
agriculture.
▪ Lack of agricultural inputs - Low levels of
technology, lack of irrigation facilities and
negligible use of fertilisers resulted in a dismal
level of agricultural productivity and efficiency.
▪ India’s agriculture was starved of investment in
terracing, flood-control, drainage and desalination
of soil.
▪ Commercialisation of agriculture - could hardly
help farmers in improving their economic condition
as they were producing cash crops which were to be
ultimately used by British industries back home.
▪ Partition of the country: A sizeable portion of the
undivided country’s highly irrigated and fertile
land went to Pakistan leading to an adverse impact
upon India’s output from the agriculture sector
especially, Jute industry (whole of the area went
away to East Pakistan)
INDUSTRIAL SECTOR
▪ India could not develop a sound industrial base
even while carrying the legacy of churning out the
best handicraft stuff in the world - it declined
rapidly and no corresponding modern industrial
base was allowed to take its place.
▪ Policy of systematic deindustrialisation - To
reduce India to the status of a mere exporter of
important raw materials for the upcoming
modern industries in Britain.
▪ To turn India into a sprawling market for the
finished products of those industries so that their
continued expansion could be ensured to the
maximum advantage of Britain.
▪ Decline of the indigenous handicraft industries
created massive unemployment and rural distress
in india.
▪ Cotton and jute textile mills were mainly
concentrated in the western parts of the country -
Maharashtra and Gujarat (Indians).
▪ During the second half
of the nineteenth
century, modern
industry began to take
root in India but its
progress remained very
slow and stagnant.
▪ Iron and steel industries began to rise up - The
Tata Iron and Steel Company (TISCO) was
incorporated in 1907. Other industries like sugar,
cement, paper etc. came up after the Second World
War.
▪ Capital goods industry - Though necessary to help
promote further industrialisation, this industry did
not bloom.
▪ Growth rate of the new industrial sector and its
contribution to the Gross Domestic Product (GDP)
remained dismal and piecemeal.
▪ The industrial sector thus, was left out crying for
modernisation, diversification, capacity building
and increased public investment.
▪ Limited area of operation of the public sector—
it remained confined only to the railways, power
generation, communications, ports and some other
departmental undertakings.
Capital goods industry - means industries which
can produce machine tools which are, in turn, used
for producing articles for current consumption.
FOREIGN TRADE
▪ India has been an important trading nation since
ancient times.
▪ Restrictive policies of commodity production,
trade and tariff made India an exporter of primary
products (raw silk, cotton, wool, sugar, indigo, jute
etc.) and an importer of finished consumer goods
(cotton, silk and woollen clothes and capital goods
like light machinery) produced in the factories of
Britain
▪ Britain maintained a monopoly control over India’s
exports and imports, leading to more than half of
India’s foreign trade to be restricted to Britain
while the rest was allowed with a few other
countries like China, Ceylon (Sri Lanka) and Persia
(Iran).
▪ The opening of the Suez Canal further intensified
British control over India’s foreign trade
2
 ▪ Several essential commodities such as food grains,
clothes, kerosene etc. suffered acute scarcity in the
domestic market.
▪ The expenses incurred by an office, set up by the
colonial government in Britain and expenses on
war fought by the British government were
accrued from revenue generated from India.
DEMOGRAPHIC TREND
▪ First documentation of the population of British
India was conducted through the 1881 (decennial)
census. This census revealed the unevenness in
India’s population growth. India’s stages of
demographic transition:
o 1st stage: Before 1921
o 2nd stage: After 1921 - Neither the total
population of India nor the rate of population
growth at this stage was very high and the
various social development indicators were also
not quite encouraging.
▪ Overall literacy level: less than 16 per cent; (the
female literacy level was at about seven per cent)
▪ Public health facilities: either unavailable to the
larger population or, when available, were grossly
inadequate.
▪ Rampant occurrence of water and air-borne
diseases taking a
huge toll on life
▪ The overall
mortality rate
was very high
and the infant
mortality rate
was quite
alarming - about 218:1000
▪ Life expectancy was also very low - 32 years
▪ Extensive poverty prevailed in India during the
colonial period which contributed to the worsening
profile of India’s population of the time.
OCCUPATIONAL STRUCTURE
▪ Occupational structure connotes the distribution of
working persons across different industries and
sectors
▪ Very little signs of changes in occupational
structure witnessed during the colonial period.
▪ Largest share of the workforce is about 70-75 per
cent witnessed in agriculture.
▪ Manufacturing and the services sectors accounted
for only 10 and 15-20 per cent growth in regional
variation respectively.
▪ The parts of the then Madras Presidency,
Maharashtra and West Bengal witnessed a
decline in the dependence of the workforce on
3
the agricultural sector
with a commensurate
increase in the
manufacturing and the
services sectors
▪ Orissa, Rajasthan and
Punjab experienced an
increase in the share of
workforce in agriculture during the same time.
INFRASTRUCTURE
▪ To sub-serve various colonial interests (not to
provide basic amenities to the people), development
of basic infrastructure (railways, ports, water
transport, posts and telegraphs) took place in India.
▪ Roads-
o To mobilize the army within India
o To draw out raw materials from the
countryside to the nearest railway station or to
the ports to send these to far away England
o To reach out to the rural areas during the
rainy season.
▪ Railways-
o Introduced in 1850s by Lord Dalhousie
o Enabled people to undertake long distance
travel thereby breaking geographical and
cultural barriers
o facilitated commercialisation of Indian
agriculture which adversely affected the
comparative self-sufficiency of the village
economies in India
o Volume of India’s export trade expanded with
benefits rarely being accrued to the Indian
people
o Social benefits outweighed the country’s huge
economic loss with the ‘railways’ needing
further upgradation, expansion and public
orientation
▪ Electric telegraph served the purpose of
maintaining law and order in remotest parts.
▪ Postal services were useful but remained
inadequate.
▪ Development of the inland trade and sea lanes -
Mixed reaction to the development of these as
sometimes they proved uneconomical (Coast Canal
on the Orissa coast)
TYPES OF ECONOMIC SYSTEMS
 individual can acquire any
amount of property
Freedom of choice to the Optimum use of Depression and
consumers resources unemployment
Competition among Progress and Insufficient
producers and sellers prosperity production
More scope for innovation Quality products Class conflict
at low costs

SOCIALIST ECONOMIC SYSTEM

▪ In a socialist society, the government determines
what products are to be manufactured in
accordance with the requirements of society.
▪ It is believed that the government understands
what is appropriate for the citizens of the
country, therefore, the passions of individual buyers
are not given much attention.
▪ The government concludes how products are to be
created and how the product should be disposed of.
▪ In principle, sharing under socialism is assumed
to be based on what an individual needs and not
what they can buy.
▪ A socialist system does not have a separate estate
because everything is controlled by the
government.

FEATURES MERITS DEMERITS

Co-existence of Welfare state Non-cooperation
private and public between the two
ownership sectors
Existence of Better allocation of Inefficient Public
economic planning the resources sector
Conducive policies Promotes the Economic
by govt. for private equitable fluctuation and
sector distribution of Administered
CAPITALIST (MARKET) ECONOMY SYSTEM wealth and social prices are not the
▪ In a capitalist system, the products manufactured justice most efficient
are divided among people not according to what Planned and Ensures that all Breeding ground
definite economic citizens have the for corruption, red-
people want but on the foundation of Purchasing role of govt. means to achieve a tapism, and
Power - which is the ability to buy products and minimum living favouritism.
services. standard
▪ Which means an individual needs to have the Consumers do not It provides Socialism does not
money with him to buy the goods and services. have absolute comprehensive promote hard work
freedom of choice. social security to or any creativity in
▪ Example - The affordable housing for the all its members its citizens.
underprivileged is much required but will not
include demand in the market because the needy do MIXED ECONOMIC SYSTEM
not have the buying power to back the demand. ▪ It is a golden combination of a command
▪ Therefore, the commodity will not be manufactured (Socialist) economy and a market (Capitalist)
and provided as per market forces. economy.
▪ For this purpose, the mixed economic systems are
FEATURES MERITS DEMERITS
Freedom of Enterprise- Increase in Leads to also called dual economic systems.
every individual is free to production monopoly ▪ However, there is no sincere method to determine
make his own economic a mixed system, sometimes the word represents a
choices market system beneath the strict administrative
Right to Private Flexible system Inequalities
control in certain sections of the economy.
Property - Every

4
 GOALS AND POLICIES OF MIXED and
ECONOMIC SYSTEM private
Price determined by determined determine
Determinat the market by the d by
ion forces of central central
FULL
EMPLOYNEBT
demand and planning planning
supply authority. authority
and
demand
ECONOMIC
GROWTH
STABILITY & supply.
Motive of Profit motive Social The profit
GOALS Production welfare motive in
the
private
sector and
EQUITY EFFICIENCY welfare
motive in
the public
sector
FEATURES MERITS DEMERITS Role of No role Complete Full role
combination of a Healthy The public sector gets Governme role in the
command competition in maximum benefits nt public
economy and a the market. whereas the private sector and
market sector remains limited
economy. controlled. role in the
Coexistence of Enjoys the Inefficient Planning - private
All Sectors- In a advantages of large sectors of the sector
mixed economy central economy remain outside Competitio Exists No Exist only
all three sectors economic the control of the n competition in the
coexist in planning government. private
harmony sector
Social Welfare- Economic Ineffectiveness of Distributio Very Unequal Quite Equal Considera
aims to reduce freedom to Sectors- private sector n of ble
the wealth gap ownership of does not get full freedom, income inequaliti
in the country property and hence it becomes es exist.
and fight the choice of ineffective. This leads to
inequalities. goods and ineffectiveness among WHAT TYPE OF ECONOMY IS INDIA?
services. the public sector. ▪ India has a mixed economy. Nearly half of India's
Economic Existence of Constant fear of working population is engaged in agriculture, the
Planning - price nationalisation of the signature of a traditional economy.
General mechanism. private sector.
guideline for So the
▪ One-third of its workers are employed by the
economic allocation of services industry, which contributes two-third of
growth and resources is India's output.
prosperity of the more scientific
nation. and beneficial Services
to the sector
economy.
Existence of Corruption and Black
Cooperative Marketing
Economic
Sector Agriculture
reforms

DIFFERENCE BETWEEN CAPITALIST, SOCIALIST

AND MIXED ECONOMIC MODELS ▪ The productivity of this segment is made possible
PARAME CAPITALIST SOCIALIST MIXED by India's shift towards a market economy.
TER ▪ Since the 1990s, India has deregulated several
Ownership Private public Both
industries. It has privatized many state-owned
of Property public

5
 enterprises, and opened doors to foreign direct
investment.
REASONS FOR ADOPTION OF MIXED
ECONOMY
• To maintains a healthy balance between the public
and the private sector. This ensures cooperation and
competition between them which is conducive to
attain high growth targets.
• Through its pricing mechanisms as well as
freedoms of production, consumption, occupation
and the presence of a profit motive, it ensures that
there is an efficient allocation of resources in the
economy.
• By working towards minimizing the inequalities
of income, wealth etc.
• Eliminating unemployment and poverty.
• Mixed economy maximizes social welfare. It has all
the main features of a welfare state.
MEANING OF “PLAN”
▪ A plan spells out how the resources of a nation
should be put to use. It should have some general
goals as well as specific objectives which are to be
achieved within a specified period of time;
▪ In India plans are of five years duration and are
called five year plans (we borrowed this from the
former Soviet Union).
▪ Our plan documents specify the objectives to be
attained in the five years of a plan and what is to
be achieved over a period of twenty years (called
as perspective plan)
▪ Five year plans of India do not spell out how much
of each and every good and service is to be
produced.
INDICATIVE
PLANNING BY
IMPERATIVE
INDUCEMENT
FIXED
TYPES OF
PLANNING
DEMOCRATIC
CENTRALIZED DECENTRALIZED
In 1950, the Planning Commission was set up with the
Prime Minister as its Chairperson and the era of five
year plans had begun.
TYPES OF ECONOMIC PLANNING
Directional planning
▪ Directional type of planning followed by countries
which believe in socialism. The targets of plans are
pre-determined and executed with the help of the
government in power. In Directional type of
planning all things are under control of the state
including, financial institutions, industrial sector,
transport, infrastructure, etc.
Planning by inducement
▪ This planning is independent planning. In this
type, the state regulates and controls the process
of production, forming the enterprise and various
patterns of consumption. The government
formulates various monetary and fiscal policies
to regulate the economy effectively.
Perspective planning
▪ Perspective planning is long term planning for a
time period of 20 to 25 years. It’s an outline of
development to be undertaken over a longer
period in a phased manner. They can further be
divided into annual plans. These five-year plans
generally maintain continuity.
Indicative Planning
▪ Indicative planning is a comparatively flexible type
(soft planning) of planning, as it is different from
comprehensive or imperative planning. It works on
decentralized principles in the completion of
target plans. In this planning, the targets for the
public sector are mandatory while for the private
sector they are only indicative. It was initially used
in countries like France and Japan.
Imperative Planning
▪ In this, the government in power directs and
PERSPECTIVE
controls all the economic activities and resources
in the economy. All available resources are used
with high efficiency to complete set targets of the
plan. Since the government's decision and
DIRECTIONAL policymaking is very rigid they are to be followed
by the market players. Imperative planning is in use
in Russia and China.
Democratic planning
▪ The basic ideology in democratic planning is to
form the democratic form of government. Plans
6
 are prepared according to the requirement and
needs of the people. The discussion with various
parties involved in the economy is the main
principle of democratic planning. Aim of
democratic planning is eradicating inequalities of
income and wealth.
Fixed planning
▪ Plans are prepared for a fixed period of time. The
objectives and targets of a fixed plan are to be
achieved within the plan period. Physical targets
and spending on these targets are often not changed
except during an emergency. Fixed planning is
used in India.
Centralized Planning
▪ The centralized authority plans and formulates all
planning activities in the country in centralized
planning. This authority fixes targets for all
industries and fixes priorities for all sectors. It
takes all the investment decisions according to the
goals and targets set in the plan.
Decentralized Planning
▪ In decentralized planning, the plans are executed at
grass root level. In this, the plan is prepared by
central authority along with discussion with all the
administrative units in the country whether at state
level or district level. Plans for industries are
prepared with full discussion with all the major
representative stakeholders in the industries.
INDIAN ECONOMY - POST-INDEPENDENCE
ERA (1950-1990)
PLANNING IN INDIA
PRE-INDEPENDENCE POST-INDEPENDENCE
PLANNING PLANNING
A. PRE-INDEPENDENCE PLANNING IN INDIA
▪ M. Visvesvaraya published his book “Planned
economy in India” in 1934. In this book he
presented a constructive draft of the development of
India in 10 years. His core idea was to lay out a plan
to shift labour from agriculture to industries and
double up National income in ten years. This was
the first concrete scholarly work towards
planning.
▪ The economic perspective of India’s freedom
movement was formulated during the Karachi
session of INC (1931), Faizpur session of INC
(1936).
7
▪ National Planning Committee (1938) - was the
first attempt to develop a national plan for India.
This committee was set up by Congress president
Subhash Chandra Bose and was chaired by
Jawaharlal Nehru. However the reports of the
committee could not be prepared and only for the
first time in 1948-49 some papers came out.
▪ Bombay Plan - In 1944, Industrialists of Bombay
including Mr. JRD Tata, GD Birla, Purshottamdas
Thakurdas, Lala Shriram, Kasturbhai Lalbhai, AD
Shroff, Ardeshir Dalal, & John Mathai working
together prepared “A Brief Memorandum
Outlining a Plan of Economic Development for
India” which was popularly known as Bombay
Plan. This plan envisaged doubling the per capita
income in 15 years and tripling the national
income during this period.
▪ In August 1944, The British Indian government set
up a “Planning and Development Department”
under the charge of Ardeshir Dalal. But this
department was abolished in 1946.
▪ People’s Plan - Plan was based upon Marxist
socialism and drafted by M N Roy. This plan was
for a ten years period and gave greatest priority
to Agriculture. Nationalization of all agriculture
and production was the main feature of this plan.
▪ Gandhian Plan (1944) – Put forward by Sri
Shriman Narayan in 1944 who was principal of
Wardha Commercial College. It was a modest
kind of plan. Plan emphasized economic
decentralization with primacy to rural
development by developing cottage industries.
▪ Sarvodaya Plan (1950) – Plan was drafted by
Jaiprakash Narayan inspired by Gandhian plan as
well as Sarvodaya Idea of Vinoba Bhave. It
emphasized on small and cotton industries and
agriculture as well. Plan also stressed upon land
reforms and decentralized participatory
planning.
B. POST-INDEPENDENCE
▪ Economic Programme Committee (EPC) -
formed by All India Congress Committee (AICC)
with Nehru as its chairman. The aim of this
committee was to make a plan which could balance
private and public partnership and urban and
rural economies. The EPC recommended in 1948
to form a permanent Planning Commission in
India.
▪ In March 1950 in pursuance of declared objectives
of the Government, the Planning Commission was
set up by a Resolution, with Jawaharlal Nehru as
the first Chairman of the Planning Commission.
▪ The Planning Commission was charged with the
responsibility of making assessment of all
resources of the country, augmenting deficient
resources, formulating plans for the most effective
and balanced utilization of resources and
determining priorities.
Democratic Socialism: Nehru was greatly
influenced by the achievements of Soviet Planning;
The philosophy was to not only check the growth of
monopolistic tendencies of the private sector but
also provide freedom to the private sector to play
for main objective of social gain rather than
economic gain.
THE GOALS OF FIVE YEAR PLANS
Growth Modernization
Self Reliance Equity
1. GROWTH
▪ Growth refers to an increase in the country’s
capacity to produce the output of goods and
services within the country.
▪ Good indicator of economic growth is the steady
increase in the country’s Gross Domestic
Product (GDP) - the market value of all the goods
and services produced in the country during a year.
▪ The GDP of a country is derived from the
different sectors (Primary, Secondary and
Tertiary) of the economy - the contribution made by
each of these sectors makes up the structural
composition of the economy.
2. MODERNIZATION
▪ Steps taken by a factory to increase output by using
a new type of machine and technology is called
modernization.
▪ Modernisation also leads to changes in social
outlook such as the recognition that women should
have the same rights as men.
3. SELF RELIANCE
▪ A nation can promote economic growth and
modernisation by using its own resources or by
using resources imported from other nations.
▪ The first seven five year plans gave importance
to self-reliance which means avoiding imports of
those goods which could be produced in India itself,
in order to reduce our dependence on foreign
countries, especially for food.
▪ There was a fear that dependence on imported food
supplies, foreign technology and foreign capital
may make India’s sovereignty vulnerable to
foreign interference in our policies.
▪ Recently, PM stressed for a self-reliant India
(Atma Nirbhar Bharat) in the backdrop of the
Covid-19 outbreak.
4. EQUITY
▪ To ensure that the benefits of economic prosperity
reach the poor sections as well instead of being
enjoyed only by the rich - every Indian should be
able to meet his or her basic needs such as food,
a decent house, education and health care; and
reducing inequality in the distribution of wealth.
OBJECTIVES OF PLANNING
▪ Economic and social planning and ensuring
pattern of the ‘welfare state’.
▪ Sustainable economic growth.
▪ Poverty alleviation
▪ Employment generation and self-employment
▪ Modernising the traditional economy was set as a
foremost objective of planning especially the
agriculture sector
▪ Accord due place and weightage to all the
aspirations of the Preamble, the Fundamental
Duties, the Fundamental Rights and the Directive
Principles of the State Policy - adequate means of
livelihood, opportunities for employment and a
socio-economic order based on justice and equality.
▪ Self-reliance - an effort to strike against a
subordinate position in the world economy.
▪ Ensuring economic equality
FINANCIAL RESOURCES FOR PLANNING
▪ Central budget and state budgets – revenue and
capital receipt side
▪ Public Sector Enterprises (PSEs)
▪ Domestic private sector
▪ Gross Budgetary Support – This is an amount
from the central budget which goes to fund the
planned investment during the plan period.
▪ Foreign Direct Investment (FDI) in India
8
 PRIME MOVING FORCE - AGRICULTURE VS.
INDUSTRY
▪ The government of the time opted for industry to
be India’s prime moving force of the economy.
▪ Given the available resource base it seems an
illogical decision as India lacked all those
prerequisites which could suggest the declaration
of industry as its prime mover -
o Almost no presence in the infrastructure
sector.
o Lack of robust infrastructure industries, i.e.,
iron and steel, cement, coal, crude oil, oil
refining and electricity.
o Lack of availability of investible capital -
either by the government or the private sector.
o Absence of required technology to support the
process of industrialisation and lack of
research and development.
o Lack of skilled and semi-skilled manpower.
o Lack of entrepreneurship spirit among the
people.
o Lack of a market for industrial goods.
o Many other socio-psychological factors which
acted as negative forces for the proper
industrialisation of the economy.
▪ The obvious choice for India would have been
the agriculture sector as the prime moving force
of the economy because:
o The country was having the natural resource of
fertile land which was fit for cultivation.
o Human capital did not require any kind of
higher training.
o Higher population in rural areas with
involvement in agriculture
o Just by organising our land ownership,
irrigation and other inputs to agriculture, India
could have gone for better prospects of
development.
o Once the masses were able to achieve a level
of purchasing capacity through remunerative
income from agriculture, India could have
gone for the expansion of industries.
▪ Following developments were in favour of
industrialisation –
o By choosing industry as the prime moving
force, India opted to industrialise the economy
as well as modernise the traditional mode of
farming.
o The dominant ideology around the world as
well as in the WB (World Bank) and the IMF
(International Monetary Fund) was in favour
of industrialisation as a means to faster growth
and development.
9
o The Second World War had proved the
supremacy of defence power - which needs
support not just of science and technology, but
also of a robust industrial base.
o India also required a powerful defence base for
herself as a deterrent force.
o By the time of independence the might of
industrialisation was already proven and there
were no doubts regarding its efficacy.
A major shift took place in the Indian economic
landscape, when the government announced in 2002
that from now onwards, in place of industry,
agriculture will be the prime moving force of the
economy.
▪ According to the Planning Commission such a
policy shift will solve the following major
challenges faced by the economy:
1. Economy will be able to achieve food security
with the increase in agricultural production.
2. The agricultural surplus will generate exports
in the globalising world economy benefiting
out of the WTO (World Trade Organisation)
regime.
3. The challenge of poverty alleviation will be
solved to a great extent as the emphasis will
make agriculture a remunerative occupation
and induce growth in the rural economy by
generating more gainful employment.
4. The situation of India as an example of ‘market
failure’ will cease.
PLANNED AND MIXED ECONOMY FOR INDIA
▪ Post-independence, India was declared to be a
planned and a mixed economy.
▪ India was not only facing regional disparities at
the level of resources, but inter-regional
disparities were also prevalent, since centuries.
▪ Deeply entrenched mass poverty could only be
remedied once the government started the process
of economic planning.
▪ The abject poverty of the masses made the
government go for planning so that it could play an
active role in the allocation of resources and
mobilise them for equitable growth and
development.
▪ Although, constitutionally India was declared a
federation of states, but in the process of planning,
the authority of regulation, directing and
undertaking economic activities got more and more
centralised in the Union government.
▪ Following factors made pressing points to opt for
planned and mixed economy –
 o Great Depression (1929) and the
reconstruction challenges after the second
world War favoured a state intervention in the
economy
o In the 1950s and 1960s, the dominant view
among policymakers around the world was in
favour of an active role of the state in the
economy – Soviet Union and the East
European countries were notable examples.
o A dominant role of the State in the economy to
neutralise market failure situations
o The dominant force behind planning in India,
was Nehru himself who had strong socialist
leanings.
WHY EMPHASIS ON PUBLIC SECTOR ?
▪ The state was to be given an active and dominant
role in the economy, it was very much decided by
the time India became independent.
▪ Naturally, there was going to be a giant structure of
the government-controlled enterprises to be known
as the PSUs.
▪ The reason behind the ambitious expansion of the
PSUs was in the face of the following major
requirements:
o Infrastructural Needs
o Industrial Needs
o Employment Generation
o Development of the Social Sector
o Emergence of the Private Sector
NEHRU – MAHALANOBIS MODEL OF
GROWTH
▪ The turning point in India's planning strategy came
with the second five-year (1956- 61) plan.
▪ The model adopted for the plan is known as the
Nehru-Mahalanobis strategy of development as it
was articulated by Jawahar Lal Nehru's vision
and P.C. Mahalnobis was its chief architect.
▪ The Mahalanobis model of growth was based on the
predominance of the basic goods (Capital goods
or investment goods that are used to make further
goods).
▪ It was based on the premise that it would attract
all round investment and result in a higher rate
of growth of output.
▪ That will develop a small scale and ancillary
industry to boost employment generation, poverty
alleviation, exports etc.
Other elements of the model were -
▪ Import substitution - Protective barriers against
foreign competition to enable Indian companies to
develop domestically produced alternatives for
imported goods.
▪ A sizable public sector active in vital areas of the
economy including atomic energy and rail
transport.
▪ A vibrant small-scale sector driving consumer
goods production for dispersed and equitable
growth and producing entrepreneurs.
▪ Outcomes of the model -
o In terms of the core objective of rising up the
rate of growth of industrial production, the
strategy was successful.
o Rate of growth of overall industrial production
picked up.
o The strategy laid the foundation for a well-
diversified industrial structure within a
reasonably short period and this was a major
achievement.
o It gave the base for self-reliance.
▪ Criticism –
o Visible imbalances between the growth of the
heavy industry sector and other spheres like
agriculture and consumer goods etc.
o It heavily relied on trickle-down effect
benefits of growth will flow to all sections in
course of time.
o Eradication of poverty is slow and
incremental.
RAO-MANMOHAN SINGH MODEL OF
GROWTH
▪ Economic reforms since 1991 are based upon Rao-
Manmohan model (Narsimha Rao – PM and
Manmohan Singh – Finance minister)
▪ Features of model
o Selectively dismantle controls and permits in
order to permit the private sector to invest
liberally.
o Reorient the role of state in economic
management. State should refocus on social
and infrastructural development.
o External sector liberalisation in order to
integrate the Indian economy with the global
economy to benefit from the resource flow and
competition.
o Open up the economy and create competition
for PSEs – for better profitability, productivity
and efficiency.
o Forex reserves accumulation thus alleviating
the BoP pressures and the foreign flows – FDI
and FII increased. Indian economy became
competitive.
▪ Its success is seen in the more than 6.5% average
annual rate of growth of the economy during the 8th
10
 Plan (1992-1997). Forex reserves accumulated
leaving the BOP crisis in history; taming of
inflation; and the foreign flows- FDI and FII
increased.
FYPs - PERIOD & PERFORMANCE
PLANs DESCRIPTION
▪ Duration – from 1951 to 1956.
▪ Focus - Agriculture sector
including irrigation and power
projects.
▪ Targeted growth rate – 2.1 percent
▪ Achieved growth rate of 3.6%
(more than its target)
▪ It was based on the Harrod-Domar
First Five model.
Year Plan ▪ About 44.6 percent of the plan
outlay went in favour of the public
sector undertakings (PSUs).
▪ Launching of Community
Development Programme (2 oct
1952)
▪ Imperial Bank of India transformed
into State Bank Of India (Gorwala
Committee recommendations)
▪ Duration – from 1956 to 1961
▪ Focus – rapid industrialisation with
a focus on heavy industries and
capital goods
▪ Targeted growth rate – 7.5 percent
▪ Achieved growth rate of 4.1% (plan
Second Five was successful )
Year Plan ▪ It was based on the P.C.
Mahalanobis Model.
▪ Second Industrial Policy, 1955 –
divided industries into three
schedules.
▪ Target of achieving “Socialistic
pattern of society” in economic
policies – failed to achieve
▪ Duration – from 1961 to 1966.
▪ This plan is called ‘Gadgil
Yojana’.
▪ Witnessed two wars, one with
China in 1961–62 and the other
with Pakistan in 1965–66
▪ Severe famine – 1965 -1966
Third Five ▪ The main target of this plan was to
Year Plan make the economy independent and
to reach the self-active position of
take-off.
▪ For the first time, considered the
aim of balanced, regional
development.
11
▪ Established Food Corporation Of
India (FCI) in 1965
▪ Duration - from 1966 to 1969.
Three ▪ Reason - Indo-Pakistan war &
annual failure of the third plan.
plans ▪ Focus – Self reliance
(plan ▪ Green revolution was ushered in
holiday) this period. (1966-67)
(1966-1969) ▪ During this plan, annual plans were
made and equal priority was given
to agriculture & its allied sectors
and the industry sector.
▪ Duration - from 1969 to 1974.
▪ Objectives - Growth with stability
and progressive achievement of
self-reliance.
▪ Targeted growth rate – 5.7 percent
Fourth Five ▪ Achieved growth rate of 3.3%
Year Plan (plan failed to achieve targeted
growth rate)
▪ During this plan, the slogan of
“Garibi Hatao” was given during
the 1971 elections by Indira Gandhi.
▪ Enactment of Foreign Exchange
Regulation Act (FERA 1973),
Monopolistic & Restrictive Trade
Practices Act (MRTP 1969)
▪ Nationalisation of 14 banks in
1969
▪ Duration – From 1974 to 1979.
▪ Focus – Top priority
to agriculture followed by industry
& mines
▪ Focus on poverty alleviation and
self-reliance
▪ Targeted growth rate – 4.4 percent
▪ Achieved growth rate of 4.8% (plan
Fifth Five was successful )
Year Plan ▪ The draft of this plan was prepared
and launched by D.P. Dhar. This
plan was terminated in 1978.
▪ First population policy of india
declared in 1976
▪ Twenty-point Programme (1975)
▪ Integrated Child Development
Scheme (ICDS) launched in 1975-
76
▪ Duration – From 1978 to 1980.
▪ “Rolling Plan” concept was
envisaged and coined by Prof.
Gunnar Myrdal in “India’s
Economic Planning in its Broader
Rolling Setting”
Plan
 ▪ The Food for Work programme
was launched.
▪ Antyodaya scheme
▪ New lease of life to Panchayati Raj
Institutions (PRIs) (i.e., the 2nd
Phase of the revival of the PRIs);
▪ Duration - from 1980 to 1985.
▪ Targeted growth rate – 5.2 percent
Sixth Five ▪ Achieved growth rate of 5.7% (plan
Year Plan was successful)
▪ Objective - poverty eradication and
Employment generation.
▪ It was based on investment Yojana,
infrastructural changing and trend
to the growth model.
▪ Launched - National Rural
Employment Programme (NREP)
on 2 Oct 1980
▪ Integrated Rural Development
Programme (IRDP)
▪ Nationalisation of six banks in
1980 (Second round of
nationalisation)
▪ Establishment of NABARD in 1982
on recommendations of Sivaraman
Committee
▪ Duration - from 1985 to 1990.
▪ Objectives - emphasised on rapid
food grain production, increased
employment creation and
productivity in general.
▪ Targeted growth rate – 5 percent
▪ Achieved growth rate of 6% (plan
was successful)
Seventh ▪ Indicative planning started for Sci &
Five Year Tech.
Plan ▪ Launched Jawahar Rojgar Yojana
(JRY) in 1989 – first decentralized
scheme
▪ For the first time, the private sector
get priority over the public sector.
▪ The Plan was not laid with a strong
financial strategy, which put the
economy into a crisis of
unsustainable balance of
payments and fiscal deficits
▪ The Eighth Plan (1990–95) could
not take off due to the ‘fast-
changing political situation at the
Two Annual Centre
Plans ▪ Fiscal imbalances of the late 1980s
1990-91 & were the other important reasons for
1991-92. the delay in the launch of the Eighth
Plan.
▪ BoP(Balance of Payment) crisis
and shortage of FOREX
▪ Uncontrollable fiscal deficit
▪ Duration - from 1992 to 1997.
▪ Targeted growth rate – 5.6 percent
▪ Achieved growth rate of 6.8% (plan
was successful)
▪ Objective - Development of human
Eighth Five resources i.e. employment,
Year Plan education, and public health.
▪ Adoption of Indicative planning in
totality
▪ Narasimha Rao Govt. launched
the New Economic Policies of
India
▪ Rao-Manmohan Model – LPG
(Liberalisation, Privatisation,
Globalisation)
▪ Constitution of Disinvestment
Commission in 1996
▪ Launching of – Mid Day Meal
Scheme, MPLADS, National Social
Asst. Programme
▪ Constitutional status to Panchayat
Raj Institution in 1992 by 73rd and
74th Amendment acts.
▪ Statutory Status to SEBI (Securities
& Exchange Board of India) in 1992
▪ Duration - from 1997 to 2002.
▪ Targeted growth rate – 7 percent
▪ Achieved growth rate of 5.6%
▪ Objective - “growth with justice
and equity”.
▪ It was launched in the 50th year of
Ninth Five independence of India.
Year Plan ▪ Plan was launched when there was
an all-round ‘slowdown’ in the
economy led by the South East
Asian Financial Crisis (1996–97).
▪ Launched National Population
Policy, National Population fund
and Population Stabilization Fund
in 2000.
▪ Swarna Jayanti Shahari Rojgaar
Yojana (SJSRY) and Swarna
Jayanti Gram Swarojgaar Yojana
(SGSY) were launched.
▪ Sarva Shiksha Abhiyan launched in
2001.
▪ Duration - from 2002 to 2007.
▪ Objective - aims to double the Per
Capita Income of India in the next
10 years.
▪ Targeted growth rate – 8 percent
12
 ▪ Achieved growth rate of 8.2% 4. Every State must have an
▪ Plan aims to reduce the poverty average growth rate in the
ratio by 15% by 2012. Twelfth Plan preferably higher
▪ For the first time the Plan went to set than that achieved in the
the ‘monitorable targets’ for Eleventh Plan.
eleven select indicators of ▪ Head-count ratio of consumption
Tenth Five development for the Centre as well poverty to be reduced by 10
Year Plan as for the states percentage points over the
▪ ‘Governance’ was considered a preceding estimates by the end of
factor of development Twelfth FYP.
▪ States’ role in planning to be ▪ Mean Years of Schooling to
increased with the greater increase to seven years by the end
involvement of the PRIs of Twelfth FYP.
▪ Policy and institutional reforms in ▪ Reduce IMR to 25 and MMR to 1
each sector - reforms in the PSUs, per 1,000 live births, and improve
legal reforms, administrative Child Sex Ratio (0–6 years) to 950
reforms, labour reforms, etc by the end of the Twelfth FYP.
▪ Agriculture sector was declared ▪ Reduce Total Fertility Rate to 2.1
as the prime moving force (PMF) by the end of Twelfth FYP.
of the economy in 2002. ▪ Increase green cover (as measured
▪ Increased emphasis on the social by satellite imagery) by 1 million
sector – About 27% of total outlay. hectare every year during the
▪ Duration - from 2007 to 2012. Twelfth FYP.
▪ Targeted growth rate – 8.1 percent ▪ Increase investment in
▪ Achieved growth rate of 7.9% infrastructure as a percentage of
Eleventh ▪ Objective - “faster and more GDP to 9 per cent by the end of
Five Year inclusive growth” Twelfth FYP
Plan ▪ Plan target of 9-10 per cent GDP ▪ Provide access to banking services
growth. to 90 per cent Indian households
▪ It was prepared by C. Rangarajan. by the end of Twelfth FYP.

▪ Duration - from 2012 to 2017. CONCLUSION

▪ Objective - “Faster, More Inclusive ▪ To conclude, India’s five year plans did not
and sustainable growth” achieve much in terms of what they set out to do.
▪ Growth rate target is 9%. ▪ The economic progress that we have witnessed so
▪ Broad Objectives of 12th Five far is, by and large, a result of the opening up of
Year Plan India’s economy post 1991 BoP crisis.
1. To reduce poverty ▪ Today the private sector has overtaken the public
2. To improve regional equality sector and taken lead across various sectors of the
across states and within states economy.
3. To improve living conditions ▪ There are both positive and negative aspects to this.
for SCs, STs, OBCs,
Minorities MULTI LEVEL PLANNING
4. To generate attractive ▪ By the mid-1960s, the states were given the power
employment opportunities for to plan, by the Centre, advising them that they
Indian youth. should promote planning at the lower levels of the
5. To eliminate gender gaps. administrative strata.
Twelfth ▪ Economic Growth ▪ By the early 1980s, India was a country of multi-
Five Year 1. Real GDP Growth Rate of 8.0 level planning (MLP) with the structure and strata
Plan per cent. of planning as follows:
2. Agriculture Growth Rate of 4.0
per cent. First Strata: Centre-Level Planning
3. Manufacturing Growth Rate of At centre level planning, three types of Central Plans
10 per cent. had evolved over the years - Five Year Plans, Twenty-

13
Point Programme and MPLADS (Member of
Parliament Local Area Development Scheme)
Second Strata: State-Level Planning
By the 1960s, the states were planning at the state level
with their respective planning bodies, (State Planning
Boards) with the respective CMs being their Chairman.
The plans of the states were for a term of five years and
parallel to the concerned Five Year Plans of the Centre.
Third Strata: District-Level Planning
By the late 1960s all the districts of the states were
having their own plans with their respective District
Planning Boards with the respective District
Magistrate as chairman.
Fourth Strata: Block-Level Planning
As a part of the district-level planning the block level
planning came up which had the District Planning
Boards as their nodal body.
Fifth Strata: Local Level Planning
By the early 1980s, plans were being implemented at
the local level via the blocks and had the District
Planning Boards (DPBs) as the nodal agency.
ACHIEVEMENTS OF PLANNING
▪ National income increased manifold
▪ India became one of the largest and emerging
economies in Asia with about 2.7 trillion USD
GDP.
▪ India has become the fifth-largest economy in
2019, overtaking the United Kingdom and France.
▪ India ranks third when GDP is compared in terms
of purchasing power parity at $11.33 trillion.
▪ Improvement in social indicators – IMR, MMR,
Literacy among others.
▪ Robust industrial sector – cement, fertilizers, steel,
pharma etc.
▪ Agriculture growth is also gaining momentum with
record breaking food grains productions.
The Member of Parliament Local Area
Development Scheme (MPLADS)
MPLADS is the last of the Central Plans. The
scheme was launched in 1993 with Rs. 2 crore
given to each MP. In April 2011 the corpus was
enhanced to Rs. 5 crore while announcing the new
guidelines for the scheme. Under this scheme the
Members of Parliament recommends some works
(i.e. creation of fixed community assets, based on
locally felt developmental needs) to the concerned
District Magistrate.
▪ Whopping rise in FOREX reserves- about 480 bn
USD (June 2020)
▪ Global leadership of India in the service sector.
▪ Considerable expansion of the higher and
vocational education sector – Health universities,
engineering institutions etc.
▪ Poverty dropped to about 20% of the population
FAILURES OF PLANNING
▪ High rate of unemployment
▪ Quality of outcome from education is dismal
▪ Rampant poverty.
▪ Gender parity is still steep and widespread
▪ R&D is not globally competitive along with poor
spending (about 0.6% of GDP)
▪ Export growth is not much high.
▪ Regional imbalances are clearly visible
▪ Low productivity of agriculture sector
▪ Half of the children suffer from malnutrition.
PRE-REFORM PERIOD (PRE 1990s)
Achievements
▪ Acceleration of the growth rate – during the first
three decades of planning, the growth rate averaged
around 3.5 to 4 percent (known as Hindu growth
rate – coined by Prof. Raj Krishna)
▪ Growth of the agriculture sector – average
spending on agriculture and allied sector was
around 23-25 percent of plan outlay in each FYP.
Multipurpose projects such as Damodar valley,
Bhakra Nangal also brought prospects for the
agriculture sector. The Green revolution was also
brought in.
▪ Development of economic infrastructure –
development of irrigation projects, hydro electric
projects, thermal power projects and expansion of
network of surface transports.
▪ Development of heavy capital goods industry
base.
Failures
▪ Failure to create employment opportunities –
India is facing a problem of underemployment and
disguised unemployment.
▪ Failure to eradicate poverty – more than quarter
of the population in India was living below poverty
line even after four decades of planning, this speaks
about the failure of planning in creating ‘growth for
all’.
▪ Failure in undertaking land reforms and other
institutional reforms in agriculture – productivity
of agriculture is dismal. Non remunerative nature of
agriculture.
14
 ▪ Failure in setting up a strong, competitive, ▪ India agreed to the conditionalities of World Bank
diversified industrial base – promotion of capital and IMF - announced the New Economic Policy
goods industries by the state led to concentration (NEP) - which consisted of following economic
and inefficiency. reforms:
1. Creating a more competitive environment in the
ECONOMIC REFORMS SINCE 1991 economy by removing the barriers to entry and
▪ The origin of the financial crisis can be traced from growth of firms;
the inefficient management of the Indian 2. Introduced liberalization with a view to
economy in the 1980s. Government’s expenditure integrate the Indian economy with the world
was more than its income. economy;
3. To remove restrictions on FDI as also to free
ECONOMIC CRISIS OF 1980s the domestic entrepreneur from the restrictions
▪ Government expenditure began to exceed its of Monopolies and Restrictive Trade Practices
revenue by such large margins that meeting the (MRTP) Act;
expenditure through borrowings became 4. To unleash the Indian industrial economy from
unsustainable. the web of unnecessary bureaucratic controls;
▪ There was a sharp rise in the prices of many 5. To reduce the load of public sector enterprises
essential goods. which have shown a very low rate of return or
▪ Imports grew at a very high rate without which were incurring losses over the years.
matching growth of exports.
▪ Foreign exchange reserves declined to a level that REASONS FOR ECONOMIC REFORMS
was not adequate to finance imports for more than ▪ Rise in Prices - Inflation surged from 6.7% to
two weeks. 16.7%. attributed to rapid increase in money
▪ No sufficient foreign exchange to pay the interest supply.
to international lenders. ▪ Rise in Fiscal Deficit - Due to increase in non-
development expenditure fiscal deficit of the
To avert and mitigate the crisis, India approached the Government had been increasing. This was
International Bank for Reconstruction and accompanied by rise in public debt and resultant
Development (IBRD) (World Bank) and the interest.
International Monetary Fund (IMF) and received $7 ▪ Adverse Balance of Payments: When foreign
billion as loan to manage the crisis. exchange falls short for payment or total imports
exceeds total exports, problems of adverse balance
Measures to avail the loan from IMF and World Bank of payments arise.
▪ Iraq-Kuwait War 1990-91 – This led to rise in
petrol prices. The flow of remittances from Gulf
Liberalisation - Removing countries stopped.
1. restrictions on the private sector ▪ Dismal performance of the PSUs - These were
not performing well due to political interference
Privatisation - Reducing the role and became a big liability for the Government.
2. of the government in many areas ▪ Fall in Foreign Exchange Reserves - Indians
foreign exchange reserve fell to lowest in 1990-91
Globalisation- Removing trade and it was insufficient to pay for an import bill
for 2 weeks (In 1989-90, it declined to Rs. 6252
3. restrictions
crores)

CONDITIONS OF IMF FOR INDIA Balance of Payments of a country is the record of all
economic transactions between the residents of the
▪ Devaluation of the rupee by 22 per cent.
country and the rest of world in a particular period.
▪ Drastic reduction in the peak import tariff from the
prevailing level of 130 per cent to 30 per cent.
Import cover - measures the number of months
▪ Excise duties to be hiked by 20 percent to neutralize
of imports that can be covered with foreign exchange
the revenue shortfalls due to the custom cut.
reserves (FOREX) available with the central bank of the
▪ All government expenditure to be cut down by 10
country.
per cent, annually.

15
 ECONOMIC REFORMS IN INDIA
▪ Economic reforms is the process in which a
government prescribes a declining role for the
state and an expanding role for the private sector
in an economy.
▪ Economic reforms started in India in 1991 have
been widely termed by experts as gradualist or
incremental in nature with characteristic of
occasional reversals.
▪ Process of economic reforms started in India with
the motto and slogan of ‘reforms with human
face’. However, it has utterly failed to garner the
empathy of the masses i.e., reforms are to benefit
all.
▪ Countries such as Brazil, Argentina, South Africa,
etc. also went for the stop-and-go approach of
reforms, unlike India.
▪ In these reforms, the governments first decide the
sector where reform is needed - then they pin-point
the prerequisites, and finally both sets of the
reforms are activated simultaneously.
REFORM MEASURES
REFORM MEASURES
Macroeconomic
Structural Reform
Stabilisation
Measures
Measures
1. Macroeconomic Stabilisation Measures
▪ These include all those economic policies which
intend to boost the aggregate demand in the
economy - be it domestic or external.
▪ For enhancing domestic demand, increasing the
purchasing power of the masses is essential, which
connotes an emphasis on the creation of gainful
and quality employment opportunities.
2. Structural Reform Measures
▪ Measures that include all the policy reforms which
have been initiated by the government to boost the
aggregate supply of goods and services in the
economy.
▪ It naturally entails unshackling the economy so
that it may search for its own potential of enhanced
productivity.
▪ For the purchasing capacity of the people to be
increased, the economy needs increased income,
which comes from increased levels of activities.
▪ Income so increased is later distributed among the
people whose purchasing power has to be
increased.
▪ This will take place by properly initiating a suitable
set of macroeconomic policies.
LPG FRAMEWORK OF THE REFORMS
▪ The process of reforms in India had to be completed
via a roadmap of three processes - liberalisation,
privatisation and globalisation (LPG).
▪ These three processes specify the characteristics
and extent of the reform process India initiated.
▪ Liberalisation 🡪 the direction of reform
▪ Privatisation 🡪 the path of reform
▪ Globalisation shows the ultimate goal of the
reform.
Liberalisation
Privatisation
Globalisation
LIBERALIZATION
▪ The term “liberalization” in this context implies
economic liberalization.
▪ This policy connotes that greater freedom is to be
given to the entrepreneur of any industry, trade
or business and that governmental control on the
same be reduced to the minimum.
▪ Liberalisation was introduced to put an end to
regulations and restrictions and open up various
sectors of the economy.
▪ Only key issues of welfare and other regulatory
mechanisms are left with the state.
Economy liberalization in Indian context includes:
▪ Removal of Industrial Licensing and Registration
▪ Reducing the quantitative restrictions on imports
also reduces import duties.
▪ Reduced control on FOREX management both in
current and capital accounts.
▪ Financial systems reforms
▪ Reduction in the level of both personal and
corporate taxation.
▪ Liberalized rules for FDI and foreign portfolio
investment (FPI).
16
 ▪ Opening of the public-sector domains like power,
transport, banking etc to private players.
▪ Partial privatization of public sector units.
▪ Change in approach towards industrial sickness
IMPORTANT MEASURES UNDER
LIBERALISATION
Removal of Industrial Licensing
Financial Sector Reforms
Liberalization of Foreign Investment
Public Sector Reforms
MRTP Act
1. Removal of Industrial Licensing:
▪ All industrial licensing was abolished except a
shortlist of 18 industries related to security and
strategic concerns, social reasons, hazardous
chemicals and overriding environmental reasons.
▪ Subsequently, all industries except for a small
group of five industries (alcohol, cigarettes,
hazardous chemicals industrial explosives,
electronics, aerospace and drugs and
pharmaceuticals), industrial licensing
requirements have been done away with.
▪ Reservations for the Public sector for defence
equipment, atomic energy generation and railway
transport.
▪ Market mechanism to determine the prices.
2. Financial Sector Reforms:
▪ The major aim of financial sector reforms is to
reduce the role of RBI from regulator to
facilitator of the financial sector.
▪ RBI regulates the financial institutions such as
commercial banks, investment banks, stock
exchange operations and foreign exchange markets.
▪ All the banks and other financial institutions in
India are regulated through various norms and
regulations of the RBI.
▪ Financial sector reforms led to the establishment of
private sector banks, both Indian as well as foreign.
3. Liberalization of Foreign Investment:
▪ Earlier, prior approval was required by foreign
companies, now automatic approvals were given
for FDI to flow into the country.
17
▪ A high-priority and investment-intensive industries
were de-licensed and could now invite up to 100%
FDI including sectors such as hotel and tourism,
infrastructure, software development,etc.
▪ Use of foreign brand name or trademark was
permitted for sale of goods.
4. Public Sector Reforms:
▪ Greater autonomy was accorded to the PSUs in-
order to restrict interference of the government
officials and allow their management greater
freedom in decision-making.
5. MRTP Act :
▪ The Industrial Policy 1991 restructured the
Monopolies and Restrictive Trade Practices Act.
▪ Regulations relating to concentration of economic
power, pre-entry restrictions for setting up new
enterprises, expansion of existing businesses,
mergers and acquisitions etc. have been abolished.
Effects of liberalization on Indian Economy
▪ India’s annual average growth rate (GDP) from
1990 – 2018 has been 6.7 % which is almost
double than the pre-reforms era.
▪ Industrial Growth Rate – The performance of the
industrial sector is dismal, barring few exceptional
years. Its share in GDP is still at 29% (2017-18).
▪ Foreign companies got free access to Indian
markets and made domestic products
uncompetitive.
Reasons for poor industrial growth rate
▪ Lower productivity in industry than in services
within India - predominance of the 'unorganized'
sector (account for almost two-thirds of industrial
employment in India)
▪ Wages in India are low. However, manufacturing
in India is more capital-intensive than in
comparable countries.
▪ One cause of low productivity is poor
infrastructural facilities.
▪ Transmission and distribution losses in the power
sector in India are more than 20 per cent - higher
than in any comparable country.
▪ State-owned power companies are inefficient and
cannot supply electricity round the clock – shortage
of electricity.
▪ World Bank studies have repeatedly found India to
be low in ease of doing business as compared to its
counterparts such as China.
▪ Labour laws are more complicated and made by
both the Centre and the states.
▪ India has invested too little in transport
infrastructure – resulting in poor connectivity.
▪ The rise of twin balance sheet problems in India.
▪ Share of agriculture in the domestic economy has
declined to about 17% (2017-18). However, people
dependent upon agriculture are still around 47%.
▪ Economic reform for agricultural development
are critical for –
o Raising living standards,
o Alleviating poverty,
o Assuring food security,
o Generating buoyant market for expansion of
industry and services
o Making substantial contribution to the national
economic growth
PRIVATISATION
▪ The policies through which the ‘roll back’ of the
state was done included deregulation, privatization
and introduction of market reforms in public
services.
▪ Privatization at that time was used as a process
under which the state assets were transferred to
the private sector.
▪ Another variant of privatization is disinvestment.
▪ Disinvestment is de-nationalization of less than
100 per cent ownership transfer from the state to
the private sector.
▪ If the sale of shares of the state-owned assets has
been to the tune of 51 per cent, the ownership is
really transferred to the private sector even then it
is termed as privatization.
▪ In general sense, all the economic policies which
directly or indirectly seem to promote the
expansion of the private sector or the market
(economy) have been termed as the process of
privatization.
GLOBALISATION
▪ Globalization is termed as ‘an increase in
economic integration among nations’.
▪ For the WTO, the official meaning of globalization
is movement of the economies of the world towards
“unrestricted cross border movements of goods
and services, capital and the labour force”.
▪ Globalization is world economic integration
through free movement across national borders of:
o Financial capital represented by investment in
capital markets and money markets,
o Physical capital represented by plant and
machinery
o Technology
o Labour.
MAINS ELEMENTS OF GLOBALISATION
▪ To open the domestic markets for inflow of foreign
goods, India reduced customs duties on imports -
to only 10%
▪ The import licensing has been almost abolished.
▪ Tariff barriers have also been eliminated
significantly to encourage trade volume to rise in
keeping with the World trade Organization (WTO)
▪ Foreign Exchange Regulation Act (FERA) was
liberalized in 1993 and later Foreign Exchange
Management Act (FEMA) 1999 was passed to
enable foreign currency transactions.
▪ The FDI policy of the GoI encouraged the inflow of
fresh foreign capital by allowing 100% foreign
equity in certain projects under the automatic
route.
▪ India signed many agreements with the WTO
affirming its commitment to liberalize trade such as
TRIPs (Trade Related Intellectual Property Rights),
TRIMs (Trade Related Investment Measures) and
AOA (Agreement on Agriculture).
EFFECT OF GLOBALIZATION ON INDIAN
ECONOMY
Positive effects
▪ Increase in Foreign Trade - India’s share in the
world trade has gone up significantly in post
globalization.
▪ Increase in Foreign investment - Govt. started
encouraging the entry of foreign investment, which
resulted in an increase in FDI and FPI.
▪ Increase in Foreign Exchange Reserves – foreign
exchange reserves of India hovering round US$ 480
billion at end March 2020.
▪ Increase in foreign collaborations and joint ventures
– such as Dassault Aviation and Reliance
▪ Expansion of Market - expanded size of market
facilitated Indian business units to expand their
business in the whole world - Infosys, TCS, Wipro,
Tata Steel etc.
▪ Technological Development - technical
collaboration of foreign companies enabled the
inflow of modern advanced and superior foreign
technology in India.
▪ Brand Development - Globalization has promoted
the use of branded goods. Brand development has
led to quality improvement.
▪ Development of Capital Market - helped in Indian
capital market development. How many foreign
investors invest in Indian capital market?
▪ Increase in Employment - foreign companies are
establishing their production and trading units in
India.
▪ Reduction in brain Drain – many multinational
corporations (MNCs) have set up their business
18
 units in India which provide attractive salary
packages in India itself.
Negative Effect
▪ Loss of Domestic industries - Because of better
quality and low cost of foreign goods, foreign
competition has increased in India.
▪ Problem of Unemployment – companies are using
capital intensive technology, so employment
opportunities have reduced.
▪ Exploitation of Labour – exploitation of unskilled
workers by giving lower wages, contractual long
working hours and worse working condition.
▪ Increase in Inequalities - small and cottage
industries are adversely hit by foreign industries.
▪ Bad Effect on Culture and Value System –The
vulgar advertisements shown by some MNCs
pollute the thinking of the young generation in
India.
ADVOCACY OF GLOBALIZATION
▪ Globalisation promotes foreign direct investment
which in turn facilitates national development.
▪ Globalisation helps developing countries to make
use of and adapt technologies developed by
advanced countries without undertaking heavy
expenditures in R&D.
▪ Globalisation widens the access of developing
countries to export their goods and services to
developed countries.
▪ Globalisation enables consumers in developing
countries to acquire quality consumer goods,
especially consumer durables, at relatively much
lower prices.
▪ Globalisation facilitates faster diffusion of
knowledge.
▪ It enables developing countries to attain
international standards of production and
productivity.
▪ By reducing tariffs and quantitative restriction,
globalisation increases the share of foreign trade as
a percentage of GDP.
Conclusively, the proponents of globalisation consider
it as the engine of growth, technological advancement,
raising levels of productivity, enlarging employment
and bringing about poverty reduction with
modernisation.
GENERATIONS OF ECONOMIC REFORMS
▪ During the launching of economic reforms in 1991,
there were no such official announcements. In the
coming times, many ‘generations’ of reforms were
announced by the governments.
19
▪ A total of three generations of reforms have been
announced till date, while experts have gone to
suggest the fourth generation as well.
Fourth
First Second Third Generation
Generation Generation Generation
(Unofficial)
FIRST GENERATION (1991-2000)
▪ First Generation – Reforms from 1991 to 2000
were called by the government as the reforms of the
First Generation .
▪ It was in the year 2000–01 that the government, for
the first time, announced the need for the Second
Generation of economic reforms and it was
launched in the same year.
▪ The broad contours of the First Generation of
reforms may be seen as follows:
1. Promotion to Private Sector - Included
various important and liberalising policy
decisions - De-reservation and de- licencing of
the industries, abolition of the MRTP limit,
simplifying environmental laws.
2. Public Sector Reforms - The steps taken to
make the PSUs profitable and efficient, more
autonomy in decision making, disinvestment,
corporatisation, etc.
3. External Sector Reforms - Consisted of
policies such as abolishing quantitative
restrictions on import, switching to the floating
exchange rate, full current account
convertibility, reforms in the capital account,
permission to foreign investment (direct and
indirect), liberal Foreign Exchange
Management Act, etc.
4. Financial Sector Reforms - Initiatives were
taken up in areas such as banking, capital
market, insurance, mutual funds, etc.
5. Tax Reforms - Consisted of all the policy
initiatives directed towards simplifying, broad
basing, modernising, checking evasion,
DTAAs (Double Taxation Avoidance
Agreements), etc.
SECOND GENERATION REFORMS (2000-01
ONWARDS)
▪ The government launched the second generation of
reforms in 2000-01.
▪ The fact is, that the reforms India launched in the
early 1990s were not taking place as intended and
a need for another set of reforms was felt by the
government.
▪ These reforms were not only deeper and delicate,
but required a higher political will power from the
governments.
▪ The major components of the reform are as given
below:
1. Factor Market Reforms - Considered as the
‘backbone’ for the success of the reform
process in India, it consists of dismantling of
the Administered Price Mechanism (APM).
Now, only kerosene oil and LPG remained
under the APM, while petrol, diesel (by March
2014), lubricants have been phased out.
Opening the petroleum sector for private
investment, cutting down the burden of levy on
sugar, etc. Factor Market Reforms are still
going on.
2. Public Sector Reforms – especially
emphasises on areas like greater functional
autonomy, freer leverage to the capital market,
international tie-ups and greenfield ventures,
disinvestment (strategic), etc.
3. Reforms in Govt. and Public Institutions –
Involves conversion of role of the government
from the ‘controller’ to the ‘facilitator’ or the
administrative reform.
4. Legal Sector Reforms – Although started in
the first generation, now it was to be deepened
and newer areas were to be included, such as,
abolishing outdated and contradictory laws,
reforms in the Indian Penal Code (IPC) and
Code of Criminal Procedure (CrPC), Labour
Laws, Company Laws and enacting suitable
legal provisions for new areas like Cyber Law,
etc.
5. Reforms in Critical Areas - reforms initiated
in the infrastructure sector (power, roads,
telecom, energy sector among others),
agriculture, agricultural extension, education
and healthcare, etc. These areas have been
called by the government as ‘critical areas’.
▪ Some other important areas were also emphasised:
1. State’s Role in the Reform - All new steps of
the reforms were now to be started by the state
with the centre playing a supportive role.
2. Fiscal Consolidation - The FRBM Act is
passed by the Centre and the Fiscal
Responsibility Act (FRAs) is followed by the
states to ensure fiscal prudence.
3. Greater Tax Devolution to the States -
during the second generation of reforms, we see
a visible change in the central policies
favouring greater fiscal leverage to the states.
4. Focussing on the Social Sector - especially
healthcare and education gets increased
attention by the government with manifold
increases in the budgetary outlay.
THIRD GENERATION REFORMS
▪ Announcement of the third generation of reforms
were made on launching of the Tenth Plan (2002–
07) - ‘inclusive growth and development’
▪ This generation of reforms commits to the cause of
a fully functional Panchayati Raj Institution
(PRIs), so that the benefits of economic reforms, in
general, can trickle down to the grassroots.
▪ The constitutional arrangements for a decentralised
developmental process was already affected by
73rd and 74th amendment,
▪ It was agreed in the early 2000s that the
government gets convinced of the need of
‘inclusive growth and development’.
▪ Till then, the development process had lacked the
‘inclusion’ factor,
FOURTH GENERATION REFORMS
▪ Fourth generation is not an official ‘generation’ of
reform in India.
▪ In early 2002, some experts coined this generation
of reforms which entail a fully ‘information
technology-enabled’ India.
▪ They hypothesised a ‘two-way’ connection
between the economic reforms and the
information technology (IT), with each one
reinforcing the other.
CONCEPT OF DISINVESTMENT
▪ Another variant of privatization is Disinvestment.
▪ The aim of disinvestment was to raise resources
through sale of PSUs to be directed towards social
welfare expenditures, raising efficiency of PSUs
through increased competition, increasing
consumer satisfaction with better quality goods and
services, upgrading technology and most
importantly removing political interference along
with according autonomy in decision.
▪ Aftermath of Industrial Policy of 1956, the
socialisation of the economy was measured by the
size of the public sector in the national economy.
▪ The greater the share of the public sector, the
greater was the degree of socialisation of the
economy.
▪ Post economic reforms 1991, the private sector is
considered as the engine of growth. The new
environment assigned an increasing role for the
private sector.
Reasons for disinvestment of Indian PSU
20
 ▪ Indian PSUs had shown a very negative rate of
return on capital employed.
▪ Inefficient PSUs had become and were continuing
to be a drag on the Government’s fiscal resources
turning to be more of liabilities to the Government
than being assets.
▪ The national GDP and gross national savings were
also getting adversely affected by low returns from
PSUs.
▪ About 10 to 15 % of the total gross domestic
savings were getting reduced on account of low
savings from PSUs.
▪ Political interference in decision making
▪ Lack of standardization and competitiveness of
the products
▪ Inefficiency and low productivity – rate of 7-8 percent.
underutilization of resources
Advantages and use of disinvestment proceeds
▪ For financing and making up the increasing fiscal
deficit.
▪ Resource mobilization, the proceeds can be used to
invest in other growth sectors which can induce
economic activity and generate better returns for the
government
▪ Financing large scale infrastructure through
disinvestment.
▪ Financing for social sectors (health, education,
women and children) creates positive externality
as it will facilitate more production and trade.
▪ Improve overall efficiency of the PSUs - the
inefficient PSUs will now be forced to make better
achievable targets.
THE RANGARAJAN COMMITTEE ON
DISINVESTMENT 1993
The Rangarajan Committee of 1993 was constituted
by the govt for making recommendations in context
with the disinvestment. The committee said -
• The units to be disinvested should be identified and
disinvestment could be made upto any level, except
in defence and atomic energy where the govt
should retain the majority holding in equity.
• Disinvestment should be a transparent process
duly protecting the right of the workers.
• An autonomous body for the smooth functioning
and monitoring of the disinvestment programme
should be established. → Disinvestment
Commission established in 1996 as an advisory
body
• It suggested four modes of disinvestment viz.
Trade sale, Strategic Sale, Offer of shares and
Closure or sale of Assets.
21
• In its budget speech of 2000-01, the govt.
emphasized that more emphasis would now be
paid on the strategic sale of public sector
enterprises.
The disinvestment receipts for finance year 2017-18
exceeds Rs 1 lakh crore which is higher than the figure
of last year at Rs 46,250 crore. Government also
launched BHARAT 22 Exchange Traded Fund (ETF)
to meet the disinvestment targets.
POST-REFORM PERIOD
Appraisal
▪ Rise in growth rate – economy has come out of
“Hindu growth rate” and clocked averaged growth
▪ Rise in exports – India is global leader of software
export.
▪ Surge in inflows of foreign investment
▪ Growth of private sector – The private sector
entered into new areas and expanded production
and employment
▪ Robust performance of the service sector – with
the onset of reforms, the share of services sector
went up to 44 percent in total GDP.
▪ Built up of foreign exchange reserves - India has
about USD 480bn as forex reserve in May 2020
Failure
▪ Agriculture has not gained much – Agriculture is
the backbone of Indian economy and rural india. It
needs greater focus to enhance productivity and
make it more remunerative business.
▪ GDP compositions in 2017 are as follows
Agriculture Services
(16.8%) (46.6%)
Industry (28.9%)
▪ Problem of poverty still persists – About 30
percent of the population still live in poverty.
▪ Unemployment is on rise – in rural areas the
problem of unemployment and underemployment is
widespread and deeply entrenched. New economic
policies were more beneficial to the skilled and
trained workforce.
▪ Rural India still neglected – about 70 percent
India lives in rural areas. People migrate to urban
areas due to inadequate employment opportunities.
▪ Plight of agriculture workers has worsened –
agricultural workers and labourers continue to be
the most backward and neglected class.
GREEN REVOLUTION
The Green Revolution is referred to as the process of
increasing agricultural production by incorporating
modern tools and techniques in agricultural practices.
BACKGROUND
▪ At the time of its independence, India was
predominantly an agricultural economy. And yet
the state of Indian agricultural sector was dismal.
▪ From the lack of investment, a dearth of technology,
low yield per acre and many such problems plagued
the industry.
▪ After 1947 India had to rebuild its economy. Over
75 percent of the population depended on
agriculture in some way or the other.
▪ But agriculture in India was faced with several
structural and other problems. The productivity of
grains was very low, along with fragmentation of
landholding. India was still monsoon dependent
because of lack of irrigation and other
infrastructure.
▪ So in 1965, the government with the help of Indian
geneticists M.S. Swaminathan (father of Green
Revolution) launched the Green Revolution. The
movement lasted from 1967 to 1978 and was a
great success.
FEATURES OF GREEN REVOLUTION
▪ Introduced High Yielding Variety seeds in
traditional Indian agriculture.
▪ The Green Revolution at first focused on states
with better infrastructure such as Tamil Nadu and
Punjab due to rich irrigation facilities.
▪ During the second phase, the high yielding variety
seeds were given to other states and crops other
than wheat were also included in the plan.
▪ The Green Revolution has improved the irrigation
systems around farms in India.
▪ Commercial crops and cash crops such as cotton,
jute, oilseeds, etc were not a part of the plan.
Green revolution in India mainly emphasised on
food grains such as wheat and rice.
▪ To enhance farm productivity, the green
revolution increased the availability and use of
fertilizers, weedicides, and pesticides to reduce
any damage or loss to the crops.
▪ It also helped in promoting commercial farming
in the country
▪ Introduction of machinery and technology like
harvesters, drills, tractors, etc and thus, facilitated
mechanization of farming.
FIRST GREEN REVOLUTION
The high yielding varieties (HYVs) of wheat and rice
have been the key elements in Indian green revolution.
Though the term “green revolution” refers to wheat and
rice, some agricultural scientists include maize,
soybean and sugarcane where spectacular gains in
yield have occurred.
COMPONENTS OF GREEN REVOLUTION
Use of Chemical
High Yielding
Fertilizers and
Varieties (HYV)
Pesticides
Mechanization
Irrigation
of Agriculture
1. INTRODUCTION OF HIGH YIELDING
VARIETIES (HYV)
▪ In the 1960s, the average national yield of wheat
was very low as compared to the wheat yields of
agriculturally advanced countries.
▪ MS Swaminathan, (former Director General of
ICAR) stressed the need for reorientation of the
entire breeding programme of tall varieties.
▪ Norman E. Borlaug was invited from Mexico in
1963 by the GoI to assess the possibilities of
using dwarf varieties in India.
▪ Borlaug recommended the feasibility of
using semi dwarf wheat of Mexican origin as the
Agro-climatic conditions prevailing in India are
similar to Mexico.
▪ On his recommendation two semi dwarf varieties
namely Lerma Rajo and Sonora-64 were chosen
and were released for cultivation in irrigated fields.
▪ These varieties gave very high yield and brought
in revolution in wheat production.
▪ In 1970, Norman E. Borlaug was awarded the
Nobel prize for the “Green Revolution” which
also helped India.
▪ The important high yielding varieties responded
favourably to fertilizer and irrigation.
22
 ▪ River Lift Systems - Water is directly drawn from
2. USE OF CHEMICAL FERTILIZERS AND the rivers for supplementing irrigation in areas close
PESTICIDES to rivers. Mostly practiced in South India.
▪ Pesticides are chemicals which have been
developed to kill or control organisms called pests
which are unwanted in agriculture.
▪ Nitrogenous fertilizers (N) - Nitrogen containing
fertilizers e.g. ammonium sulphate, ammonium
nitrate and urea.
▪ Nitrogenous fertilizers promote plant growth and
are essential for food production.
▪ Potassium fertilizers (P) - Potassium containing
fertilizers e.g. potassium sulphate and potassium
nitrate.
▪ Phosphate fertilizers (K) - Phosphate containing
fertilizers e.g. ammonium phosphate, calcium
dihydrogen phosphate (superphosphate). ▪ Tanks - These are small storage reservoirs, which
intercept and store the run-off of smaller
3. MECHANIZATION OF AGRICULTURE catchment areas.
▪ Increase in productivity on large areas of land
brought the idea of farm mechanization. IMPACT OF GREEN REVOLUTION
▪ To cope up with the shortage of agricultural POSITIVE
labour, farm mechanization was the obvious choice ▪ The Green Revolution has remarkably increased
for completing agricultural operations. Agricultural Production. The biggest beneficiary
▪ Mechanization improves the efficiency of inputs of the revolution was the Wheat Grain.
and ensures economy of scale. ▪ Green Revolution increased the per hectare yield
in case of wheat from 850 kg per hectare to an
4. IRRIGATION incredible 2281 kg/hectare in its early stage.
▪ HYVs usually require abundant water and hence
irrigational facilities were a prerequisite for green
revolution.

Tanks

River Lift
Wells IRRIGATION Systems

Canals
▪ Wells (Dug and Tube) - This kind of irrigation is
widely practiced in plain regions of India. Over-
exploitation of wells is well observed in Punjab-
Haryana region.
▪ Canals - This is usually an elaborate and
extensive irrigation system. Canal irrigation is
well suited for regions with clayey soil is clayey
soil prevents water percolation. Mostly practiced in
south India and Ganga-Yamuna region.
▪ India reached its way to self-sufficiency and was
less dependent on imports. The production in the
country was sufficient to meet the normal and
emergency demand.
▪ Rather than depending on the import of food grains
from other countries India started exporting its
agricultural produce.
▪ There was a rise in rural employment. The tertiary
industries created employment opportunities for the
workforce.
▪ The adoption of new technology has also given
boost to agricultural employment because of
diverse job opportunities created by multiple

23
 cropping and shift towards hired workers - ▪ Interpersonal inequalities between large and
transportation, irrigation, food processing, small scale farmers.
marketing, etc ▪ Adverse effects on the distribution of pattern of
▪ There has been more consistency with the annual income in rural areas. It led to widening the inter-
harvest because the fields are worked in a similar regional and intra-regional disparities in income
way each year. ▪ The new technologies introduced during the
▪ New technology and modernization of agriculture revolution called for substantial investments
have strengthened the linkages between which were beyond the means of a majority of small
agriculture and industry. farmers.
▪ It has helped to create numerous strains of plants ▪ Farmers having large farmlands continued to
that are resistant to disease and pests. It makes make greater absolute gains in income by
farmers more secure financially. reinvesting the earnings in farm and non-farm
▪ The Green Revolution in India majorly benefited assets, purchasing land from the smaller cultivators,
the farmers of the country. Farmers not only etc.
survived but also prospered during the revolution. ▪ Ecological cost of the green revolution is
Their income saw a significant raise which enabled tremendous and unsustainable.
them to shift from sustenance farming to ▪ The farmers are largely dependent on the market
commercial farming. for the supply of inputs and for the demand for
their products.
NEGATIVE ▪ Demand for agricultural credit has also increased as
▪ Retardation of agricultural growth due to the new technology has increased the cash
inadequate irrigation cover, fragmentation of farm requirements of the farmers. Poor farmers were
size, failure to evolve new technologies, inadequate not able to get loans easily.
use of technology, declining plan outlay, ▪ There has been displacement of agricultural labour
unbalanced use of inputs and weaknesses in credit by extensive agricultural mechanization and left
delivery system. them unemployed.
▪ Regional dispersal of the evolution created ▪ The hybrid crops have also created
regional inequalities. The benefits of the green environmental impacts like soil pollution, water
revolution remained concentrated in the areas pollution due to excessive use of fertilisers,
where the new technology was used. pesticides etc. needed by these crops.
▪ Since the revolution for the number of years
remained limited to wheat production, its
benefits were mostly accrued only to wheat-
growing areas.
CONCLUSION
▪ There are both positive and negative impacts of the Green Revolution on farmers.
▪ Due to the Green Revolution there was a considerable increase in food grains production which was extremely
necessary for farmers to increase production so that agriculture became remunerative.
▪ Due to the Green Revolution, the agricultural sector of India is able to meet the increasing demand for food grains.
However, now is the high time to bring a green revolution which is also farmers friendly.

Other Revolutions related to Agriculture

Black Revolution
Blue Revolution
Brown Revolution
Golden Revolution
Green Revolution
Grey Revolution
Pink Revolution
Silver Revolution
White Revolution
Yellow Revolution
Related with petroleum production
Related with fish production
Related with leather production
Related with overall horticulture, honey and fruits productions
Related with agriculture production
Related with fertilizers
Meat and poultry production
Related with egg production
Related with dairy and milk production
Related with oil seed production

24
25
 CH-2 MONEY PART-1
1. MEANING OF MONEY
▪ Money is a commonly accepted medium of
exchange.
▪ Money is anything that can be generally accepted
as payment for goods and services or settlement of
debts.
▪ Money is the most liquid (it is easy to sell in the
market like gold, silver etc.) of all assets in the
sense that it is universally acceptable and hence
can be exchanged for other commodities very
easily.
is taken today, it can be paid back in future using
money.
▪ Transfer of Value – money has the same value
throughout the country and has its value is
transferrable.
▪ Store of Value – It can be kept as savings (in bank
account) and could be used for investment purpose
e.g. buying property. Its storage costs are also
considerably lower.
3. EVOLUTION OF MONEY

2. FUNCTIONS OF MONEY Barter system

Commodity money

Metallic money

Paper money (Fiat money)

Bank money
2.1 PRIMARY FUNCTIONS
▪ Measure of value - Money serves as a common Virtual (Crypto) currency
measure of value or unit of account so, the relative
comparison of goods is possible. This is possible
because of Divisibility & Fungibility of money. 3.1 BARTER SYSTEM
▪ The Barter system is an exchange of goods for
Divisible - Money can be easily divided into small other goods. The exchange of commodities
increments so that it can match commodity values without the mediation of money is called Barter
more precisely. For example, 4 notes of Rs.500 Exchange.
have same value as 1 note of Rs.2000 ▪ It suffers from a problem of double coincidence of
Fungible - Fungibility is the ability of a good or wants.
asset to be interchanged with other individual goods ▪ The barter system does
or assets of the same type. For example, 1 note of not provide for the
Rs.500 can buy same amount of good as the other direct purchase of
note of Rs.500 goods since there was no
▪ Medium of exchange (transaction) - people can common unit of account
easily exchange goods and services with money. and medium of exchange
This is possible because money is: (Money).

Readily acceptable as it is legal tender. POSITIVES NEGATIVES

Durable as it remains functional for a long time ▪ Simplest in form ▪ Double coincidence
Recognizable by authorities and people as well. ▪ No foreign exchange of wants was a must
Hard to Counterfeit and duplicate. regime ▪ Exchange of
▪ No concentration of perishable goods
2.2 DERIVATIVE FUNCTIONS wealth ▪ No saving capital
▪ Deferred Payment – Money also serves as a ▪ No circular flow of
standard mode of deferred payments. Time value of income
Money, for instance, Credit card, EMI etc. If a loan

26
 ▪ No Divisibility or High fungibility
Fungibility of the (replaceable by
same value. fungibility Less fungible another identical
item; mutually
BARTER SYSTEM Vs MONEY interchangeable)

PARAMETER BARTER MONEY DIFFICULTIES UNDER BARTER SYSTEM

SYSTEM
Problem with It is not perishable
perishable goods so it can be stored. Double
coincidence
Perishable so they cannot It will remain of wants

be stored for a intact for a long

long time. E.g. time. E.g. Coins
Potatoes, rice. and paper currency
Double Not needed to No unit of Difficulties Lack of
account to under informatio
Double coincidence of initiate a measure n about
the worth Barter product
coincidence of wants is must to transaction. of good System quality
want initiate a
transaction.
High divisibility,
money can be Impossibility
of sub
Divisibility Divisibility is divided into small divisions

difficult increments that can

be
used in exchange
It has high Comparatively low DOUBLE COINCIDENCE OF WANTS
storage cost storage cost. It is an economic phenomenon where two parties each
Storage cost given perishable hold an item the other wants, so they exchange these
nature of items directly without any monetary medium.
commodities. E.g. - shoemaker wants to buy wheat and the
Money facilitates farmer wants to buy shoes then they both can exchange
Universal No universal exchanges by their commodities.
acceptability acceptability acting as a
commonly
acceptable 3.2 COMMODITY MONEY
medium of ▪ Commodity money is money whose value comes
exchange from a commodity of which it is made.
Temporary ▪ Commodity money consists of objects having
Deferred Not possible postponements of value or use in themselves (intrinsic value) as
payment payment possible. well as their value in buying goods - for example
Convertibility Easy to convert gold not only use as medium of exchange but also
to other Difficult into other for making jewellery as well.
Commodities commodities ▪ India→Cowries were used to make exchanges
Poor on account Money can be during earlier times.
Exchangeability of exchanged easily
exchangeability
PROBLEMS OF COMMODITY MONEY-
High Liquidity
(Easily available
Liquidity Poor liquidity and tradable in any Face Value was not same throughout region.
market)
Not act as Money acts as Generally commodities used were perishable in nature.

Unit of Account standard unit of standard unit of

account account. Generally commodities are bulky to carry

No fungibility (replaceable by another identical item; mutually interchangeable)

and divisibility

27
3.3. METALLIC MONEY settle all debts & payments within territorial
▪ It is money made up of pure and superior metals jurisdiction.
like gold and silver. ▪ Fiat money gives central banks greater control over
▪ This type of metallic money has the face value just the economy because they can control how
equal to the intrinsic value. much money is printed.
The value inscribed in the ▪ When fiat money is backed by gold or silver
coins is called face value standard, it’s called “representative money”, and
of money. The value of when central bank promises “to pay bearer the
metal used to mint the coin sum of this many rupees”, currency becomes an
is called intrinsic value. “anonymous bearer bond with zero interest”.
▪ Forged in Gold (Muhr) → High value (Because ▪ Examples→ US dollar, Indian Rupee, Euro, etc.
gold supply was relatively lower than silver and ▪ In India, two entities issue fiat money -
copper.) 1. Government of India under the coinage act
▪ Forged in Silver (Rupaiya) → Moderate value 1909 issues all coins and Rs.1 note; while
▪ Forged in Copper/ Bronze (Dam, Paisa) → For day 2. RBI Act 1934 empowers RBI to issue the
to day purchases remaining bank notes and RBI central board is
empowered to make recommendation to
FACE VALUE INTRINSIC VALUE government of India to withdraw any notes
The face value is the legally Intrinsic value refers to from circulation. This is called
defined value of the coin the market value of the “Demonetization” and was done thrice in
relative to other units of constituent metal within a India after independence.
currency. coin.
Fiat money has the face Fiat money does not have WHAT IS NOT FIAT MONEY?
value. intrinsic value. ▪ Money without government legal backing
Face value cannot be derived Intrinsic value can be ▪ Superstores plastic coins, cards & coupons
from selling of constituent derived from selling of ▪ Shares, Bonds, Debentures, G-Sec, T-bill
metal/currency itself. constituent metal itself. ▪ DD, Cheques, Credit Card, ATM card
▪ Bitcoin & other Digital currency
Positives of Metallic Negatives of Metallic PROBLEMS OF FIAT MONEY-
Money Money ▪ Reduction in value of money by monetary policies
Metallic money has Bulky to carry so leads to over printing of currency which could
intrinsic value and it has difficult to move. result in hyperinflation.
non-perishable nature – ▪ Still Bulky to carry, so reduces its movability
can be stored for long ▪ Risk of theft and prone to counterfeit
time. (duplicate/fake currency)
Divisible– Item used as Smuggling for intrinsic ▪ Change problem -money cannot be easily divided
money can be easily value. into small increments so that it can match
divided into small commodity values more precisely, leads to
increments so that it can rounding off problem.
match commodity values ▪ E.g. petrol pumps not returning 60 paise per
more precisely. customer due to change problem.
Fungible–Replaceable by High storage cost.
another identical item; Hyper-inflation is a situation when inflation rises at an
mutually extremely faster rate. The rate of inflation can increase
interchangeable. from 50 times to 300 times.

3.4 PAPER MONEY (FIAT MONEY) 3.5 BANK MONEY

▪ Paper money acted as money (Legal tender) ▪ Backed by Central bank of the country viz.
because they are guaranteed by the national o Cheque, Bank Draft, NEFT, RTGS
governments. Fiat money is legally recognized to o Credit cards & Debit cards

28
 BENEFITS OF BANK MONEY
o Transaction could be settled on the spot, result
in time saving.
o Option of the Deferred payment
o Easy to transfer over long distance
o Exact amount can be transferred (No change
problem)
o Hard to counterfeit or make duplicate
o Can be freezed if card is stolen via. KYC
(Know Your Customer) norms
o Legally recognized for high value payment.
Deferred Payment – It is temporary postponement of
the payment of an outstanding bill or debt, usually
involving repayment by instalments.
3.6 VIRTUAL MONEY
▪ Virtual currency is a type of unregulated digital
currency that is only available in electronic
form.
▪ Virtual currency is currency held within the
blockchain network that is not controlled by a
centralized banking authority.
▪ It is stored and transacted only through
designated software, mobile or computer
applications, or through dedicated digital wallets,
and the transactions occur over the internet through
secure, dedicated networks.
▪ Virtual currency is considered to be a subset of the
digital currency group, which also
includes cryptocurrencies, which exist within the
blockchain network.
▪ Virtual currency is different than digital currency
since digital currency is simply currency issued by
a bank in digital form.
3.7 FIDUCIARY MONEY
▪ Fiduciary money is that money which is accepted as
a medium of exchange because of the trust between
the payer and the payee.
▪ Example of Fiduciary money is Cheques,
Banknotes, etc.
3.8 CREDIT MONEY
▪ Credit Money refers to that money, in which money
value is more than the commodity value.
▪ Money value > Commodity value.
Money is the most liquid of all assets. Liquidity
Order is as following -
1. Currency
29
2. Demand deposits in Banks
3. Savings deposits in Banks
4. Term (Time) deposits in Banks
Q. Consider the following liquid assets: (UPSC 2013)
1.Demand deposits with the banks
2.Time deposits with the banks
3.Savings deposits with the banks
4.Currency
The correct sequence of these assets in decreasing order
of liquidity is
a) 1-4-3-2
b) 4-3-2-1
c) 2-3-1-4
d) 4-1-3-2
4. CREATION OF MONEY
▪ Money supply– It is all the currency and other
liquid instruments in a country's economy on the
date measured.
▪ The money supply is roughly composed of both
cash and deposits that can be used almost as easily
as cash.
▪ Money supply will change if the value of any of its
components such as Consumer Unit (CU), Demand
Draft (DD) or Time Deposits changes.
▪ For simplicity, use the most liquid definition of
money, viz. M1 = CU + DD, as the measure of
money supply in the economy.
▪ Various actions of the monetary authority, RBI, and
commercial banks are responsible for changes in
the values of these items.
▪ The preference of the public for holding cash
balances vis- ́a-vis deposits in banks also affects the
money supply.
▪ These influences on money supply can be
summarised by the following key ratios-
4.1 CURRENCY DEPOSIT RATIO (cdr)
▪ The currency deposit ratio (cdr) is the ratio of
money held by the public in currency to that they
hold in bank deposits (cdr = CU/DD)
▪ It reflects people’s preference for liquidity. It is a
purely behavioural parameter which depends,
among other things, on the seasonal pattern of
expenditure.
▪ For example, cdr increases during the festive
season as people convert deposits to cash balance
for meeting extra expenditure during such periods.
HIGH
POWERED
MONEY
CURRENCY
COMMERCIAL CREATION
DEPOSIT
BANKS OF MONEY
RATIO
RESERVE
DEPOSIT
RATIO
4.2 RESERVE DEPOSIT RATIO
▪ Reserve deposit ratio (rdr) is the proportion of the
total deposits commercial banks keeps as
reserves.
▪ Reserve money consists of two things –
o Vault cash in banks and
o Deposits of commercial banks with RBI.
▪ Banks hold a part of the money, that people keep in
their bank deposits as reserve money and loan out
the rest to various investment projects.
▪ Banks use this reserve to meet the demand for cash
by account holders.
▪ However, RBI requires commercial banks to keep
reserves in order to ensure that banks have a safe
cushion of assets to draw on when account holders
want to be paid.
▪ RBI uses various policy instruments to bring forth
a healthy rdr in commercial banks.
▪ The first instrument is the Cash Reserve Ratio
which specifies the fraction of their deposits that
banks must keep with RBI.
▪ There is another tool called Statutory Liquidity
Ratio which requires the banks to maintain a given
fraction of their total demand and time deposits in
the form of specified liquid assets.
▪ Apart from these ratios RBI uses a certain interest
rate called the Bank Rate to control the value of
rdr.
▪ Commercial banks can borrow money from RBI at
the bank rate when they run short of reserves. A
high bank rate makes such borrowing from RBI
costly and, in effect, encourages the commercial
banks to maintain a healthy rdr.
Q. When the Reserve Bank of India announces an
increase of the Cash Reserve Rate, what does it
mean? [CSE -2010]
a) The commercial banks will have less money to
lend
b) The Reserve Bank of India will have less money to
lend
c) The Union Government will have less money to
lend
d) The commercial banks will have more money to
lend
4.3 COMMERCIAL BANKS
▪ Commercial Banks accept deposits from the
public and lend out this money to interest earning
investment projects.
▪ The rate of interest offered by the bank to deposit
holders is called the ‘borrowing rate’ and the rate
at which banks lend out their reserves to investors
is called the ‘lending rate’.
▪ The difference between the two rates, called
‘spread’, is the profit that is appropriated by the
banks.
▪ Deposits are broadly of two types – demand
deposits, payable by the banks on demand from the
account holder, e.g. current and savings account
deposits, and time deposits, which have a fixed
period to maturity, e.g. fixed deposits.
Q. Which of the following is not included in the assets
of a commercial bank in India?
(a) Advances
(b) Deposits
(c) Investments
(d) Money at call and short notice
Function of Commercial Banks
30
 Primary ▪ Accepting deposit and Providing ▪ People desire to hold money balance broadly for
loans following motives-
Secondary ▪ Collection and payment of various
items e.g. Cheques, Bills
TRANSACTION MOTIVE
▪ Purchase and sell of securities &
remittance of money
▪ Purchase and sell of foreign
exchange
▪ Acting as executors and trustees of SPECULATIVE
MOTIVE
PRECAUTIONARY
MOTIVE
wills & underwriting of shares
▪ Lockers facility & Travellers’
cheque and letter of credit
6.1 TRANSACTION MOTIVE
Q. The main functioning of the banking system is
▪ The principal motive for holding money is to
to________ (CDS-2013)
purchase goods and services in day to day life and
a) Accept deposits and provide credit
carry out transactions
b) Accept deposits and subsidies
▪ The transaction demand for money in the economy
c) provide credit and subsidies
is fraction of the total volume of transactions in
d) accept deposits, provide credit and subsidies
the economy over the unit period of time.
▪ The total value of annual transactions in an
5. VALUE OF MONEY
economy includes transactions in all
▪ By value of money, we mean the purchasing intermediate goods and services and is clearly
power of money. much greater than the nominal GDP.
▪ Purchasing Power is the amount of goods or ▪ An increase in nominal GDP implies an increase in
services that can be purchased with a unit of the total value of transactions.
currency.
▪ When the value of money rises i.e. its purchasing 6.2 SPECULATIVE MOTIVE
power increases, the general price level falls and
▪ When people wish to hold money rather than
vice versa. This means the value of money is
buying assets/bonds/risky investment. An
inverse of the general price level.
individual may hold her wealth in the form of
▪ For instance, at a point of time, Rs. 10 were able to
landed property, bullion, bonds, money etc.
purchase 2 packets of biscuits, but on another times
▪ Different people have different expectations
it can buy only one packet because of erosion of
regarding the future movements in the market
purchase power of that currency. This also results
rate of interest based on their private information
in increased purchase power of biscuit packet, it
regarding the economy.
became Rs.7.
▪ Speculative demand for money is inversely
related to the rate of interest can be thought of as
6. DEMAND FOR MONEY
an opportunity cost or ‘price’ of holding money
▪ Money is the most liquid of all assets in the sense balance.
that it is universally acceptable and hence can be ▪ E.g. If interest rates are high, and people expect
exchanged for other commodities very easily. interest rates to fall, then there is likely to be greater
▪ On the other hand, it has an opportunity cost. If, demand for buying bonds and less demand for
instead of holding on to a certain cash balance, you holding money. If interest rates fall, then the price
put the money in a fixed deposits in some bank you of bonds will rise.
can earn interest on that money.
▪ Total demand for money in an economy is 6.3 PRECAUTIONARY MOTIVE
composed of transaction demand and speculative
▪ The precautionary demand for money is the act of
demand. Demand for money balance is thus often
holding real balances of money for use in an
referred to as liquidity preference.
emergency situation.

31
▪ As receipts and payments cannot be perfectly
foreseen, people hold precautionary balances to
minimize the potential loss arising from a
contingency.
▪ The precautionary demand is dependent on the size
of income, the availability of credit, and the rate of
interest.
7. OPPORTUNITY COST OF MONEY
▪ Opportunity cost refers to a benefit that a person
could have received, but gave up, to take another
course of action. Stated differently, an opportunity
cost represents an alternative given up when a
decision is made. Opportunity cost is also called the
economic cost.
▪ Opportunity Cost = Return of Most Lucrative
Option – Return of Chosen Option.
▪ As per microeconomics, opportunity cost is zero for
free goods such as Air and common goods such as
fish / grazing land.
▪ For public goods such as street light and defence,
opportunity cost is involved (Government could
have spent that much money on street lights rather
than on military). Opportunity cost is not zero in
case of public goods.
Q. If a commodity is provided free to the public by
the government, then:
a) The opportunity cost is zero.
b) The opportunity cost is ignored.
c) The opportunity cost is transferred from the
consumers of the product to the taxpaying
public.
d) The opportunity cost is transferred from the
consumers of the product to the government.
8. DETERMINANTS OF MONEY DEMAND
▪ The prevalent price level – High interest rate or
price level will reduce demand for money and vice
versa.
▪ Inflation level in an economy–Inflation level
reduces demand for money because people prefer to
save instead of expenditure because of price rise.
▪ Real income (Real GDP) - Real income is how
much money an individual or entity makes after
accounting for inflation.
▪ Disposable income–Higher the disposable income,
there will be higher tendency to spend more.
▪ Innovation level in an economy.
9. MONEY SUPPLY (MONETARY
AGGREGATES)
▪ The supply of money is a total stock of money in
circulation among the public at a particular
point of time.
▪ The measures of money supply in India are
classified into four categories M1, M2, M3 and M4
along with M0.
▪ The classification of money supply was introduced
in April 1977 by Reserve Bank of India.
▪ The term ‘the supply of money’ is synonymous with
such terms as ‘money stock’, ‘stock of money’,
‘money supply’ and ‘quantity of money’. The
supply of money at any moment is the total amount
of money in the economy.
▪ The supply of money is the product of Money
Multiplier (m) and the amount of high-powered
money or the reserve money.
Q. Which of the following measures would result in
an increase in the money supply in the economy?
[CSE -2012]
1. Purchase of government securities from the public
by the Central Bank
2. Deposit of currency in commercial banks by the
public
3. Borrowing by the government from the Central
Bank
4. Sale of government securities to the public by the
Central Bank
Select the correct answer using the codes given below:
a) 1 only
b) 2 and 4 only
c) 1 and 3
d) 2, 3 and 4
9.1 RESREVE MONEY (M0)
▪ Reserve Money (M0): It is also known as High-
Powered Money, monetary base, base money etc.
▪ Reserve Money is the monetary base of the
economy.
Reserve Money (M0) = Currency in circulation +
Bankers’ Deposits with the RBI + ‘Other’ deposits with
the RBI.
▪ ‘Other’ deposits with RBI comprise mainly:
o deposits of quasi-government; other financial
institutions including primary dealers,
o balances in the accounts of foreign Central
Banks and Governments,
32
 o Accounts of international agencies such as the
International Monetary Fund. M1 M2 M3 M4

• CURRENCY • M1 + • M1 + • M3 +
+ DEMAND POST TIME POST
9.2 NARROW MONEY (M1) DEPOSITS +
OTHER OFFICE DEPOSITS OFFICE
DEPOSITS (ONLY (TOTAL)
▪ In banking terminology, M1 is called narrow SAVINGS)

money as it is highly liquid and banks cannot run

their lending programmes with this money.
9.4 HIGH POWER MONEY
▪ M1 = Currency with the Public + Demand Deposits
with the Banking System + ‘Other’ deposits with ▪ The total liability of the monetary authority of
the RBI. the country, RBI, is called the monetary base or
high powered money.
M2 = M1 + Savings Deposits of Post-office Savings ▪ It consists of currency (notes and coins in
Banks circulation with the public and vault cash of
commercial banks) and deposits held by the
9.3 BROAD MONEY (M3) Government of India and commercial banks with
RBI.
▪ The money component M3 is called broad money.
▪ If a member of the public produces a currency note
With this money (which lies with banks for a known
to RBI the latter must pay her value equal to the
period) banks run their lending programmes.
figure printed on the note.
▪ M3 = M1 + Time Deposits with the Banking
▪ Similarly, the deposits are also refundable by
System.
RBI on demand from deposit-holders. These items
are claims which the general public, government or
M4 = M3 + All deposits with Post Office Savings
banks have on RBI and hence are considered to be
Banks (excluding National Savings Certificates).
the liability of RBI.
▪ In general, therefore, this liability must be backed
▪ M3 and M4 are known as broad money.
by an equal value of assets consisting mainly, gold
and foreign exchange reserves. In practice,
Q. Consider the following:
however, most countries have adopted a ‘minimum
1. Currency with the public
reserve system’
2. Demand deposits with banks
▪ By definition, money supply is equal to currency
3. Time deposits with banks
plus deposits –
Which of these are included in Broad Money (M3)
a) 1 and 2
M = CU + DD = (1 + cdr)DD
b) 1 and 3
c) 2 and 3
where, cdr = CU/DD.
d) 1, 2 and 3
▪ Assume, for simplicity, that treasury deposit of the
Government with RBI is zero. High powered
Q. Following are some components of money supply
money then consists of currency held by the public
in India:
and reserves of the commercial banks, which
1. Currency with the public
include vault cash and banks’ deposits with RBI.
2. Aggregate demand deposits with banks
Thus,
3. Aggregate time deposits with banks
4. 'Other' deposits with the Reserve Bank of India
H=CU+R=cdr.DD+rdr.DD=(cdr + rdr)DD
Which of the aforesaid items are components of narrow
money (M1) in India?
▪ The currency issued by the central bank is called
a) 1, 2 and3
‘high power money’ because it is generally backed
b) 2 and 4 only
by supporting ‘reserves’ and its value is
c) 1, 2 and 4
guaranteed by the government and it is the source
d) 1and 4 only
of all other forms of money.
HIGHEST LIQUIDITY TO LOWEST LIQUIDITY

@Akash_Singhh

33
 9.5 MINIMUM RESERVE
▪ The RBI is required to maintain a reserve
equivalent of Rs. 200 crores in gold and foreign
currency with itself, of which Rs. 115 crores
should be in gold.
▪ Against this reserve, the RBI is empowered to issue
currency to any extent. This is being followed since
1957 and is known as the Minimum Reserve
System (MRS).
▪ In India, there are two sources of high power money
supply: 10. MONEY MULTIPLIER
▪ The money multiplier is maximum amount of
broad money that could be created by
Sources of high power commercial banks for a given fixed amount of base
money supply money and reserve ratio.
▪ Its value is determined in ratio of total money
supply to the stock of the high-powered money in
an economy.
RBI Government of India

▪ The RBI issues currency notes of rupees 2, 5, 10,

20, 50, 100, 200, 500, and 2000 denominations
which RBI calls as the ‘Reserve Money’.
▪ The RBI issues currency of one rupee notes and ▪ M- stock of money, H-stock of high powered
coins including coins of smaller denominations on money
behalf of the Government of India which accounts ▪ Clearly, its value is greater than 1.
for around 2 per cent of the total high power ▪ The Currency Deposit Ratio (cdr) and Reserve
money. Deposit Ratio (rdr) plays an important role in
determining money multiplier.
RESERVE BANK OF INDIA ▪ cdr = C/DD ratio of the total deposit kept by
LIABILITIES ASSETS commercial banks.
Notes in circulation Foreign currency assets ▪ rdr is the proportion of the total deposit kept by
commercial banks.
Notes held in banking Bill purchases and ▪ The money multiplier (M) is the inverse of the
dept discounts Reserve Requirement (R)
Deposits Collaterals by ▪ M = 1/R
commercial banks ▪ Monetary base is the sum of currency in circulation
Other liabilities Loan and advances and bank reserves.
Rupee securities
Gold coin bullion

Q. Supply of money remaining the same when there

is an increase in demand for money, there will be
(CSE-2013)
a) A fall in the level of prices
b) An increase in the rate of interest
c) A decrease in the rate of interest Q. The money multiplier in an economy increases
d) An increase in the level of income and employment with which one of the following?

34
 a) Increase in the cash reserve ratio
b) Increase in the banking habit of the population
c) Increase in the statutory liquidity ratio
d) Increase in the population of the country
11. VELOCITY OF MONEY CIRCULATION
▪ The number of times a unit of money changes
hands during the unit period is called the velocity
of circulation of money.
▪ It is the average number of times money passes
from one hand to another, during given time period.
▪ E.g. you bought pen worth Rs.10 from shopkeeper,
he uses same 10 rupee note to buy Coca-Cola→then
same currency note performed function of
TWENTY Rupees. This is called “Velocity of
money”
FACTORS AFFECTING VELOCITY OF MONEY
▪ Income distribution - Poor people immediately
use their money. So, money in the hands of poor
money has higher velocity.
▪ Business cycle - During booming period,
production of goods and services increases, so there
is higher demand for goods and services which
leads to higher economic transactions so, higher
velocity and vice versa
▪ If more people use EMI loans for purchase, it will
result in higher velocity of money.
▪ Developed countries have higher velocity of
money, because of higher spending pattern and
confidence in Government social-security.
A boom refers to a period of increased commercial
activity within a business, market, industry, or economy
as a whole.
12. FACTORS AFFECTING MONEY SUPPLY
▪ Monetary Base - A monetary base is the total
amount of a currency that is either in general
circulation in the hands of the public or in the
commercial bank deposits held in the central bank's
reserves. If there is more of reserve money in the
system, money supply would increase and vice
versa.
▪ Monetary policy - RBI’s dear (tight) money policy
reduces money supply in market. However, RBI’s
cheap money policy increases money supply in
market.
▪ People’s choice–When people deposit higher
portion of their income in banks, it results in
decreased money supply.
35
▪ Fiscal policy- Fiscal policy deals with the
government policy concerning changes in the
taxation and expenditure overheads and
components.
▪ Business cycle–In boom cycle, money supply
increases and in depression cycle, the money supply
decreases.
▪ Money multiplier
▪ Money supply will decrease if: -
o Higher Taxation – as it will reduce money in
the market.
o Sale of Government Securities (G-sec) –
peoples will purchase this, so it will reduce
money supply.
o Deficit financing by government will increase
money supply, so the level of inflation also
increases.
Business cycle is fluctuations in economic activity that
an economy experiences over a period of time. Business
cycles are generally measured using the rise and fall in
the real gross domestic product (GDP) or the GDP
adjusted for inflation. It is also known as the economic
cycle or trade cycle.
Q. Which of the following measures would result in
an increase in the money supply in the economy?
(CSE-2012)
1. Purchase of G-Sec from the public by the Central
Bank.
2. Deposit of currency in commercial banks by the
public.
3. Borrowing by the government from the Central
Bank.
4. Sale of government securities to the public by the
Central Bank.
Answer Codes:
a) 1 only
b) 2 and 4 only
c) 1 and 3
d) 2, 3 and 4
13. DETERMINANTS OF MONEY SUPPLY
▪ Reserve Ratio–higher reserve ratio (e.g. CRR,
SLR, Repo rate) reduces the available money with
bank to lend, so it reduces money supply and vice
versa.
▪ The Level of Bank Reserves–higher bank reserves
reduces the available money with bank.
▪ Public’s Desire to Hold Currency and Deposits–
higher deposits by public reduces money supply in
the market.
▪ Money Multiplier – this refers to how an initial
deposit can lead to bigger final increase in the total
money supply.
▪ Interest rates – higher interest rates discourages
the borrowings by people from the bank. So it
reduces money supply.
Q. With reference to inflation in India, find correct
statement:
a) Controlling the inflation in India is the
responsibility of the Government of India only
b) The Reserve Bank of India has no role in
controlling the inflation
c) Decreased money circulation helps in controlling
the inflation
d) Increased money circulation helps in controlling the
inflation
WHY IS SAVINGS/CURRENT ACCOUNT
BALANCE TREATED AS MONEY?
▪ This is because to settle a transaction, you can
draw a cheque against these accounts. These
deposits are also called demand deposits because
they are payable by the bank on demand from the
account holder.
▪ However, cheques drawn on savings or current
accounts can be refused by anyone as a mode of
payment. Thus they are not legal tenders. This is
because cheques (or drafts) are just an instrument
for transacting but it has no value of its own.
14. CREDIT CREATION IN INDIA
▪ A situation in which banks make more loans
available to consumers and businesses, which
results in creation of credit in the overall economy.
▪ Credit is created by commercial banks in two ways-
o Advancing loans
o By purchasing securities.
▪ Banks maintain some part of deposits as liquid cash,
termed as cash reserve. This is in minimum
requirement as specified by RBI. The excess or
surplus is given out as loans and advances.
▪ When giving a loan, banks open deposit account in
the name of the borrower. This is known as
secondary or derivative deposit.
▪ The deposit left after giving out loans is known as
credit multiplier. Thus, credit is created from
secondary deposits.
▪ Credit multiplier indicates the number of times
primary deposits multiplies and is the inverse of
CRR.
Primary deposits refer to that sum of money which is
deposited in the bank accounts while opening such
accounts.
Secondary deposit or derivative deposit is the deposit
of credit created by the bank to the borrower while
lending loan.
TYPES OF CREDIT CREATION
The need for credit comes from demand and supply side
of the economy. The consumers of demand side require
credit to acquire simple assets like consumer durables.
The demand for credit from supply side corporate
houses arises due to their needs for long-term
investments. Types of loans:
▪ Commercial loans: Loans which are given to
supply side. These are given for 2 purposes:
1. For acquiring fixed assets
2. For maintaining the business
▪ Individual loans: Loans which are given to
demand side. These are given for:
1. Consumption
2. Acquiring durables
▪ Installment credit: Credit amount is decided in
advance and the amount is disbursed either in stages
or all at once. It is however, repaid in installments.
▪ Operating credit: This is given to meet the daily
credit requirements for operations. Banks decide
the credit limit and provide a current account from
which money can be withdrawn.
▪ Receivable finance: Credit is in form of bills of
finance.
Receivable
finance
Operating
credit
Commercial
loans
Types
of loans
Installment Individual
credit loans
MERITS
▪ Banks are able to diversify the operational risks
with the help of credit creation.
▪ The loans and advances are generally done from
excess or surplus reserves.
▪ This money which is lying passive joins the active
process of credit creation.
36
 TOOLS OF MONETARY
DEMERITS POLICY
▪ It is directly dependent on the volume of excess
reserves available with the banks. Qualitative
Quantitative
▪ Cash Reserve Ratio (CRR) – CRR is the quantum Instruments Instruments
which bank should keep with RBI as safety
measure. The minimum cash limit of the bank
which varies from 3-15%. Any increase in CRR QUANTITATIVE TOOLS
leads to less availability of the credit.
▪ Risk – Averse nature of customers which makes
them keep some cash with them for emergencies REPO
RATE
while banks prefer giving more loans to keep credit
creation going. BANK
▪ Periods of economic recessions call for less loan CRR
RATE
demands from the customers.
Quantitativ
e
15. MONETARY POLICY OF RBI Tools
▪ Monetary policy refers to all those operations,
REVERSE
which are used to control the money supply in the OMO
REPO
economy.
▪ RBI reviews its monetary policy every two months
SLR
(Six times in a year)
▪ The RBI implements the monetary policy through
open market operations, bank rate policy, CRR,
SLR, reserve system, credit control policy, moral
persuasion etc. QUALITATIVE TOOLS

15.1 OBJECTIVE OF MONETARY POLICY

▪ To maintain economic and financial stability – by Prompt
Corrective
targeting healthy inflation range. Action
▪ To ensure adequate financial resources for the (PCA)

purpose of development. Direct Action

▪ Ensuring price stability in market by maintaining by RBI on
banks
Credit ceiling

optimum inflation level.

▪ Adequate flow of credit to productive sectors. Qualitativ
e
▪ Promotion of productive investments & trade by Tools
ensuring conducive monetary policy, E.g. by credit
rationing tool. Differential
Moral suasion
Interest Rates
▪ Promotion of exports and economic growth – by
providing timely credit and favourable monetary
stimulus through various monetary policy tools. Margin
requirements

Q. An increase in the Bank Rate generally indicates

that_____(2013)
a) Market rate of interest is likely to fall.
(NOTE- details of monetary policy tools have been
b) Central Bank is no longer making loans to
discussed in Banking chapter)
commercial banks.
c) Central Bank is following an easy money policy.
Consider the following: (CSE-2015)
d) Central Bank is following a tight money policy.
1. Bank rate
2. Open market operations
15.2 TOOLS OF MONETARY POLICY
3. Public debt

37
4. Public Revenue
Which of them is/are part of Monetary Policy?
a) 1 only
b) 2, 3 and 4
c) 1 and 2
d) 1, 3 and 4
16. MONETARY POLICY COMMITTEE (MPC)
▪ Monetary policy refers to the credit control
measures adopted by the central bank of a country.
RBI is the sole monetary authority which decides
the supply of money in the economy.
MPC is a statutory body created under Monetary
Policy Framework Agreement 2015 between the
RBI and Government in 2016
▪ MPC is entrusted with the responsibility of fixing
the benchmark repo rate (policy rate) required to
contain inflation as defined in the Monetary Policy
Framework Agreement.
▪ The meetings of the MPC are held at least 4 times
a year and it publishes its decisions after each such
meeting.
▪ MPC is 6-member body including 3 members
from RBI and 3 members to be nominated by the
Central Government.
▪ Chairperson of MPC – RBI Governor
▪ Quorum for meeting - 4 members
▪ Decisions are taken by majority with the
Governor having the casting vote in case of a tie.
▪ To ensure transparency - Govt can send message
only in writing.
▪ Committee must publish its proceedings of the
meeting on the 14th day, and “Monetary policy
report” at every 6 months.
RBI SIDE GOVT. SIDE
3 members – RBI 3 members will be
Governor, Dy. Governor, selected from
One nominated person - government side.
will be from RBI side.
RBI Governor (Shri
Shaktikanta Das), as the
Ex-officio Chairman.
Their tenure tied with Tenure: 4 years, no
their ex-officio job tenure. reappointment.
RBI Governor & Dy. They’re selected by
Governor are selected by Search-cum-Selection
Financial Sector Committee headed by
Regulatory Appointment Cabinet Secretary (IAS)
Search Committee
(FSRASC), headed by
Cabinet Secretary (IAS)
▪ Inflation target is decided by Union Government
after consulting with the RBI Governor.
▪ The present mandate of the committee is to
maintain 4% annual inflation (until March 31,
2021) with bandwidth of ceiling 6% and a floor of
2%.
▪ If Target fail: If inflation not kept in 4% +/-2%
zone for 3 consecutive quarters then the
Committee must send report to Govt. with
reasons and remedies.
INFLATION TARGETING
▪ It is a monetary policy where a central bank follows
an explicit target for the inflation rate for the
medium-term and announces this inflation target
to the public.
▪ The Government of India has notified a medium-
term inflation target of 4 %, with a band of +/- 2
%
16.1 OBJECTIVE OF MPC
▪ Price Stability for promoting economic
development through ensuring optimum inflation
level which will drive economic growth in long run.
▪ Controlled Expansion of Bank Credit with
special attention to seasonal requirement (E.g. for
agricultural purposes) for credit without affecting
the output.
▪ Promotion of Fixed Investment to increase the
productivity of investment by restraining non-
essential fixed investment.
▪ Promotion of Exports and Food Procurement
Operations by paying special attention in order to
38
 boost exports and facilitate the trade. It is an
independent objective of monetary policy.
▪ Desired Distribution of Credit - Monetary policy
decides over the specified percentage of credit that
is to be allocated to priority sector and small
borrowers.
▪ Equitable Distribution of Credit to all sectors of
the economy and all social and economic class of
people.
▪ To promote economic efficiency in the financial
system and tries to incorporate structural changes
such as deregulating interest rates, ease operational
constraints in the credit delivery system, to
introduce new money market instruments etc.
▪ Reducing the Rigidity and encouraging more
competitive environment and diversification.
The Chakravarty committee has emphasized that
price stability, growth, equity, social justice, promoting
and nurturing the new monetary and financial
institutions have been important objectives of the
monetary policy in India.
(NOTE - Detailed topic has been discussed in
Banking chapter)
Q. Which of the following statements is/are correct
regarding the Monetary Policy Committee (MPC)?
[CSE-2017]
1. It decides the RBI's benchmark interest rates.
2. It is a 12-member body including the Governor of
RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union
Finance Minister.
Select the correct answer using the code given below:
a) 1 only
b) 1 and 2 only
c) 3 only
d) 2 and 3 only
17. FINANCIAL LIQUIDITY
▪ Liquidity refers to the amount of liquid assets that
are available to pay expenses and debts as they
become due. It is availability of cash or cash
equivalents to meet short-term operating needs.
▪ Bank leverages the deposits for lending in the
economy which is known as ‘credit creation’ by
banks. This credit creation is almost like fresh
money injected in the economy and contributes to
inflationary pressures.
▪ Liquidity in the economy should strike a balance
between requirements of growth and at the same
39
time keep the prices under check. Managing
liquidity is a major aspect of the RBI functions.
▪ Money deposited in the bank is a source of
liquidity. Money deposited could either be
‘demand’ deposits (payable by the bank on
demand by a customer. Like, money retained in
your savings account in the bank can be withdrawn
by you at any time) or, ‘time’ deposits (can be
withdrawn after a fixed period only like fixed
deposits). Both demand as well as time deposits
are the liabilities of the bank as the bank has to pay
it back to the customer.
▪ These demand and time liabilities of the banking
system are the source of increasing liquidity.
18. LIQUIDITY TRAP
▪ A liquidity trap is when monetary policy becomes
ineffective due to very low interest rates combined
with consumers who prefer to save rather than
invest in higher-yielding bonds or other
investments.
▪ A liquidity trap means consumers' preference for
liquid assets (cash) is greater than the rate at which
the quantity of money is growing.
▪ While a liquidity trap is a function of economic
conditions, it is also psychological since consumers
are making a choice to hoard cash instead of
choosing higher-paying investments because of a
negative economic outlook.
18.1 REASONS FOR LIQUIDITY TRAP
▪ Expectations of deflation by the public
▪ Preference for saving - Liquidity traps occur during
periods of recessions and a gloomy economic
outlook.
▪ Credit Crunch - Banks lost significant sums of
money in buying sub-prime debt, which defaulted.
Therefore, they are seeking to improve their balance
sheets by restricted lending activities.
▪ Banks don't pass Base Rate cuts onto consumers
▪ Ineffective monetary policy transmission
▪ Unwillingness to hold bonds - If interest rates are
zero, investors will expect interest rates to rise
sometime. If interest rates rise, the price of bonds
falls.
19. VARIOUS TERMS FOR CURRENCIES
19.1 HARD CURRENCY
▪ It is the international currency in which the
highest faith is shown and is needed by every
economy.
▪ It is strongest currency of the world, one which has
a high level of liquidity. Basically, the economy
with the highest as well as highly diversified
exports, that are compulsive imports for other
countries (high-level technology, defence products,
lifesaving medicines and petroleum products) will
also create high demand for its currency in the
world and becomes the hard currency. It is always
scarce.
▪ Meanwhile, by late 2015, the IMF allowed the SDR
to be denominated in the Chinese ‘Yuan’–paving
the way for a new hard currency to be
implemented in 2016.
19.2 SOFT CURRENCY
▪ A term used in the foreign exchange market which
denotes the currency that is easily available in
any economy in its forex market.
▪ For example, rupee is a soft currency in the Indian
forex market. It is basically the opposite term for
the hard currency.
19.3 HOT CURRENCY
▪ Hot currency is a term of the forex market and is a
temporary name for any hard currency.
▪ Due to certain reasons, if a hard currency is exiting
an economy at a fast pace for the time, the hard
currency is known to be hot.
▪ As in the case of the South East Asian crisis, the
US dollar had become hot.
19.4 HEATED CURRENCY
▪ A term used in the forex market to denote the
domestic currency which is under enough
pressure (heat) of depreciation due to a hard
currency’s high tendency of exiting the economy
(since it has become hot).
▪ It is also known as ‘currency under heat’ or ‘under
hammering’.
19.5 CHEAP CURRENCY
▪ A term first used by the economist J. M. Keynes
(1930s). If a government starts re-purchasing its
bonds before their maturities (at full-maturity
prices) the money which flows into the economy is
known as the cheap currency, also called cheap
money.
▪ In the banking industry, it means a period of
comparatively lower/softer interest rates regime.
19.6 DEAR CURRENCY
▪ This term was popularised by economists in early
1930s to show the opposite of the cheap currency.
when a government issues bonds, the money which
flows from the public to the government or the
money in the economy in general is called dear
currency, also called as dear money.
▪ In the banking industry, it means a period of
comparatively higher/costlier interest rates
regime.
19.7 HELICOPTER MONEY
▪ It is a hypothetical concept put forward by the
economist, Milton Friedman.
▪ This involves the central bank of the country
printing currency notes and distributing it to the
people free of cost.
▪ The idea here is to promote demand in the
economy during recession.
20. CURRENCY IN INDIA
▪ In India, the paper currency was first issued during
British East India Company rule.
▪ The first paper currency issued in India was the Rs.
1 note. The first paper notes were issued by the
private banks such as Bank of Hindustan and the
presidency banks during late 18th century.
21. CURRENCY CIRCLE
▪ After the 1861 act, the Government of India had the
monopoly to issue paper notes in India.
▪ The lack of mobility, lack of development and lack
of education resulted in a major issue in redemption
of these notes.
▪ Consequently, there were only some areas (such as
major cities and nearby areas) in various parts of
country, where the paper notes of Indian
government were legal tenders. These areas were
called “Currency Circles”.
22. CURRENCY CONTROLLER IN INDIA
40
 ▪ Section 22 of the RBI Act 1934 provided that RBI
has the sole right to issue Bank notes of all
denominations.
▪ Thus, on 1 April 1935, the currency function
moved from Controller of Currency to RBI.
▪ Today, Reserve Bank is responsible for the design,
production and overall management of the nation’s
currency, with the goal of ensuring an adequate
supply of clean and genuine notes.
23. DECIMALIZATION OF COINAGE
▪ During time of independence, the basic unit of
Indian currency was 1 Rupee which could be
divided into 16 Annas or 64 pice (pice was old
spelling of paise)
▪ This 16 Anna or 64 Pice structure remained till
1957, when decimalization of the coinage was
done.
▪ Henceforth, spelling of “pice” was changed to
“Paisa” and 1 Rupee was divided into 100 Paise.
This is called Decimalization of Coinage and it took
place in 1957. The 100th part of Rupee was now
called Naya Paisa. The term “naya” was dropped in
1964.
24. ROLE OF RBI W.R.T. COINS IN INDIA
▪ The distribution of Coins is undertaken by RBI
as an agent of the Government, (coins are minted by
the Government and not by RBI).
▪ However RBI is the only source of legal tender
money because distribution of one rupee notes and
coins and small coins all over the country is
undertaken by the Reserve Bank as agent of the
Government.
25. CURRENT PAPER NOTES IN
CIRCULATION
▪ At present, paper currency notes in India are issued
in the denomination of Rs.5, Rs.10, Rs.20, Rs.50,
Rs.100, Rs.200, Rs.500 and Rs.2,000.
▪ The printing of Rs. 1 and Rs. 2 denominations has
been discontinued, though the notes in circulation
are valid as per the Coinage Act 2011.
▪ RBI has been authorized to issue notes of Rs. 5000
and Rs. 10000 also. In fact, as per RBI act, RBI can
issue any note of any denomination but not
exceeding Rs. 10,000. The notes denomination is
notified by Government and RBI acts accordingly.
26. SIGNATURE ON CURRENCY NOTES
41
▪ Under Section 22 of the Reserve Bank of India
Act, RBI has sole right to issue currency notes of
various denominations except one rupee notes.
▪ Signature on currency notes is of the incumbent
RBI Governor.
▪ The One Rupee note is issued by Ministry of
Finance and it bears the signatures of Finance
Secretary.
27. PROPORTIONAL RESERVE SYSTEM
▪ Originally, the assets of the Issue department were
to consist of not less than 2/5th of the Gold or
sterling securities, provided Gold was not less
than Rs. 40 Crores in value.
▪ Remaining 3/5th of the assets might be rupee
coins. This was called “Proportional Reserve
System”. In 1956, this system was changed.
▪ Now, RBI is required to maintain a Gold and
Foreign Exchange Reserves of Rs. 200 Crore, of
which at least Rs. 115 Crore should be in Gold.
▪ Against minimum reserve, the RBI is empowered
to issue currency to any extent. This is being
followed since 1957 and is known as the Minimum
Reserve System (MRS).
28. CURRENCY CHESTS
▪ Currency chests are storehouses where bank notes
and rupee coins are stocked on behalf of the
Reserve Bank.
▪ The currency chests have been established with
State Bank of India, six associate banks,
nationalized banks, private sector banks, a foreign
bank, a state cooperative bank and a regional rural
bank.
▪ Deposits into the currency chest are treated as
reserves with the Reserve Bank and are included
in the Cash Reserve Ratio.
29. PRINTING PRESS IN INDIA FOR BANK
NOTES
▪ Note Press (CNP), Nasik (Maharashtra) established
in 1928, was the first printing press for banknotes
in India.
30. LANGUAGES ON CURRENCY NOTES
▪ The amount of a banknote is written on it in 17 (15 in panel on backside + Hindi + English) languages.
▪ The 15 languages in the panel are Assamese, Bengali, Gujarati, Kannada, Kashmiri, Konkani, Malayalam, Marathi,
Nepali, Oriya, Punjabi, Sanskrit, Tamil, Telugu and Urdu.

31. ISSUE DEPARTMENT AND CURRENCY DEPARTMENTS OF RBI

▪ RBI has a separate department called issue department whose assets and liabilities are kept separate from the
Banking Department.
▪ Currency Management function of Reserve Bank is carried out at the “Department of Currency Management”
located at Central Office Mumbai.
▪ There are 19 Issue offices. RBI authorizes selected branches of Banks to establish Currency Chests and Coin
Deposits.

42
 CH-2 MONEY PART - 2
1. LEGAL TENDER MONEY d) The metallic money in circulation in a country.
▪ The 'Legal tender' is the money that is recognised
by the law of the land, as valid for payment of Limited Legal Tender Unlimited Legal
transactions and debts. Money Tender Money
▪ Denomination of a country's currency by law, must
This is a form of money, In this form of money,
be accepted as a medium of exchange and
which can be paid in this can be paid in
payment for a money debt.
discharge of a debt up to discharge of a debt of any
▪ While usually all denominations of the circulating
a certain limit, and amount.
paper money are legal tenders, the denomination
beyond this limit, a
and amount in coins acceptable as legal tender
person may refuse to A person who refuses to
varies from country to country. This is also called
accept the payment and accept this money a legal
lawful money.
no legal action can be action can be taken
▪ The RBI Act of 1934, which gives the Central Bank
taken against. against.
the sole right to issue bank notes, states that "Every
bank note shall be legal tender at any place in India
Coins are limited legal Paper notes/currency
in payment for the amount expressed therein".
tender in India. are unlimited legal tender
▪ The recognition or cancellation of the legal tender
in India.
status is important because paper money derives
all its value from the Government's recognition
of it. 2. BLOCK CHAIN AND DISTRIBUTED
▪ LEDGER TECHNOLOGY (DLT)
▪ Blockchain, sometimes referred to as Distributed
Ledger Technology (DLT), makes the history of
any digital asset unalterable and transparent
through the use of decentralization and
cryptographic hashing.
▪ Blockchain Technology was invented by Satoshi
Nakamoto in 2008 for use in the crypto-currency
bitcoin, as its public transaction ledger.
▪ Satoshi Nakamoto’s aim in creating the
▪ The legal tender money is of two types: decentralized Bitcoin ledger - the blockchain - was
to allow users to control their own money so that
no third party, not even the government, would be
Legal Tender Money able to access or monitor it.
▪ Blockchain consists of three important concepts:
blocks, nodes and miners.
Limited Legal Tender Unlimited Legal
Money Tender Money
Blocks
Q. Which one of the following statements correctly
describes the meaning of legal tender money?
a) The money which is tendered in courts of law to Nodes Miners
defray the fee of legal cases.
b) The money which a creditor is under compulsion
to accept in settlement of his claims.
c) The bank money in the forms of cheque, drafts, bills ▪ Blocks - Blocks are files where data pertaining to
of exchange, etc. the bitcoin network are permanently recorded. A
block is like a page of a ledger or record book.

43
▪ Nodes can be any kind of electronic device that ▪ Since no authority
maintains copies of the blockchain and keeps the controls the
network functioning. generation of the coins
▪ Miners create new blocks on the chain through a or tracks them, the
process called mining. system itself is
designed in such a
3. CRYPTO-CURRENCIES way that the network
▪ A Cryptocurrency is an internet-based medium of maintains a foolproof system of the record of every
exchange which uses cryptographical functions transaction as well as tracking issuance of the
to conduct financial transactions. currency sent without either side knowing the
▪ It leverages blockchain technology to gain identity of the other
decentralization, transparency, and ▪ Bitcoins are ‘mined’ using computing power in a
immutability (ability of a blockchain ledger to distributed network.
remain unchanged, ▪ It’s the first example of a growing category of
unaltered and indelible) money known as cryptocurrency.
▪ The most important
feature of a cryptocurrency Q. With reference to ‘Bitcoins’ sometimes seen in the
is that it is not controlled news, which of the following statements is/are
by any central authority correct? (CSE-2019)
- the decentralized nature of the blockchain makes 1. Bitcoins are tracked by the Central Banks of the
cryptocurrencies theoretically immune to the old countries.
ways of government control and interference. 2. Anyone with a Bitcoin address can send and receive
Bitcoins from anyone else with a Bitcoin address.
3.1 EVOLUTION OF CRYPTO CURRENCY 3. Online payments can be sent without either side
▪ The first decentralized cryptocurrency, bitcoin, knowing the identity of the other.
was created in 2009 by presumably pseudonymous Select the correct answer using the code given below.
developer Satoshi Nakamoto. a) 1 and 2 only
▪ Subprime crisis and recession in 2008-2009 leads b) 3 only
to Quantitative Easing (the introduction of new c) 2 and 3 only
money into the money supply by a central bank) of d) 1, 2 and 3
dollar in US which increased dollar supply and led
to erosion of purchasing power dollar
▪ Banks charge fees on online transfer, credit card,
ATM Decentralized

4. BITCOIN
▪ It is an electronic or digital currency that works
on a peer-to-peer basis. It is decentralized and has
no central authority controlling it. Non-
Bitcoins Transparent
▪ Bitcoins can be sent digitally to anyone who has a repudiable

bitcoin address anywhere in the globe. One person

could have multiple addresses for different
purposes – personal, business and the like.
▪ Satoshi Nakamoto proposed bitcoin, which was an
electronic payment system based on mathematical Traded
digitally
proof.
▪ A bitcoin is not printed currency but is a non-
reputable (assurance that someone cannot deny the
validity of something) record of every transaction 5. LIBRA
that it has been through. All this is part of a huge ▪ There’s a new cryptocurrency called Libra to be
ledger called the blockchain. rolled out by Facebook by 2020.

44
 ▪ It wants to be a ‘global currency’, one that can be ▪ They pose several risks, including anti-money
used to transfer money anywhere in the world laundering and terrorism financing concerns for
without any transaction fees. the state and liquidity, credit, and operational risks
▪ It is the asset-backed cryptocurrency meant to for users.
revolutionize international money. ▪ On the perspective of consumers, issues linked to
crypto-currencies are heightened by the striking
Asset-backed cryptocurrencies are crypto coins that paucity of information on their design, use and
have a link to an object with economic value. operation and indications of market manipulation.
▪ It is possible that the business models of
6. CRYPTO-CURRENCIES VS DIGITAL commercial banks may be seriously disrupted.
CURRENCIES
8. RBI’ STAND ON DECENTRALISED
CRYPTO- DIGITAL DIGITAL CURRENCY (VIRTUAL)
CURRENCIES CURRENCIES CURRENCY
Cryptocurrencies Digital currencies ▪ No central bank has authorized Bitcoins.
are decentralized, and are centralized, ▪ Not traded through BSE, NSE or Commodity
the regulations inside the meaning that transaction exchange (SEBI, FMC)
network are governed by within the network is ▪ No Forex dealers under FEMA can convert Fiat
the majority of the regulated in a currency into Bitcoin or vice versa
community. centralized location, ▪ Bitcoin Exchange website→Legal status unclear
like a bank. ▪ Danger of Hacking, Phishing, Malware, Password
lost
Cryptocurrencies Digital currencies ▪ Consumer courts cannot help in this regard
are transparent. are not transparent. ▪ Poses high risk of speculation & volatility
Anyone and everyone is With digital currencies, ▪ Mere digital code, no intrinsic value, not backed by
able to see any and all you cannot choose the Gold, silver or crude oil etc.
transactions made and address of the wallet and ▪ Media reports on use for illegal drug, money
received by any user, as see all money transfers laundering, terror-financing.
all revenue streams are since the beginning of ▪ Unintentionally breaching anti-money laundering /
placed in a public chain – time. This information is Anti-terror laws
the blockchain. kept strictly ▪ Same for all Digital currencies / virtual currencies
confidential and
private. 9. BAN OR REGULATE? - INDIA’S
Cryptocurrencies Digital currencies have POLICY ON CRYPTOCURRENCIES
are regulated by their
a central authority that ▪ The recommendation of an inter-ministerial
respective can deal with any committee that India should ban all private
communities. problems or issues. This cryptocurrencies, that is, Bitcoin and others like it,
Most countries havecentral body can, for hardly comes as a surprise.
some legal framework
example, freeze or cancel ▪ Finance Minister, in his Budget speech in 2018, said
surrounding digital
transactions on the the government doesn’t consider them legal
currencies. request of the participant tender.
or the authorities. ▪ The RBI has repeatedly warned the public of the
An Encrypt Form Of A Unified Electronic risks associated with cryptocurrencies.
Digital Currency. Cash-form.
10. CONCERNS WITH CRYPTO -
CURRENCIES
7. RBI BANNED CRYPTOCURRENCIES IN
▪ A May 2019 article by Bloomberg, citing data from
2018
blockchain analysis firm Chainalysis, said
▪ Cryptocurrencies are a poor unit of account, as “speculation remains Bitcoin’s primary use case”.
demonstrated by their frequent and high ▪ Its use in illegal online marketplaces that
fluctuation in value. deal with drugs and child pornography is well-
documented.

45
▪ There have been cases of consumers being
defrauded, including in India.
▪ Given all this, it is understandable that the
committee, under the chairmanship of Subhash
Chandra Garg, the former Economic Affairs
Secretary, has come across as being cautious
of private cryptocurrencies even while advocating
a central bank-issued cryptocurrency.
11. CRYPTO-CURRENCY PANEL FOR BAN
ON PRIVATE DIGITAL CURRENCIES
▪ The committee headed by finance secretary
Subhash Chandra Garg set up to look into the
legality of cryptocurrencies and blockchain has
submitted its report to the Finance Ministry and
recommended that private cryptocurrencies be
banned completely in India.
▪ The committee notes with serious concern
mushrooming of cryptocurrencies almost
invariably issued abroad and numerous people in
India investing in these.
▪ The Committee, however, leaves the door open
for the central bank issued cryptocurrencies,
adding that it endorsed the RBI’s stance of banning
any sort of interface of cryptocurrencies with the
banking system in India.
▪ The Committee recommends that all private
cryptocurrencies, except any cryptocurrency
issued by the state, be banned in India.
▪ It endorses the stand taken by the RBI to
eliminate the interface of institutions regulated by
the RBI from cryptocurrencies.
▪ However, the report goes on to say that it would
be advisable to “have an open mind” regarding
the introduction of an official, government-backed
cryptocurrency in India.
▪ But it also added that it is currently unclear what
the advantages of such a currency in India would
be.
12. BANNING OF CRYPTOCURRENCY &
REGULATION OF OFFICIAL DIGITAL
CURRENCY BILL, 2019
▪ The Subhash Chandra Garg committee has
drafted a law which mandates a fine and
imprisonment of up to 10 years for offences.
▪ The draft law says that anybody who mines,
generates, holds, sells, deals in, transfers, disposes
of or issues cryptocurrencies with will face a fine
and/or jail time of between 1 and 10 years.
12.1 WHY BAN ON CRYPTOCURRENCIES?
▪ All the cryptocurrencies have been created by non-
sovereigns.
▪ They do not have any intrinsic value of their own
and lack any of the attributes of a currency.
▪ That is, they neither act as a store of value nor
are they a medium of exchange in themselves.
▪ These cryptocurrencies cannot serve the purpose
of a currency.
▪ The private cryptocurrencies are inconsistent with
the essential functions of money/currency, hence
private cryptocurrencies cannot replace fiat
currencies.
13. ADVANTAGES OF DLT AND
BLOCKCHAIN
▪ Distributed ledger technology (DLT) is a digital
system for recording the transaction of assets in
which the transactions and their details are recorded
in multiple places at the same time.
▪ Unlike traditional databases, distributed ledgers
have no central data store or administration
functionality.
▪ While the committee has taken a strong stance
against cryptocurrencies, it has highlighted the
benefits of the DLT technology and blockchain.
▪ The Committee recommends that blockchain based
systems may be considered by MEITY for
building a low-cost KYC system that reduces the
need for duplication of KYC requirements for
individuals.
▪ DLT-based systems can be used by banks and other
financial firms for loan tracking, collateral
management, fraud detection, claims
management in insurance etc.
▪ Similarly, DLT can be beneficial for removing
errors and frauds in land markets if the
technology is implemented for maintaining land
records.
▪ The Committee therefore recommends that various
state governments may examine the feasibility of
using DLT for land-records management.
14. SUPREME COURT ON
CRYPTOCURRENCY (2020)
▪ Recently, the Supreme Court struck down a
circular of RBI, which bans financial
institutions from enabling deals in digital or
cryptocurrencies.
▪ The ban that came into force in April 2018, had
crippled the Indian cryptocurrency industry.
▪ This ban was challenged by the Internet & Mobile
Association of India (IAMA) in the Supreme
46
 Court, the IAMA pleaded that dealing and trading ▪ The ten core promoter banks are State Bank of
in cryptocurrency was a legitimate business India, Punjab National Bank, Canara Bank, Bank of
activity and that the RBI did not have jurisdiction Baroda, Union Bank of India, Bank of India, ICICI
over it as these assets could be classified as Bank, HDFC Bank, Citibank and HSBC. In 2016
commodities rather than currency. the shareholding was broad-based to 56 member
banks to include more banks representing all
14.1 JUDGMENT sectors.
▪ Economic Dimension: While the RBI had the
power to take note of and deal with virtual Q. Which one of the following links all the ATMs in
currencies, the prohibition was excessive since it India? (CSE -2018)
cut off the lifeline of otherwise legitimate trade. a) Indian Banks’ Association
▪ Administrative Aspect: An outright ban on virtual b) National Securities Depository Limited
currencies would be a disproportionate c) National Payments Corporation of India
measure by the government since many less d) Reserve Bank of India
intrusive measures are available.
▪ Constitutional Aspect: Theban was Consider the following statements: (CSE-2017)
unconstitutional. It is in violation of the freedom 1. National Payments Corporation of India (NPCI)
to carry on trade guaranteed by Article 19(1)(g) of helps in promoting financial inclusion in the
the Indian Constitution. country.
2. NPCI has launched RuPay, a card payment scheme.
14.2 WAY FORWARD Which of the statements given above is/are correct?
▪ Rather than impose bans, it would be more a) 1 only
pragmatic to institute awareness campaigns to b) 2 only
alert investors to specific risks, and to monitor c) Both 1 and 2
trades for fraud and scams. d) Neither 1 nor 2
▪ There is a need for RBI to formulate a detailed
regulatory framework to license virtual currency 16. DIGITAL PAYMENTS
intermediaries like exchanges. ▪ Recently various steps
▪ These local cryptocurrency exchanges could be have been taken to
asked to adhere to the KYC norms followed by promote digital
stock exchanges. payments in India.
▪ A vibrant cryptocurrency segment could add value ▪ RBI has removed
to India’s financial sector. Thus, in the face of charges for payments
growing technological innovation in the financial via NEFT and RTGS
sector, it is critical to strengthen the supporting and asked banks to pass
regulatory frameworks of India that operate on the benefits to
regardless of the nature of an instrument. customers.
▪ The merchant discount
15. NATIONAL PAYMENT CORPORATION rate(MDR)charges
OF INDIA (NPCI) applicable on payment
▪ It is an umbrella organisation for operating retail via RuPay and UPI have
payments and settlement systems in India. It is an been removed.
initiative of RBI and Indian Banks’ Association ▪ All business companies with an annual turnover
(IBA) under the provisions of the Payment and of ₹50 crore or more have been mandated to offer
Settlement Systems Act, 2007. RuPay & UPI modes of payment to customers.
▪ It has been incorporated as a “Not for Profit” ▪ RuPay and UPI are products of National Payments
Company under the provisions of Section 25 of Corporation of India (NPCI).RuPay is the first
Companies Act 1956 (now Section 8 of domestic Debit and Credit Card payment
Companies Act 2013). network of India.
▪ National Financial Switch (NFS) is the largest
network of shared automated teller machines PAYMENT AND SETTLEMENT SYSTEMS IN
(ATMs) in India. INDIA: VISION-2018

47
Document published by RBI. The Vision-2018 aims at ▪ The DPI will be made available from July 2020
building best of class payment and settlement systems onwards.
for a ‘less-cash’ India. The broad contours of Vision-
2018 revolve around 5 Cs – coverage, convenience, Committees related to Digital Payment in India
confidence, convergence and cost. To achieve these, 1. Ratan Watal (2016)
Vision-2018 will focus on four strategic initiatives 2. Nandan Nilekani (2019)
such as responsive regulation, robust infrastructure,
effective supervision and customer centricity. 16.2 TRENDS IN DIGITAL PAYMENTS
Digital payments witnessed a Compounded Annual
16.1 DIGITAL MODES OF PAYMENT Growth Rate (CAGR) of 61% and 19% in terms of
SETTLEMENT volume and value, respectively over the past 5 years.
This demonstrates a steep shift towards digital
payments.
FEATUR NEFT RTGS IMPS
E ACCEPTANCE DEVELOPMENT FUND
▪ Recently, RBI announced setting up of Acceptance
Introduced RBI RBI NPCI Development Fund to improve the last- mile
by
payments network in rural India to transact
Settlement Half- One on One on
digitally.
type hourly one one
▪ It will be operationalized as a bank- sponsored
batches settlement settlement
development fund solely to improve payment
Min Rs.- Rs. 2 lakh Rs. 1 infrastructure in Indian small towns and villages
transfer especially in Tier III to Tier VI centers, where most
limit daily transactions are in cash.
Max No limit No limit Rs. 2 lakh
transfer (Rs. 50,000 DIGITAL COMPETITIVE INDEX
limit per ▪ Released by- IMD World Competitiveness
transaction Center.
) ▪ It was started in 2017 and measures the capacity
Funds 2 hours Immediat Immediat and readiness of 63economies to adopt and explore
Transfer e e digital technologies as a key driver for economic
Speed transformation in business, government and wider
24/7 Available 24/7 society.
on certain ▪ To evaluate an economy, WDCR examines 3
days of factors: Knowledge- capacity to understand and
Service week learn the new technologies; technology-
timings between competence to develop new digital innovations; and
stipulated future readiness- preparedness for coming
time developments.
period (till
6PM) 17. PLATFORMS FOR DIGITAL
Mode Online/ Online/ Online PAYMENTS
offline offline
17.1 UPI and UPI 2.0
DIGITAL PAYMENTS INDEX (DPI) ▪ UPI is a payment system that allows money transfer
▪ The Reserve Bank shall construct and periodically between any two bank accounts by using a
publish a composite DPI to capture the extent of smartphone. It was launched in April 2016
digitisation of payments effectively. ▪ UPI allows a customer to pay directly from a
▪ The DPI would be based on multiple parameters bank account to different merchants, both online
and shall reflect accurately the penetration and and offline, without the hassle of typing credit card
deepening of various digital payment modes. details, IFSC code, or net banking/wallet
passwords.

48
 ▪ It also caters to the “Peer to Peer”(P2P) collect
request which can be scheduled and paid as per
requirement and convenience.
▪ NPCI has upgraded the UPI as UPI 2.0 with
enhanced features such as-
1. Linking of overdraft account – Apart from
the savings and current accounts, the UPI users
can now link their overdraft account to it.
2. One-time Mandate (account blocking) – It
allows customers or merchants to pre-authorize
a transaction and pay at a later date.
3. Security Layer in QR – The app allows the
users to scan the QR code and check the
authenticity of the merchants through
notification to the user to ascertain the
information.
4. Increased Transaction Limit From 1 lakh/day
to 2 lakh/day.
5. Signed intent and QR (Quick Response
code): This feature helps customers to check
the authenticity of merchants while scanning
QR. It notifies the user with information to
ascertain whether the merchant is a verified UPI
merchant or not. This provides an additional
security.
Q. Which of the following is a most likely
consequence of implementing the 'Unified Payments
Interface (UPI)'? [CSE-2017]
a) Mobile wallets will not be necessary for online
payments.
b) Digital currency will totally replace the physical
currency in about two decades.
c) FDI inflows will drastically increase.
d) Direct transfer of subsidies to poor people will
become very effective.
17.2 BHIM AND BHIM 2.0
▪ Bharat Interface for Money (BHIM) is a mobile
payments application based on NPCI’s Unified
Payments Interface (UPI).
▪ BHIM is developed by National Payments
Corporation of India (NPCI)
▪ The BHIM app was launched in December 2016 by
NPCI.
▪ A new and modified version of Bharat Interface for
Money (BHIM), BHIM 2.0 has been launched
under the Ministry of Electronics and
Information Technology.
▪ Under BHIM 2.0, the existing cap of Rs. 20,000
has been increased to Rs. 1,00,000, from verified
merchants.
49
▪ BHIM provides an easy and secure mode of
money transfer for the users on a mobile platform.
It provides the facility to easily send or receive
money from other customers using the UPI.
17.3 BHARAT QR
▪ A QR code consists of black squares arranged in
a square grid on a white background, which can
be read by an imaging device such as a camera.
▪ Bharat QR is P2M (Person to Merchant) Mobile
payment solution. This solution is mutually
derived among NPCI, Visa and Mastercard
payment networks.
▪ Once the BQR codes are deployed on Merchant
locations, user can pay the utility bills using BQR
enabled mobile banking apps without sharing
any user credentials to the merchant. It is a quick
method of payment.
▪ Bharat QR transactions are different from POS
transactions. In POS transaction, POS terminal
is required whereas in Bharat QR transaction,
QR Code is required.
17.4 AEPS
▪ Aadhar Enabled Payments System is bank led
model which allows online interoperable
financial inclusion transactions at Point of Sale
through the business correspondent of any bank
using Aadhaar authentication.
17.5 EMV CARDS (EUROPAY-MASTERCARD-
VISA)
▪ Debit card security standard that includes a small
micro-chip in the debit card.
▪ The microprocessor chip embedded in the card
prevent card skimming or cloning that is possible
in magnetic stripe cards
ADVANTAGE OVER MAGNETIC STRIPE CARDS
▪ The magnetic stripe credit and debit cards store the
data on the magnetic stripe found on the reverse
side of the card.
▪ Fraudsters place a skimmer device inside the card
swipe slot in ATMs or PoS terminals to read the
customer data stored in the magnetic stripe.
▪ EMV chip cards prevent such skimming because
they do not reveal the user data to the terminal at the
time of swiping the card.
MOBILE MONEY IDENTIFIER (MMID)
MMID is a 7 digit number, issued by banks. Every
bank account has only one MMID. Different MMID’s
can be linked to same Mobile Number. MMID is one of
the input which when clubbed with mobile number
facilitates fund transfer. Combination of Mobile no. &
MMID is uniquely linked with an Account number
and helps in identifying the beneficiary details.
18. MERCHANT DISCOUNT RATE (MDR)
▪ MDR is the cost paid by a merchant to a bank for
accepting payment by digital means from their
customers, which is usually recovered from the
customer.
▪ MDR also called as the Transaction Discount
Rate (TDR)
▪ MDR is user-fee charged by the banks to
merchants for facilitating card-based or digital
transactions. It is charged as a percentage of the
transaction amount.
▪ Recently the government has done away with
MDR altogether for large-retails clearing the way
for adoption of low-cost digital payments like
BHIM UPI, UPI-QR Code, Aadhaar Pay etc.
Q. Which one of the following best describes the
term “Merchant Discount Rate” sometimes seen in
news? (CSE-2019)
a) The incentive given by a bank to a merchant for
accepting payments through debit cards pertaining
to that bank.
b) The amount paid back by banks to their customers
when they use debit cards for financial transactions
for purchasing goods or services.
c) The charge to a merchant by a bank for
accepting payments from his customers through
the bank’s debit cards.
d) The incentive is given by the Government to
merchants for promoting digital payments by their
customers through Point of Sale (PoS) machines
and debit cards.
19. PAYMENTS AND SETTLEMENTS
SYSTEM
▪ System that facilitates transfer of money from a
payer to the beneficiary.
▪ The payment and settlement systems act,
2007provide for the regulation and supervision of
payment systems in India and to designate the
Reserve Bank of India as the authority for that
purpose and for matters connected therewith or
incidental thereto.
▪ It includes both paper based payments such as
cheques, drafts as well as electronic payments
such as Real Time Gross Settlement (RTGS),
National Electronic Funds Transfer (NEFT),
immediate payment Service (IMPS), UPI etc.
20. LABLES OF ATM IN INDIA
The ATM entered India by late 1980s and have evolved
into three of its types by now –
LABLES DETAILS
These are owned and operated by
the concerned bank and carry the
Bank’s own bank’s ‘logo’. They are the costliest
ATMs way to provide such service to bank’s
customers.
These are owned by third party (a
non-banking firm). The concerned
banks only handle part of the process
Brown Label that is ‘cash handling’ and ‘back-
ATMs end server’ connectivity. These are
(BLAs) ‘owned’ and ‘operated’ by a third
party (a non-banking firm).
They do not bear ‘logo’ of the
banks they serve. They are
interconnected with the entire ATM
White Label network in the country. The Tata
ATMs Communications Payment
(WLAs) Solutions became the first such firm
to get permission of the RBI – Brand
name was “Indicash”.
50

The 3rd parties have a mandate to deploy -
▪ 67% ATMs - Rural location
▪ 33% ATMs - Urban location
▪ E.g. - Tata communications payment solutions -
first firm to get permission from RBI (‘Indicash’)
21. CARD TYPES BASED ON PAYMENT
MODALITY
21.1 CREDIT CARDS (PLASTIC MONEY)
▪ It allows holder to make purchase on credit
(loan), even if he may / may not have sufficient
balance in his bank account at the time of
purchase.
▪ Customer does shopping using credit card→ bank
transfers concerned amount to merchant from
bank’s own funds and later bank recovers same
amount from customer.
▪ Customer can pay entire due amount at once or
convert it into Equated Monthly Installments
(EMI).
▪ Interest rate may be charged depending on billing
cycle, grace period and other terms and conditions
▪ If Credit card used for withdrawing money from
ATM, then it’s a type of ‘borrowing’, so, bank
levies interest rate.
21.2 DEBIT CARDS (PLASTIC MONEY)
▪ It allows holder to make purchases upto the
extent of the amount lying in own his bank
balance.
▪ Customer does shopping using debit card →bank
transfer concerned amount from customer’s own
bank account to merchant.
▪ If he has insufficient balance, he may not be able to
make purchase. Although nowadays e- commerce
sites allow debit- card based EMIs.
▪ Debit card can be used to withdraw money from
ATM from your existing bank balance. So, it’s not
‘borrowing’.
21.3 HYBRID CARD / DUO CARD
▪ Single card containing two chips for -
1. credit card
2. debit card.
▪ So, you don’t have to carry two separate cards. E.g.
Indus bank Hybrid card.
21.4 PRE -PAID CARD
51
▪ It’s a subtype of debit card. While debit card is
linked to a given bank account, a person can buy
pre-paid card even without having account in the
given bank e.g. IRCTC’s UBI prepaid card which
can be used for buying rail tickets, meals etc.
22. DIGITAL PAYMENT REGULATORY
BODIES
22.1 DIGITAL TRANSACTIONS OMBUDSMAN
(2019)
▪ RBI designates senior RBI officials at 21 places
across India as Digital Transactions Ombudsman
(DTO)
▪ They will hear customer complaints upto ₹ 20 lakh
against prepaid payment instruments, Mobile
wallets, Apps, NEFT/RTGS and other digital
transactions.
▪ They can order the company / bank to revert /settle
the transaction and pay upto additional ₹ 1 lakh
for mental agony of customer→Higher Appeal to
Dy.Gov of RBI.
▪ If amount involved is more than ₹ 20 lakh, then
matter outside his jurisdiction. Victim has to
approach ordinary courts/consumer courts
depending on the case matter.
In line with the recommendations of the report of the
“committee on deepening of digital payments”
chaired by Nandan Nilekani, RBI announced creation
of a Payments Infrastructure Development Fund
(PIDF). The 500 crores PIDF seeks to encourage
acquirers to deploy Points of Sale (PoS)
infrastructure for both physical and digital modes.
22.2 PAYMENT REGULATORY BOARD (PRB)
(PROPOSED)
▪ 1998: Narasimhan-II Committee on Banking
Reforms suggested regulatory framework for e-
banking, card payment etc.
▪ 2007: Payment & Settlement Systems Act
established Board for Regulation and Supervision
of Payment and Settlement Systems (BPSS) in RBI.
All payment system providers have to register with
RBI’s BPSS- whether bank, non-bank,
wallet/Prepaid Payment Instrument (PPI) etc.
▪ 2016: Ratan Watal Committee on digital
payment suggested replacing this BPSS with a
Payments Regulatory Board (PRB) in RBI, to look
after Interoperability, Consumer protection,
Innovation, R&D in digital payments.
▪ 2018: Draft Payment and Settlement System Bill
to implement it. But, RBI vs Government difference
 of opinion about who should be chairman, how
many members from Government side etc.
23. RECOMMENDATIONS OF NANDAN
NILEKANI PANEL ON REFORMING
RBI AND NPCI
▪ RBI should prepare area wise ‘Digital Financial
Inclusion Index’ to monitor progress & take
remedial steps.
▪ Ensure no user is more than 5 kms away from a
banking access point.
▪ Local vendor should be made Banking
Correspondent(BC).
▪ Setup an Acceptance Development Fund (ADF)
to develop digital payment infrastructure in poorly
served areas (e.g. subsidy on PoS devices). RBI
and Banks should co-contribute fiscal amount in
this fund.
▪ Reduce the MDR / card payment fees - Allow
customer to do “n” number of digital payment
transactions per month with no charges.
▪ RBI should make NEFT available 24/7 and review
charges on its usage. (June 2019: RBI removed
charges on both NEFT and RTGS and asked the
banks to pass on the benefits to customers.)
▪ NPCI should offer RuPay and BHIM UPI in
other countries to facilitate remittance to India.
▪ Encourage local language apps/ software for
digital payments.
24. DEMONETISATION – CRITICAL
ANALYSIS
▪ Demonetization is the act of stripping
a currency unit of its status as legal tender.
▪ Demonetization has been used as a tool to stabilize
a currency and
fight inflation, to
facilitate trade and
access to markets,
and to push
informal economic
activity into more
transparency and away from black and grey
markets.
24.1 EARLIER DEMONETIZATIONS IN INDIA
▪ The first demonetisation was implemented in
1946(RBI demonetised Rs 1,000 and Rs 10,000
notes)
▪ The Morarji Desai government demonetised these
notes in 1978.
24.2 POSITIVE IMPACTS OF DEMONETISATION
▪ Increase in tax collection and considerable
increase in the number of Income Tax Returns
(ITRs) filed. ITR registered an increase of 24.7%.
▪ Tackling Black Money - The government has
identified more than 37000 shell companies which
were engaged in hiding black money and hawala
transactions.
▪ Impacts on terrorism, Naxalism, and trafficking
- Due to demonetisation, terrorist and Naxalite
financing has stopped almost entirely.
▪ The note ban had led to a huge fall in sex
trafficking. Since demonetisation, no high-quality
fake currency notes were found/seized by
intelligence operations.
▪ Increase in digital transactions - digital
transactions have increased by around 50-55%
points since demonetisation.
▪ Increase in digital transactions→RBI has to print
fewer notes which save printing costs of the
government.
Cash - to - GDP ratio - gives the ratio of cash
currency available in the market to the total monetary
value of GDP. Currency-to-GDP ratio as of March 2019
was 11.23% which is highest in three years.
Tax-to-GDP ratio represents the size of a country's tax
kitty relative to its GDP. It is a representation of the size
of the government's tax revenue expressed as a
percentage of the GDP. Higher the tax to GDP ratio the
better financial position the country will be in.
24.3 NEGATIVE IMPACT OF DEMONETISATION
▪ Poor Planning - At the time of demonetisation, the
high-value notes constitute 87.5% of the currency
value.
▪ Impacts on Jobs - As people ran out of money,
they could not be able to pay which results into
economic slowed down & supply-chain of informal
sector gets affected.
▪ Impacts on Savings - Households are now holding
far more of their savings in cash than in the year
prior to demonetisation.
▪ Impacts on Government expenditure: by RBI
cost the government around Rs 8000 crore during
the period between July 2016-June 2017.
▪ Impacts on GDP - country’s growth rate, which
was 7.5% in September 2016 declined to5.7% in
June 2017 - reduction of 1.5%.
▪ It is still apparent that the corruption has not yet
suppressed since demonetisation.
52
 ▪ The cash-GDP ratio has reached levels similar to
the period before demonetisation.
▪ Stress in agriculture have begun to appear because
of demonetization pertains to cash as the dominant
mode of transaction in the agriculture sector.
▪ Banks are not in a position to considerably
increase lending; their net interest income has
decreased. Worsening their capital situation and
their NPA situation got worse.
25. MEASURES TO PROMOTE LESS CASH
ECONOMY
▪ Ratan Watal Committee to Finance Ministry for
medium term recommendations to strengthen
digital payment ecosystem.
▪ Chandrababu Naidu chief ministers’ Committee
to PM to promote digital payment.
▪ HRD ministry’s Vittiya Saksharta Abhiyan
wherein college students explain people about
digital transactions.
▪ NITI and NPCI jointly launched lottery / cash back
schemes for customers (Lucky Grahak) and
merchants (Digi Dhan Vyapar). Government itself
launched further referral bonus, cashback schemes
for using UPI-BHIM.
▪ Budget-2017: Imposed ceilings the cash
transactions, provided tax incentives to companies
for using digital transactions, reduced custom duties
on ATM related devices.
▪ Digidhan Mission (2017) - Ministry of Electronics
and Information Technology (MeitY), to create
awareness about digital payments.
▪ MeitY also launched a DIGIDHAN
DASHBOARD web portal to monitor the digital
transactions in India.
▪ Budget-2018: promised to explore blockchain
technology for promoting digital economy.
▪ Budget-2019: Imposed Tax Deduction at Source
(TDS) on withdrawal of ₹1 cr or more from a single
user account.
▪ Digital Payment Abhiyan (2019- Sept) –launched
by MEITY along with Google India and Data
Security Council of India (DSCI, a not-for-profit
organization by NASSCOM).
26. BLACK MONEY- CRITICAL ANALYSIS
▪ An income which is not declared by a person or
a group of persons in a nation is termed as black
money. It is also termed as ‘illegitimate’ as it goes
unrecognized for the tax declaration.
26.1 MEANING OF BLACK MONEY
53
▪ There is no universal definition for black money
in economics. In layman’s language, it is money
that has been acquired through illegitimate
means or money which is unaccounted for, that
is, for which tax is not paid to the government.
▪ Cash transactions without proper accounting are
classified as black money.
▪ Black money is hidden from government
authorities and is not reflected in the GDP of
India, national income, etc.
▪ White money is money that is earned through
legitimate means and is accounted for, for which
income or other tax is paid.
▪ In an ideal economy, all money that is transacted
should be accounted for. This would help the
government to collect taxes.
26.2 GENERATION OF BLACK MONEY
The illegal activities that can lead to
black money generation are:
▪ Crime
▪ Corruption
Illegitimate ▪ Non-compliance with tax
activities requirements
▪ Complex procedural regulations
▪ Money laundering
▪ Smuggling
This is where an entity wilfully does
Tax not pay taxes that are due to the
evasion government.
This is where an entity takes advantage
Tax of the existing loopholes in the system
avoidance and avoids paying taxes. This is not
illegal though.
26.3 SOURCES OF BLACK MONEY IN INDIA
▪ Sellers or traders who do not give bills or receipt
create black money.
▪ Many people invest in bullion or jewellery to hide
their actual income from the authorities.
▪ In the real estate sector, many people undervalue
their real assets to refrain from paying the rightful
tax.
▪ Some SHGs and trusts do not provide proper
sources for their funds and donations received.
▪ Tax havens - Tax havens are generally small
countries where foreigners don’t have to pay
taxes. These countries generally have very liberal
 regulatory frameworks, which big corporations
take advantage of.
▪ Setting up of shell companies and redirect all their
profits to this entity, by which they can reduce their
tax liabilities by a huge margin.
▪ Investments through innovative derivative
instruments like participatory notes (P-Notes) also
are a means to hide black money.
26.4 EFFECTS OF BLACK MONEY
▪ It affects the financial system of the country. The
central bank is not able to control money supply in
the economy causing higher inflation. This will
lead to a fall in the value of the currency.
▪ Black money affects the credibility of a country
negatively.
▪ It is most often used for illegal activities such as
drugs and narcotics dealing, terrorism, etc.
▪ The government suffers a big loss in the form of
taxes because of black money.
▪ Black money creates a parallel economy in the
country, which is completely underground.
▪ Black money can also cause real estate prices to
go up, which may lead to an asset bubble.
26.5 MEASURES TAKEN TO CURB BLACK
MONEY
▪ Tax reforms have been initiated with a view to
resisting black money. The tax base has been
increased and rates have been slashed. Reforms are
being made to incorporate tax deduction at the
source itself.
▪ Through the Black Money Bill 2015, the
government has allowed the reporting of black
money generated through tax evasion in a given
time frame.
▪ Demonetisation of Rs.500 and Rs.1000 was
carried out in 2016 with the primary view of making
black money useless.
▪ The government is encouraging cashless/digital
transactions with a view to making things more
transparent.
▪ Electoral reforms are also intended to curb black
money as much of the black money generated in
India is used in elections.
▪ The Undisclosed Foreign Income and Assets
(Imposition of Tax) Bill, 2015
▪ Lokpal and Lokayukta Act, 2013
27. MONEY LAUNDERING
▪ Money laundering is the process by which black
money is converted into white money.
▪ People who possess black money cannot spend it
publicly. They should either hide it or spend it on
the underground economy.
▪ Through money laundering, people separate the
money earned (illegally) from its source, mix it
with white money, and then funnel it back into the
source.
▪ Another associated term is round-tripping. In this,
people send money to a tax haven like Mauritius
or Cayman Islands (to avoid paying tax) and then
invest that money into India, thus becoming a
foreign investment.
28. VOCABULARY
ACCOMODATIVE STANCE
▪ Accommodative stance is taken when a central
bank (such as RBI) attempts to expand the overall
money supply to boost the economy when growth
is slowing (as measured by GDP).
▪ The policy is implemented to allow the money
supply to rise in line with national income and the
demand for money.

26.6 LEGISLATIVE FRAMEWORK TO DEAL

WITH BLACK MONEY
▪ Prevention of Corruption Act, 1988
▪ Benami Transactions Prohibition Act, 1988
▪ Prevention of Money Laundering Act, 2002

54
 CH-3 BANKING IN INDIA – PART 1
1. HISTORY AND EVOLUTION OF BANKING
IN INDIA
▪ The term Banking originated in the western world.
▪ Earliest evidence of Banking in India is found from
the period of Vedic Civilization. During those
days, loan deeds called rnapatra or rnalekhya
were prevalent.
▪ Various types of instruments were found in
Buddhist, Mauryan and Mughal periods.
▪ The Arthashastra of Kautilya mentions presence
of bankers during Mauryan era, known as
“Adesha” which are equivalent to Bill of exchange
of current times.
▪ The first bank of India called Bank of
Hindostan was established in 1770.
A bank is a financial institution that accepts deposits
from the public and creates credit. Lending activities
can be performed either directly or indirectly through
capital markets.
A bank is a financial institution licensed to receive
deposits and make loans. Banks may also provide
financial services such as wealth management, currency
exchange, and safe deposit boxes. There are several
different kinds of banks including retail banks,
commercial or corporate banks, and investment banks.
In most countries, banks are regulated by the national
government or central bank.
THREE PRESIDENCY BANKS
▪ Three Presidency banks were set up under charters
from the British East India Company- Bank of
Calcutta (1806), Bank of Bombay (1840) and
Bank of Madras (1843). These banks worked as
quasi central banks in India for many years.
55
IMPERIAL BANK OF INDIA
▪ In 1921, the three presidency banks were
amalgamated to form Imperial Bank of India.
▪ In 1955, this Imperial Bank of India was
nationalized and renamed as State Bank of India
(SBI). Thus, SBI is the oldest Bank of India
among the banks that exist today.
Banking in India is truly a reflection of a mixed
economy with co-existence of public sector banks,
private and foreign banks
OLDEST JOINT STOCK BANK OF INDIA
▪ India’s Oldest Joint Stock Bank is Allahabad
Bank. It is also known as India’s oldest public
sector bank. It was established in 1865.
A bank that has multiple shareholders is called joint-
stock bank.
FIRST BANKS OWNED / MANAGED BY
INDIANS
▪ The first bank purely managed by Indians was
Punjab National Bank, established in Lahore in
1895. The PNB is one of the largest banks in
India.
▪ However, the first Indian commercial bank which
was wholly owned and managed by Indians was
the Central Bank of India which was established
in 1911.
Central Bank of India is called India’s First
Swadeshi bank. Its founder was Sir Sorabji
Pochkhanawala and its first chairman was Sir
Pherozeshah Mehta.
Bank of India was the first Indian bank to open a
branch outside India, in London in 1946.
TIMELINE OF BANKING IN INDIA
Year Bank
1770 The first bank of India called Bank of
Hindostan was established in 1770
1861 Paper Currency Act was enacted by
British Government of India
1865 Oldest Joint-Stock bank Allahabad Bank
was established
 1881 Oudh Commercial Bank, the first Bank of Definition Formal system of Informal system of
India with Limited Liability to be finance is licensed finance is not
managed by Indian Board was by central bank licensed by central
established at Faizabad. bank
1895 Punjab National Bank was established. It Institution Commercial & Saving collectors,
was first bank purely managed by Indians development banks saving and credit
1911 Central Bank of India, first Indian – RRBs, post office associations, and
commercial bank which was wholly banks etc. moneylenders
owned and managed by Indians, was
Principle Large businesses, People who avail
established. It was called First Truly
clients salaried workers, informal finance are
Swadeshi bank
small and medium either rural poor or
1921 Three presidency banks - Bank of
enterprises self-employed
Calcutta, Bank of Bombay and Bank of
Madras amalgamated to form Imperial peoples
Bank of India
1935 Creation of Reserve Bank of India TYPES OF FINANCIAL INTERMEDIARIES
1949 Nationalization of Reserve Bank of India
1949 Enactment of Banking Regulation Act
1955 Nationalization of Imperial Bank of
India, which then became the SBI
1969 Nationalization of 14 major Banks
1980 Nationalization of 7 more banks with
deposits over Rs. 200 Crore
Reforms Committees made for reforms in
banking sector 🡪 Narasimham-I (1991),
M Narasimham-I (1997), Dr. Raghuram
Rajan Committee (2007) and P J Nayak According to the alternative view of monetary and
Committee (2014) banking operations, banks are not intermediaries but
‘fundamental money creation’ institutions, while the
2. FINANCIAL INTERMEDIARIES other institutions in the category of supposed
▪ The institutions that channel funds between ‘intermediaries’ are simply investment funds.
savers (surplus) to user (deficit) agents are called
financial intermediaries.
▪ They serve as middlemen between savers (lenders, Risk
investors, households) and borrowers spreading
(entrepreneurs, business firms.)
Greater
Convenience
liquidity

ADVANTAGES OF
FINANCIAL
INTERMEDIARIES

Safe Financial
investment specialist

▪ Such FI can be subdivided into (1) Formal (2)

Informal. Economy of
scale

Parameter Formal Informal

IMPACT OF FI ON THE WHOLE ECONOMY

56
 ▪ FIs help circulate money in the system. 1934 The RBI Bill was passed and received the
▪ Ensures high velocity of money. Governor General’s assent.
▪ They promote the habit of savings. 1 April Reserve Bank commenced operations as
▪ A needy businessman will easily get loans. 1935 India’s central bank as a private shareholders’
bank with a paid up capital of rupees five
▪ Promotes new business, expand existing business,
crore.
hire more employees, increase production of The Government of India nationalized the
1949
goods/services. Reserve Bank under the Reserve Bank
(Transfer of Public Ownership) Act, 1948.
BANKS IN INDIA
▪ The RBI is the supreme monetary and banking
authority in the country and controls the banking
system in India.
▪ It is called the ‘Reserve Bank’ as it keeps the
reserves of all commercial banks.

Original headquarters of RBI was in Kolkata, but in

1937, it was shifted to Shahid Bhagat Singh Marg,
Mumbai.

3.1 BANKING REGULATION ACT, 1949

▪ Immediately after the independence, the
Government of India came up with the Banking
Companies Act, 1949.
▪ This act was later changed to Banking Regulation
3. RBI : ORIGIN AND EVOLUTION (Amendment) Act, 1949.
▪ Prior to establishment of RBI, ▪ Further, the Banking Regulation (Amendment)
the functions of a central bank Act of 1965 gave extensive powers to the Reserve
were virtually done by the Bank of India as India’s central banking
Imperial Bank of India . authority.
RBI started its operations
from April 1, 1935. 3.2 INSTITUTIONAL STRUCTURE OF RBI
▪ It was established via the RBI
act 1934, so it is also known as a statutory body. RBI
Similarly, SBI is also a statutory body deriving its
legality from SBI Act 1955.
▪ RBI did not start as a Government owned bank Non - Official
Official Directors
Directors
but as a privately held bank.
▪ Post-independence, the government passed
Dy. Governor Others (one
Reserve Bank (Transfer to Public Ownership) Governor (Maximum
Nominated
each from four
(10+2)
Act, 1948 and took over RBI from private four) local boards)

shareholders after paying appropriate ▪ Central Board of Directors is the top decision
compensation. making body in the RBI. It is made up of official
▪ Thus, nationalization of RBI took place in 1949 and non-official directors.
and from January 1, 1949, RBI started working as a ▪ The Governor and Deputy Governors are the
government owned bank. official directors.
▪ There is a Governor and maximum 4 Deputy
TIMELINE Governors (According to Section-8 of RBI Act
1926 The Royal Commission (Hilton Young 1934); so maximum number of Official Directors in
commission) on Indian Currency and Finance RBI’s Central Board of Directors is five.
recommended creation of a central bank for ▪ Governor and Deputy governors are appointed by
India. On the basis of mainly this commission,
Central Government. The tenure of service is
the RBI Act, 1934 was passed
maximum of 3 years and can be reappointed

57
▪ Further, there are 16 non-official directors in RBI.
▪ Out of them, four represent the local Boards located
in Delhi, Chennai, Kolkata and Mumbai, thus
representing 4 regions of India.
▪ Rest 12 are nominated by the Reserve Bank of
India. These 12 personalities have expertise in
various segments of Indian Economy.
▪ The Central Board of Directors holds minimum 6
meetings every year. Out of which, at least 1
meeting every quarter (every 3 months) is held.
▪ Though, typically the committee of the central
board meets every week (Wednesday).
3.3 GOVERNOR OF RBI
▪ APPOINTMENT- Appointed after the proposal
made by the Financial Sector Regulatory
Appointments Search Committee (FSRASC),
headed by the Cabinet Secretary.
▪ TERM - According to Section 8 (4) of the RBI Act,
the Governor and Deputy Governors shall hold
office for such term not exceeding 3 years as the
Central Government may fix when appointing
them.
▪ RE-APPOINTMENT - They are eligible for re-
appointment
▪ QUALIFICATION - The RBI Act does not
provide for any specific qualification for the
governor.
▪ REMOVAL - The governor can be removed by the
central government.
PRESENT GOVERNOR OF RBI– Shri. Shashikant
Das (IAS)
3.4 SUBSIDIARIES OF RBI
▪ Deposit Insurance and Credit Guarantee
Corporation (DICGC)
▪ Bharatiya Reserve Bank Note Mudran Private
Limited (BRBNMPL)
▪ Reserve Bank Information Technology Private Ltd.
(ReBIT)
▪ Indian Financial Technology And Allied Services
(IFTAS)
ASSISTIVE BODIES IN RBI – Board of Financial
Supervision (BFS) and Board for Payment and
Settlement Systems (BPSS); Both of these are chaired
by RBI Governor.
No. of Four printing presses prints and supply bank
Press notes
1. Dewas – Madhya Pradesh
Location 2. Nashik – Maharashtra
3. Mysore – Karnataka
4. Salboni – West Bengal
The presses in Madhya Pradesh and
Maharashtra are owned by the Security
Owned Printing and Minting Corporation Of India
by Govt. (SPMCIL), a wholly owned company of GoI.
SPMCIL is the only PSU under the Dept. of
Economic Affairs (MoF)
The presses in Karnataka and West Bengal are
Owned owned by Bharatiya Reserve Bank Note
by RBI Mudran Private Limited (BRBNMPL), a
wholly owned subsidiary of RBI.
GoI is the issuing authority of coins and
Coins supplies coins to the Reserve bank on demand.
The RBI puts the coins into circulation on
behalf of Central Government
3.5 FUNCTIONS OF THE RBI
1. Bank of Issue
▪ Issuing money is exclusive right of RBI.
▪ All notes except Rs.1 note and coins are issued by
RBI.
▪ It also exchanges or destroys old damaged
currencies.
▪ Rs.1 notes and coins are issued by Ministry of
Finance and circulated by RBI.
2. Custodian and Manager of Foreign exchange
▪ RBI keeps the foreign exchange (i.e. foreign
currency) which flows into the country.
▪ It also keeps the foreign exchange rate stable to
certain extent.
3. Banker and Debt Manager to Government
▪ It acts as a banker to both central and state
governments (except Jammu and Kashmir and
Sikkim).
▪ It keeps deposits of governments and lends to
governments.
▪ RBI carries out lending and borrowing operations
by issuing government securities on behalf of the
government.
▪ Though RBI is not a banker to Sikkim and Jammu
and Kashmir it manages their public debt to some
extent.
4. Banker to bank-
▪ It is the banker of all the banks.
▪ It keeps the reserve of the banks like cash reserve
ratio (CRR) with it.
58
 ▪ It provides financial assistance to banks against 3.6 SOURCES OF INCOME AND EXPENDITURE
mortgaged securities. OF RBI
▪ It rediscounts bills of exchange.
▪ Usually banks borrow and lend money among INCOME EXPENDITURE
themselves via call money market, regulated by Returns from foreign Printing of currency
RBI. currency assets
▪ RBI provides enough money to banks and so called
Interest on rupee- Staff expenditure
as lender of last resort.
denominated
5. Monetary Management - Controller of Money
government bonds
Supply, Makes Monetary Policy, Credit Control etc
6. Financial Regulator – to Commercial banks, Interest on overnight Commission given to
Credit information Companies, RRBs, Local Area lending to commercial commercial banks.
Banks, NBFC etc. banks.
7. Representative role - RBI represents govt. as a Management Commission to primary
member of the IMF and World Bank. commission on handling dealers.
8. Central Clearance and Accounts Settlement - As the borrowings of central
RBI keeps cash reserves from commercial banks and state governments.
therefore it rediscounts their bills of exchange
easily.
9. Developmental role - Performing a variety of 3.7 ASSETS AND LIABILITIES OF RBI
developmental and promotional functions under
which it did set up institutions like IDBI, SIDBI, RESERVE BANK OF INDIA
NABARD, NHB, etc. LIABILITIES ASSETS
10. Promotional Roles - Consumer protection, Currency held by Public Foreign currency assets
Ombudsman, Financial Inclusion through PSL
Vault cash held by Bill purchases and
norms, 25% rural branch requirements etc.
commercial banks discounts
NEW INITIATIVES OF RBI IN CREDIT AND Government securities Collaterals by
MONETARY POLICY REGIME commercial banks
▪ Transition to bi-monthly monetary policy cycle Other liabilities Loan and advances
▪ Recognition of the glide path for disinflation (on Rupee securities
recommendation of Urjit Patel Committee report). Gold coin bullion
Under it, the CPI (C) is used by the RBI as the
“Headline Inflation” for monetary management.
3.8 INDEPENDENCE OF THE RBI
▪ A Monetary Policy Framework (2015) has been
put in place – an agreement in this regard was ▪ Under section 7 of the RBI Act 1934, the central
signed between the Government of India and the government may from time to time give such
RBI late February 2015. Under the framework, the directions to the RBI as it may, after consultation
RBI is to ‘target inflation’ at 4 per cent with a with the Governor of the Bank, considered
variations of +/- 2 per cent. (of the CPI-C). necessary in the public interest. Moreover, there is
▪ Besides the existing repo route, term repos have no legal act mandating autonomy of the RBI.
been introduced for three set of tenors - 7, 14 and ▪ RBI is not only vested with the powers to
28 days - Move aimed at improving the formulate the monetary policy but also to
transmission of policy and stability to loan market. monitor the functioning of all banks.
▪ As per the Union Budget 2016-17, individuals will ▪ To play its role effectively, autonomy in its
also be allowed by the RBI to participate in the functioning is sine qua non for RBI.
government security market (similar to the ▪ However, this has been challenged many times
developed economies like the USA). due to a continued tug of war for wresting more
▪ RBI is progressively reducing banks’ access to power between the bank and the govt.
overnight liquidity (at the fixed repo rate), and
encouraging the banks to increase their dependency 3.9 REASONS FOR DIMINISHING AUTONOMY
on the term repos. OF RBI
▪ RBI’s failure to check the growth of NPAs.

59
▪ Reduced liquidity in the economy due SCHEDULED BANK Vs NON- SCHEDULED BANK
to tight monetary policy followed by RBI.
▪ Corrective measures taken by RBI to clean up the Scheduled Bank Non-Scheduled Bank
banking system which are not seen very positively Scheduled banks are Non-scheduled banks are
by the government. those which are those which are not in
▪ Impossible trinity of RBI- capital mobility, mentioned in 2nd 2nd schedule of RBI Act
Exchange rate flexibility and monetary autonomy. schedule of RBI Act 1934
▪ Clash between short term populist agenda of the 1934
government and long term view for price stability Required to deposit CRR Can maintain the CRR
taken by RBI. money to RBI money with themselves.
▪ One important limitation is that the Reserve Bank is
statutorily limited in undertaking the full scope of Eligible to borrow / Depends on RBI’s
actions against public sector banks (PSBs). deposit funds in RBI’s discretion.
▪ Erosion of statutory powers of the central bank window operations.
through piece-meal legislative amendments that Are required to protect They also need to follow
directly or indirectly eat away separation of the the interests of depositors RBI Norms or there can
central bank from the government. and abide to RBI norms. be action under Banking
Regulation Act.
3.10 PUBLICATIONS OF RBI
1. Report on Trend and Progress of Banking in India- 3.12 PRIORITY SECTOR LENDING (PSL)
Annually ▪ All Indian banks have to follow the compulsory
2. Financial stability report- Half yearly target of priority sector lending (PSL).
3. Monetary policy report- Half yearly
4. Report on foreign exchange reserves- Half yearly Categories Domestic scheduled Foreign
5. Bi-monthly Policy Statement commercial banks banks (less
(excluding RRB and SFB) than 20
6. Industrial Outlook Survey of the Manufacturing and Foreign banks with 20 branches)
Sector (Quarterly) and above branches
7. Consumer Confidence Survey (Quarterly) Total 40 per cent of Adjusted 40 per cent
8. Report on Financial Review Priority Net Bank Credit or Credit of ANBC or
Sector Equivalent Amount of Credit
Off-Balance Sheet Equivalent
3.11 MINIMUM RESERVE SYSTEM OF RBI Exposure, whichever is Amount of
With a minimum value of government-held gold of higher. Off-Balance
₹200 crores (₹115 cr rupee should in the form of Sheet
Gold or gold bullion and rest ₹85 cr should be in the Exposure,
form of foreign currencies) and the remaining is backed whichever is
by the government securities issued and held by RBI. higher, to be
achieved in a
phased
OBJECTIVES OF MINIMUM RESERVE SYSTEM manner by
(MRS) 2020.
▪ To maintain the money supply in the economy Agriculture 18 per cent of ANBC or Not
without inflationary pressure and maintain the # Credit Equivalent Amount applicable
confidence of the general public in the currency. of Off-Balance Sheet
▪ To ensure the confidence of the Indian currency Exposure, whichever is
holders that the currency held by them is a legal higher.
Within this 18 percent
tender.
target 🡪 8 percent is
▪ RBI wants to ensure the appropriate supply of prescribed for Small and
currency in the economy through MRS. Marginal Farmers.
▪ Through the MRS, the RBI accelerate the Micro 7.5 percent of ANBC or Not
economic growth of the country without increasing Enterprises Credit Equivalent Amount applicable
the rate of inflation in the economy. of Off-Balance Sheet

60
 Exposure, whichever is
higher.
Advances to 10 percent of ANBC or Not
Weaker Credit Equivalent Amount applicable
Sections of Off-Balance Sheet
Exposure, whichever is
higher
# Domestic banks have been directed to ensure that their
overall direct lending to non-corporate farmers does not
fall below the system-wide average of the last three years
achievement.
In 2007, the RBI included five minorities - Buddhists,
Christians, Muslims, Parsis and Sikhs under the PSL.
PRIORITY SECTOR LENDING CERTIFICATES
(PSLCS) - are a mechanism to enable banks to achieve
the PSL target and sub-targets by purchase of these
instruments in the event of shortfall.
“The revised guidelines also aim to encourage and
support environment friendly lending policies to help
achieve Sustainable Development Goals (SDGs),” the
RBI said
Q. Priority Sector Lending by banks in India
constitutes (CSE- 2013)
a) Agriculture
b) Micro and Small Enterprises
c) Weaker Sections
d) All of the above
3.13 MONETARY POLICY OF RBI
▪ Monetary Policy is an instruments under RBI aimed
at regulating interest rates, money supply and
availability of credit in an economy.
▪ RBI decides monetary policy cycle on bi-monthly
basis.

CATEGORIES IN PSL OBJECTIVES OF MONETARY POLICY

Priority sector loans to the following borrowers are ▪ Economic and financial stability - To regulate
eligible to be considered under Weaker Sections monetary expansion so as to maintain a reasonable
category:- degree of price stability. Maintaining price stability.
▪ Development - To ensure adequate financial
1. Small and Marginal Farmers resources for the purpose of development.
2. Beneficiaries under Government Sponsored ▪ flow of credit - Adequate flow of credit to
Schemes – Such as NRLM, NULM etc. productive sectors.
3 Weaker sections of society - Scheduled Castes ▪ Employment and growth - Promotion of
and Scheduled Tribes, women productive investments & trade. Equitable
4 Beneficiaries of Differential Rate of Interest distribution of income. Employment generation
(DRI) scheme ▪ International trade and exports - Promotion of
5 Self Help Groups exports and economic growth. Maintaining
6 Distressed farmers indebted to non-institutional exchange rate stability.
lenders
7 Persons with disabilities 2.1.14 TOOLS OF MONETARY POLICY
8 Minority communities
9 Agriculture Quantitative Instruments Qualitative Instruments
10 Micro, Small and Medium Enterprises
11 Housing
Liquidity Adjustment Facility
12 Renewable Energy (Repo & Rev. Repo)
Credit Rationing

13 Social Infrastructure
14 Education Open Market Operations Moral Suasion

15 Start ups
SLR, and CRR Prompt Corrective Action (PCA)

Recent changes in PSL (7 Aug 2020)

NEWS - Priority sector lending: Start-ups included, Bank Rate Direct Action by RBI on banks

renewables limits expanded

The changes include broadening the scope of PSL to Credit Ceiling Differential Interest Rates

include start-ups, increasing the limits for renewable

energy, including solar power and compressed biogas Marginal Standing Facility

plants and increasing the targets for lending to small

and marginal farmers and weaker sections.
QUANTITATIVE INSTRUMENTS

61

1. CASH RESERVE RATIO (CRR)
▪ CRR is the certain % (fixed by the RBI) of Net
Time and Demand Deposits of a Scheduled bank in
India need to kept with the RBI in the form of cash
only.
▪ CRR aimed to have control over banks credit.
▪ The ratio between 3% (floor) -15% (ceiling)
removed via RBI (Amendment) Bill 2006.
An increase in CRR 🡪 higher proportion of deposits to
be kept with RBI by banks 🡪 less funds are available to
be provided as credit to the economy 🡪 money supply
will decrease.
2. STATUTORY LIQUIDITY RATIO (SLR)
▪ The schedule banks needs to also keep certain %
(fixed by the RBI) of their Net Time and Demand
Deposits kept with itself (i.e. not with RBI) in the
form of liquid assets such as cash, gold and select
government securities.
▪ Need of SLR is to prevents bank from lending all
its deposits which is too risky and it is mandatory
under Banking Regulation Act 1949.
▪ Similar to CRR, SLR aimed to have control over
banks credit.
▪ SLR includes G-Secs, thus it ensures certain
amount of money is secured for govt.
▪ There were excessively high rates (about 25-30
percent) prevalent before 1991 reforms with
provision of ceiling and floor.
An increase in SLR 🡪 higher proportion of funds to be
kept aside by banks in liquid form 🡪 less funds
available to be provided as credit to the economy 🡪
money supply will decrease.
Higher the CRR and SLR, lower will be the liquidity
in the system as Banks will have lesser money for
providing loans. For instance, CRR and SLR rate is
4% and 19.5% respectively. Bank deposits is Rs.100
crores then bank can sanction loans upto 76.5 crores.
Q. When the Reserve Bank of India reduces the
Statutory Liquidity Ratio by 50 basis points, which
of the following is likely to happen? (CSE-2015)
a) India’s GDP growth rate increases drastically
b) Foreign Institutional Investors may bring more
capital into our country
c) Scheduled Commercial Banks may cut their
lending rates
d) It may drastically reduce the liquidity to the banking
system
Q. In the context of Indian economy, which of the
following is/are the purpose / purposes of ‘Statutory
Reserve Requirements? (2014)
1. To enable the Central Bank to control the amount
of advances the banks can create.
2. To make the people’s deposits with banks safe and
liquid.
3. To prevent the commercial banks from making
excessive profits.
4. To force the banks to have sufficient vault cash to
meet their day-to-day requirements.
Select the correct answer using the code given below.
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2, 3 and 4
3. BANK RATE
▪ Rate at which RBI provides long-term borrowings
to its clients. Its clients include GoI, state
governments, banks, financial institutions,
cooperative banks etc.
▪ Increase in the bank rate is the symbolizes
tightening of RBI monetary policy. (i.e. Dearer
Monetary Policy)
▪ An increase in bank rate will make borrowing
from RBI expensive 🡪 discourage banks to borrow
from RBI 🡪 money supply will tend to decrease.
▪ It presently uses it as a penalty rate imposed by
RBI on banks for violations of RBI directives.
Q. An increase in the Bank Rate generally indicates
that the (CSE-2013)
a) market rate of interest is likely to fall
b) Central Bank is no longer making loans to
commercial banks
c) Central Bank is following an easy money policy
d) Central Bank is following a tight money policy
Q. The lowering of Bank Rate by the Reserve Bank
of India leads to (CSE-2012)
a) More liquidity in the market
b) Less liquidity in the market
c) No change in the liquidity in the market
62
 d) Mobilization of more deposits by commercial overnight liquidity only by pledging securities over
banks and above the securities held under SLR
requirement.
4. REPO RATE (POLICY RATE) ▪ Under MSF, on the other hand, banks can pledge
▪ It is the rate (Rate of Repurchase) at which securities held for SLR purposes.
commercial banks borrow from RBI (which ▪ The interest rate for MSF is Repo rate plus 1%.
provides short-term liquidity to banks) by Usually, the Reverse Repo rate is Repo rate
mortgaging their dated Government securities and minus 1%. Therefore, the Repo rate act as an
Treasury bills (T-Bills). anchor rate. The Repo rate stands in the middle of
two. The MSF rate stands above and Reverse Repo
▪ Increase in repo rate 🡪 borrowing from RBI rate stands below the Repo Rate.
expensive 🡪 banks will borrow less from RBI 🡪
less credit will be provided by banks to households MSF (RR+1%) 🡪 RR (Anchor rate) 🡪 RRR (RR-1%)
🡪 money supply will decrease. ▪ Under this facility, banks can borrow funds up to
1% of their Net Demand and Time Liabilities
▪ Decrease in Repo Rate 🡪 Borrowing from RBI is (NDTL)
cheaper 🡪 Banks will borrow more 🡪 More credit
is available 🡪 Money supply will increase. NDTL shows the difference between the sum of
demand and time liabilities (deposits) of a bank (with
▪ Reduction in Repo rate helps the banks to get the public or the other bank) and the deposits in the form
money at a cheaper rate and increase in Repo rate of assets held by the other bank.
discourages the banks to borrow from RBI. Bank’s NDTL = Demand and time liabilities – deposits
▪ The Call Money Market of India (inter-bank with other banks
market) operates at this rate and banks use this
route for overnight borrowings. Q. The terms ‘Marginal Standing Facility Rate’ and
▪ Repo rate has direct relation with the interest ‘Net Demand and Time Liabilities’, sometimes
rates banks charge on the loans they offer (as it appearing in news, are used in relation to (2014)
affects the operational cost of the banks).
a) Banking operations
5. REVERSE REPO RATE b) Communication networking
▪ It is the rate at which RBI borrows from c) Military strategies
commercial Banks by mortgaging its dated d) Supply and demand of agricultural products
Government securities and Treasury bills.
▪ An increase in reverse repo rate means that 7. OPEN MARKET OPERATIONS (OMO)
commercial banks will get more incentives to park ▪ OMO refers to sale and purchase of government
their funds with the RBI, thereby decreasing the securities by RBI in the open market with the aim
supply of money in the market. of influencing liquidity in the economy in the
▪ A decrease in reverse repo rate means that medium term.
commercial banks will get less incentive to park
their funds with RBI and thus more money is If RBI sells If the RBI buys
available in the market increasing the money If the RBI sells these If the RBI buys these
supply. instruments, banks and instruments from
▪ It has a direct bearing on the interest rates public will buy it and pay instrument holders, it
charged by the banks and the financial institutions money to the RBI. will pay money to the
on their different forms of loans. latter.
During inflation the RBI During deflation, the
6. MARGINAL STANDING FACILITY (MSF) sells government RBI will buy back the
▪ Liquidity management window given by RBI securities. As a result securities thus causing
under which banks can borrow additional money supply in the money supply to rise
overnight (one day) liquidity over and above LAF economy falls causing which cures deficiency in
window. prices to fall. demand.
▪ Introduced to deal with unforeseen liquidity
crunch because under LAF banks can borrow

63
Open Market Purchase by RBI 🡪 It will release ▪ Through the LTRO, the RBI seeks to inject long
liquidity in the economy 🡪 money supply will term liquidity into the economy at a lower
increase. interest rate.
▪ The LTROs would be carried out through e-Kuber.
Q. With reference to Indian economy, consider the
following: (2015) e-Kuber is the Core Banking Solution (CBS) of the
1. Bank rate RBI which enables each bank to connect their single
current account across the country.
2. Open market operations
3. Public debt LATEST RBI BANK RATES IN INDIAN BANKING (
4. Public revenue July 2020)
Which of the above is/are component/components of Repo Rate 4.00%
monetary policy? Reverse Repo Rate 3.35%
a) 1 only MSF 4.25%
b) 2, 3 and 4 only Bank Rate 4.25%
c) 1 and 2 only Cash Reserve Ratio 3.00%
d) 1, 3 and 4 Statutory liquidity ratio 18.00%
Source - https://www.rbi.org.in/
Q. In the context of Indian economy, ‘Open Market
Operations’ refers to (2013) QUALITATIVE INSTRUMENTS
a) borrowing by scheduled banks from the RBI
b) lending by commercial banks to industry and trade 1. CREDIT RATIONING
c) purchase and sale of government securities by ▪ Rationing of credit is a method by which the RBI
the RBI seeks to limit the maximum amount of loans and
d) None of the above advances and, also in certain cases, fix ceiling for
specific categories of loans and advances.
8. LIQUIDITY ADJUSTMENT FACILITIES (LAF)
2. MARGIN REQUIREMENTS
▪ Monetary policy instrument that the RBI uses in
▪ Qualitative tool used by the RBI in order to
order to influence the liquidity conditions in the
regulate the credit flow to a particular sector.
market in the short term.
▪ When a bank advances credit to its customers it
▪ Under the LAF window, the RBI uses various
does so against collateral. However there is a
instruments to inject or absorb liquidity to or
difference between the value of the security and the
from the market respectively.
loan offered. This difference is called ‘Margin’.
▪ Repo and Reverse repo rates are a part of RBI’s
“Liquidity Adjustment Facility (LAF)”.
3. MORAL SUATION
▪ The RBI introduced a LAF as a result of
the Narasimham Committee on Banking Sector ▪ It refers to a method adopted by the Central Bank to
Reforms (1998). persuade or convince the commercial banks to
advance credit in the economic interest of the
country.
Marginal Standing Facility X+1% ▪ “Persuasion” without applying punitive
measures.
Repo Rate X% ▪ Since it involves no administrative compulsion or
threats of punitive action it is a psychological and
Reverse Repo Rate X-1% informal means of selective credit control.

4. DIFFERENCIAL RATE OF INTEREST

9. LONG TERM REPO OPERATIONS (LTRO)
▪ The differential rate of interest (DRI) is a lending
▪ New policy tool used by the RBI to inject more programme launched by the government in April
liquidity into the Economy. 1972 which makes it obligatory upon all the public
▪ Similar to the term repos, but with a longer sector banks in India to lend 1 per cent of the total
maturity period of 1 year and 3 years.

64
 lending of the preceding year to ‘the poorest
among the poor’ at an interest rate of 4 per cent
per annum.
5. DIRECT ACTION
▪ This step is taken by the RBI against banks that
don’t fulfill conditions and requirements. RBI
may refuse to rediscount their papers or may give
excess credits or charge a penal rate of interest over
and above the Bank rate, for credit demanded
beyond a limit.
6. PROMPT CORRECTIVE ACTION (PCA)
▪ The PCA is triggered when banks breach certain
regulatory requirements like minimum capital,
and quantum of non-performing assets.
▪ To ensure that banks don't go bust, RBI has put in
place some trigger points to assess, monitor, control
and take corrective actions on banks which are
weak and troubled.
7. CONSUMER CREDIT REGULATION
▪ RBI can issue rules to set the minimum/maximum
level of down-payments and periods of payments
for purchase of certain goods.
3.15 UNCONVENTIONAL MONETARY POLICY
INSTRUMENTS BY RBI
1. ZERO INTEREST RATE POLICY (ZIRP)
▪ Policy also called as ‘Quantitative Easing’.
▪ This policy was adopted by USA from 2008 in the
wake of financial crisis to inject money into the
economy.
▪ Under this policy, the Fed Bank provides loans to
the banks at low interest rates (0.25%) to spur
investment level in the economy.
2. NEGATIVE INTEREST RATE POLICY (NIRP)
▪ In NIRP, the banks would be required to pay
interest to the central bank if they park their
surplus reserves.
▪ This encourages the banks to provide loans to the
borrowers at cheaper rates instead of parking their
surplus reserves with the Central Bank.
▪ This policy is usually followed in developed
economies such as Japan, Denmark, Sweden,
Switzerland etc
3. HELICOPTER MONEY
▪ This involves the central bank of the country
printing currency notes and distributing it to the
65
people free of cost. The idea is to promote
demand in the economy during recession.
3.16 OTHER MONETARY TOOLS USE BY RBI
1. CALL MONEY MARKET
▪ It is a Inter Bank money market for short-term
financial assets that are close substitutes of money.
▪ The call money market is an important segment of
the money market where borrowing and lending
of funds take place on overnight basis (for one
day)
▪ Money market also known as ‘overnight
borrowing money at call’.
▪ Funds raising/borrowing maximum period 🡪 14
days ("Short notice")
▪ Borrowing can take place against securities or
without securities.
▪ Rate of Interest - ‘glides’ with ‘repo rate’.
▪ Longer the interest rate 🡪 higher the interest rate.
▪ Real call rate 🡪 revolves nearby current repo
rate, according to the availability and demand of
fund in market.
▪ Borrowers as well as lenders 🡪 Schedule
commercial banks, cooperative banks.
▪ Lender only 🡪 LIC, GIC, mutual funds, IDBI and
NABARAD.
2. MARKET STABILISATION SCHEME (MSS)
▪ MSS is a policy tool used by the Reserve Bank of
India to suck out excess liquidity from the market
through issue of securities like T-Bills, Dated
Securities etc. on behalf of the government.
▪ The RBI initiated the MSS scheme in 2004, to
control the surge of US dollars in the Indian market,
RBI started buying US dollars while pumping in
rupee
▪ MSS was introduced to deal with the excess
liquidity in the market which could lead to
inflation.
▪ The issued securities under the MSS are
government bonds and they are called as Market
Stabilisation Bonds and these securities are owned
by the government though they are issued by the
RBI.
Post demonetization (2016) RBI has raised the ceiling
for MSS 20 times to suck excess cash out of the banking
system and help banks earn some return from the
voluminous deposits they have garnered after the
government’s demonetization move.
3. STANDING DEPOSIT FACILITY SCHEME
▪ Standing deposit facility is a collateral free
liquidity absorption mechanism which aims to
absorb liquidity from commercial banking system
into RBI.
▪ Concept was first recommended by the Urjit
Patel committee report in 2014.
▪ The new scheme has been proposed by the Union
Budget 2018-19.
▪ The scheme is aimed at helping RBI to manage
liquidity in a better way, especially when the
economy is flush with excess fund (as was seen
after the demonetisation 2016).
▪ CRR, SLR, Repo Rate, Reverse Repo Rate, Bank
Rate should be reduced.
▪ It is called Cheap Money policy as interest rates
are low thus borrowing money becomes cheap.
3.18 STRATEGIES OF A MONETARY POLICY
MAKING
STRATEGIES OF A MONETARY POLICY
MAKING

3.17 TYPES OF MONETARY POLICY Exchange Multiple Inflation

Rate Stability Indicators Targeting

TYPES OF MONETARY POLICY 1. Exchange rate stability - Singapore & other

export-oriented economies use this.
2. Multiple Indicators - Central Bank tries to focus
on Growth, Employment, Inflation Control and
CONTRACTIONARY EXPANSIONARY Exchange rate stabilization. India's RBI had this
MONETARY POLICY MONETARY POLICY before 2016.
3. Inflation targeting - here the Central Bank only
CONTRACTIONARY MONETARY POLICY aims to keep inflation under control, then other
indicators (growth, employment, exchange rate)
▪ Contractionary Monetary Policy also called a Dear
will automatically fall in line. It was successful in
Money Policy.
Western nations, adopted in India 2016, based on
▪ It is pursued to control Inflation.
Urjit Patel Committee Report (2013-14), by
amending RBI Act Section 45.
Case 1 Case 2
▪ If CRR is increased. ▪ Repo Rate is 3.19 MONETARY POLICY COMMITTEE (MPC)
▪ SLR is also increased
▪ MPC is a statutory body created under Monetary
increased ▪ Reverse Repo Rate is
Policy Framework Agreement 2015 between the
▪ Lending capacity of also increased
RBI and Government in 2016
the Banks decreases ▪ This leads to, RBI
▪ MPC is entrusted with the responsibility of fixing
▪ Bank rate is paying more interest
the benchmark repo rate (policy rate) required to
increased. on Banks deposits
contain inflation as defined in the Monetary Policy
▪ This leads to RBI ▪ Thus Banks prefer to
Framework Agreement.
charging higher rate deposit extra money
of interest on bank with RBI instead of
lending due to which giving loans to
banks borrow less public
from RBI. ▪ It is called Dear
Money Policy as
loans get expensive
for the public

EXPANSIONARY (CHEAP) MONETARY POLICY

▪ This policy is adopted to increase money supply
in the economy in order to stimulate economic
growth.
▪ It is also pursued to overcome recession.

66
 ▪ The meetings of the MPC are held at least 4 times
a year and it publishes its decisions after each such
meeting.
▪ MPC is 6-member body including 3 members
from RBI and 3 members to be nominated by the
Central Government.
▪ These Government of India nominees are
appointed by the Central Government based on
the recommendations of a search cum selection
committee. Moreover, Govt. nominees of the MPC
will hold office for a period of four years and will
not be eligible for re-appointment.
▪ Decisions are taken by majority with the
Governor having the casting vote in case of a tie.
▪ Chairperson of MPC – RBI Governor
▪ Quorum for meeting - 4 members
▪ To ensure transparency - Govt can send message
only in writing.
▪ Committee must publish its proceedings of the
meeting on the 14th day, and “Monetary policy
report” at every 6 months.
▪ Inflation target decided by Union Government
after consulting with RBI Governor.
▪ The present mandate of the committee is to
maintain 4% annual inflation (until March 31,
2021) with bandwidth of ceiling 6% and a floor of
2%.
▪ If Target fail: If inflation not kept in 4% +/-2%
zone for 3 consecutive quarters then Committee
must send report to Govt. with reasons and
remedies.
3.20 LIMITATIONS OF MONETARY POLICY
▪ Existence of black money in the economy limits
the working of the monetary policy
▪ Conflicting objectives - To achieve the objective
of economic development, the monetary policy is
to be expansionary but to achieve the objective of
price stability and curb on inflation policy is to be
contractionary.
▪ Underdeveloped Indian money market - The
weak money market limits the coverage, as also the
efficient working of the monetary policy.
▪ Indian Banks don’t immediately pass on the RBI
rate cuts to customers (monetary transmission),
citing NPA/Bad loans/profitability problem.
▪ Government Side Issues - Fiscal repression, Fiscal
slippage, Fiscal deficit, Subsidy leakage, Populist
Loan-waivers etc.
▪ Structural Issues in Economy - Lack of
electricity-road infrastructure / Ease of Doing Biz
production, long pending land and labour reforms.
67
▪ Presence of Informal moneylenders in rural
areas - circulate illegitimacy money at exorbitant
interest rates.
▪ Poor penetration of banking sector and financial
inclusion etc.
Q. Which of the following statements is/are correct
regarding the Monetary Policy Committee (MPC)?
(2017)
1. It decides the RBI’s benchmark interest rates.
2. It is a 12-member body including the Governor of
RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union
Finance Minister.
Select the correct answer using the code given below
a) 1 only
b) 1 and 2 only
c) 3 only
d) 2 and 3 only
FINANCIAL STABILITY AND DEVELOPMENT
COUNCIL
FSDC is a non-statutory apex council setup in 2010
under the Ministry of Finance and chaired by the
Finance Minister. Its constitution was proposed by
the Raghuram Rajan committee (2008) on financial
sector reforms.
Members 🡪
1. Governor of RBI,
2. Chairperson of SEBI
3. Chairperson of IRDA
4. Chairperson of PFRDA
5. Finance Secretary and/or Secretary, Department of
Economic Affairs (Union Finance Ministry)
6. Secretary, Department of Financial Services
7. Chief Economic Adviser.
Functions of FSDC 🡪
▪ Monitor macro-prudential supervision of the
economy.
▪ Assess the functioning of the large financial
conglomerates.
▪ Enhancing inter-regulatory coordination
▪ Promoting holistic financial sector development.
▪ To strengthen and institutionalize the mechanism
for maintaining financial stability
In recent meeting, it was noted that the COVID-19
pandemic poses a serious threat to the stability of the
global financial system since its impact and timing of
recovery was still uncertain.
Q. With reference to ‘Financial Stability and
Development Council’, consider the following
statements (CSE-2016)
1. It is an organ of NITI Aayog.
2. It is headed by the Union Finance Minister.
3. It monitors macro prudential supervision of the
economy
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 3 only
c) 2 and 3 only
d) 1, 2 and 3
3.21 MONETARY POLICY TRANSMISSION
▪ Monetary policy transmission is said to have
occurred when the changes in the policy rates
(repo, reverse repo) will lead to corresponding
change in the interest rates in retail sector.
(Housing, auto loans etc.)
INTEREST RATES AND MONETARY POLICY
TRANSMISSION
▪ Subject to norms of the RBI, Banks in India are free
to determine interest rates on the loans/deposits
they extend to their customers.
▪ However banks publish the minimum interest
rates they charge their best clientele.
▪ This minimum interest rate is commonly called
as prime lending rate. However the problem with
prime lending rate was that it was not transparent.
▪ In 2016, RBI introduced the concept of MCLR in
order to ensure monetary policy transmission.
▪ Under MCLR the banks use the marginal cost for
obtaining funds to set their lending rates.
▪ MCLR has replaced base rate system of fixing
interest rates.
3.22 BENCHMARK PRIME LENDING RATE
(BPLR)
▪ BPLR was used as benchmark rate by banks for
lending till June 2010.
▪ Under BPLR, bank loans were priced on the actual
cost of funds.
▪ However, the BPLR was subverted, resulting in an
opaque system. The bulk of wholesale credit (loans
to corporate customers) was contracted at sub-BPL
rates and it comprised nearly 70% of all bank
credit.
▪ Under BPLR system, banks were subsidising
corporate loans by charging high interest rates
from retail and small and medium enterprise
customers.
3.23 BASE RATE
▪ Base Rate is the interest rate below which
Scheduled Commercial Banks will lend no loans
to its customers –
▪ It replaced the idea of BPLR on 1 July, 2010. The
BPLR system, introduced in 2003, fell short of its
original objective of bringing transparency to
lending rates.
▪ This was mainly because under this system, banks
could lend below BPLR. This made a bargaining
by the borrower with bank- ultimately one
borrower getting cheaper loan than the other,
and blurred the attempts of bringing in transparency
in the lending business.
▪ Loans taken between June 2010 and April 2016
from banks were on base rate.
▪ Base rate is calculated on following three
parameters -
Blended cost of funds
(liabilities)
Base
Rate
Average cost of Marginal cost of
funds funds
▪ Hence, the rate depended on individual banks
and they changed it whenever their cost of funds
and other parameters changed.
▪ For the same reason, it was also difficult to assess
the transmission of policy rates of the Reserve
Bank to lending rates of banks.
▪ The Base Rate system is aimed at enhancing
transparency in lending rates of banks and
68
 enabling better assessment of transmission of
monetary policy.
▪ Banks are not allowed to offer any loan below
their base rates.
3.24 MARGINAL COST OF FUNDS BASED
LENDING RATE
▪ The MCLR refers to the minimum interest rate of
a bank below which it cannot lend, except in some
cases allowed by the RBI. It is an internal
benchmark or reference rate for the bank.
▪ In 2016, RBI introduced the concept of MCLR in
order to ensure monetary policy transmission.
▪ Under MCLR, the banks use the marginal cost for
obtaining funds to set their lending rates.
▪ Marginal cost includes cost that the banks incur to
obtain fund like in case of deposit from customers
or at repo rate from RBI.
▪ MCLR has replaced base rate system of fixing
interest rates in 2016.
▪ Since October 2019, The RBI has made
it mandatory for all banks to link all new floating
rate loans to an external benchmarking. The move
is aimed at faster transmission of monetary
policy rates.
REASONS FOR IMPLEMENTING THE MCLR
SYSTEM
▪ To improve the transmission of monetary policy
▪ To bring transparency in the methodology of banks
to fix interest rates.
▪ To ensure that bank credit is available at interest
rates which are fair to both borrowers and lenders.
▪ Currently it is an internal benchmark or
reference rate for the bank.
69
▪ Banks will have more competition and their long-
run value will increase.
THE MAIN FEATURES OF MCLR
▪ It will be a tenor linked internal benchmark, to
be reset on annual basis.
▪ Actual lending rates will be fixed by adding a
spread to the MCLR.
▪ To be reviewed every month on a pre- announced
date.
▪ Existing borrowers will have the option to move to
it.
PROBLEM WITH MCLR-BASED SYSTEM
▪ Due to internal benchmarking of loan, policy rate
cuts often don't reach the borrowers.
▪ It is opaque since it’s an internal benchmark that
depends on the way a bank does its business.
FINANCIAL INCLUSION INDEX
It was launched by the Minister of Finance. The
composite index gives a snap shot of level of financial
inclusion that would guide Macro Policy perspective.
The index will have three measurement dimensions,
viz. (i) access to financial services; (ii) usage of
financial services; and (iii) the quality of the products
and the service delivery.
Q. What is/are the purpose/purposes of the
`Marginal Cost of Funds based Lending Rate
(MCLR)’ announced by RBI? (CSE-2016)
1. These guidelines help improve the transparency in
the methodology followed by banks for
determining the interest rates on advances.
2. These guidelines help ensure availability of bank
credit at interest rates which are fair to the
borrowers as well as the banks.
Select the correct answer using the code given below.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
3.25 EXTERNAL BENCHMARKING OF
INTEREST RATES
▪ Under the new system which will come into effect
from April 1, 2019, banks will have to link their
lending rates with an external benchmark
instead of MCLR.
 BENEFITS
▪ Better transmission of policy rate cuts.
▪ It will make interest rate fixing more transparent.
▪ Better benchmark for borrowers to compare loans
offered by different banks.
3.26 NET DEMAND AND TIME LIABILITY
(NDTL)
▪ Banks are in the business of accepting deposits and
deploying these funds by way of lending and
thereby earning profit in the process.
▪ The resources mobilized by the bank for lending are
its liabilities. Liabilities of a bank can be classified
broadly into:
LIABILITIES OF BANK
Demand Liabilities Time Liabilities
▪ Demand and time deposits from public form the
largest share of bank’s liabilities.
Demand Liabilities Time Liabilities
The demand liabilities Time liabilities of a bank
for a bank include all are those liabilities of a
those liabilities which are bank which are payable
payable on demand, otherwise on demand
Which includes - Current means after a certain
deposits, Savings bank time period. Ex: Fixed
deposits and Demand Deposit.
Drafts (DDs).
In total it is called NDTL.
3.27 CHRONOLOGY OF LENDING RATES
YEAR INITIATIVES
1969 Began nationalization of private banks, and
‘Administered Interest Rates’ on them.
1991 M. Narasimham suggested deregulation:
Govt should not dictate / administer
individual banks’ interest rates. RBI should
only give methodology to banks.
2003 RBI introduced Bench march Prime
lending rate(BPLR).
2010 RBI introduced BASE Rate + Spread
system; update frequency on individual
banks’ discretion.
2016 RBI introduced Marginal cost of lending
rates(MCLR) + Spread system.
2019 The RBI has made it mandatory for all
banks to link all new floating rate loans (i.e.
personal/retail loans, loans to MSMEs) to
an external benchmarking. The move is
aimed at faster transmission of monetary
policy rates.
3.28 WAYS AND MEANS OF ADVANCES (WMA)
▪ The RBI gives temporary loan facilities to the
centre and state governments as a banker to the
government. This temporary loan facility is called
WMA.
▪ It is a mechanism to provide to States to help them
tide over temporary mismatches in the cash flow
of their receipts and payments.
▪ It was introduced on April 1, 1997, after putting
an end to the four-decade-old system of ad-hoc
(temporary) Treasury Bills to finance the Central
Government deficit.
▪ Under Section 17(5) of RBI Act, 1934, the RBI
provides Ways and Means Advances (WMA) to the
central and State/UT governments.
WAYS TO AVAIL WMA
▪ This facility can be availed by the government if it
needs immediate cash from the RBI.
▪ The WMA is to be vacated after 90 days.
▪ The interest rate for WMA is currently charged at
the repo rate.
▪ The limits for WMA are mutually decided by the
RBI and the Government of India.
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 TYPES OF WMA

WMA

Normal Special

▪ Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by
the state.
▪ After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage
point less than the repo rate.
▪ The number of loans under normal WMA is based on a three-year average of actual revenue and capital
expenditure of the state.
▪ The RBI has raised the Ways and Means Advances, or WMA, limit by 30% for all States and UTs to enable them
to tide over the crisis caused by COVID-19 outbreak.

71
 CH-3 BANKING IN INDIA – PART 2
1. COMMERCIAL BANKS
▪ Commercial banks may be defined as any banking
organization that deals with the deposits and loans
of business organizations. Commercial banks
issue bank cheques and drafts, as well as accept
money on term deposits.
▪ Commercial banks also act as moneylenders, by
way of instalment, loans and overdrafts.
▪ Commercial banks also allow for a variety of
deposit accounts, such as current, savings, and time
deposit.
▪ These institutions are run to make a profit and are
owned by a group of individuals.
▪ They lend to all sectors ranging from rural to urban.
▪ These banks do not charge concessional interest
rates unless instructed by the RBI.
▪ Public deposits are the main source of funds for
these banks.
▪ They have a unified structure and are owned by the
government, state, or any private entity.
SCHEDULED COMMERCIAL BANKS (SCB)
▪ Governed by the Banking Regulation Act-1949.
▪ Scheduled banks are those mentioned in the 2nd
schedule of RBI Act, 1934.
▪ Scheduled commercial banks (SCBs) account for a
major proportion of the business of the
scheduled banks.
▪ Private sector banks include the old private sector
banks and the new generation private sector
banks- which were incorporated according to the
revised guidelines issued by RBI regarding the
entry of private sector banks in 1993.
1.1 PUBLIC SECTOR BANKS
▪ These are banks where the majority
stake is held by the Government of
India. Examples of public sector banks
are: SBI, Bank of India, Canara Bank,
etc.
EMERGENCE OF STATE BANK OF INDIA
(SBI) GROUP
▪ State bank group implies, State
bank of India and its associates.
▪ Prior 1955, SBI was known as
“Imperial Bank of India”.
▪ Imperial Bank of India created in
1921 by amalgamating 3
Presidency banks of - Bengal, Bombay and
Madras.
▪ Post – independence, the economic model of Five-
year plan necessitated a reorganisation of banking.
Following this, on July 1, 1955 as per the SBI act
1955, the SBI constituted and it took over the
business and undertaking of Imperial Bank.
▪ By enacting SBI Act, 1955 the government
partially nationalized Imperial Bank of India and
renamed it as SBI.
▪ In 1959, by enacting SBI (Associates) Act, 1959 the
government brought 8 banks of former princely
states under SBI as its associates. They were –
o State bank of Bikaner
o State bank of Jaipur
o State bank of Hyderabad o State bank of Indore
o State bank of Mysore
o State bank of Saurashtra
o State bank of Patiala
o State bank of Travancore
▪ State bank of Bikaner and Jaipur were merged and
known as SBBJ (State Bank of Bikaner and Jaipur)
▪ 2008 - State bank of Saurashtra was merged with
state bank of India.
▪ Now the number of associate banks is 5.
▪ SBI associates and Bharatiya Mahila Bank was
merged with SBI w.e.f. April 1, 2017.
▪ SBI is the largest public sector bank in India.
▪ To unload RBI from its administrative work and to
endow it with only regulatory functions, RBI’s
shareholding was transferred to the government of
India.
2019: Global top banks – 100 banks 🡪 China (18
banks), USA (12 Banks), Japan > France >.....India
(only 1 bank: SBI at Rank 55).
The Union Cabinet in 2017, had approved the merger
of five associate banks along with Bharatiya Mahila
Bank with SBI. The five banks were State Bank of
Bikaner and Jaipur, State Bank of Hyderabad, State
Bank of Travancore, State Bank of Mysore and State
Bank of Patiala. At present, there are 12 Public Sector
Banks in India including SBI.
72
 1.2 NATIONALIZATION OF THE BANKS 6 Canara Bank
▪ In India, the banks which were previously 7 Indian Bank
functioning under the private sector were 8 Indian Overseas Bank
transferred to the public sector by the act 9 Bank of Baroda
of nationalization and thus the nationalized 10 Union Bank
banks came into existence. 11 Allahabad Bank
▪ Post-independence, the GOI adopted a planned 12 United Bank of India
economic development model for the country. 13 UCO Bank
Nationalisation was in accordance with the 14 Bank of India
national policy of adopting the socialistic pattern
of society. ▪ The above was followed by a second phase of
▪ The first major step was Nationalization of the nationalization in 1980, when the Government of
Imperial Bank of India in 1955 via the State Bank India acquired the ownership of 6 more banks, thus
of India Act. bringing the total number of Nationalized Banks
▪ SBI was made to act as the principal agent of RBI to 20. This step brought 80% of the banking
and handle banking transactions of the Union and segment in India under Government ownership.
State Governments. ▪ The private banks at that time were allowed to
▪ After that, in a major process of nationalization, function side by side with nationalized banks and
seven subsidiaries of the SBI were nationalized the foreign banks were allowed to work under strict
via the SBI (Subsidiary Banks) Act, 1959. regulation.
▪ In 1969, a major phase of nationalization was ▪ A few recent events as part of banking sector
carried out and 14 major commercial banks in reforms include:
India were nationalized. o Deregulation of interest rates
▪ The second phase of nationalization Indian o Differentiated banking – Small and Payment
Banking Sector Reform was carried out in 1980 banks
with six more banks. o Increased autonomy to banks
o Basel III compatibility of banks
o Regulation of NBFCs etc.
14 banks nationalized
1969 1.2.1 REASONS FOR NATIONALIZATION OF
BANKS
6 more banks nationalized
▪ Wars with China (1962) and Pakistan (1965) that
The nationalized banks controlled about 91% of
1980 banking assets put immense pressure on public exchequer.
▪ Two successive years of drought had led to severe
food shortages and also compromised national
Narsimhan Committee Reforms security (PL 480 program).
New Economic Policies (NEP) ▪ Resultant three-year plan holiday affected
1990
aggregate demand as public investment was
reduced.
▪ India’s economic growth barely outpaced
Golden anniversary (50 years) of the bank population growth in 1960-70s and average
nationalisation - First round of bank nationalisation was incomes stagnated.
done in 1969 (2019-1969) ▪ Share of the industrial sector in credit disbursement
by commercial banks almost doubled between 1951
▪ These 14 banks Nationalized in 1969 are shown in and 1968, from 34% to 68% whereas agriculture
the below table. received less than 2% of total credit, though more
Sr. Bank than 70 percent of the population was dependent
1. Central Bank of India upon it.
2 Bank of Maharashtra ▪ Priority Sector Lending - the agriculture sector
3 Dena Bank and its allied activities were the largest contributors
4 Punjab National Bank to the national income.
5 Syndicate Bank

73
▪ Nationalisation aimed at mobilizing the savings of
the people to the largest possible extent and to
utilize them for productive purposes.
▪ Reducing inter and intra-regional imbalance to
curb the urban-rural divide
▪ Controlling private monopolies over financial
sectors.
▪ Ensuring Socio-economic welfare as enshrined in
preamble of the Indian constitution.
▪ Expansion of banking to rural pockets to ensure
financial inclusion.
▪ To shift from ‘class banking’ to ‘mass banking’
(social banking)
1.2.2 OBJECTIVE OF NATIONALISATION
▪ To Induce Confidence of Public in Banking Sector
▪ To provide social orientation like loan to weaker
sections of society
▪ Expansion of banking, Opening accounts in rural
areas – financial inclusion
▪ To reduce inequalities in society.
▪ Controlling private monopolies
▪ Reducing regional imbalances
▪ Developing banking habits
▪ Priority sector lending to weaker sections –
inclusive growth
1.2.3 IMPACT OF NATIONALIZATION OF BANKS
▪ Nationalization of the Banks brought the public
confidence in the banking system of India.
▪ After the two major phases of nationalization in
India, 80% of the banking sector came under
government ownership.
▪ After the nationalization of banks, the branches of
the public sector banks in India rose to
approximately 800 per cent in deposits, and
advances took a huge jump by 11,000 per cent.
▪ Government ownership gave the public implicit
faith and immense confidence in the sustainability
of public sector banks.
▪ Indian banking system has reached even to the
remote corners of the country.
▪ More equitable and prioritized disbursement of
credit to different sectors of economy.
▪ Nationalization of banks led to a smooth and
streamlined Indian growth process, particularly in
the Green revolution.
▪ Aim of nationalization is to promote rapid growth
in agriculture, small industries and export, to
encourage new entrepreneurs and to develop all
backward areas.
ECONOMIC SURVEY 2020 - After the 1980
nationalization, PSBs had a 91% share in the national
banking market which has reduced to 70% in recent
times. Reduced stake has been absorbed by New
Private Banks (NPBs) which came up in early 1990s
after liberalization
ECONOMIC SURVEY 2020 - Allow campus
recruitment, lateral entry in higher management
positions, make employees ‘part owners’ through
Employee Stock Ownership Plan (ESOP). Use
Artificial Intelligence (AI), Machine Learning (ML),
Big Data Analytics, geotagging of mortgaged assets etc.
Setup an organization PSBN Network to implement
above ICT-solutions to improve efficiency of PSBs.
1.2.4 CRITICAL ASSESSMENT OF
NATIONALISATION
▪ Most of the social objectives were achieved.
▪ Bank deposits increased significantly.
▪ Loans to the priority sector increased drastically.
▪ Nationalisation ensured deep penetration of the
banking sector in rural and remote pockets.
▪ Financial inclusion
▪ Women empowerment - ensured by extending
credits to SHGs which are led by women.
1.2.5 DOWN SIDE OF NATIONALISATION OF
BANKING
▪ Efficiency and profitability of Banks declined
drastically
▪ Issue of NPA becoming major roadblock in
profitability of banking sector
▪ Nationalization of banks led to an interest rate
structure that was incredibly complex - different
rates of interest for different types of loans.
▪ Nationalization drive has led to lesser competition
between the public sector and private sectors banks.
▪ Bureaucratic attitude and procrastination in the
functioning of the banking system.
▪ Lack of responsibility and initiative, red-tapism,
inordinate delays are common features of
nationalized banks.
▪ Ruthless expansion of these banks are now facing
the problems of heavy overdue loans and
economically unviable branches.
▪ Political interference led to disbarment of loans
which were against the sound banking rules and
weakened the economic viability of these
institutions.
CONCLUSION
74
 ▪ Advocating privatisation of banks is not a
panacea.
▪ India must not make haste in going for the
privatisation of banks, rather India must focus on
comprehensive governance reforms, resolution
of NPAs at earliest and creating a free financial
market so that investment can be reinvigorated and
wheels of the economy can again get back on track.
1.3 MERGERS/CONSOLIDATION OF BANKS
▪ The government has decided that Bank of Baroda,
Vijaya Bank and Dena Bank shall be
“amalgamated” making the new entity India’s
third largest lender after SBI and ICICI.
▪ The GoI has proposed to merge 10 Public sector
Banks into 4 large banks by April 1 2020.
1.3.1 CHRONOLOGY
▪ PJ Nayak Committee (2014) recommended for
merger of PSBs
▪ 2017: Union Cabinet gave in-principle approval for
amalgamation of Public Sector Banks
▪ 2017: State Bank of India merged with 5 of its
associate banks and Bharatiya Mahila Bank - State
Bank of Bikaner and Jaipur, State Bank of Mysore,
State Bank of Travancore, State Bank of
Hyderabad, and State Bank of Patiala.
▪ 2018: Vijaya Bank, Dena Bank and Bank of Baroda
(Anchor bank - BoB)
1.3.2 BACKGROUND
▪ Merger was proposed through a ministerial panel
called Alternative Mechanism headed by the
Finance Minister.
▪ The idea of bank mergers floated since 1998, when
M. Narasimham Committee II recommended the
government to merge banks into three-tiered
structure –
o Three large banks with an international
presence at top
o Eight to ten national banks
o A large number of regional and local banks.
▪ P J Nayak committee (2014) - suggested that the
government should privatise or merge some PSBs.
▪ 2017 – Government had approved the merger of
SBI’s five associate banks and later of the Bharatiya
Mahila Bank (BMB) with SBI.
Economic Survey - points out that constant failure of
banks to provide credit to both emerging and existing
industries has resulted in stagnation in the economic
growth of the nation.
75
▪ 2018 - Government has constituted an Alternative
Mechanism Panel headed by the Minister of
Finance and Corporate Affairs, Arun Jaitley to look
into merger proposals of public sector banks.
▪ Government also initiated amalgamation of
Regional Rural Banks under Phase 3 consolidation,
bringing them down from 56 to 38.
In merger, two or more companies/entities are
combined together to form either a new company or
an existing company absorbing the other target
companies. In merger one company acquires the other
companies. (e.g. bank B acquires bank C and D and
eventually only bank B shall exist).
Amalgamation is a type of
merger in which two or more
companies combine their
businesses to form an
entirely new
entity/company.
E.g. Consolidation of 2
entities Mittal Steel & Arcelor
resulting in new entity
Arcelor Mittal.Amalgamation
is the combination of one or
more companies into a new
entity (e.g. bank A and bank
B combine to form a new bank C).
1.3.3 SIGNIFICANCE OF THE MOVE
▪ Lead to cost cutting and greater efficiency in wake
of rising NPAs.
▪ Improve customer base & enhanced
geographical outreach - Facilitate resources
diversion to other underserved segments.
▪ Better diversification of risks and stronger overall
profitability contributing to higher credit ratings.
▪ Help create a globally stronger & competitive
financial institutions
▪ Lead to a bigger capital base & higher liquidity
which will help in meeting BASEL III norms.
▪ Enhanced human resource availability.
▪ Problem of credit lending, based on the twin
balance sheet crisis, can be checked by the
formation of bigger banks.
▪ Bigger banks with diverse portfolios have lesser
chances of failure
▪ However, factors like regional balance,
geographical outreach, financial inclusion,
systemic risks due to large-sized banks, financial
burden and smooth human resource transition have
to be looked into while deciding on consolidation.
1.3.4 UNDERLYING RATIONALE
▪ Recommended by several committees -
Narasimhan Committee, PJ Nayak committees
etc.
▪ To meet contemporary credit demand
▪ Reduction in the net NPA ratio of the merged
bank and kick start credit creation.
▪ The merger of weak banks (higher NPAs and low
profits) with the strong Banks would prevent the
collapse of the weak banks and protect the
customers and financial system.
▪ Would reduce the financial burden on the Govt.
on undertaking frequent recapitalisation of the
Public Sector Banks.
▪ Meeting the stringent capital requirements
stipulated under the BASEL III Norms.
▪ Better monitoring and transparency framework.
1.3.5 ARGUMENTS IN FAVOUR OF
CONSOLIDATION
▪ Too many Public Sector Banks (PSBs) -
Currently there are 12 PSBs in India which often
intricate into each other’s businesses.
▪ Resolving the NPA issue - The consolidation is
being seen as a way out of the NPA issue through
the “strong” banks absorbing the strain on the books
of weaker banks.
▪ Increase in business - Consolidation will lead to
substantial expansion in customer base and
market reach along with offering more services or
products to customers.
▪ Global banks - The consolidation will help create
a globally stronger and competitive financial
institution. Currently Indian banks are small when
compared with their global peers.
▪ Cost cutting - Consolidation can lead to reduced
operating costs for public sector banks - duplicate
operations, redundancies, overlapping branches.
▪ Enhanced geographical reach - For example,
Vijaya Bank has strength in the South while Bank
of Baroda and Dena Bank had a stronger base in
Western India. That would mean wider access for
both the proposed new entity and its customers.
▪ Greater capital and liquidity - bigger capital base
and higher liquidity will help in meeting the
BASEL III norms.
▪ Reduction in the government's burden of
recapitalising the public sector banks time and
again.
▪ Enhanced human resource - Merger can lead to
availability of a bigger scale of expertise and that
helps in minimising the scope of inefficiency
which is more common in small banks.
▪ Employee welfare - The disparity in wages for
bank staff members will get reduced and service
conditions would become uniform.
1.3.6 ARGUMENTS AGAINST CONSOLIDATION
▪ Setback to corporate governance perspective -
The merger sends out a poor signal of a dominant
shareholder i.e. government dictating decisions that
impact the minority shareholders.
▪ Forced mergers of the stronger banks with the
weaker banks tend to take a toll on the operations
of the strong banks. For instance: Bank of
Baroda’s shares took a nosedive in wake of the
announcement.
▪ Meaningless without implementing governance
reforms - The new entity will face similar problems
unless significant reforms take place in the overall
functioning of PSBs.
▪ Merger could only give temporary relief but not
real remedies to problems like bad loans and bad
governance in public sector banks.
▪ Setback to financial inclusion - Consolidation
may lead to large scale shutting down of
overlapping branches of the entities being merged.
▪ Systemic risks - There is a global consensus that
banks that are “too big to fail” are sources of
serious risk to financial stability and consolidation
might lead to such a scenario.
▪ Protests and opposition - Addressing the concerns
of unions and shareholders can prove to be a major
roadblock.
▪ Varied work culture - Aligning contrasting HR
practices will also pose a challenge to the new
management.
▪ Harmonization of Technology - It is a big
challenge as various banks are currently operating
on different technology platforms.
1.3.7 WAY FORWARD
▪ The consolidation process among banks should be
driven primarily by synergies, efficiency, cost
saving, and economies of scale. It is essential to
evaluate the merger of banks by assessing the
benefits such as cost rationalization, additional
business, etc. against the likely future costs.
▪ Mergers must happen on commercial
considerations and must not be politically
imposed.
▪ Governance reforms - More regulatory power to
RBI over PSBs and Independence from political
interference.
▪ Allow “non-risky” failures - Failures are the
essence of the free market so sometimes we also
76
 need measures that allow banks to fail safely ▪ By reciprocity, it means that overseas banks are
without causing systemic shocks. given near national treatment in India only if their
home country allows Indian banks to open branches
1.4 PRIVATE SECTOR BANKS there without much restrictions.
▪ These are banks whose majority of share capital of ▪ By single mode of presence, it means that RBI
the bank is held by private individuals. These allows either of the branch mode or a wholly owned
banks are registered as subsidiary (WOS) mode in India.
companies with limited ▪ Some other policy guidelines of RBI towards
liability. Examples of foreign banks are as follows:
private sector banks are: 1. Banks have to adhere to mandated Capital
ICICI Bank, Axis bank, Adequacy requirements as per Basel
HDFC, etc. Standard.
▪ In private sector banks, most of the capital is in 2. They should meet the minimum capital
private hands. requirement of INR 500 cr.
▪ There are two types of scheduled commercial 3. They should maintain minimum CRAR at
(private sector) banks in India viz. 10% .
4. Priority sector targets for foreign banks in
Old Private Banks New Private Banks India is 40%.
These are those which These banks were 5. Further, the foreign banks have to follow other
existed in India at the incorporated as per the norms as set by the Reserve Bank of India.
time of nationalization of revised guidelines issued
major banks but were not by the RBI regarding the SHARE OF FOREIGN BANKS IN INDIA
nationalized due to their entry of private sector Foreign Banks account for less than 1% of the total
small size or some other banks in 1993. At branch network in the country. However, they account
reason. present, there are seven for approximately 7% of the total banking sector
new private sector banks assets and around 11% of the profits.
viz. Axis Bank,
Development Credit 2. DIFFERENTIATED BANKS IN INDIA
Bank (DCB Bank Ltd), ▪ Differentiated banks are banking institutions
HDFC Bank, ICICI licensed by the RBI to provide specific banking
Bank, IndusInd Bank, services and products.
Kotak Mahindra Bank, ▪ Main aim for giving license to these banks is to
Yes Bank. promote financial inclusion and payments.
▪ Differentiated banks licensing was launched in
1.5 FOREIGN BANKS 2015.
▪ Foreign banks are present in the country
either through complete 1 SMALL FINANCE BANKS
branch/subsidiary route presence or
through their representative offices. 2 INDIA POST PAYMENT BANKS
▪ These banks are registered LOCAL AREA BANKS
3
and have their headquarters
in a foreign country but 4 PAYMENT BANKS
operate their branches in our country. Examples
of foreign banks in India are: HSBC, Citibank, 5 WHOLESALE BANKING
Standard Chartered Bank, etc
6. REGIONAL RURAL BANK
RBI POLICY TOWARDS FOREIGN BANKS IN
▪ The concept was once discussed in a Paper
INDIA
“Banking Structure in India – The Way
▪ RBI policy towards presence of foreign banks in Forward”, brought out by the RBI in August 2013.
India is based upon two cardinal principles viz. ▪ RBI granted in-principle approvals to 11 entities for
1. Reciprocity
setting up payments banks (PBs) in August 2015
2. Single mode of presence.

77
 and 10 for Small Finance Bank (SFB) in September
2015.
NEED FOR DIFFERENTIATED BANKS
▪ To broaden the policy goal of financial inclusion
▪ Tailor made financial solution to cater various
sections of society
▪ They are niche banks that focus and serve the
needs of a certain demographic segment of the
population.
▪ Provision of small saving schemes to inculcate
saving culture
▪ Payment services
Q. What are differentiated banks? Discuss their
significance in furthering financial inclusion in India.
Chronology of differential banks: RRB (1976) →
Local Area Bank (1996) → Small Finance Bank &
Payments bank (2015) → Wholesale banks (proposed)
2.1 REGIONAL RURAL BANKS (RRB)
▪ RRBs are financial institutions which ensure
adequate credit for agriculture and other rural
sectors.
▪ They were conceived as low cost institutions
having a rural ethos and pro poor focus, but with
expertise of commercial banks.
▪ It was set up on the basis of the recommendations
of the Narasimham Working Group (1975), and
after the legislations of the Regional Rural Banks
Act, 1976🡪 statutory backup
▪ The sources of funds of RRBs comprise of owned
fund, deposits, borrowings from NABARD,
Sponsor Banks and other sources including SIDBI
and National Housing Bank.
▪ RRBs are at par with commercial banks as far as
compliance requirements to CRR and SLR is
concerned.
▪ The RRBs combine the characteristics of a
cooperative in terms of the familiarity of the rural
problems and a commercial bank in terms of its
professionalism and ability to mobilise financial
resources.
▪ Each RRB is owned by three entities with their
respective shares as follows:
o Central Government → 50%
o State government → 15%
o Sponsor bank→ 35%
50% 35%
sponsor
Centre bank
15% state govt.
▪ However, PSL target of RRBs is 75% of total
outstanding advances (PSL norm is 40% for a
commercial bank).
RRB Viz-a-viz COMMERCIAL BANKS
▪ Ownership - they are owned by three different
entities – Central govt, state govt and sponsor bank.
▪ Regulation - They are regulated by NABARD
▪ Statutory Background - RRBs have a separate law
behind them viz. RRB Act, 1976.
▪ Statutory pre-emptions - RRBs don’t need to
maintain CRR and SLR like other banks.
2.1.1 Objectives of the RRB
To develop the rural economy by providing, for the
purpose of development of agriculture, trade,
commerce, industry and other productive activities in
the rural areas, credit and other facilities, particularly to
small and marginal farmers, agricultural labourers,
artisans and small entrepreneurs, and for matters
connected therewith and incidental thereto.
POLICY OF CURRENT GOVERNMENT ON RRB
▪ The Modi Government has put hold on further
amalgamation of the Regional Rural Banks.
▪ The focus of the new government is to improve
their performance and explore new avenues of
investments in the same.
▪ Currently, there is a bill pending to amend the RRB
Act which aims at increasing the pool of investors
to tap capital for RRBs.
2.1.2 NEED FOR RRBs
▪ To ensure adequate credit in rural areas during the
lockdown due to the COVID-19 crisis.
▪ RRB helps to bring the financial inclusion in the
primary level of the nation
▪ To provide banking services to rural and semi-
urban areas.
78
 ▪ Locker, debit and credit card facilities to the
countryside people.
▪ To enhance employment opportunities by
promoting trade and commerce in rural areas.
▪ To support entrepreneurship in rural areas.
▪ Pension and MGNREGA wages distribution
2.1.3 ISSUES WITH RRBs
▪ Organisational problem - multi agency control of
RRBs led to a lack of uniformity in their
performance.
▪ Recruitment process as well as training of staff of
RRB hasn’t received sufficient attention
▪ Problems of loan recovery
▪ Mounting losses resulting into non-viability
▪ Management Problems pertain to involvement of
three agencies.
The Cabinet Committee on Economic Affairs has given
its approval for continuation of the process of
recapitalization of RRBs by providing minimum
regulatory capital to RRBs for 2020-21 for those RRBs
which are unable to maintain minimum CRAR of 9%,
as per the regulatory norms prescribed by the RBI
2.2 SMALL FINANCE BANKS (SFB)
▪ According to RBI guidelines,
small and payment banks are
‘niche’ or ‘differentiated’
banks with a common
objective of increasing
financial inclusion.
▪ These are private financial
institutions for the objective
of financial inclusion
without any restriction in
the area of operations,
unlike the RRBs or Local
Area Banks.
▪ They can provide basic banking services like
accepting deposits and lending to the unbanked
sections such as small farmers, micro business
enterprises, micro and small industries and
unorganised sector entities.
▪ They were proposed by the Nachiket Mor
Committee of RBI as one of the differentiated
banking systems for credit outreach and
announced in the annual Budget of 2014.
▪ Currently, SFBs constitutes 0.2% of the total
deposits of all scheduled commercial banks and
makes up 0.6% of the total lending undertaken by
the scheduled commercial banks in India.
79
▪ Some of the operational Small Finance Banks in
India are: Ujjivan SFB, Janalakshmi SFB, Equitas
SFB, AU SFB, and Capital SFB.
▪ They focus and serve the needs of a certain
demographic segment of the population.
▪ SFBs was recommended by the Nachiket Mor
committee on financial inclusion.
2.2.1 OBJECTIVE OF THE SFB
▪ To increase financial inclusion by provision of
savings vehicles to under-served and unserved
sections of the population
▪ Supply of credit to small farmers, micro and small
industries, and other unorganised sector entities
through high technology low-cost operations.
▪ The purpose of the small banks will be to provide
a whole suite of basic banking products such as
deposits and supply of credit, but in a limited area
of operation.
▪ The provision of savings vehicles
▪ Supply of credit to small business units; small and
marginal farmers; micro and small industries; and
other unorganised sector entities, through high
technology-low cost operations.
2.2.2 NEED FOR SFB
▪ To cater large population - India has the second-
largest unbanked population in the world where
more than 200 million people do not have a bank
account and many rely on cash or informal
financing.
▪ Priority sector lending - SFBs play a key role in
the priority sector lending space as their main focus
is the unserved and underserved segment.
▪ Financial inclusion of women - To provide loans
to women. female customers can avail full banking
solutions.
▪ Social Impact - The SFBs are now looking beyond
the simple metric of “income improvement” to
other indicators of positive social impact,
▪ SFBs not only serve to provide banking solutions
but empower the socio-economic progress of its
consumers.
▪ RBI states that small banks will act as a savings
vehicle to these segments of the population.
2.2.3 GUIDELINES FOR SFB
▪ They cannot set up subsidiaries to undertake non-
banking financial service activities.
▪ 75% of its ANBC should be advanced to the
priority sector as categorized by RBI.
▪ It must have 25% of its branches set up in
unbanked areas.
▪ Minimum capital requirement - 100 crore. Total 10. The RBI as of
▪ Promoter contribution - at least 40% for first 5 years Capital Small date has given
o Excess shareholding - brought down to 90% by Examples Finance Bank licences to 11
end of 5 th year, 30% by end of 10 th year and (Punjab), payments banks
to 26% in 12 years from commencement of Ujjivan of which six are
business. (Karnataka), currently
▪ Foreign shareholding as per current FDI policy. Utkarsh (UP). etc operational.
▪ Voting rights - same as according to existing These include
guidelines for private banks. Aditya Birla
▪ Entities other than promoters would not hold share Payments Bank,
in excess of 10%. Airtel Payments
▪ They must comply with the corporate governance Bank, India Post
guidelines, including ‘fit and proper’ criteria for Payments Bank,
directors as issued by RBI. Fino Payments
▪ They will be subject to all prudential norms and Bank, Jio
regulations of the RBI as applicable to existing Payments Bank
commercial banks – maintaining CRR and SLR. and Paytm
▪ It can transform into a full-fledged bank, but only Payments Bank.
after RBI's approval. Min.100cr. Min.100cr.

Capital Resident capital resident

Indian, Indians,
Local Area Bank, NBFCs, mobile
NBFC, Micro- telephone
Eligibility finance, with 10 companies,
years exp. in supermarket
banking / finance chains,
cooperatives &
companies
controlled by
resident Indians
The RBI
Committee gave
selection
Q. What is the purpose of setting up Small Finance preference to
Banks (SFBs) in India? (CSE-2017) Area North East & Anywhere
1. To supply credit to small business units
Central India
2. To supply credit to small and marginal Farmers clusters where
3. To encourage young entrepreneurs to set up Universal Banks’
business particularly in rural areas. penetration is
Select the correct answer using the code given below: poor.
a) 1 and 2 only
Usha Throat
Nachiket Mor
b) 2 and 3 only
Selected by (Former RBI
(Ex-RBI Board
c) 1 and 3 only
Dy.Gov) Member)
d) 1, 2 and 3
Same as Indian
Private Banks,
SMALL FINANCE BANKS Vs PAYMENT
Same as Indian but caveats in
BANKS
CRR, SLR, private banks SLR – 75% in G-
Repo, FDI Sec or T Bills
Parameters Small Finance Payment banks and 25% can be
Banks FD in Any Bank.
No need but 25%
access points

80
 Must have 25% must be in rural ▪ Payments banks will be entitled to issue ATM or
Rural branches in areas like debit cards to their customers but cannot issue a
Penetration unbanked rural Business credit card.
areas. correspondence ▪ Similar to commercial banks, reserve ratios will be
(BC). applicable to the Payments banks.
Promoting Small ▪ Payment banks can provide the Facility of utility
savings bill payments to its customers and the general
Remittance of public.
Unserved, migrant labours, ▪ Payments banks can become a business
Target Underserved low income representative of any other bank, but it will have
Consumers Farmers, Micro, households, to comply with the guidelines of the RBI.
Small industries unorganized ▪ The Payments Banks would be required to use the
sector, small word ‘Payments’ in its name to differentiate it
business. from other banks.
No NRI deposits, ▪ Payments banks cannot provide loans or lending
Fixed deposit, services to customers.
Recurring
Deposit. According to the RBI data, almost 60% of the people of
Accept Yes, without any Can accept only the country are still not connected with the banking
Deposits restrictions Demand sector.
Deposits and
max. balance Rs. 2.3.1 OBJECTIVES
1 lakh per year Increase financial inclusion by providing small saving
per customer accounts, payment remittance services to migrant
Debit cards YES YES labourer, low income households, small businesses,
Credit cards YES No (because other unorganized sector entities and other users by
can’t “loan”) enabling high volume - low value transactions in
deposits and payments/remittance services in a secured
2.3 PAYMENT BANKS technology – driven environment.
▪ According to RBI guidelines issued in 2014,
payment banks are ‘niche’ or ‘differentiated’
banks with a common objective of increasing
financial inclusion.
▪ Payments Banks can accept demand deposits
(only current account and savings accounts).
▪ They would initially be restricted to holding a
maximum balance of Rs 1 lakh per customer.
Based on performance, the RBI could enhance this
limit.
▪ The banks can offer payments and remittance
services, issuance of prepaid payment
instruments, internet banking, functioning as
business correspondent for other banks.
▪ Payments Banks cannot set up subsidiaries to
undertake NBFC business.
2.3.2 WHO CAN PROMOTE A PAYMENTS
BANK?
▪ Non-bank PPIs, NBFCs, corporate’s, mobile
telephone companies, supermarket chains, real
sector cooperatives companies and public sector
entities. Even banks can take equity in Payments
Banks.

81
 post office branches with IPPB services. This will
create the country’s largest banking network
with a direct presence at the village level.
▪ Range of products - savings and current accounts,
money transfer, direct benefit transfer, bill and
utility payments, enterprise and merchant
payments.
▪ It will offer three types of savings accounts -
regular, digital and basic – will attract an interest
rate of 4% per annum.
▪ It will also provide access to third-party financial
services such as insurance, mutual funds, pension,
credit products and forex.
▪ It will not offer any ATM debit card.
Instead, it will provide its customers a
CONCLUSION QR Code-based biometric card.
The setting up of the payments banks will not only ▪ The government - owned payments bank will be
increase the financial inclusion in the country but also able to accept deposits of up to Rs. 1 lakh from
strengthen the weaker section of the country so that they customers.
can also give their contribution in the economic ▪ But they do not have the rights to use these funds to
development of the country. advance risky loans at higher interest rates.
Q. Find the correct Statement(s) about Payment
Banks? (CSE-2016) 2.4.1 SIGNIFICANCE OF IPPB
1. Mobile telephone companies and supermarket ▪ Furthering goal of achieving financial inclusion.
chains that are owned and controlled by residents ▪ Efficient utilization of a wide network of branches
are eligible to be promoters of Payment Banks. of India's age-old postal department across India.
2. Payment Banks can issue both credit cards and debit ▪ IPPB offers savings, remittance, and payments
cards. services to the rural and unorganised sectors.
3. Payment Banks cannot undertake lending activities. ▪ Digital services are expected to make financial
Codes: services more accessible.
a) 1 and 2 only ▪ Payments bank idea will help reinvigorate the
b) 1 and 3 only postal system.
c) 2 only
d) 1, 2 and 3 2.4.2 CHALLENGES FACE BY THE IPPB
▪ Charges and restrictions - There are 80 different
2.4 INDIA POST PAYMENT BANKS (IPPB) charges and restrictions which could prove to be
▪ IPPB is a financial challenges in its objective of financial inclusion.
service provider that ▪ Severe restrictions imposed by the RBI on
will operate under deployment of funds by IPPB
the country’s postal ▪ IPPB is likely to face stiff competition from private
department. companies.
▪ Started in 2017, ▪ First wave of new payments banks that commenced
IPPB has been business last year (Airtel, Paytm) have not made
incorporated as a any significant changes
public sector ▪ Striking down of certain provisions of Aadhaar
company under the by SC has made Aadhar based KYC authentication
department of difficult.
posts, with 100% ▪ Promoting IPPB as well as maintaining balance
government equity with DoP work by staff
and is governed by ▪ Department of Post (DoP) staff needs to be trained
the RBI. in digital operations.
▪ It will focus on providing banking services to ▪ Limited manpower in post offices- Clients might
people in rural areas, by linking all the 1.55 lakh find it difficult to withdraw cash from rural post

82
 offices because these are managed by one or two
people, who are unlikely to have a lot of money
with them.
▪ Limited accessibility- IPPB is unable to offer
ATM cards yet. As a result clients can’t use the
united payments interface service.
▪ Limited appeal- For Urban customers who have
easy access to private banks offering purely digital
accounts with more services, interest rates of up to
6 per cent and latest technologies like UPI.
2.5 LOCAL AREA BANK
▪ Introduced in India in the year 1996 based on
Budget-1996 by the then Finance Minister, Dr.
Manmohan Singh.
▪ Unlike RRBs, they're not set up by Union or State
governments or by any special act of the
parliament, but by private entities, simply
applying to RBI under Banking Regulation Act.
▪ Each Local Area bank is registered as a public
limited company under the Companies Act, 1956.
However, they are licensed under the Banking
Regulation Act, 1949.
▪ Earning profit is the main objective of Local Area
Banks
▪ They are Non-Sch. Banks - CRR, SLR, PSL
applicable.
▪ Only RBI regulates them.
▪ Present in Maximum 3 geographically contiguous
districts. only 1 urban centre per district.
2.6 LEAD BANK SCHEME
▪ The Lead Bank Scheme was introduced in 1969 in
which aims at providing adequate banking and
credit in rural areas through an ‘service area
approach’, with assignment of lead roles to
individual banks (both in public sector and private
sector) - one bank assigned for one area
▪ A bank having a relatively large network of
branches in the rural areas of a given district and
endowed with adequate financial and manpower
resources has generally been entrusted with the lead
responsibility for that district.
▪ On the recommendation of the Gadgil Study
Group and Banker’s Committee, the Scheme was
introduced by RBI. The commercial banks did not
have adequate presence in rural areas and also
lacked the required rural orientation which was
hindering the growth of rural areas.
Q. The Services Area Approach was implemented
under the purview of_______ (CSE-2019)
a) Integrated Rural Development Programme
83
b) Lead Bank Scheme
c) Mahatma Gandhi National Rural Employment
Guarantee Scheme
d) National Skill Development Mission
OBJECTIVES OF LEAD BANK SCHEME
▪ to identify those regions which unbanked and
underbanked in districts and to extend banking
facilities to such areas
▪ to help in removing regional imbalances through
appropriate credit deployment.
▪ It was observed in the studies by the committee that
there are certain credit gaps in various sectors which
need to be addressed and a credit plan is needed.
▪ to identify economically viable and technically
feasible schemes.
▪ The structural and procedural changes in the
banking sector were needed.
▪ Development of co-operation amongst financial
and non-financial institutions.
Govt. constituted Usha Thorat committee which
highly favoured the further continuance and
revitalization of the scheme for the sake of the
financial inclusion in the country.
3. CO - OPERATIVE BANKS
▪ In India, the history of Cooperatives begins with the
Cooperative Credit Societies Act, 1904 which led
to the formation of Cooperative Credit Societies in
both rural and urban areas.
▪ In independent India, with the onset of planning,
the cooperative organizations gained more
leverage and role with the continued governmental
support.
▪ Co-operative bank is a financial entity which
belongs to its members, who are at the same time
the owners and the customers of their bank. Co-
operative banks are often created by persons
belonging to the same local or professional
community or sharing a common interest.
▪ Co-operative banks played an important role in
national development. Initially set up to supplant
indigenous sources of rural credit, particularly
money lenders, today they mostly serve the needs
of agriculture and allied activities, rural-based
industries and to a lesser extent, trade and industry
in urban centres.
▪ Cooperative banks are the primary financiers of
agricultural activities, some small- scale
industries and self-employed workers.
▪ These banks are cooperative credit institutions that
are registered under the Cooperative Societies
 Act 1912. These banks work according to the
cooperative principles of mutual assistance.
▪ Indian cooperative structures are one of the largest
such networks in the world with more than 200
million members. It has about 67% penetration
in villages and funds 46% of the total rural
credit.
Anyonya Co-operative Bank Limited (ACBL) is the
first co-operative bank in India located in the city of
Vadodara in Gujarat.
Banking activities of Urban Cooperative Banks are
monitored by RBI.
However, registration and management activities are
managed by the Registrar of Cooperative Societies
(RCS). These RCS operate in single- state and Central
RCS (CRCS) operate in multiple states.
3.1 FEATURES OF COOPERATIVE BANKS
▪ Customer owned entities
▪ Democratic member combers
▪ Profit allocation
▪ Principle of mutual assistance
▪ Financial inclusion
▪ Principle of one person-one vote
3.2 SOURCES OF FUNDS (RESOURCES)
▪ Ownership funds
▪ Deposits or debenture issues.
▪ Central and state government
▪ Reserve Bank of India (RBI)
▪ NABARD
▪ Other co-operative institutions
A high powered committee chaired by former Deputy
Governor of RBI, R. Gandhi has recommended
the merging and converting some of the cooperatives
banks to small finance banks
3.3 TIERS OF CO-OPERATIVE BANKS
State Co-Operative
Banks-SCBc
District Central Co-
Operative Banks
Primary Credit
Societies-PCSs
URBAN CO-OPERATIVE BANKS (UCB)
▪ Primary credit societies (PCSs) in urban areas
that meet certain specified criteria can apply to RBI
for a banking license to operate as urban co-
operative banks (UCBs).
▪ They are registered and governed under the co-
operative societies acts of the respective states and
are covered by the Banking Regulation Act, 1949
- thus are under dual regulatory control.
▪ The managerial aspects of these banks are
controlled by the state governments, while the
matters related to banking are regulated by RBI.
▪ Well managed primary UCBs with deposits of over
Rs. 50 crore are also allowed to operate in more
than one state subject to certain norms.
▪ As they are covered by the RBI Act, 1934 (2nd
Schedule) they have certain rights and
obligations - rights of obtaining refinance and loans
from the RBI and obligations such as maintenance
of cash reserves, submission of returns to the RBI
etc.
DCCBs & SCBs:
▪ As their names implies, they operate at the district
and state levels.
▪ One district can have no more than one DCCB with
a number of DCCBs reporting to the SCB.
▪ They were under supervision of the RBI - later on
this function was delegated to the NABARD.
3.4 ADVANTAGES OF COOPERATIVE BANKS
▪ Effective alternative to the traditional defective
credit system of the village money lender.
▪ Provides cheap credit to masses in rural areas.
▪ Discouraged unproductive borrowing personal
consumption and have established the culture of
productive borrowing.
▪ Cooperative credit movement has encouraged
saving and investment, instead of hoarding money
▪ Cooperative credit is available for purchasing
improved seeds, chemical fertilizers, modern
implements, etc
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 ▪ Cooperatives Banks offer higher interest rates on RBI,
deposits. NABARD,
Regulator State Registrar
3.5 ISSUES WITH CO-OPERATIVE BANKS RBI of Cooperative
Societies
▪ Issue of dual regulatory control - the UCBs come Yes, but, RBI
under the RBI and the Registrar of Co-operative CRR, SLR, Yes could keep
Societies (RCS) of the respective states while the BASEL-III different slabs/
DCCBs and SCBs come under the NABARD, the norms.
RBI and the RCSs. Yes, but only
▪ Close links between politicians and co-operatives selected
and the fact that the RCS functions under the state Repo, MSF Eligible category of
government, in practice this dual (or triple) borrow Cooperative
custody of the co-operative banks led to poor Banks
supervision and control. Only Urban
PSL Lending Yes 40-75% Cooperative
▪ Most co-operative banks are lacking in skill and
Banks
expertise. Who can Anyone First preference
▪ Recruitments are politicised as are appointments at borrow? to members
most levels. According to
▪ Income recognition and prudential norms are Based on Cooperative
still due in this sector. Shareholding, like a Society norms,
▪ Co-operative banks have been in the news mostly Vote power Commercial members will
for fraudulent deals E.g. PMC bank crisis. Company have vote
▪ Patchy growth of cooperative societies across the power
map of India. It is said these have grown maximally Yes, purely profit Yes, but, RBI
motive, so lending could keep
in states of Gujarat, Maharashtra, Tamil Nadu
Profit Motive rates may be higher different slabs/
whereas the other parts of India don’t have a than Cooperatives norms.
heightened presence. All India & overseas Mainly in GJ,
▪ The state partnership has led to excessive state Presence MH, Andhra,
control and interference. This has eroded the TN
autonomous characters of many of these.
▪ Their main focus being credit so they have reduced 4. WHOLESALE & LONG TERM FINANCE
to borrower-driven entities and majority of BANKS (WLTF)
members are nominal and don’t enjoy voting rights. ▪ WLTF banks will focus primarily on lending to the
▪ Credit recovery is weak especially in rural areas infrastructure sector and small, medium and
and it has a sustainability crisis in some pockets. corporate businesses.
▪ There is a lack of risk management systems and ▪ Released by RBI in 2017
lack of basic standardised banking models. There ▪ These banks will provide refinance to lending
is a widening gap between the level of skills and the institutions and shall be present in capital markets
increasing computerization of banks. in the form of aggregators
▪ Can’t accept deposits less than 10 crores, can give
3.6 COMMERCIAL BANKS Vs COOPERATIVE loans only to large corporates & infrastructure
BANKS projects.
▪ They will also mobilise liquidity for banks and
COMMERCIAL CO- financial institutions directly originating priority
PARAMETER BANK OPERATIVE sector assets, through securitisation of such assets
BANK
and actively dealing in them as market makers.
Banking Reg. Applicable since Applicable
Act 1949 1949 since 1966.
▪ They may also act as market-makers in securities,
such as, corporate bonds, credit derivatives,
Are joint stock Governed by warehouse receipts, and take-out financing, etc.
companies they are the Co-
Act governed by the operative 5. MUDRA BANKS
Banking Regulation societies Act,
Act, 1949. 1904.

85
▪ The GoI launched (April 2015) the Micro Units
Development and Refinance Agency Bank
(MUDRA Bank) with the aim of funding these
unfunded non-corporate enterprises. This was
launched as the PMMY (Prime Minister Mudra
Yojana).
▪ MUDRA bank is a subsidiary of SIDBI.
▪ According to the GoI, large industries provide
employment to only 1.25 crore people in the
country while the micro units employ around 12
crore people.
▪ There is a need to focus on these 5.75 crore self-
employed people (owners of the micro units) who
use funds of Rs. 11 lakh crore, with an average per
unit debt of merely Rs. 17,000.
▪ Under this banking model, the micro units can
avail up to Rs. 10 lakh loan through refinance
route (through the Public and private sector banks,
NBFCs, MFIs, RRBs, District Banks, etc).
▪ The products offered-
TYPES OF LOAN COVERAGE OF LOAN
1. Shishu loan up to Rs. 50,000
2. Kishor Rs. 50,000 to Rs 5 lakh
3. Tarun Rs. 5 lakh to Rs. 10 lakh
▪ Though the scheme covers the traders of fruits and
vegetables, in general, it does not refinance the
agriculture sector.
▪ There is no fixed interest rate in this scheme. As
per the GoI, presently, banks are charging the
interest rates between Base Rate plus one per cent
to 7 per cent per annum.
▪ Interest rates on the loans are supposed to vary
according to the risk involved in the enterprises
seeking loans.
▪ There is no general subsidy offered on interest
rates except if the loan is linked to some other
government scheme.
▪ The loans are basically for people having a business
plan in a Non-Farming Sector with Income
generating activities like the following:
o Manufacturing
o Processing
o Trade
o Service Sector
o Or any other fields whose credit demand is less
than ₹10 lakhs.
Q. Pradhan Mantri MUDRA Yojana is aimed
at______(CSE-2016)
a) bringing the small entrepreneurs into formal
financial system
b) providing loans to poor farmers for cultivating
particular crops
c) providing pensions to old and destitute persons
d) funding the voluntary organizations involved in the
promotion of skill development and employment
generation
FUND OF FUNDS FOR START-UPS (FFS)
Established by GoI and managed and operated by
SIDBI. Fund size is Rs.10,000 crore and would be built
over the 14th and 15th Finance Commission cycles till
2025. FFS would not invest directly in Start-ups, but
would participate in the capital of Alternate
Investment Funds (AIF) registered with SEBI for
investing in equity and equity linked instruments of
various Start-ups at early stage, seed stage and growth
stages.
6. INTERNATIONAL FINANCIAL
INSTITUTION
▪ These are
those banks
that are
established
by more than
one country
and provide
international
finance.
▪ They are an important pillar of the Global
Financial System and sometimes work as
important bridges between developed and
86
 developing countries in matters of development ▪ Prime Borrower – Borrower has the capacity to
finance. repay loans.
▪ Currently, the world's largest International ▪ Subprime Borrower- Such borrower doesn’t have
Financial Institution is European Investment the capacity to repay loan. Giving teaser rate home
Bank. loans to subprime borrowers was among the reasons
▪ The IFIs can be multilateral, regional or bilateral. for the Subprime Crisis in the USA (2007-08),
▪ Examples of multilateral IFIs include the World which ultimately led to the Global Financial
Bank, African Development Bank, Asian Crisis.
Infrastructure Investment Bank (AIIB). ▪ Overleveraged Borrower- Such a company has
▪ Examples of regional IFIs include Asian borrowed too much money than its ability to pay it
Development Bank (ADB). back. An Overleveraged company has a high ratio
▪ Examples of bilateral IFIs include French of Debt (Bonds/loans) to Equity (Shares).
Development Agency. ▪ Zombie Lending- When a weak bank keeps giving
new loans to a subprime / over leveraged borrower.
7. DIFFERENT TYPES OF LOANS
At present, interest rates on loans are linked to a bank’s 9. BAD BANKS (PARA)
marginal cost of fund-based interest rate, known as ▪ To resolve the twin problems of ‘balance sheet
the Marginal Cost of Lending Rate (MCLR). syndrome’ (banks and corporate sector), the
Economic Survey 2016-17 has suggested the
Fixed Interest Floating Teaser Loan Government to set up a public sector asset
Interest rehabilitation agency (PARA) - charged with the
The fixed Floating interest A sub-type of largest and most complex cases of the
interest rate on rate implies that floating interest ‘syndrome’.
loans means the rate of rate loan, ▪ Such initiatives were successfully able to handle the
repayment of interest varies wherein initial ‘twin balance sheet’ (TBS)
loans in fixed with market years have low problems in the countries hit by
equal instalments conditions. The interest, but
the South East Currency Crises
over the entire drawback with afterwards higher
period of the floating interest interest rate. of the mid-1990s.
loan. In this case, rates is While RBI has ▪ Coordination problem as in this
the interest rate the uneven not banned case, the debts would be
doesn't nature of Teaser loans but centralised in one agency.
change with monthly has put stricter ▪ It could be set up with proper incentives by giving
market instalments. regulations on it an explicit mandate to maximize recoveries
fluctuations. them from 2011. within a defined time period.
▪ It would separate the loan resolution process
from concerns about bank capital.
Q. Why is the offering of “teaser loans’’ by ▪ As per the Survey, gross NPAs has climbed to
commercial banks a cause of economic concern ? almost 12 percent of gross advances for public
(CSE-2011) sector banks at end-September 2016. At this level,
1. The teaser loans are considered to be an aspect of India’s NPA ratio is higher than any other major
subprime lending and banks may be exposed to the emerging market, with the exception of Russia .
risk of defaulters in future. ▪ The consequent squeeze of banks has led them to
2. In India, the teaser loans are mostly given to slow credit growth to crucial sectors - especially to
inexperienced entrepreneurs to set up industry and medium and small scale enterprises
manufacturing or export units. (MSMEs) - to levels unseen over the past two
Which of the statements given above is/are correct? decades. As this has occurred, growth in private
a) 1 only and overall investment has turned negative.
b) 2 only ▪ This all implies that a decisive resolution is
c) Both 1 and 2 urgently needed before the TBS problem becomes
d) Neither 1 nor 2 a serious drag on growth.
8. TYPES OF BORROWERS

87
 CH-3 BANKING IN INDIA – PART 3
NON-BANKING FINANCIAL INSTITUTIONS
(NBFIs)
A Non-Banking Financial Company (NBFC) is a
company registered under the Companies Act, 1956
engaged in the business of loans and advances,
acquisition ofshares/stocks/bonds/debentures/securities
issued by Government or local authority or other
marketable securities of a like nature.
NBFI
Primary
AIFI NBFC
Dealers
EXIM NABARD SIDBI NHB
1. ALL INDIA FINANCIAL INSTITUTION
(AIFI)
All India Financial Institutions (AIFI) is a group
composed of Development Finance Institutions
(DFI) and investment institutions that play a pivotal role
in the financial markets. Also known as "financial
instruments", the financial institutions assist in the
proper allocation of resources, sourcing from
businesses that have a surplus and distributing to others
who have deficits - this also assists with ensuring the
continued circulation of money in the economy. AIFI
were set up by respective acts of Parliament.
1.1 EXPORT-IMPORT BANK OF INDIA (EXIM)
▪ EXIM of India is the premier export finance
institution in India, established in 1982 under
Export-Import Bank of India Act 1981.
▪ EXIM Bank is India’s leading export financing
institute that engages in integrating foreign trade
and investment with the country’s economic
growth.
▪ EXIM Bank is a wholly-owned subsidiary of the
Indian Government.
▪ EXIM Bank is an important government
organisation working in the field of exports. It
plays a crucial role in helping Indian companies
do business abroad and bring in foreign exchange.
Financial Products By EXIM
• Buyer’s credit – it is a credit facility programme
that encourages Indian exporters to explore new
regions across the globe. It also facilitates exports
for SMEs by offering credit to overseas buyers to
import goods from India.
Corporate banking – it offers a variety of financing
programmes to augment the export-competitiveness of
Indian companies.
Lines of credit – it offers extended a line of credit to
Indian exporters to help them expand to new
geographies and uses line of credit as an effective
market-entry tool.
Overseas investment finance – it offers term loans to
Indian companies for equity investments in their
overseas joint ventures or wholly-owned subsidiaries.
Project exports – encourages project exports from
India and helps Indian companies secure contracts
abroad.
Services offered By EXIM
• Marketing advisory services – helps Indian
exporters in their globalisation ventures by assisting
in locating overseas distributors/partners, etc. Also,
assists in identifying opportunities abroad for
setting up plants, projects or acquiring companies.
• Research and analysis – conducts research in the
field of international economics, trade and
investment, country profiles to identify risks, etc.
• Export advisory services – it offers information,
advisory and support services enabling exporters to
evaluate international risks, exploit export
opportunities and improve competitiveness.
• Term deposit scheme
Concessional Finance Scheme (CFS)
▪ Under the CFS, the GoI has been supporting Indian
Entities bidding for strategically important
infrastructure projects abroad since 2015-16 (got
extension upto 2023)
▪ The Scheme is presently being operated through the
EXIM Bank of India, which raises resources from
the market to provide concessional finance.
▪ CFS enables India to generate substantial
backward linkage induced jobs, demand for
material and machinery in India and also a lot of
goodwill for India.
▪ Under the Scheme, MEA selects the specific
projects keeping in view strategic interest of India
88
 and sends the same to Department of Economic
Affairs (DEA) for further considerations.
1.2 NABARD
▪ National Bank for Agriculture and Rural
Development (NABARD) is an apex development
financial institution in India to provide finance
for agriculture and rural development.
▪ Established in 1982 on the recommendations of B.
Sivaraman Committee.
▪ It is a statutory body established in 1982 under
Parliamentary act - NABARD Act, 1981.
▪ Its headquarter is located in Mumbai.
▪ NABARD today is fully owned by the
Government of India. The authorized share capital
is about Rs.30,000 crore.
▪ It is responsible for the development of the small
industries, cottage industries, and any other such
village or rural projects.
▪ NABARD operates Rural Infra. Development
fund (RIDF) from PSL shortfalls from SCBs.
▪ The Bank has been entrusted with "matters
concerning policy, planning and operations in the
field of credit for agriculture and other economic
activities in rural areas in India".
▪ NABARD also has a portfolio of Natural
Resource Management Programmes involving
diverse fields like Watershed Development, Tribal
Development and Farm Innovation through
dedicated funds set up for the purpose.
▪ It is one of the premier agencies providing
developmental credit in rural areas. It does not
grant Direct credit to Rural Households.
▪ NABARD is active in developing financial
inclusion policy and is a member of the Alliance
for Financial Inclusion (global network of
financial inclusion policymakers, Founded in 2008)
▪ NABARD is also known for its “SHG Bank
Linkage Programme” (1992) which encourages
India's banks to lend to SHGs.
Refinance facility by NABARD is available to 🡪
▪ State co-operative agriculture and rural
development banks (SCARDBs),
▪ State co-operative banks (SCBs),
▪ Regional rural banks (RRBs),
▪ Commercial banks (CBs) and
▪ Other financial institutions approved by RBI.
1.2.1 FUNCTIONS OF NABARD
▪ The major functions of NABARD include
promotion and development, refinancing,
financing, planning, monitoring and supervision.
89
▪ Promotional and developmental initiatives in the
areas of farm, off-farm, micro finance, financial
inclusion, Convergence with Govt sponsored
programmes.
▪ Supporting the financial inclusion efforts of RRBs
and Cooperative Banks
▪ Loans to State Governments for developing rural
infrastructure and strengthening of the Cooperative
Credit Structure
▪ Refinance to Rural Financial Institutions for
investment credit (long term loan) and production
and marketing credit (short term loan) purposes for
farm and off-farm activities in rural areas.
▪ Assist in policy formulation of GoI, RBI and State
Governments on matters related to agricultural
credit and rural development
▪ Credit Planning and Monitoring, Coordination
with various agencies and institutions.
1.2.2 THE NABARD (AMENDMENT) BILL, 2017
(PASSED IN 2018)
▪ Amendment in Act enabled Union Government to
increase the authorized capital of NABARD from
Rs. 5,000 crore to Rs. 30,000 crore.
▪ Transfer of the RBI’s share to the central
government - Under the 1981 Act, the central
government and the RBI together must hold at least
51% of the share capital of NABARD. The Bill
provides that the central government alone must
hold at least 51% of the share capital of
NABARD.
▪ Micro, small and medium enterprises (MSME) -
Under the 1981 Act, NABARD was responsible for
providing credit and other facilities to industries
having an investment of upto Rs 20 lakh in
machinery and plant. The Bill extends this to
apply to enterprises with investment upto Rs 10
crore in the manufacturing sector and Rs five
crore in the services sector.
▪ Further, banks providing loans to small-scale, tiny
and decentralised sector industries are eligible to
receive financial assistance from NABARD. The
Bill extends these provisions to the MSME.
1.2.3 CONTRIBUTION OF THE NABARD IN
INDIAN GROWTH
▪ Refinance - Short term and long term Loans - Crop
loans are extended to farmers for crop production
by financial institutions.
▪ Rural Infrastructure Development Fund- for
supporting rural infrastructure projects.
▪ Long-Term Irrigation Fund (LTIF)
▪ NABARD Infrastructure Development
Assistance (NIDA) to complement RIDF.
▪ Warehouse Infrastructure Fund (WIF)
▪ Direct Lending to Cooperative Banks
▪ Kisan Credit Card Scheme for Farmers -
designed by NABARD in association with the RBI
in 1998 for providing crop loans.
▪ Tribal Development - the Tribal Development
Programme
▪ Umbrella Programme on Natural Resource
Management (UPNRM) in 2007, works
at enhancing investments in rural areas, creating
business opportunities and enabling rural
communities to sustainably utilise their natural
resources.
▪ Microfinance Sector - NABARD had launched
the SHG-Bank Linkage Programme in 1992. Over
23 lakh SHGs were credit-linked during 2017-18
financial year.
▪ E-Shakti - launched in 2015 in a bid to digitize
SHGs
▪ Skill Development - Promoting an entrepreneurial
culture among the rural youth and encouraging
them to start enterprises in the rural off-farm
sector has been NABARD’s strategy for over three
decades.
▪ Marketing Initiatives - For providing marketing
opportunities to rural artisans and producers,
NABARD has traditionally facilitated their
participation in exhibitions across the country.
▪ Producer Organizations Development Fund
(PODF) for POs & PACS
PRODUCER ORGANISATION (PO) - It is a legal
entity formed by primary producers, viz. farmers, milk
producers, fishermen, weavers, rural artisans,
craftsmen. A PO can be a producer company, a
cooperative society or any other legal form which
provides for sharing of profits/benefits among the
members.
PRIMARY AGRICULTURAL CREDIT SOCIETY
(PACS) – It is a basic unit and smallest co-operative
credit institution in India. It works on the grassroots
level (gram panchayat and village level). It provides
credit to farmers in the form of term loans and
recovers the amount after harvesting of crop from the
cultivator.
1.2.4 CHALLENGES TO THE NABARD
▪ Cost of financing by NABARD has gone up since
market borrowings of NABARD add up to 80 per
cent of its resources.
▪ The north-eastern states have been getting little
share of the NABARD’s credit funds. The
northeast gets 1% of the credit, leading to farmers
trapping in the net of money-lenders.
▪ The penetration of banks in insurgency-hit
states and areas is less and it should ramp up.
CONCLUSION
▪ More than 75 per cent people of India reside in
rural India and depend on agriculture. Rural
infrastructure investments help in raising the socio-
economic status of the rural people through
increased income levels and quality of life.
▪ NABARD being an apex institution for providing
credit facilities and capacity building to Indian rural
economy, it has great opportunities for poverty
reduction, socio-economic empowerment of
rural India and ensure inclusive development.
RURAL INFRASTRUCTURE DEVELOPMENT FUND
▪ Fund is maintained by the NABARD. Banks
which are not able to meet their targets of PSL are
required to keep the shortfall in RIDF.
▪ The RIDF was set up by the government during
1995-1996 for financing ongoing rural
infrastructure projects.
▪ Domestic commercial banks contribute to the fund
to the extent of their shortfall in stipulated
priority sector lending to agriculture (mandated -
18%).
▪ The scope of RIDF has been widened to include
activities such as rural drinking water schemes, soil
conservation, rural market yards, rural health
centres and primary schools, mini hydel plants,
shishu shiksha kendras, anganwadis and system
improvement in the power sector. At present, there
are 37 eligible activities under RIDF as approved by
GoI. The eligible activities are classified under
three broad categories i.e. Agriculture and related
sector, Social sector, Rural connectivity.
Eligible Institutions:
• State Governments / Union Territories
• State Owned Corporations / State Govt.
Undertakings
• State Govt. Sponsored / Supported Organisations
• Panchayat Raj Institutions/Self Help Groups
(SHGs)/ NGOs (provided the projects are submitted
through the nodal department of State Government,
i.e Finance Department)
NABARD releases the sanctioned amount on
reimbursement basis except for the initial mobilisation
advance @30% to North Eastern & Hilly States and
20% for other states.
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 Long Term Irrigation Fund (LTIF) finance
▪ Government has announced creation of a dedicated institutions both
LTIF in NABARD with an initial corpus of Rs. at local and
20,000 crore for funding and fast tracking the regional levels
implementation of incomplete major and and to provide
medium irrigation projects. financial and
▪ The Long Term Irrigation Fund (LTIF) aims to other support
bridge the resource gap and facilitate completion incidental to such institutions and for matters
of these projects during 2016-2020. connected therewith.
▪ NHB registers, regulates and supervises Housing
Q. Which of the following grants/grant direct credit Finance Company (HFCs), keeps surveillance
assistance to rural households? (2013) through On-site & Off-site Mechanisms and co-
1. Regional Rural Banks ordinates with other Regulators.
2. NABARD
3. Land Development Banks NHB Residex - It is a set of benchmarks that aims to
Select Answer Codes below: track housing price indicators across Indian cities. It is
a) 1 and 2 only designed by a technical advisory committee comprising
b) 2 only Government representatives, lenders and property
c) 1 and 3 only market players.
d) 1, 2 and 3
Q. Find Correct Statement/s (CSE-2004)
EXIM (1982) NABARD (1982) A. NHB, the apex institution of housing finance in
Export-Import Bank of National Bank For India, was set up as a wholly owned subsidiary
India Agriculture And Rural of RBI.
Development B. Small industries development bank of India was
Fully owned by Since 2018, NABARD is established as a wholly owned subsidiary of the
Government of India 100% owned by the Industrial development bank of India (IDBI).
(100%) government. C. Both A and B
(earlier RBI had minor D. Neither A nor B
stakes)
Promotes cross border Regulatory authority: 1.4 SMALL INDUSTRIES DEVELOPMENT
trade and investment, Cooperative and RRB. BANK OF INDIA (SIDBI)
helps importers-exports NABARD provides ▪ SIDBI set up in 1990 under an Act of Parliament,
with loans and foreign indirect refinance to acts as the Principal Financial Institution for
currency. farmers, artisans etc. Promotion, Financing and Development of the
Operates RIDF from PSL MSME sector as well as for coordination of
shortfalls from SCBs. functions of institutions engaged in similar
Exim operates NABARD Amendment activities
Concessional Finance Act 2017 🡪 ▪ Shareholding in SIDBI- GOI (15.4%) + SBI
Scheme 1) Increased capital (16.73%) + LIC (14.25%) + NABARD (10%) +
2) facilitated transfer of Others (43.62)
RBI shares ▪ Initiatives by SIDBI – Udyog Aadhar (MSME),
to Govt Udyami Mitra portal, Guarantee fund, Small
3) MSME definitions Enterprises Development Fund (SEDF).
updated. ▪ SIDBI is one of the four AIFI regulated and
supervised by the RBI (other three are EXIM
1.3 NATIONAL HOUSING BANK (NHB) Bank, NABARD and NHB)
▪ NHB is an apex financial institution for housing ▪ The Small Industries Development Bank of India -
set up in 1988 under the NHB Act, 1987. SIDBI announced that the SIDBI Assistance to
▪ Originally owned by RBI (100%). But in April Facilitate Emergency response against COVID-19
2019, RBI sold 100% to the Government. pandemic (SAFE PLUS) will be offered collateral
▪ NHB has been established with an objective to free and disbursed within 48 hours.
operate as a principal agency to promote housing

91
▪ The loans will be offered at an interest rate of five Government or local authority or other marketable
percent. The limit of SAFE loans has been securities of a like nature.
enhanced from 50 lakh rupees to two crore ▪ NBFC does not include any institution whose
rupees. principal business is that of
▪ The scheme was launched to provide financial agriculture activity, industrial
assistance to MSMEs activity, purchase or sale of any
engaged in manufacturing goods (other than securities) or
of hand sanitizers, masks, FINANCING PROMOTION providing any services and
gloves, head gear, sale/purchase/construction of
bodysuits, shoe-covers, immovable property.
ventilators and goggles DEVELOPMENT
CO-
ORDINATION
▪ NBFCs provides financial services without
used in dealing with meeting the legal definition of a bank.
COVID-19 pandemic. ▪ NBFCs have broadened and diversified the range
of products and services offered by a financial
NHB (1988) SIDBI (1990) sector.
National Housing Bank Small Industrial ▪ The RBI has decided to
Development Bank of merge three categories of
India NBFCs into a single
Originally owned by RBI Owned by - SBI, LIC, category to provide greater
(100%). From 2019 IDBI other public sector operational flexibility to non-
NHB is 100% owned by banks, insurance banking lenders.
Govt. companies etc.
Finance to banks and Operates Credit ▪ Systemically Important NBFCs 🡪 NBFC whose
NBFCs for housing Guarantee fund, Small asset size is of ₹ 500 cr or more are considered as
projects. Enterprises Development systemically important NBFCs. Example. Power
Regulator of Housing Fund (SEDF). Operates Finance Corporation Limited (PFCL), Rural
Finance Companies Udaymimitra.in for Electrification Corporation Limited (RECL),
(NBFCs) loans to small IL&FS, etc.
RESIDEX index to entrepreneurs & SME via
monitor residential real schemes like Mudra,
estate prices. Stand- up-India. NBFC
classified into
2 PRIMARY DEALERS
▪ A primary dealer is a firm that buys government
securities directly from a government, with the Asset Finance Investment Loan
intention of reselling them to others, thus acting as Companies Companies Companies
a market maker of government securities.
▪ The government may regulate the behaviour and
number of its primary dealers and impose 3.1 HOW NBFCS ARE DIFFERENT FROM
BANKS
conditions of entry.
▪ They deal in the "primary" market, directly buy G- ▪ They can only accept time deposits and not
sec from RBI’s E-Kuber platform and sell it in the demand deposits.
secondary market. ▪ NBFCs do not form part of the payment &
settlement system & cannot issue cheques to its
▪ Total 21 primary dealers licensed by RBI (14 of
customers.
them are Banks). E.g. Standard Chartered Bank,
HSBC (Hong Kong), SBI, Kotak etc. ▪ No deposit insurance facility of Deposit Insurance
and Credit Guarantee Corporation of India is
3 NON-BANKING FINANCIAL COMPANIES available to depositors of NBFCs, unlike in case of
(NBFCs) banks.
▪ In general, an NBFC is not required to maintain
▪ A NBFC is a company registered under the
Reserve Ratios. However, deposit taking NBFCs
Companies Act, 1956 engaged in the business of
are required to maintain at least 15% of its
loans and advances, acquisition of
public deposits as liquid assets.
shares/stocks/bonds/debentures/securities issued by

92
 ▪ NBFCs can deposit depositors’ money in the They can keep Can invest client’s
share market unlike banks. depositor’s money money in the share
Investment in RBI approved market. E.g.
Q. With reference to the Non-banking Financial securities but not in Mutual Funds,
shares directly. Insurance
Companies (NBFCs) in India, consider the following
Companies.
statements: (CSE-2010)
Decided as per Varies & depends
1. They cannot engage in the acquisition of securities RBI’s on nature of
issued by the government. methodology from business
2. They cannot accept demand deposits like Savings Loan Rate time to time
Accounts. (BPLR, MCLR
Which of the statements given above is/are correct? and now External
a) 1 only Benchmark
b) 2 only Lending rate)
c) Both 1 and 2 Only Housing
d) Neither 1 nor 2 Loan recovery Finance
Recovery powers under Companies have
SARFAESI Act. SARFAESI
Q. The main functioning of the banking system is to:
powers. Gold Loan
(UPSC-CDS 2013) company can
a) accept deposits and provide credit auction gold
b) provide credit and subsidies RBI’s RBI’s separate
c) accept deposits and subsidies Consumer Ombudsman, Ombudsman for
d) accept deposits, give credit and subsidies Complaints Bank’s Internal NBFCs starting the
Redressal Ombudsman NBFC-D in 2018.
3.2 SIGNIFICANCE OF NBFCs
Payment and Integral part of Not a part of the
Settlement system. system.
1. Mobilization of funds/resources system of the
RBI
2. Capital formation Foreign Allowed up to 74% Allowed up to
Employment generation Investment for private sector 100%
3.
banks
Development of financial market NBFC-D: SLR
4.
Prudential CRR, SLR, required but RBI
5. Provision of long term credit Norms applicable can prescribe
different slabs /
6. Attracting foreign grants norms. CRR not
applicable on any
NBFC.
NBFCs ARE DIFFERENT FROM BANKS IN Deposit Available Not available
Insurance
FOLLOWING MANNER –
Facility

Parameters Commercial bank NBFCs

3.3 CIC – ND – SI is a NBFC
Banking Companies act ▪ With asset size of Rs 100 cr & above.
Registration Regulation Act 1956 ▪ Holds not less than 90% of its net assets in the
1949 form of investment in equity shares, preference
RBI Varies: Mutual shares, bonds, debentures, debt or loans in group
funds-SEBI, companies.
Supervision Insurance ▪ It does not trade in its investments in shares,
Company - IRDAI bonds, debentures, debt or loans in group
etc companies.
Entry capital INR 500 cr. INR 5cr for Micro-
▪ It accepts public funds.
Finance, 2 cr for
others; 200 cr. For
reinsurer etc.

93
Systemically important NBFCs (NBFCs-SI) are those
with an asset size of Rs 500 crore or more.
NBFCs-ND are categorized into two broad
categories viz.,
1. NBFCs-ND (those with assets of less than Rs. 500
crore) and
2. NBFCs-ND-SI (those with assets of Rs. 500 crore
and above).
NBFCs complementary to the banking sector
▪ Customer-oriented services;
▪ Simplified procedures;
▪ Attractive rates of return on deposits;
▪ Flexibility and timeliness in meeting the credit
needs of specified sectors.
3.4 NBFCs REGULATED BY RBI
NBFC Characteristics
New category in 2019 - by merging
Investment and previous NBFC categories viz. Asset
Credit Company Finance Companies, Loan
Companies, Investment Companies.
E.g. SREI Equipment Finance
They do long term investment in
Companies. E.g. Tata / Birla /
Reliance Capital & Infrastructure
Leasing & Financial Services
Core Investment Limited(IL&FS).
Company (CIC)
IL&FS is owned by SBI, LIC and
Corporates from Japan and Abu
Dhabi. 2018- In controversy because
it couldn't repay interest to lenders.
Infrastructure Give loans for infrastructure
Finance Company projects.
(IFC)
Infrastructure E.g. Rural Electrification Company
Debt Fund (IDF) ltd. (REC): PSU under Power
Ministry.
L&T IDF, Kotak IDF, IDFC IDF
(“IDFC First” has separate license
for Bank).
They buy bad loans / NPA from
Asset Banks & other NBFCs, and try to
Reconstruction salvage value from the underlying
Companies assets.
(ARC) E.g. Anil Ambani’s Reliance ARC.
They lend short term money to
Factoring clients against their invoices /
Companies accounts receivable. E.g. IFCI
Factors, Siemens Factoring.
Gold Loan e.g. Muthoot gold loan,
Companies Manappuram Gold. RBI decides
their Loan to Value ratio.
Micro Finance MFI regulated by RBI and
Institutions Ministry of Corporate Affairs
MUDRA (2015) A non-deposit taking NBFC owned
by SIDBI. It gives indirect loans to
Micro enterprises through PM
Mudra Yojana.
(Discussed in detailed in Banking –
part 2)
Fintech Similar to Olx and Quikr connecting
Companies- sellers of second hand goods with
P2P Lenders buyers, the P2P lending websites
connect borrowers and lenders. E.g.
Faircent.com, Cashkumar.com
Fintech They manage information about a
Companies- customer’s financial assets & display
Account it to him or to a third party (like loan
Aggregators (AA) giver, credit rating company, App
like Google play etc.)
Residuary Any NBFC that is not regulated by
NBFCs any other regulator- falls under
RBI’s purview
3.5 NBFCs REGULATED BY SEBI
Mutual Funds They pool clients’ money and MF-
(MF) manager invests it in shares/bonds
using his own discretion & expertise.
E.g. SBI’s Shariah Equity Mutual
Fund
Stock Broker They help clients buy - sell shares
and bonds (debentures)
depending on his instructions E.g.
India bulls, Karvy etc.
Real estate Pool & invest money in real estate /
investment trusts infra projects e.g. IRB.
(REITs) and
Infrastructure
investment trusts
(InvITs)
Investment Merger & Acquisition, Wealth
Banks: (US term) Management of rich people: E.g.
& Merchant Kotak Mahindra, Citigroup, Bank of
Banking America, DSP Merrill Lynch,
Companies: (UK Morgan Stanley, SBI capital
term) (separate license)
Venture Capital Help start-up companies via equity
Fund VCF finance e.g. IFCI.
3.6 NBFCs REGULATED BY OTHERS
IRDAI Insurance Regulatory and Development
Authority (IRDAI) regulates:
1) Life Insurance companies e.g. LIC,
HDFC Standard Life Insurance
2) General (Non-Life) insurance companies
e.g. IFFCO-Tokio General Insurance.
94
 PFRDA Pension Fund Regulatory and Development ▪ Cannot offer interest rates higher than the ceiling
Authority (PFRDA) regulates all Pension rate prescribed by the RBI.
Funds, except EPF & other statutory ▪ Cannot offer gifts, incentives or any other
funds. additional benefit to the depositors.
National Housing Finance Companies such as DHFL,
▪ Should have minimum investment grade credit
Housing Muthoot Housing finance etc. (endowed
Bank SARFAESI Powers). They were regulated
rating.
(NHB) by NHB but after Budget-2019, this ▪ Their deposits are not insured.
category was handed over to RBI for ▪ The repayment of deposits by NBFCs is not
regulation. guaranteed by RBI.
Ministry of 1.NIDHI Companies: Mutual benefit club, ▪ Need to maintain Capital Adequacy Ratio (CAR)
Corporate only members can borrow. norm as prescribed by the RBI.
Affairs 2. Microfinance Companies
State Chit fund is a type of collective investment 3.8 EXEMPTED NBFCs TO ELIMINATE DUAL
Registrar scheme with monthly contributions & REGULATION
of Chit borrowing by contributing members e.g.
Funds Shriram Chits. (Detailed in financial
1. Venture capital fund, merchant bank, stock broking
inclusion) firms (SEBI registers and regulates them);
2. Insurance company (registered and regulated by the
NBFCs CLASSIFIED INTO TWO CATEGORIES: IRDA);
3. Housing finance company (regulated by the
On the basis of deposits :
National Housing Bank);
NBFC-D NBFC-ND
4. Nidhi company (regulated by the Ministry of
▪ Deposit accepting ▪ Non-Deposit taking Corporate Affairs under the Companies Act, 1956);
NBFCs 5. Chit fund company (by respective state)
NBFC
▪ Incorporated under ▪ Permitted only to lend
and not take any public 3.9 CATEGORIES OF NBFCs
Companies act, 2013
deposits. ▪ Asset Finance Company - Principal business is
▪ Allowed to ▪ E.g.: NBFC-MFI: financing physical assets such as automobiles,
accept/renew public NBFC Micro Finance tractors, housing etc.
deposits for a Institutions ▪ Investment Company -Principal business is
minimum period of 12
acquisition of securities.
months and maximum ▪ Loan Company -Principal business of providing
period of 60 months. loans
▪ Examples: Loan ▪ Infrastructure Finance Company -NBFC that
companies, Investment deploys at least 75% of its total assets in
companies, Asset infrastructure loans
Finance Companies ▪ Infrastructure Debt Fund -NBFC to facilitate the
flow of long term debt into infrastructure projects
▪ NBFC-MFI - Provides Microfinance
NBFC
3.10 MICRO FINANCE INSTITUTIONS
Non Deposit accepting Deposit accepting ▪ Microfinance (called microcredit) is a type of
banking service provided to unemployed or low-
income individuals or groups who otherwise
Systemically
Residuary NBFCs would have no other access to financial services
Important NBFCs
▪ In 2010, on recommendations of Y. H. Malegam
Committee (by RBI), RBI created a new NBFC
3.7 REGULATIONS RELATING TO DEPOSIT category called Micro Finance Institution (MFI).
TAKING NBFCs ▪ MFI gives small loans to the poor without
▪ Allowed to accept and/or renew public deposits for collateral, flexible EMI.
a minimum period of 12 months and maximum ▪ MFIs are regulated by RBI and Ministry of
period of 60 months. Corporate Affairs
▪ Cannot accept demand deposits (i.e., the saving
and current accounts).

95
▪ Households whose annual income is not more than
₹ 1.25 lakh (rural) or ₹ 2 lakhs (urban) are
eligible to borrow from MFIs.
▪ However, maximum borrowing should not be
more than ₹ 1.25 lakh.
▪ E.g. of MFI - Bandhan (West Bengal), Disha
(Gujarat), Cashpor (UP), Ujjivan (Karnataka).
Q. Microfinance is the provision of financial services
to people of low-income groups. This includes both
the consumers and the self-employed. The service/
services rendered under microfinance is/are : (CSE-
2011)
1. Credit facilities
2. Savings facilities
3. Insurance facilities
4. Fund Transfer facilities
Select the correct answer using the codes given below
the lists ?
a) 1 only
b) 1 and 4 only
c) 2 and 3 only
d) 1, 2, 3 and 4
ECONOMIC SURVEY 2020 ON MFI
Post-2000, MFIs moved from purely pursuing social
goals to the double bottom-line approach of
achieving social and financial returns. Survey also
appreciated the role of MFI in Helping the weaker
section because Majority of its borrowers are women
(97%), SC/ST(30%) and minorities (29%)
Q. Economic Survey in India is published officially,
every year by the___(CSE-1998)
a) Reserve Bank of India
b) Planning Commission of India
c) Ministry of Finance, Govt. of India
d) Ministry of Industries, Govt. of India
To promote financial inclusion through direct
interaction between small lenders and small borrowers
together with addressing consumer protection, during
2017-18, RBI introduced following two new
categories of the NBFC:
New types of NBFCs
Peer to Peer (P2P) Account
Aggregators (AA)
Today, the NBFC sector accounts for 17 per cent of
bank assets and 0.26 percent of bank deposits with a
balance sheet size of Rs. 20.7 lakh crores.
3.11 CONTEMPORARY PROBLEMS WITH
NBFCs
▪ Multiple regulatory bodies - RBI doesn’t regulate
all the NBFC. Other institutions such as NHB,
SEBI, IRDAI, etc. are also involved depending on
the type of NBFC.
▪ Difficulties in access to credit - There is a reversal
of interest rate cycle as interest rates are now going
up both domestically and also in the international
market.
▪ Asset-liability mismatch - in the operations of
NBFCs as these firms borrow funds from the
market for short term and lend it for long term.
▪ It has led to a situation where the NBFCs are facing
a severe liquidity crunch in the short term.
▪ Mutual fund among the biggest fund providers to
NBFCs via commercial papers and debentures.
Now these investors are getting reluctant to lend
post the IL&FS crisis.
▪ Riskier Lending Pattern - NBFCs are less
cautious while lending. For instance, NBFCs have
grown their portfolio of small and micro loans in a
big way where there are risks of lack of credit
history, scale and historically high NPAs.
▪ The unsecured loan segment is also on the rise in
the NBFC segment.
▪ Cascading effect of IL&FS default - Default
followed by downgrade of IL&FS recently has
created a liquidity squeeze for the entire non-
banking financial company (NBFC) sector.
▪ Delayed Projects - Many infrastructure projects
financed by NBFCs are stalled due to various
reasons like delayed statutory approvals, problems
of land acquisition, environmental clearance, etc.
which has impacted their financial health.
WAY FORWARD FOR NBFC SECTOR
▪ Better Regulatory Regime - The Financial Sector
Legislative Reform Commission (FSLRC)
recommendation of creating a body with powers
to monitor risk-cutting across sectors should be
implemented.
▪ Timely Project clearances - Ensuring timely
clearances, especially to infrastructural projects is a
must to minimise cost inflation of these projects.
▪ Expanding the “Plug and Play” approach to
other sectors can be a possible solution.
96
 ▪ RBI must encourage NBFCs to securitise their
assets that can be purchased by banks.
▪ RBI must revisit lending restrictions placed on
banks under Prompt Corrective Action and consider
allowing them lending to NHB.
▪ RBI may also open a special window for mutual
funds to get refinance against collateral.
▪ A coordinated and consultative approach at this
point of time to address the various problems of the
sector is critical to national economic health and
stability.
3.12 INFORMAL FINANCIAL
INTERMEDIARIES
▪ These intermediaries provide loans without KYC,
PAN or Aadhar card, formal documentation but
require property/vehicle/home/goods/crop/gold etc.
as collaterals.
▪ They charge very high compound interest rates &
use muscle power for recovery, hence their NPA
is minimal.
▪ They do not fall under regulatory ambit of
RBI/SEBI. However, State Governments have
individual laws to regulate them e.g. Bombay
Moneylenders Act 1947, Gujarat (2011).
▪ These laws require such informal lenders to
register, impose ceiling on the interest rate &
prohibit strong-arm tactics.
4. SUBTYPES OF BANKING
BRANCH BANKING
▪ Branch banking involves business of banking via
branches. The branches are set up under Section 23
of Banking Regulations Act, 1949.
▪ The advantage of branch banking is that it helps in
better management, more inclusion and risk
diversification.
▪ The disadvantage of branch banking is that it might
encourage outside local influences.
UNIT BANKING
▪ It is a limited way of banking where banks operate
only from a single branch (or a few branches in
97
the same area) taking care of the local
community.
▪ In comparison to branch banking, the size of unit
banks is very small.
▪ Due to small size and due to unit structure; the
decision making in unit banks is very fast.
▪ The management in unit banks enjoy more
autonomy and more discretionary powers.
▪ However, due to single units, the risk is not
distributed or diversified.
MIXED BANKING
▪ Mixed Banking is the system in which banks
undertake activities of commercial and
investment banking together.
▪ These banks give short-term and long-term loans
to industrial concerns.
▪ They thus promote rapid industrialization. They
may however pose a grave threat to liquidity of a
bank and lead to bad debts.
CHAIN BANKING
▪ Chain banking system refers to the type of banking
when a group of persons come together to own
and control three or more independently
chartered banks.
▪ Each of these banks could maintain their
independent existence despite common control
and ownership.
▪ The banks in the chains were assigned specific
functions so there was no loss of profits and
overlapping of interests.
RETAIL BANKING
▪ Retail banking means banking where transactions
are held directly with customers and there are no
transactions with other banks or corporations.
▪ The banks provide all kinds of personal banking
services to customers like saving accounts,
transactional accounts, mortgages, personal loans,
debit and credit cards etc.
▪ However, due to increasing use of new technology,
the operational costs for banks have gone up
considerably.
RELATIONSHIP BANKING
▪ Relationship banking is a banking system in which
banks make deliberate efforts to understand
customer needs and offer him products
accordingly.
▪ It helps banks to gather critical soft information
about the borrowers, which helps them to determine
creditworthiness of such clients.
▪ Clients can often renegotiate their loan terms and
hence result in inefficient investments for banks.
CORRESPONDENT BANKING
▪ Correspondent banking prevalent in over 200
countries is a profitable way of doing business by
banks in foreign countries in which they don’t have
physical presence or limited operational
permissions.
▪ Correspondent banks thus act as banking agents
for a home bank and provide various banking
services to customers where otherwise the home
bank does not operate.
▪ It helps customers to perform banking operations
at ease even in places where their banks don’t have
physical presence.
SOCIAL BANKING
▪ Social banking is a concept where banking services
are oriented towards mass welfare and financial
inclusion of the poor and vulnerable segments of
society.
▪ RBI has taken some praiseworthy initiatives to
make financial inclusion a reality for the remotest
segments of Indian population. Some of these are:-
It is mandatory for banks to open 25% of new
branches in rural areas which don’t have access
to formal banking, Basic Savings Bank Deposit
Account has been introduced for all, KYC
documentations have been considerably relaxed
and simplified for small accounts.
VIRTUAL BANKING
▪ Virtual banking is performing all banking
operations online. This has served as a great
revolution in the banking market as banks have to
continuously struggle for perfection to live up to
competition and stay ahead of it.
▪ As banks don’t have physical offices, they find the
options very cost-effective. The banks thus pass
these benefits to customers in the form of waiving
of account fee or higher rates of interest.
NARROW BANKING
▪ Narrow Banking is very much an antonym to
Universal Banking.
▪ Narrow Banking means Narrow in the sense of
engagement of funds and not in activity.
▪ So, simply, Narrow Banking involves mobilizing
the large part of the deposits in Risk Free assets
such as Government Securities.
ISLAMIC BANKING
▪ Islamic banking is banking or banking activity that
is consistent with the principles of sharia and its
practical application through the development of
Islamic economics.
SHADOW BANKING
▪ Shadow banking is a set of activities and
institutions. They operate partially (or fully)
outside the traditional commercial banking
sector. They are not fully regulated by the RBI.
▪ A shadow banking system can be composed of a
single institution or multiple entities forming a
chain. They mobilize funds by borrowing from
banks, issuing Commercial Papers (CP) and Bonds
(Non-convertible debentures)
▪ Shadow banking system’s assets are risky and
illiquid. If there is a ‘bank run’ like situation, these
shadow banks can’t honour the obligations as we
saw in the ILFS crisis (2019)
5. FINANCIAL SECTOR REFORMS
▪ Reforming the financial sector-banking, insurance,
pension reforms- is crucial to make them generate
resources, gain efficiencies, innovate new
products and serve the economy and people well.
▪ It involves adoption of best practices in
regulation and other areas like micro finance etc.
▪ The need is particularly felt in the wake of the
global financial crisis brought about essentially by
the financial sector that ruined the real economy
related to production.
5.1. REASONS FOR THE FINANCIAL SECTOR
REFORMS
▪ To increase the efficiency of financial resource
mobilizations and generate higher levels of growth.
▪ To ensure overall macroeconomic stability.
▪ Financial sector reforms are an integral part of the
New Economic Policies of 1991 – era of L-P-G.
▪ Regulatory reforms- setting up of the FSDC is
crucial for better supervision and clear demarcation
of the jurisdiction.
▪ The roadmap for financial sector reforms has been
defined by the RH Patil, Percy Mistry &
Raghuram Rajan reports.
▪ Recommended by committees such as
Chakravarty Committee (1985), Vaghul
Committee (1987) and most notably by
Narasimham Committee I (1991).
▪ Debt market- The bond market in India remains
limited in terms of nature of instruments, their
maturity, investor participation and liquidity.
98
 Recommendations Of B. N. Shrikrishna Committee
On FSLRC
FSLRC submitted its report to the Ministry of Finance
on March 22, 2013, containing an analysis of the
current regulatory architecture and a draft Indian
Financial Code to replace the bulk of the existing
financial laws. The Draft Indian Financial Code:
• Consumer protection: Regulators should ensure
that financial firms are doing enough for consumer
protection. The draft Code establishes certain basic
rights for all financial consumers and creates a
single unified Financial Redressal Agency (FRA)
to serve any aggrieved consumer across sectors.
• Micro-prudential regulation: Regulators should
monitor and reduce the failure probability of a
financial firm.
• Resolution: In cases of financial failure, firms
should be swiftly and sufficiently wound up with
the interests of small customers. A Unified
Resolution Corporation, dealing with various
financial firms, should be created to intervene when
a firm is close to failure.
• Capital controls: While the FSLRC does not hold
a view on the sequencing and timing of capital
account liberalisation, any capital controls should 5.2. COMMITTEE ON FINANCIAL SYSTEM
be implemented on sound footing with regards to (CFS)
public administration and law. ▪ High level Narasimham Committee I (1991)
• Systemic risk: Regulators should undertake setup by the government.
interventions to reduce the systemic risk for the ▪ Task of the committee was to examine the structure,
entire financial system. The FSLRC envisages organization, function and procedure of the
establishing the Financial Stability and financial system in India.
Development Council (FSDC) as a statutory ▪ Committee had made assumptions which were
agency taking a leadership role in minimizing basic to the banking industry. Such as “the
systemic risk. resources of the bank come from the general public
• Development and redistribution: Developing and held by the banks in trust that they are to be
market infrastructure and process would be the deployed for maximum benefits of the depositors”
responsibility of the regulator while redistribution ▪ On the basis of such assumptions committee gave
policies would be under the purview of the Ministry several recommendations, which became basis for
of Finance. reforms introduced in the banking system in 1991-
• Monetary policy: The law should establish 1992
accountability mechanisms for monetary
policy. An executive Monetary Policy Committee AIM OF CFS
(MPC) would be established to decide on how to
exercise the RBI’s powers. Ensuring operational flexibility
1.
• Public debt management: The draft Code
establishes a specialised framework for public Internal autonomy for PSB in their decision
2. making process
debt management with a strategy for long run low-
cost financing. The FSLRC proposes a single More professionalism in banking operation
3.
agency to manage government debt.
• Contracts, trading and market abuse: The draft
Code establishes the legal foundations for 5.3. RECOMMENDATIONS OF CFS
contracts, property and securities markets.

99
On directed investment
▪ RBI was advised by the committee to use OMO as
the principal instrument of monetary and credit
control instead of CRR.
▪ Progressive reduction of CRR.
▪ RBI should pay interest on the CRR of the banks
above the basic minimum requirement.
▪ Cut SLR to minimum level in next 5 years.
▪ Committee advised the Govt. to meet their
borrowing requirements from the market so that
banks can get economic benefit from SLR.
On directed credit (concessional loans) program
▪ These recommendations were related to priority
sector lending (PSL) by banks.
▪ Gradual phase out of Directed credit programme.
▪ Directed credit should be temporary in nature as
they were to help a certain weaker section.
▪ Redefining the concept of PSL to include only
weakest sections like marginal farmers, rural
artisans, village and cottage industries etc.
▪ “Redefined PSL” should have 10% fixed aggregate
bank credit.
▪ Review of the composition of PSL after every 3
years.
On the Interest rates structure
▪ Determination of interest rates by market forces
▪ Removal and withdrawal of all kinds of control on
interest rates of deposits and loans.
▪ Phasing out concessional interest rates for PSL.
▪ Bank rate to anchor rate and all other interest rates
to linked with it (such as Repo Rate and Reverse
Repo Rate and MSF)
▪ RBI will be the sole authority to simplify interest
rate structure.
On structural reorganization of bank
▪ Reduce PSB (through merger and acquisitions) so,
greater efficiency in banking operations.
▪ RBI to be made primary agency for regulation of
banking system and do away dual control (RBI &
Ministry of finance’s banking division)
▪ Made PSBs - free and autonomous
▪ RBI to examine all the guidelines and directions
issued to the banking system in context of
independence and autonomy.
▪ Every PSB must adopt technology and culture
change so it can become competitive internally.
▪ Appointment of chief executive of a bank (CMD)
must be on professionalism and integrity and not on
political considerations.
Asset Reconstruction Companies Fund (ARC)
▪ Concept of ARC was taken from the USA.
▪ Objective of setting up of ARC to tackle Non-
performing assets problem of banks and financial
institutions.
▪ Committee had opined that, worsening state of
affairs of PSBs was due to use and abuse of banks
by government officials, bank employees and trade
unions.
MAJOR RECOMMENDATIONS ACCEPTED BY
GOVT.
▪ Opening of new private sector banks permitted in
1993
▪ Introduction of capital adequacy norms with
international standards.
▪ Simplification of banking regulation.
Q. The Narasimham Committee for financial sector
Reforms has suggested reduction in____(CSE-1995)
a) SLR and CRR
b) SLR, CRR and Priority Sector Financing
c) SLR and Financing to capital goods sector
d) CRR, Priority Sector Financing and Financing to
capital goods sector
KNOW YOUR CUSTOMER (KYC)
KYC is the due diligence and bank regulation that
financial institutions and other regulated companies
must perform to identify their clients and ascertain
relevant information pertinent to doing financial
business with them.
6. BANKING SECTOR REFORMS
The government had started a comprehensive reform
package in the financial system in 1992-93, notably
after recommendations of CFS in 1991.
6.1. BANKING SECTOR IN PRE-REFORM ERA
100
 6.2. OBJECTIVES OF BANKING SECTOR 6. RBI started helping the commercial banks to
REFORMS improve the quality of their performance.
7. The government also enacted Recovery of Debts
Due to Banks and Financial Institutions
STRUCTURAL
CHANGES
(RDDBFI) Act, 1993, Debt Recovery Tribunals
REGULATORY
REFORMS
ENHANCE
STABILITY AND
with an Appellate Tribunal for quicker recovery of
EFFICIENCY
bad debts (1993). Later enacted SARFAESI Act
2002.
GOVERNANCE
CUSTOMER
ADVOCACY
8. Banking Ombudsman scheme was launched
(1995)
9. More private banks were allowed.
10. BASEL Norms were adopted.
OPERATIONAL BANKING 11. In 1993, RBI invited applications and 10 banks
COMPETITIVENESS
FLAEXIBILITY
REFORMS were given License in which 6 survived: ICICI,
HDFC, UTI (became Axis bank in 2007), IDBI,
Indus and DCB Bank.
6.3. NARASIMHAM COMMITTEE I – 1991 The Securitisation and Reconstruction of Financial
The Narasimham Committee was established under Assets and Enforcement of Securities Interest Act,
former RBI Governor M. Narasimham in August 1991. 2002 (SARFAESI Act) is an Indian law. It allows banks
Committee recommended - and other financial institutions to auction residential or
1. Reduce CRR (10% not 14) and SLR (25% not 38.5) commercial properties (of Defaulter) to recover loans.
2. Interest rates should be deregulated
3. Reduction in priority sector lending (PSL) rate 6.4. NARASIMHAM COMMITTEE II – 1998
4. More autonomy to Public Sector Banks In 1998 the government appointed another committee,
5. Debt Recovery Tribunals (DRT) should be known as the Banking Sector Committee (chairman
established – M. Narasimham) to review the banking reform
6. Banking Ombudsman should be established progress and design a programme for further
7. Adoption Basel Norms strengthening the financial system of India.
8. More laws (legal framework) for loan recovery It suggested following recommendations:
should be strengthened 1. Review of banking laws - an urgent need for
9. Rationalize branches and staffs of PSBs. reviewing and amending main laws governing
10. License to new private banks (domestic + foreign) Indian Banking Industry.
continue. 2. Implementation of SARFAESI Act 2002 - Act
11. Depoliticization of bank's board under RBI allows banks and other financial institutions to
supervision. auction residential or commercial properties of
12. Board for financial regulation and supervision Defaulter to recover loans.
(BFRS) should be setup for whole banking, 3. Committee recommended faster computerization,
financial and NBFCs (like a financial super technology up gradation, training of staff,
regulators) depoliticizing of banks, professionalism in
banking, reviewing bank recruitment, etc.
Actions on recommendations of Narasimham
Implementation of Voluntary Retirement Scheme,
Committee I: Payment and Settlement Act
1. The SLR was brought down from 38.5% to 28% in 4. License to New Banks - In 2003- 2004 two banks
five years. The CRR was also brought down from Kotak Mahindra and Yes Bank given License
14% to 10% by 1997. 5. Narrow Banking - Those days many public sector
2. Except for a few sectors, banks were given banks were facing a problem with the NPAs. Thus,
autonomy to decide interest rates. it recommended the ‘Narrow Banking Concept’
3. The banks were given autonomy on PSL rate, where weak banks will be allowed to place their
except a few sectors. funds only in the short term and risk-free assets.
4. More freedom was given to banks to open 6. Capital Adequacy Ratio – recommended that the
branches (25% branches in rural areas). Government should raise the prescribed CAR to
5. Rapid computerization of the banks was adopted.

101
 improve the inherent strength of the banking.
This will help improve their absorption capacity.
7. Bank ownership – committee recommended a
review of functions of boards and enabled them to
adopt professional corporate strategy. Committee
argued that the government. control over the banks
in the form of management and ownership not
commensurate with bank autonomy.
Currently, the Capital Adequacy Ratio (CAR) for
Indian banks is at 9 percent – Govt. accepted BASEL
Norms.
6.5. NACHIKET MOR COMMITTEE - 2013
▪ The Committee on Comprehensive Financial
Services for Small Businesses and Low-Income
Households, set up by the RBI.
▪ Committee was mandated with the task of framing
a clear and detailed vision for financial inclusion
and financial deepening in India.
▪ In its final report, the Committee has outlined six
vision statements for full financial inclusion and
financial deepening in India.
STABILITY TRANSPARENCY
▪ Payments Banks are envisaged as entities that
would focus on ensuring rapid out-reach with
respect to payments and deposit services.
▪ Wholesale Consumer Banks and Wholesale
Investment Banks would not take retail deposits
but would instead focus their attention on
expanding the penetration of credit services.
▪ The extant Priority Sector Lending norms be
modified in order to allow and incentivize
providers to specialise in one or more sectors of the
economy and regions of the country, rather than
requiring each and every bank to enter all the
segments.
▪ The committee has suggested a fixed term of 5
years for the chairman/managing director of a
bank.
Remittances
Bank
savings
account
Financial
inclusion

FOUR PRINCIPLES
Insurance Credit
NEUTRALITY RESPONSIBILITY

SIX VISION STATEMENTS

6.6 P. J NAYAK COMMITTEE - 2014
▪ The P J Nayak Committee (Committee to Review
Universal access to Governance of Boards of Banks in India 2014),
range of deposit and
investment products at
Right To Suitability was set up by the RBI to review the governance
reasonable charges of the board of banks in India.

Reason for setting up - In nationalised banks, the

Ubiquitous access to government owns more than 50% of the shares, which
payment services and Universal Electronic gives it majority voting rights. Because of this, the
deposit products at Bank Account
reasonable charges government can interfere in the boards of such banks
and appoint inefficient people to the boards. The
appointment of the members might not always be
Universal Access to based on merit. This will lead to overall inefficiency.
range of insurance and
Sufficient access to
risk management
affordable formal credit
products at reasonable OBJECTIVES OF COMMITTEE
charges.
▪ To review the regulatory compliance
requirements of boards of banks in the country to
RECOMMENDATIONS OF COMMITTEE evaluate what can be rationalised.
▪ Completely transparent balance sheet accurately ▪ To examine the workings of the boards of banks
reflecting both the current status and the impact of including if sufficient time is given to strategy
stressful situations on this status issues, governance, growth and risk management.

102
 ▪ To review RBI regulatory guidelines on bank
ownership, ownership concentration and board
concentration.
▪ To study the representation in the banks’ board,
to check if the boards have the required mix of
capabilities and the required independence to
govern, and to inquire into possible conflict of
interest in board representation.
▪ To study any other issues pertinent to the
functioning and governance of the boards of
banks.
RECOMMENDATIONS
▪ Repeal the Bank Nationalisation Act (1970,
1980), the SBI Act and the SBI Subsidiaries Act.
This is because these acts require the government to
have above 50% share in the banks.
▪ Government should set up a Bank Investment
Company (BIC) as a holding company or a core
investment company.
▪ The government transferred its share in the
banks to this BIC. Thus, the BIC would become
the parent holding company of all these national
banks, which would become subsidiaries. BIC will
be autonomous and have the power to appoint the
Board of Directors and make other policy
decisions.
▪ Till the BIC is formed, a temporary body called
the Bank Boards Bureau (BBB) will be formed
to do the functions of the BIC.
▪ The BBB will advise on appointments to the
board, banks’ chairman and other executive
directors.
Q. The Chairman of public sector banks are selected
by the _________ (CSE - 2019)
a) Banks Board Bureau
b) Reserve Bank of India
c) Union Ministry of Finance
d) Management of concerned bank
7. IMPORTANCE OF YEAR 1991 IN BANKING
OF INDIA
▪ The public sector was born out of a planned
economy model, which was underpinned by a
Nehruvian-Fabian socialist philosophy.
▪ Prior to 1991, India was more or less an isolated
economy, loosely integrated with the economy of
the rest of the world.
▪ In 1991, India embarked on the path of
liberalization, privatization and globalization
(LPG). This injected new energy into the slow
growing Indian Economy.
103
▪ With reference to the Banking sector, it was in this
year that the Narasimham Committee I (1991)
gave a blueprint of banking sector reforms.
▪ Accordingly, the government launched a
comprehensive financial sector liberalization
programme which included interest rates
liberalization, reduction of reserved rations,
reduced government control in banking operations
and establishment of a market regulatory
framework.
▪ Another outcome of liberalization was the
dismantling of prohibitions against foreign
direct investment.
8. OUTCOMES OF REFORMS THAT
IMPACTED THE BANKING SECTOR
▪ Steps were taken to move to a market determined
exchange rate system, and a unified exchange
rate was achieved in the 1990s itself.
▪ The government also released a slew of norms
pertaining to asset classification, income
recognitions, capital adequacy etc. which the
banks had to comply with.
▪ Current account convertibility (Tarapore
committee - 2006) was allowed for the Rupee in
accordance with IMF conditions.
▪ Nationalized banks were allowed to raise funds
from the capital markets to strengthen their
capital base.
▪ The lending rates for commercial banks was
deregulated, thereby freeing them to lend more or
as they saw fit.
▪ Banks were allowed to fix their own interest rates
on domestic term deposits that matured within two
years.
▪ Customers were encouraged to move away from
physical cash, as RBI issued guidelines to the banks
pertaining to the issuance of debit cards and
smart cards
▪ The process of introducing computerization in all
branches of banks began in 1993 in line with the
Committee on Computerization in Banks’
recommendations.
▪ FII (Foreign Institutional Investors) were
allowed to invest in dated G-Securities
The Foreign Exchange Management Act (FEMA)
was enacted in 1999 and eliminated the Foreign
Exchange Regulation Act (FERA) of 1973. FEMA
enabled the development and maintenance of the
Indian foreign exchange markets and facilitated
external trade and payments
▪ The National Stock Exchange (NSE) began its
operations in 1994.
▪ RBI began the practice of auctioning Treasury
Bills spanning 14 days and 28 days
▪ Capital index bonds were introduced in India for
the first time.
▪ The RBI provided licenses to conduct banking
operations to some private banks such as ICICI
Bank, HDFC Bank etc.
▪ New technology and customer-friendly measures
were adopted by bankers to attract and retain
customers.
▪ The Banking Ombudsman was established.
9. CAPITAL ADEQUACY RATIO (CRAR)
▪ Banking is a segment of the service sector in any
economy. It is called the back home of the
economy because today economies are more
dependent on banks than in the past.
▪ Banks credit creation (loan disbursals) are highly
risky business. The depositors' money depends on
the banks, quality of lending.
▪ In banking system risks are always there and they
cannot be made nil because loan forwarded to any
entity or individual can become a bad debt -
probability of this being 50%
▪ CRAR also known as Capital Adequacy Ratio
(CAR) is the ratio of a bank’s capital to its risk.
▪ CRAR is decided by central banks and bank
regulators to prevent commercial banks from taking
excess leverage and becoming insolvent in the
process.
▪ In India, scheduled commercial banks are required
to maintain a CAR of 9% while Indian public
sector banks are emphasized to maintain a CAR of
12% as per RBI norms.
▪ CRAR is arrived at by dividing the capital of the
bank with aggregated risk-weighted assets for
credit risk, market risk, and operational risk.
credit
risk
CRAR
market Operation
risk al risk
Q. Consider the following statements: (CSE-2019)
1. Capital Adequacy Ratio (CAR) is the amount that
banks have to maintain in the form of their own
funds to offset any loss that banks incur if the
account holders fail to repay dues.
2. CAR is decided by each individual bank.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
REASONS FOR MAINTAINING CRAR
▪ To prevents bank failure
▪ To enhance capitalisation and resiliency of banking
sector
▪ Capital adequacy allows for financial regulations
to become global
▪ Amount of capital affects returns for the owners
(equity holders) of the bank.
Central bank provides cushions to banks by
following -
a) CRR - reserve a part of total deposits in cash
b) SLR - keep part of total deposits with banks
themselves
c) CAR norm
10. BASEL ACCORD
▪ The Basel Accords (i.e., Basel I, II and now III) are
a broader and inclusive set of agreements set by
the Basel Committee on Bank Supervision
(BCBS), which provides recommendations on
banking regulations in regards to –
▪ The purpose of the accords is to ensure that
financial institutions have enough capital on
account to meet obligations and absorb
unexpected losses.
104

CAPITAL RISK
MARKET RISK
OPERATIONAL RISK
▪ They are of paramount importance to the banking
world and are presently implemented by over 100
countries across the world.
▪ The BIS Accords were the outcome of a long drawn
initiative to strive for greater international
uniformity in prudential capital standards for
banks’ credit risk.
"CAMELS" model as a tool is very effective, efficient
and accurate to be used as a performance evaluate in
banking industries and to anticipate the future and
relative risk. "CAMELS" ratios are calculated in order
to focus on financial performance. The CAMELS
stands for Capital adequacy, Asset quality,
Management, Earning and Liquidity and
Sensitivity.
THE OBJECTIVES OF THE ACCORD
▪ To strengthen the international banking system;
▪ To promote convergence of national capital
standards;
▪ To iron out competitive inequalities among banks
across countries of the world.
10.1. BASEL I
▪ Launched in 1988
▪ Focus on capital adequacy of financial institution
▪ CRAR - 8% by BIS but 9% by RBI
▪ It was adopted in 1999 in India
▪ It was not a legal document
▪ First international solution for banking risk.
▪ It is said that Basel-I looked G-10 centric because
details of its implementation were left to national
discretion.
▪ India adopted Basel 1 guidelines in 1999.
105
10.2. BASEL II
▪ Launched in 2004
▪ It was to be fully implemented by 2015, however
India Adopted in 2009
▪ Three pillars - minimum capital requirements,
supervisory review and market discipline.
▪ Banks need to mandatory disclose their risk
exposure to the central bank.
▪ 8%by BIS and 9% by RBI as minimum CRAR
▪ The second Basel Accord is to be fully
implemented by 2015.
▪ The focus of this accord is to strengthen
international banking requirements as well as to
supervise and enforce these requirements.
10.3. BASEL III
▪ Basel III - A Global Regulatory Framework for
more Resilient Banks and Banking systems.
▪ The third Basel Accord is a comprehensive set of
reform measures aimed to strengthen the
regulation, supervision and risk management of
the banking sector.
▪ Launched in 2010
▪ Basel III norms 🡪 stipulated a Capital to Risk-
weighted assets (CRAR) of 8%.
▪ The buffer will range from 0% to 2.5%.
▪ Focus on - Minimum capital, supervisory review,
market discipline and liquidity coverage ratio.
▪ Basel 3 measures are based on three pillars:-
1. Improve the banking sector’s ability to absorb
shocks arising from financial and economic stress.
2. Improve risk management and governance
3. Strengthen banks’ transparency and disclosures.
Q. ‘Basel III Accord’ or simply ‘Basel III’, often seen
in the news, seeks to (2015)
a) develop national strategies for the conservation and
sustainable use of biological diversity
b) improve banking sector’s ability to deal with
financial and economic stress and improve risk
management
c) reduce the greenhouse gas emissions but places a
heavier burden on developed countries
d) transfer technology from developed countries to
poor countries to enable them to replace the use of
chlorofluorocarbons in refrigeration with harmless
chemical
ENHANCEMENTS IN BASEL III
▪ Augmentation in the level and quality of capital
▪ Introduction of liquidity standards
▪ Modifications in provisioning norms
▪ Introduction of leverage ratio
As per the Reserve Bank of India’s direction, the Basel
III capital regulation is being implemented from April
1, 2013, in India in phases, and will be fully adopted by
March 31, 2019.
RECAPITALIZATION is lending to the bank the
resources needed to conform to the capital adequacy
norms.
All Indian banks are both Basel I and II compliant.
KEY ELEMENTS OF BASEL III
BETTER QUALITY CONTROL
▪ Better quality capital means the higher loss-
absorbing capacity.
▪ This in turn will mean that banks will be stronger,
allowing them to better withstand periods of stress.
CAPITAL CONSERVATION BUFFER
▪ Another key feature of Basel III is that now banks
will be required to hold a capital conservation
buffer of 2.5%.
▪ It is the mandatory capital that financial
institutions are required to hold above minimum
regulatory requirement.
▪ It will increase the resilience of banks to losses,
reduce excessive or underestimated exposures and
restrict the distribution of capital.
▪ Recently, The RBI board, while deciding to retain
the capital adequacy requirement for banks at 9
per cent, agreed to extend the transition period for
implementing the last tranche of 0.625 per cent
under the capital conservation buffer (CCB), by one
year - up to March 31, 2020
COUNTER- CYCLICAL BUFFER
▪ The countercyclical buffer has been introduced
with the objective to increase capital
requirements in good times and decrease the
same in bad times.
▪ The buffer will slow banking activity when it
overheats and will encourage lending when times
are tough i.e. in bad times.
▪ The buffer will range from 0% to 2.5%.
11. CLASSIFICATION OF BANK'S CAPITAL
TIER I CAPITAL (CORE CAPITAL) 🡪
▪ Tier 1 capital is a term used to describe the capital
adequacy of a bank. It is a core measure of a
bank's financial strength. It consists of money kept
as Statutory Liquidity Ratio (SLR), in physical
cash form as share capital and secured loans. At
least 6% of CAR must come from Tier 1 capital.
This capital can absorb losses without the bank
ceasing its trading operations. It consists financial
capital which are in are most reliable and liquid
(share capital and disclosed reserves)
TIER II CAPITAL (SUPPLEMENTARY
CAPITAL) 🡪
▪ It includes after tax income, retail earnings of the
bank, capital in the form of bonds/hybrid
instruments & unsecured loans (getting
serviced). It is secondary bank capital (second
most reliable form of capital)
TIER III CAPITAL (TERTIARY) 🡪
▪ It is used to support market risk, commodities risk
and foreign currency risk. It includes a variety of
debt other than Tier 1 and Tier 2 capitals. It
includes a greater number of subordinated issues,
undisclosed reserves and general loss reserves
compared to tier 2 capital. To qualify as tier 3
capital, assets must be limited to 50% of a bank's
tier 1 capital, be unsecured, subordinated and have
a minimum maturity of 2 years.
DISCLOSED RESERVES are the total liquid cash and
the SLR assets of the banks that may be used any time -
part of core capital (Tier I).
UNDISCLOSED RESERVES are the unpublished or
hidden reserves of a financial institution that may not
appear on publicly available documents such as a
balance sheet, but are nonetheless real assets, which are
accepted as such by most banking institutions, but
cannot be used at will by the bank - part of its
supplementary capital (Tier II)
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 12. BANK FOR INTERNATIONAL
SETTLEMENTS
▪ The Bank for International Settlements (BIS) is an
international organization of central banks
which fosters international monetary and
financial cooperation and serves as a “bank for
central banks.”
▪ It also provides banking services, but only to central
banks, or to international organizations.
▪ Based in Basel, Switzerland, the BIS was
established by the Hague agreements of 1930.
▪ As an organization of central banks, the BIS seeks
to make monetary policy more predictable and
transparent among its 55 member central banks.
▪ The BIS’ man role is in setting capital adequacy
requirements to safeguard bank’s operations
13. SYSTEMICALLY IMPORTANT FINANCIAL
INSTITUTIONS (SIFI)
▪ In addition to meeting the Basel III requirements,
global Systemically Important Financial
Institutions (SIFIs) must have higher loss
absorbency capacity to reflect the greater risks that
they pose to the financial system.
▪ The Committee has developed a methodology that
includes both quantitative indicators and
qualitative elements to identify global
systemically important banks (SIBs).
▪ The additional loss absorbency requirements are to
be met with a progressive Common Equity Tier 1
(CET1) capital requirement ranging from 1% to
2.5%, depending on a bank’s systemic importance.
SYSTEMICALLY IMPORTANT BANKS
Type of SIB Who will identify them?
Global Systemically BASEL Committee on
important Bank (G-SIB) banking supervision
Each country’s central
bank e.g. RBI for India,
Domestic Systemically People’s bank of China
Important Banks (D- for China.
SIB) Each central bank is free
to decide the parameters
for identifying their desi
SIBs.
14. D-SIBS
▪ Recently RBI listed HDFC as Domestic -
Systemically Important Bank (DSIB) under the
bucket structure identified last year.
107
▪ DSIBs are also referred to as “Too Big To Fail”
(TBTF) because of their size, cross- jurisdictional
activities, complexity and lack of substitute and
interconnection.
▪ Banks whose assets cross 2% of the GDP are
considered DSIBs. If these banks fail, they can have
a disruptive effect on the economy. D-SIBs are
categorised under five buckets.
▪ According to these buckets the banks have to keep
aside Additional Common Equity Tier 1 as a
percentage of Risk Weighted Assets (RWAs).
▪ D-SIBs are closely monitored by the central bank
to ensure their better functioning and prevent the
indulgence of such banks in any grey areas such as
money laundering etc.
▪ They are domestically identified by Central
Banks of a country and globally by BASEL
committee on banking supervision (BCBS)
▪ In 2014: RBI issued guidelines for Domestic
Systemically Important Banks (D-SIBs).
▪ Each year in August, RBI will disclose the names
of banks designated as D-SIBs.
▪ 2015: SBI and ICICI declared as D-SIBs. List will
be updated each year in August. HDFC added in -
2017
15. TOO BIG TO FAIL (TBTF)
▪ 2009: Financial stability board (FSB) was set up.
It is an international body affiliated with G20.
▪ 2010: FSB observes following:
o Each country has certain “big” banks with
huge client base, commanding billions of
dollars, run cross-border and cross-sector
(insurance | pension etc) investment through
their NBFCs. (Non- banking financial
companies)
o These NBFCs act as “shadow banks”,
because they carry bank-like operations but are
not subject to bank-like regulations.
▪ If the parent banks fail, the Government is forced to
‘rescue’ them with a ‘bailout package’ to ensure
that the national economy doesn’t collapse and
ordinary citizen-clients don’t suffer. E.g. Subprime
crisis, US & UK Government had to spend billions
of tax-payer money to rescue their large banks.
▪ Consequently, these banks become confident
they’re “too big to fail” so they will always be
rescued by market-forces or the government, will
continue to indulge in grey-areas and reckless
practices.
 CH-3 BANKING IN INDIA – PART4
1. CONTEMPORARY ISSUES IN BANKING
SECTOR
1.1. NPA AND STRESSED ASSETS
▪ A Non-Performing Assets is a loan or advance for
which the principal or interest payment remained
overdue for a period of 90 days. NPAs are the bad
loans of the banks.
▪ In order to follow international best practices and
to ensure greater transparency, the RBI shifted to
the current policy in 2004.
▪ Under it, a loan is considered NPA if it has not
been serviced for one term (i.e. 90 days).
▪ For agriculture loans the period is tied with the
period of the concerned crops- ranging from two
crop seasons to one year overdue norm.
▪ Banks are required to classify NPAs further
into:
▪ In percentage terms, the average gross NPAs of this
group of banks rose from 7.91% in
2016. Projections are that NPA will
hover around more than 12% by
2020.
▪ Public sector banks, which have
close to 70% market share of
NPA
Restructured STRESSE
loan D ASSETS
Written
off
assets
loans, are more affected than their private sector
counterparts.
RESTRUCTURED LOANS: Those assets which got
an extended repayment period, reduced interest rate,
converting a part of the loan into equity, providing
additional financing, or some combination of these
measures.
WRITTEN OFF ASSETS: When the lender does not
count that money, borrower owes to him, then the asset
is called written off assets. However, it does not mean
that the borrower is pardoned or exempted.
1.1.1. STATUS OF THE NPA
▪ NPA problem is one of the most severe plaguing
the Indian Banking sector posing questions over
the stability of Indian Banking
System.
▪ An RBI “Report on the trend and
progress of the banking
sector” shows that gross non-
performing loans of banks
improved to 9.1 per cent by the
close of September 2019, compared to 11.2 per
cent in year 2018.
▪ According to Economic survey 2018-19, the
performance of the banking sector and Public
Sector Banks in particular, improved in 2018-19.
▪ However, the GNPA ratio of NBFC sector
deteriorated to 6.5 per cent as in December 2018
from 6.1 per cent in March 2018.
IMPROVING HEALTH OF BANKING SECTOR:
▪ Proportion of standard assets in total advances of
commercial banks increased in FY19.
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 ▪ Recovery of stressed assets improved in 2019 due Time and cost Change in govt. Poor monitoring
to IBC. overrun policies of credits
▪ Recovery under IBC contributed more than half of Business failures Price volatility Mismatches of
the total amount. due to Covid-19 of inputs funds i.e. using
▪ Cases for recovery under various mechanisms grew and resultant loans granted for
27% in volume. market failures short terms for
▪ Decline of all special mention accounts, long term
transactions
restructured standard advances, gross NPAs.
Inefficiency in Input or power Inability to raise
▪ Special Mention Accounts are ones with potential bank adequate funds
to become a NPA. shortage
management
Slackness in Recession in Granting of loans
WAYS TO RECOVER NPAs credit the economy as to certain sectors
▪ Possession/ sale of collateral. management and a whole of economy on
▪ Restructure loans to maintain cash flow. monitoring the basis of govt.
▪ Convert bad loans into equity. directives
▪ Selling of loan on discount to collection agency.

RISE OF NPA IN INDIA: Poor Conviction

Rate And Weak
▪ India’s bad loans fifth highest in the world. Laws

▪ NPA rose drastically in India from 2015.

▪ RBI tightened norms for NPA recognition in 2015.
▪ Forced banks to identify standard assets as NPA. Political
Sectoral
Slowdowns
Interference
▪ NPA originated in mid- 2000s due to economic Such As Infra.
REASONS
boom. FOR HIGH
▪ Corporations granted loans based on performance. NPAs
▪ Recession led to stagnated economic growth.

LEGISLATIONS RELATING TO NPA AND Slowdown In Irrational

BANKCRUPTCY Global
Economy
Lending By
Banks
▪ Insolvency and Bankruptcy Code, 2016
▪ SARFAESI Act, 2002
▪ Recovery of Debts Due to Banks and Financial
Institutions (DRT) Act Raghuram Rajan has identified the NPA problem as
▪ Lok Adalats a major challenge facing the Indian Banking Sector.
▪ Under Banking Regulation Act 1949
▪ Fugitive Economic Offenders Act, 2018 FORE-CLOSURE means taking over by the lender of
the mortgaged property if the borrower does not
RBI’S GUIDELINES TO RESOLVE NPA conform to the terms of mortgage. Securitization is the
▪ Strategic Debt Restructuring. process of a group of assets, such as loans or mortgages,
▪ Allows banks to change management of defaulter. and selling securities backed by these assets.
▪ Joint Lenders Forum.
▪ Lenders evolve resolution plan. 1.1.2. POSITIVE EXTERNALITIES OF
▪ Lenders can vote on its implementation DECLINING NPA
▪ Project Sashakt
ON BANKS:
MAJOR REASONS FOR SURGING NPAs ▪ It increases the profitability & liquidity of the
banks as annual return on assets come increases and
INTERNAL EXTERNAL OTHERS also the amount given as loan also gets opened
Diversion of Exchange rate Pressure due to which can now be used for some return earning
funds for fluctuations liberalization- asset otherwise. Banks can grow faster when the
expansion, competition, availability of credit increases.
modernisation or reductions in
for taking up new tariffs etc.
projects

109
▪ The Monetary Policy Transmission becomes
faster for banks to pass on the RBI-induced rate
reductions.
▪ Banks eases credit to small and medium
enterprises (SMEs) that are India's potential for
prosperity of an entrepreneurial middle class.
ON BORROWERS:
▪ Banks may begin lowering interest rates on some
products once Non-performing assets decrease.
▪ As a result, the cost of capital will decrease, making
the different businesses financially viable.
ON OVERALL ECONOMY:
▪ Economy will grow as there will be more
availability of credit from the security market,
which increases employment generation, and
development of the country.
WAYS FOR FURTHER IMPROVEMENT
▪ Managing Risks - Risk management processes still
need substantial improvement in PSBs. Compliance
is still not adequate, and cyber risk needs greater
attention
▪ Improve the process of project evaluation - and
monitoring to lower the risk of project NPAs.
Significantly more in-house expertise can be
brought for project evaluation.
▪ Strengthen the recovery process further - Both
the out of court restructuring process and the
bankruptcy process need to be made faster and
strengthened.
▪ Infusion of Capital - The government must infuse
at one go whatever additional capital is needed to
recapitalise banks providing such capital in
multiple instalments is not helpful.
1.1.3. SPECIAL MENTION ACCOUNTS (SMA)
▪ It is a tool for early stress discovery of bank loans.
▪ Introduced as a corrective action plan.
▪ Accordingly banks should identify potential stress
in the account by creating a new sub-asset category
viz. ‘Special Mention Accounts’
▪ In March 2016, RBI had notified a mechanism for
resolving stressed MSME loans of up to Rs 25
crore.
▪ According to the stress level such loans are
categorised into three categories:
▪ SMA 0 ( Delay up to 30 Days)
▪ SMA 1 ( Delay up to 31-60 Days)
▪ SMA 2 ( Delay up to 61-90 Days)
NOTE: The loans still remain standard even in these
categories and turn bad only after a delay in payment of
more than 90 days
1.1.4. WILFUL DEFAULTER
▪ There are many people and entities who borrow
money from lending institutions but fail to repay.
However, not all of them are called wilful
defaulters.
▪ A wilful defaulter is one who does not repay a loan
or liability, but apart from this there are other
things that define a wilful defaulter.
▪ However, a lending institution cannot term an entity
or an individual a wilful defaulter for a one-off case
of default and needs to take into account the
repayment track record.
▪ The default should be established to be intentional
and the defaulter should be informed about the
same.
▪ The defaulter should also be given a chance to
clarify his stand on the issue. Also, the default
amount needs to be at least Rs.25 lakh to be
included in the category of wilful defaults.
ACCORDING TO THE RBI, A WILFUL DEFAULTER IS
ONE WHO–
▪ Financially capable to repay and yet does not do
so;
▪ One who diverts the funds for purposes other than
what the fund was availed for;
▪ With whom funds are not available in the form of
assets as funds have been siphoned off;
▪ Who has sold or disposed the property that was
used as a security to obtain the loan.
▪ Diversion of fund includes activities such as using
short-term working capital for long-term
purposes, acquiring assets for which the loan was
not meant for and transferring funds to other
entities.
RESTRICTIONS ON WILFULL DEFAULTERS
▪ Barred from participating in the capital market.
▪ Barred from availing any further banking facilities
and to access financial institutions for five years for
the purpose of starting a new venture.
▪ The lenders can initiate the process of recovery with
full vigour and can even initiate criminal
proceedings, if required.
▪ The lending institutions may not allow any person
related to the defaulting company to become a
board member of any other company as well.
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 1.2. STRATEGY FOR RESOLUTION OF THE
NPAs
▪ At one hand, while the RBI tried to check the
NPAs from rising by announcing new guidelines
for the banks, on the other hand, it has also taken
several steps to ‘resolve’ the problem.
▪ Since 2014-15, the RBI has implemented a number
of schemes to facilitate resolution of the NPAs
problem of the banks are briefly discussed below:
1.2.1. 5/25 REFINANCING
▪ This scheme offered a larger window for revival
of stressed assets in the infrastructure sectors and 8
core industries.
▪ Under this scheme lenders were allowed to extend
the tenure of loans to 25 years with interest rates
adjusted every 5 years, so tenure of the loans
matches the long gestation period in the sectors.
▪ The scheme thus aimed to improve the credit
profile and liquidity position of borrowers, while
allowing banks to treat these loans as standard in
their balance sheets, reducing provisioning costs
against NPAs.
▪ However, with amortisation spread out over a
longer period, this arrangement also meant that the
companies faced a higher interest burden, which
they found difficult to repay, forcing banks to
extend additional loans (known as ‘evergreening’
of the loan).
▪ Resultantly, this in turn has aggravated the initial
problem.
1.2.2. ASSETS RECONSTRUCTION COMPANIES
(ARCs)
▪ ARCs were introduced to India under the
SARFAESI Act (2002), as specialists to resolve
the burden of NPAs.
▪ But the ARCs (most are privately-owned) finding
it difficult to resolve the NPAs they purchased, are
today only willing to purchase such loans at low
prices.
▪ As a result, banks have been unwilling to sell them
loans on a large scale.
▪ Since 2014, the fee structure of the ARCs was
modified (requiring ARCs to pay a greater
proportion of the purchase price up-front in cash to
the banks) purchases of NPAs by them have slowed
down further - only about 5 per cent of total NPAs
were sold during 2014-15 and 2015-16.
▪ Normally, banks and FIs themselves recover the
loans. But in the case of bad debts (sticky loans), it
is outsourced to the ARCs who have built-in
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professional expertise in this task and who handle
recovery as their core business.
▪ ARCs buy bad loans from banks and try to
restructure them and collect them.
▪ ARCs were recommended by Narasimham
committee II.
▪ ARCIL - the first asset reconstruction company
was set up recently.
1.2.3. PRUDENTIAL NORMS
▪ Prudential norms consist of -
o Income recognition
o Asset classification
o Provisioning for NPAs
o Capital adequacy norms (capital to risk-
weighted asset ratio, CRAR).
▪ A proper definition of income is essential in order
to ensure that banks take into account income that
is actually realized (received).
▪ It helps in classifying an asset as NPA in certain
cases. Once classified as NPA, funds must be set
apart to balance the bank’s operations so as to
maintain safety of operations in case of non-
recovery of NPAs.
▪ Thus, income recognition, asset classification and
provisioning norms are inter-related.
▪ Prudential norms make the operations transparent,
accountable, prudent and safe
▪ Prudential norms serve two primary purposes:
▪ Bring out the true standing of a bank’s
portfolio.
▪ Help in prevention of its deterioration.
1.2.4. STRATEGIC DEBT RESTRUCTURING
(SDR)
▪ In June 2015, RBI came up with the SDR scheme
provide an opportunity to banks to convert debt
of companies (whose stressed assets were
restructured but which could not finally fulfil the
conditions attached to such restructuring) to 51 per
cent equity and sell them to the highest bidders –
meaning ownership change takes place in it.
▪ By end-December 2016, only 2 such sales had
materialized, in part because many firms remained
financially unviable, since only a small portion of
their debt had been converted to equity.
1.2.5. ASSET QUALITY REVIEW (AQR)
▪ Resolution of the problem of bad assets requires
sound recognition of such assets.
▪ Therefore, the RBI emphasized AQR, to verify that
banks were assessing loans in line with RBI loan
classification rules.
▪ Any deviations from such rules were to be rectified
by March 2016.
1.2.6. S4A SCHEME
▪ Scheme for Sustainable Structuring of Stressed
Assets
▪ Introduced in June 2016, in it, an independent
agency is hired by the banks which decides as
how much of the stressed debt of a company is
‘sustainable’.
▪ The rest (‘unsustainable’) is converted into
equity and preference shares.
▪ Unlike the SDR arrangement, this involves no
change in the ownership of the company.
Q. ‘Scheme for Sustainable Structuring of Stressed
Assets (S4A)’ is related to____( CSE-2017)
a) Procedure for ecological costs of developmental
schemes.
b) Scheme of RBI for reworking the financial
structure of big corporates with genuine
difficulties.
c) Disinvestment plan for Central Public Sector
Undertakings.
d) Provision in ‘The Insolvency and Bankruptcy
Code’.
1.2.7. 4R FRAMEWORK OF RBI
Resolving
Recognising and
Recovering
Recapitalising Reforms
▪ RECOGNIZING - NPAs transparently-
▪ Through Asset Quality Reviews and Joint
Lenders’ Forum.
▪ Banks are now required to acquire Legal Entity
Identifier (LEI) number from the borrower and
report it to Central Repository of Information on
Large Credit.
▪ RESOLVING AND RECOVERING value from
stressed accounts-
▪ IBC Code, 2016 has been enacted, which has
provided for the taking over management of the
affairs of the corporate debtor at the outset of the
corporate insolvency resolution process.
▪ Amendment to the Banking Regulation Act, 1949
to empower the RBI.
▪ Amendment to the Securitisation and
Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 to make
it more effective.
▪ Project Sashakt - to resolve the problem of NPAs
through a market-led approach.
▪ RECAPITALISING - Government of India
announced recapitalization of PSBs to the tune of
Rs. 2.11 lakh crore in October 2017, through
infusion of capital by the Government and raising
of capital by banks from the markets.
▪ REFORMS in banks and financial ecosystem to
ensure a responsible and clean system.
▪ Comprehensive framework for transforming the
PSBs under Mission Indradhanush, 2015.
▪ PSBs have created Stressed Asset Management
Verticals to focus attention on recovery and
entrusted monitoring of loan accounts.
▪ Fugitive Economic Offenders Act, 2018
▪ The RBI has been aligning the regulatory and
supervisory frameworks for NBFCs with that of
SCBs.
▪ Prompt Corrective Action (PCA)
▪ The consolidation of Banks drives.
1.2.8. PCA FRAMEWORK OF RBI
▪ Prompt Corrective Action was introduced in 2002
as a structured early- intervention mechanism
for banks that become under-capitalised due to poor
asset quality, or vulnerable due to loss of
profitability.
▪ The PCA framework deems banks as risky if they
slip some trigger points such as capital to risk
weighted assets ratio (CRAR), net NPA, Return on
Assets (RoA) and Tier 1 Leverage ratio.
▪ The PCA framework is applicable only to
Commercial Banks and not extended to Co-
Operative banks, NBFCs and FMIs.
1.2.9. RBI’S PRUDENTIAL FRAMEWORK
FOR RESOLUTION OF STRESSED
ASSETS (PFRSA)
PFRSA provides for early resolution of stressed
assets in a transparent and time-bound manner by-
▪ Giving complete discretion to lenders with regard
to design and implementation of resolution plans,
▪ Disincentives for delay in implementation of
resolution plan or initiation of insolvency
proceedings,
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 ▪ Making mandatory the signing of an inter-
creditor agreement, providing for majority
decision- making by all lenders.
1.2.10. PROJECT SASHAKT
▪ Project Sashakt was proposed by a panel led by
PNB chairman Sunil Mehta.
▪ 5-pronged strategy to resolve bad loans -
1. Small and Medium Enterprise (SME)
resolution approach - Bad loans of up to ₹50
crore will be managed at the bank level, with
a deadline of 90 days.
2. Bank-led resolution approach- For bad loans
of ₹50-500 crore, banks will enter an inter-
creditor agreement, authorizing the lead bank
to implement a resolution plan in 180 days, or
refer the asset to National Company Law
Tribunal (NCLT).
3. AMC/AIF led resolution approach- For bad
loans above Rs.500 crores would be resolved
through an independent Asset Management
Company (AMC) which would be funded by
Alternative Investment Fund (AIF).
4. NCLT/IBC approach
5. Asset-trading platform
1.2.11. RBI “3R” FRAMEWORK FOR
REVITALIZING STRESSED ASSETS
Restructuring
Recovery
Rectification
In 2015, RBI ordered the Banks to
Rectification conduct Asset Quality Review
(AQR) and begin process of
rectification of bad loans.
It is changing the loan interest (%)
Restructuring or tenure or ownership.
- For Infrastructure loans, RBI
allowed banks to extend infra-loan
tenure upto 25 years, and even
reduce loan interest rate. But such
interest rate will be reviewed each
5 years – known as 5/25 strategy.
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- Corporate Debt Restructuring
🡪 For non-infra corporate loan,
RBI permitted loan restructuring if
75% of the lenders approve.
- Joint Lenders Forum (JLF)
mechanism
S4A - Scheme for Sustainable
Structuring of Stressed Assets
- SARFAESI Act 2002
- Insolvency and Bankruptcy
Recovery Code 2016 🡪 If 75% of the lenders
don’t agree for restructuring /
resolution plan, then assets will be
liquidated.
1.3. IL & FS CRISIS
▪ Recently an infrastructure financing company,
Infrastructure Leasing & Financial Services
(IL&FS), an NBFC, defaulted on their loan
repayment.
▪ IL&FS Group is a vast conglomerate with a
complex corporate structure that funds
infrastructure projects across the world’s fastest-
growing major economy like Chenani-Nashri road
tunnel, India’s
longest and has
raised billions
of dollars from
the country’s
corporate debt
market.
▪ IL&FS is a
Systematically Important Non- Deposit Core
Investment Company (CIC- ND-SI) i.e. any crisis
at IL&FS would not only impact equity and debt
markets but could also stall several infrastructure
projects of national importance.
▪ Many major corporates, banks, mutual funds,
insurance companies, etc. such as LIC, HDFC and
SBI have stakes in the IL&FS group.
▪ Recently an infrastructure financing company,
Infrastructure Leasing & Financial Services
(IL&FS), an NBFC, defaulted on their loan
repayment.
NBFC REFORMS
▪ Earlier, only privately owned NBFCs had to
maintain a minimum Capital to Risk Assets Ratio
(CRAR) of 15 % (if Tier-1 capital is 10%). Now,
the CRAR requirements are applicable to
government NBFCs as well, to be achieved by
2021-22.
▪ It will ensure both types of NBFCs stand on an
equal footing on compliance with specific RBI
rules and will also help in checking NPAs and
bankruptcy.
▪ RBI allowed banks to provide Partial Credit
Enhancement (PCE) to bonds issued by
systemically important non-deposit taking NBFCs
registered with the RBI and Housing Finance
Companies (HFCs) registered with the National
Housing Bank. This will help investors regain their
confidence in the market, post IL&FS crisis.
1.4. PUNJAB NATIONAL BANK (PNB) CRISIS
NEWS- One of the branches of State-owned Punjab
National Bank (PNB) has recently detected fraudulent
transactions worth over Rs 11,000 crores.
▪ PNB has alleged that two of its employees had
“fraudulently” issued LoUs and transmitted
SWIFT instructions to the overseas branches of
Indian Banks.
▪ This was done to raise buyer’s credit for the firm
of a diamond merchant without making entries in
the bank system.
▪ These LoUs were mostly issued to two Hong Kong
branches of Indian Banks and was for the aforesaid
diamond merchant.
IMPACT OF PNB FRAUD
▪ Hong Kong branches of Allahabad Bank and Axis
Bank have given money to the beneficiary entity on
behalf of Modi’s firms.
▪ As a result, PNB will have to settle the LoUs with
these branches according to the norms of the Hong
Kong Monetary Authority.
▪ Market sentiment has already been impacted and
PNB stock fell 9.81% in a single day, which
consequently saw investors loose over Rs 3,000
crores.
▪ The bank may have to set aside higher
provisioning in the next few quarters if it unable to
recover the money from the accused firms.
▪ The fraud has been unearthed at a time when Indian
banks are reeling under a pile of stressed assets of
about Rs 10 lakh crore.
▪ Also, higher provisioning and a rise in bond yields,
has resulted in losses for most public sector banks
in the previous quarter.
LETTER OF UNDERTAKING (LOU)
▪ LoU is an assurance given by one bank to another
to meet a liability on behalf of a customer.
▪ It is similar to a letter of credit or a guarantee.
▪ It is used for overseas import remittances and
involves four parties — an issuing bank, a receiving
bank, an importer
and a beneficiary
entity overseas.
▪ According to norms,
they are usually
valid for 180 days.
▪ LoUs are conveyed
from bank to bank
through “Society for Worldwide Interbank
Financial Telecommunication” (SWIFT)
instructions.
▪ Notably, till now, there is no record of a breach in
SWIFT instructions anywhere in the world.
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1.5. YES BANK CRISIS
▪ Within months of small cooperative bank fallout in
india, major private player Yes Bank (India's fifth
largest private sector bank) has also come under
the RBI action for mounting bad loans.
▪ In order to save Yes Bank from collapsing and to
preserve people’s trust in the Indian banking
system, RBI has taken several measures.
REASONS FOR YES BANK COLLAPSE
▪ Domino effect of IL&FS crisis - Yes Bank
illustrates the widening damage from India’s
shadow banking crisis, which has left the Bank with
a growing pile of bad loans.
▪ Rising NPA's - Yes Bank suffered a dramatic
doubling in Gross Non-Performing Assets over the
April-September 2019 to ₹17,134 crores. Due to
this, Yes Bank was unable to raise capital to shore
up its balance sheet.
▪ Vicious cycle - Decline in the financial position of
Yes Bank has triggered invocation of bond
covenants by investors (redeeming of bonds), and
withdrawal of deposits. It means that the bank was
witnessing withdrawal of deposits from
customers.
▪ Governance issues - The bank has also
experienced serious governance issues and
practices in recent years which have led to a steady
decline of the bank. For instance, the bank under-
reported NPAs to the tune of Rs 3,277 crore in
2018-19.
EFFECT OF YES BANK CRISIS
▪ Revival of the theory of India's Lehman
Moment - The government took over IL&FS in
2018 in an effort to reassure creditors after the
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defaults. The Yes Bank crisis could trigger a
domino effect that could lead to the collapse of
various other financial institution.
▪ Erosion of depositor faith - Even after RBI's
takeover of Yes Bank, the news of limiting
withdrawals at Rs 50,000, has led to long queues
of people claiming their money back.
▪ People will gravitate towards public sector
banks which are already reluctant to provide
credit.
▪ Private banks will be forced to offer higher
deposit rates, keeping the cost of credit higher.
▪ Thereby banks will not be able to cater the credit
requirement which is a prerequisite to realise the
dream of becoming a $5 trillion economy by 2024-
2025.
▪ Effect of Indian Economy - Collapse of Yes Bank
is highly undesirable, at a juncture when the growth
in the Indian economy has dropped to 5%.
INDIA's LEHMAN MOMENT
The IL&FS default raised fears of a Lehman-like crisis,
referring to the collapse of the US investment bank
Lehman Brothers in 2008-09. The event rocked global
stock markets and led to the biggest financial crash
(Global financial crisis 2008) since the Great
Depression 1929.
WAY FORWARD
▪ Yes Bank crisis should be seen as a good
opportunity for the various stakeholders:
o For RBI to review its PCA framework.
o For the Government to carry out governance
reforms in the financial sector.
o For commercial banks and shadow banking
institutions to implement prudential norms in
events of providing loans.
1.6. PMC CRISIS
▪ The Punjab and Maharashtra Cooperative
(PMC, HQ-Mumbai, setup 1984) is a Multi- State
Scheduled Urban Co-operative Bank. It
functions in Maharashtra, Delhi, Karnataka, Goa,
Gujarat, Andhra Pradesh and Madhya Pradesh.
▪ PMC bank loaned large amount to a weak
company HDIL, because of its cozy relations with
bank directors. Company who couldn’t repay it.
NPA became so large, bank might collapse.
▪ RBI imposed withdrawal limits on the depositors
using the powers of Banking Regulation Act 1949.
Because ‘bank run’ would have been so high even
CRR-SLR can’t fulfill it, if there was no withdrawal
limit.
▪ Merger / closing / liquidation of a cooperative bank
requires approval by Government’s registrar of
cooperatives so RBI alone can’t do much action.
▪ Therefore, RBI offered Urban Cooperative Banks
to convert their license into Small Finance Bank
(SFB) then RBI alone will have supervision powers
without interference from Government. But UCB
banks not interested, they enjoy the present
loopholes.
▪ Budget-2020 promised to amend the Banking
Regulation Act to increase RBI's powers over
cooperative banks.
RBI’s Y.H. Malegam Committee (2011) had
suggested many reforms on UCBs, but they’re not yet
implemented until Government amends the laws.
2. RBI: ISSUES AND INITIATIVES
2.1. TRANSFER OF FUNDS BY RBI TO
CENTRAL GOVERNMENT
▪ Section 47 of the RBI Act 1934 requires RBI to
transfer the profit it earns to the Central
Government every year.
▪ However a part of RBI’s profit every year is used to
make provisioning for unforeseen circumstances.
▪ Accordingly RBI maintains reserves in the form of
capital to cover various risks including market risk,
operational risk, credit risk and contingency risk.
▪ 5 components of RBI’s capital reserve include:
1. Contingency Fund - set apart for meeting the
unforeseen contingencies.
2. Asset Development Fund - To fund
investments in subsidiaries.
3. Currency and Gold Revaluation Account -
To cover fluctuations in gold and currency
assets that RBI holds.
4. Investment Revaluation Account (IRA) - To
cover risks associated with fluctuations of
interest rates of government securities.
5. Foreign Exchange Forward Contracts
Valuation Account - To cover risks related to
foreign exchange related forward contracts.
RBI V/S GOVT: HOW MUCH RESERVE SHOULD
BE MAINTAINED?
▪ The surplus maintained by RBI has 2 components:
1. Part of net profits every year
2. Surplus already accumulated over the years
▪ While RBI has been keeping a substantial part of its
net profits as reserves till 2013, since 2014 RBI has
been transferring 100% of its net profit to the
government since 2014.
2.2. REVIEW OF ECONOMIC CAPITAL
FRAMEWORK
▪ Economic Capital Framework is a methodology for
determining the appropriate level of risk provisions
to capital that is to be made under Section 47 of
the Reserve Bank of India Act.
▪ It is argued that RBI has become the most
capitalized central bank in the world and has
been stocking surplus capital over what is actually
required to face contingency situations.
▪ While the central banks across the world have a
surplus capital to the tune of 10-14% of their total
assets, RBI 26.8% of its total assets as reserves.
▪ Usha Thorat Committee (2004): RBI should
maintain 18% of its total assets as reserves.
▪ Malegam Committee (2014): Should transfer all
entire net profits annually to RBI.
2.3. BIMAL JALAN COMMITTEE (2019)
RECOMMENDATIONS
▪ Appointed to review the ECF and decide on the
optimum surplus capital to be maintained by RBI
▪ Level of Reserves - The surplus capital should be
in the range of 20.8% to 25.4% of the total assets
of the RBI. Thus the RBI transferred about 50000
crore of excess surplus capital this year in addition
to its annual net profits of about 1.2 Lakh Crore to
the central government this year.
▪ Financial Stability Risk - Risk buffer of 5.5-6.5%
should be dedicated to situations like Global
Financial Crisis of 2008.
▪ New Risk Framework - It recommended a new
risk framework including--
116
 o Currency risks (since the RBI keeps huge
volume of foreign currency assets)
o Gold Price Risk (RBI has gold reserves)
o Interest rate risk (RBI holds government
securities)
o Credit risk (bonds and loans to the
commercial banks), Operational risks (due to
any potential operational problems)
o Monetary and Financial stability risks (due
to weaknesses of the financial institutions like
banks, liquidity problems)
2.4. RBI’S BANKING OMBUDSMAN SCHEME
▪ Quasi-judicial authority created to resolve
customer complaints against banks, introduced
under the Banking Regulation Act in 1995.
▪ The Ombudsman is a senior official appointed by
RBI. It covers all types of banks.
▪ Customers can approach Banking Ombudsman for
grievance redressal in the following areas:
o Non-payment/ delay in the payment or
collection of cheques, drafts, bills etc.
o Non-payment/delay in payment of inward
remittances
o Failure/delay to issue drafts, pay orders or
bankers’ cheques
o Non-adherence to prescribed working hours
o Refusal to open deposit accounts without any
valid reason
o Levying of charges without adequate prior
notice to the customer
o Refusal/delay in closing the accounts
o Non-observance of RBI guidelines on
engagement of recovery agents by banks
▪ In 2018, mis-selling of 3rd party products like
insurance was added under the purview of
Banking Ombudsman
▪ Ombudsman scheme for NBFCs 2018 - Extended
to redressal of complaints against NBFCs in 2018.
2.5. NEW GUIDELINES: INTERNAL
OMBUDSMAN
▪ RBI has tightened the banking ombudsman
scheme with the objective to strengthen the
grievance redressal mechanism for customers.
▪ Internal Ombudsman: Commercial banks having
10 or more banking outlets should have an
independent internal ombudsman (IO).
▪ Fixed Term: 3-5 Years
▪ Removal: The IO can be removed only with prior
approval from RBI.
▪ Compensation limit: Ombudsman redressal is
allowed for complaints where the compensation
117
amount for any loss suffered by the complainant is
limited to Rs 20 lakh.
▪ Additionally, maximum compensation of Rs 1 lakh
for loss of time and money, harassment and mental
anguish suffered by the complainant.
2.6. SECTION 7 OF RBI ACT, 1935
▪ Section 7 of the RBI Act 1934 empowers the
central government to supersede the RBI Board
and issue directions to the RBI, after consulting
the governor, if they are considered to be
“necessary in public interest”.
2.7. UTKARSH FRAMEWORK 2022
▪ RBI launched ‘Utkarsh 2022’, the Reserve Bank of
India’s Medium- term Strategy Framework to
achieve excellence in the performance of RBI’s
mandates and strengthening the trust of citizens
and other institutions.
▪ It is a three-year road map for medium term
objective which is in line with the global central
banks’ plan to strengthen the regulatory and
supervisory mechanism.
2.8. NATIONAL STRATEGY FOR FINANCIAL
INCLUSION
▪ This strategy has been released by RBI. Financial
Inclusion Advisory Committee of the RBI has
drafted it. It will be operational from 2019 to 2024.
▪ Strategic Pillars of National Strategy for Financial
Inclusion:
1. Universal Access to Financial Services
2. Providing Basic Bouquet of Financial Services
3. Access to Livelihood and Skill Development
4. Financial Literacy and Education
5. Customer Protection and Grievance Redressal
6. Effective Co-ordination
▪ Ministry of finance is preparing an index of
financial inclusion.
FINANCIAL INCLUSION INDEX
It was launched by the Minister of Finance. The single
composite index gives a snap shot of level of financial
inclusion that would guide Macro Policy perspective.
3. REFORMS AND INITIATIVES IN BANKING
SECTOR
3.1. INSOLVENCY AND BANKRUPTCY CODE
2016
▪ Operational Creditor - Suppliers, customers,
contractors etc.
▪ Financial Creditors - banks, NBFC, bond & other
debt security holders and Home buyers.
▪ If Individual, Partnership firm or Company defaults
on a business loan of INR 1 lakh or more, then,
Financial creditors approach National Company
Law Tribunal (NCLT) to initiate proceedings
under the I&B Code. However, NCLT must accept
or reject application within 14 days.
▪ If NCLT accepts the application, then it will grant
moratorium of 180-270 days so no other lender
can unilaterally attach assets under SARFAESI
Act.
▪ Within aforesaid period, an Insolvency
Professionals (IP) will make a resolution plan.
▪ IP will present the plan to Committee of
Creditors(CoC) made up of the Financial
Creditors (FC). In this Committee, FCs’ voting
power is based on the quantity of loans given by
them.
▪ If “Specified percentage” of the FCs agree with
such resolution plan, then it will be set in motion,
otherwise, IP will liquidate the assets to recover the
dues.
Mechanisms for Appeal
Individual or partnership If borrower is a
firm borrower Company
National Company Law At Debt Recovery
Appellate Tribunal of the Tribunal 🡪 Debt
Companies Act. Recovery Appellate
Tribunal of SAFAESI Act
2002
Exemptions under IBC
Willful Defaulter - A Incapable Defaulter a
borrower who has the borrower whose loan
capacity to repay, but account is in NPA for
he’s not repaying the more than a year, and he
loan is not capable of paying
even partial loan amount.
Above two categories of borrowers are not eligible
for I&B resolution process. Their assets will be
directly liquidated under SARFAESI Act 2002.
By January 2018, over 525 cases of corporate
insolvency have been admitted across all the National
Company Law Tribunal (NCLT), as per the
Economic Survey 2017-18.
Recently, an ordinance was approved to amend the
IBC so as to provide relief for corporates as the
COVID-19 pandemic and subsequent lockdown had
significantly impacted economic activities.
NATIONAL COMPANY LAW TRIBUNAL
(NCLT)
▪ NCLT is a quasi-judicial body in India
adjudicating issues concerning companies in the
country.
▪ It was formed on June 1, 2016, as per the provisions
of the Companies Act 2013 (Section 408) by the
Indian government.
▪ It was formed based on the recommendations of the
Justice Eradi Committee that was related to
insolvency and winding up of companies in India.
▪ Each Bench is headed by a President, 16 judicial
members and 9 technical members.
▪ As of now, the Ministry of Corporate Affairs has
established 11 Benches of the tribunal with the
Principal Bench at New Delhi.
Amendments - Insolvency and Bankruptcy Code
Amendment - Permits Govt. to modify norms when
(2018 applying IBC for MSME.
- RERA registered building (home &
office) buyers are classified as
‘financial creditors’.
- So, if builder unable to finish project,
unable to repay the loans to banks then
homebuyers will have voting power in
the I&B resolution process.
- It reduced the voting requirements
for faster resolution
IBC Code - Must finish entire process within
(first) 330 days, instead of earlier 180-270
Amendment days limit.
Act (2019 - If too many FCs (e.g. homebuyers):
they may appoint a representative
for to attend the Committee of
Creditors on their behalf, for smoother
& systematic conduct of meeting.
IBC Code - IBC complaints can be made only if
(second) the loan amount is minimum
Amendment “specified” or minimum lenders are
Bill 2019) “specified”. This is to discourage
frivolous complaints by borrowers.
- If the government had given any
license, permit, registration etc. then it
will not be cancelled while IBC
proceedings are going on. (e.g. if a
liquor company’s license was
cancelled while ongoing case, then no
fresh investor would come and so that
business cannot be revived).
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 - provision of Ring-fencing from any
risk of criminal proceeding.
INSOLVENCY AND BANKRUPTCY BOARD OF
INDIA (IBBI)
▪ IBBI is the statutory body that monitors and
implements I&B Code 2016.
▪ IBBI composition (total 10 members) 🡪 1
Chairman, 1 nominated member from RBI, 8
members from Government’s side.
▪ Chairman has 5 years / 65 age tenure, whichever
earlier. Also eligible for reappointment.
▪ IBBI’s administrative control rests with the
Ministry of Corporate Affairs (MCA).
▪ IBBI selects Insolvency Professionals Agencies
(IPAs). These IPAs enrol and supervise the
members practicing as Insolvency Professionals
(IPs). Presently, 3 organizations given “IPA”
status viz.
1. ICAI (Chartered Accounts)
2. ICSI (Company Secretaries)
3. Institute of Cost Accountants.
▪ IBBI also selects Information Utility (IU)
organization to maintain database of borrowers. It
is compulsory for the lenders to share data with IU.
IU helps lenders in two ways:
1. By looking the borrowers’ credit history,
lenders can make informed decisions about
whether to give loan or not, and how much
interest to charge?
2. This database helps establishing documentary
proofs during NCLT/DRT/judicial/liquidation
proceedings.
In 2017, National E-Governance Services Ltd
(NeSL) (owned by consortium of SBI, LIC etc.) was the
first to get the IU status.
CROSS-BORDER INSOLVENCY
▪ Cross-border insolvency has two dimensions:
1. foreign creditors should be able to recover
money lent to Indian corporates & vice versa.
2. During Indian company's insolvency in India,
the Indian lenders should be able to recover
money from Indian company's foreign assets
easily, and vice versa.
▪ IBC sections 234 & 235 have provisions for it, but
they are not notified yet, so they are not enforced.
▪ Ministry of Corporate Affairs Committee (2018) on
Insolvency Law (reforms) headed by Injeti
Srinivas recommended 🡪
o We should create a separate law for Cross-
border Insolvency.
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o More than 40 nation's use United Nation's
Commission on International Trade Law
(UNCITRAL)'s Model Law of Cross Border
Insolvency (1997)
o Hence, we can use it as a template while
making our own law. Government is working
on such bill.
3.2. BANK BOARD BUREAU (BBB)
▪ It was set up in February 2016 as an autonomous
body - based on the recommendations of the RBI
appointed PJ Nayak Committee (2014) to improve
governance of Public Sector Banks (PSBs).
▪ It had replaced Appointments Board of
Government.
▪ Banks Board Bureau comprises 🡪 Chairman
(first- Vinod Rai for 2 year term), three ex-officio
members (Secretary, Department of Public
Enterprises, Secretary of the Department of
Financial Services and Deputy Governor of the
RBI), and five expert members (two of which are
from the private sector)
▪ Its broad agenda is to improve governance at
state-owned lenders.
▪ Its mandate also involved advising the
government on top- level bank appointments and
assisting banks with capital-raising plans as well
as strategies to deal with bad loans.
Q. The Chairmen of public sector banks are selected
by the _____ (CSE-2019)
a) Banks Board Bureau
b) Reserve Bank of India
c) Union Ministry of Finance
d) Management of concerned bank
3.3. FINANCIAL SECTOR REGULATORY
APPOINTMENT SEARCH COMMITTEE
(FSRASC)
▪ As per the RBI Act, the central bank should have
one governor and four deputy governors -Two
from within the ranks and one commercial banker
and another an economist to head the monetary
policy department.
▪ This committee recommends on the posts to be
filled due to any vacancy in this list.
▪ It is headed by Cabinet Secretary and includes
additional Principal Secretary to the Prime Minister
who is a permanent government nominee and 3
other experts.
▪ The same process is being followed in the selection
of Chairman of SEBI and IRDAI.
3.4. INTER CREDITOR AGREEMENT (ICA)
▪ It is aimed at the resolution of loan accounts with
a size of ₹50 crore and above that are under the
control of a group of lenders.
▪ It is part of the “Sashakt” plan approved by the
government to address the problem of resolving bad
loans.
▪ It is based on a recommendation by the Sunil
Mehta committee that looked into resolution of
stressed assets.
Q. What was the purpose of Inter-Creditor
Agreement signed by Indian Banks and financial
institutions recently ? (CSE-2019)
a) To lessen the Government of India’s perennial
burden of fiscal deficit and current account deficit
b) To support the infrastructure projects of Central and
State governments
c) To act as independent regulator in case of
applications for loans of INR 50 cr or more
d) To aim at faster resolution of stressed assets of
INR 50 cr or more which are under consortium
lending
3.5. INDRADHANUSH PLAN
▪ The Public Sector Banks (PSBs) play a vital role in
India’s economy. In the past few years, because of
a variety of legacy issues including the delay
caused in various approvals as well as land
acquisition and also because of low global and
domestic demand, many large projects have
stalled.
▪ PSBs which have got predominant share of
infrastructure financing have been largely
affected. It has resulted in lower profitability for
Framework
of
accountabilit
y
Bank
Board Stressing
Bureau
Mission
Indradhanush
Empower
ment
Appoint Capitaliza
ments tion
PSBs, mainly due to provisioning for the
restructured projects as well as for gross NPAs.
▪ Indradhanush Plan for revamping PSBs, announced
by the Govt. on 14 Aug 2015, envisaged capital
infusion by the Government of Rs. 70,000 crore.
▪ APPOINTMENT - The Govt. decided to separate
the post of Chairman and Managing Director.
This approach is based on global best practices
and as per the guidelines in the Companies Act to
ensure appropriate checks and balances.
▪ BANK BOARD BUREAU (BBB) - The BBB will
be a body of eminent professionals and officials,
which will replace the Appointments Board for
appointment of Whole-time Directors as well as
non-Executive Chairman of PSBs.
▪ CAPITALIZATION - The govt. will inject a total
of Rs 25,000 crore of capital into debt-laden state
banks. Over the next four years, the government
plans to inject Rs 70,000 crore.
▪ DE-STRESSING - The govt will concentrate on
distressing the banks’ bad loans.
▪ EMPOWERMENT - govt has said that it will not
interfere in the functioning of public sector banks
and encouraged them to take decisions
independently, keeping the commercial interest
of the organization in mind.
▪ FRAMEWORK OF ACCOUNTABILITY - The
government also announced a new framework of
key performance indicators for state-run lenders
to boost efficiency in functioning while assuring
them of independence in decision making on
purely commercial considerations.
De- ▪ GOVERNANCE REFORMS - The process of
governance reforms started with “Gyan Sangam”
PSBs
The Indradhanush framework for transforming the
PSBs represents the most comprehensive reform
effort undertaken since banking nationalisation in the
year 1970. Our PSBs are now ready to compete and
Governance
Reforms flourish in a fast-evolving financial services landscape.
3.6. FISCAL PERFORMANCE INDEX (FPI)
▪ Developed by- Confederation of Indian Industry
(CII)
▪ It assesses the quality of Budgets presented by the
Centre and state governments.
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 ▪ The index has been constructed using UNDP's to make PSBs more Responsive and Responsible
Human Development Index (HDI) methodology. viz.
▪ Components- Quality of revenue expenditure;
Quality of capital expenditure; Quality of revenue;
Customer
Degree of fiscal prudence; Debt Index Responsiveness
Credit Take-off
▪ Financial performance of states with low-income
levels is better than those with higher income.
▪ High-income states performed poorly mainly on the
PSBs as Udyami
expenditure quality and own tax receipts index as Responsible banking
Mitras
compared to their low-income counterparts.

3.7. FINANCIAL SECRECY INDEX (FSI) 2020 Digitalization and

Deepening Financial developing
▪ Released by- Tax Justice Network (TJN), an Inclusion personnel for PSB
boards
independent international network FSI ranks
jurisdictions according to their secrecy and scale
of their offshore financial activities, every two EASE 3.0, the Public Sector Bank (PSB) Reforms
years. Agenda 2020-21 for smart, tech-enabled banking.
▪ It examines how intensely the country’s legal and
financial system allows wealthy individuals and Implementation 🡪 Each whole-time director of a PSB
criminals to hide and launder money. will be entrusted with one pillar of the EASE-
▪ Parameters used in the ranking include automatic framework. Their performance will be checked by the
exchange of information and registration of PSB’s board of directors. An independent agency will
beneficial ownership. be tasked to check public perception.
▪ Cayman Island ranked first, moving up two slots
from the 2018 ranking. US continued to retain its First ever EASE-ranking released (2019): PNB > BoB
second position. India ranks 47 out of 133 > SBI.
countries.
“4R” framework (ES- “4D” framework (ES-
3.8. EASE REFORMS INDEX 2014) 2014)
▪ Enhance Access & Service Excellence (EASE) Recognition - of bad loans Disinter - "Dig-up graves,
reforms index. via asset quality review recover money" - using
(AQR) SARFAESI ACT, I&B,
▪ PSB Reforms EASE Agenda is a common reform
SASHAKT
agenda for PSBs aimed at institutionalizing clean Resolution – through Differentiate among PSB.
and smart banking. It was launched in 2018, and the schemes/mechanisms 🡪 Government should
subsequent edition of the program ― EASE 2.0 5/25, CDR, SDR, S4A, recapitalize Profit Making
built on the foundation laid in EASE 1.0 and I&B, SASHAKT PSB: while merge or
furthered the progress on reforms. privatize Loss Making
▪ Public Sector Banks have shown significant PSB.
improvement in the Action Points of the EASE Recapitalization – to Diversify - Allow more
Reforms Agenda since its introduction. comply with BASEL-III number and variety of
norms 🡪 Indradhanush, Banks 🡪 Small Finance
Bank Recap Bonds & other Banks, Payments banks
measures. Total INR 3.5 allowed. Wholesale Bank
lakh crore mobilized. also proposed.

Reforms in Governance & Deregulate - Lower SLR,

Administration of PSB Promote Corporate Bond
through BBB, EASE, CA market so they borrow less
Norms, PCR registry, from Banks e.g. Tri-Party
ESOP, PSBN Network Repo mechanism.

3.9. LEGAL ENTITY IDENTIFIER (LEI)

In 2018, Finance ministry’s Dept of financial
▪ RBI has LEI code mandatory for all market
services released EASE framework with 6 pillars
participants, other than individuals.

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▪ It is a 20 character global reference number
conceived by G20 that uniquely identifies every
legal entity or structure that is party to a financial
transaction, in any jurisdiction.
▪ Internationally LEI is implemented and maintained
by Global Legal Entity Identifier Foundation.
▪ In India entities can obtain LEI from Legal Entity
Identifier India Ltd (LEIL) (only LOU of India),
subsidiary of The Clearing Corporation of India
Ltd, recognized by RBI under Payment and
Settlement Systems Act, 2007.
▪ Now, banks will report debt details along with LEI
to Central Repository of Information on Large
Credit. It will help the banks monitor debt
exposure of corporate borrowers and will also
prevent multiple loans against the same collateral,
thus helping reduce NPAs.
▪ Moreover, it will help regulators like RBI to track
global financial transactions and check money
laundering.
GLOBAL LEGAL ENTITY IDENTIFIER
FOUNDATION
▪ It is a not-for-profit organization established by the
Financial Stability Board in June 2014.
▪ It is overseen by the LEI Regulatory Oversight
Committee, representing public authorities from
around the globe.
▪ It publishes Global LEI Index.
3.10. SARFAESI ACT 2002
▪ GoI finally cracked down on the wilful defaulters
by passing the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security
Interest (SARFAESI) Act, 2002.
▪ The Act gives far reaching powers to the
banks/FIs concerning NPAs
▪ Banks/FIs having 75 per cent of the dues owed by
the borrower can collectively proceed on the
following in the event of the account becoming
NPA🡪
1. Issue notice of default to borrowers asking to
clear dues within 60 days.
2. On the borrower’s failure to repay:
a. Take possession of security and/ or
b. take over the management of the
borrowing concern and/or
c. appoint a person to manage the concern.
3. If the case is already before the BIFR, the
proceedings can be stalled if banks/FIs having
75 per cent share in the dues have taken any
steps to recover the dues under the provisions
of the ordinance.
▪ The banks/FIs can also sell the security to a
securitisation or Asset Reconstruction Company
(ARC), established under the provisions of the
Ordinance. (The ARC is sought to be set up on the
lines similar to the USA, few years ago.)
Limitations of SARFAESI Act 2002
▪ Understaffed DRTs and DRATs results into
pendency of cases. More than 1 lakh cases
pending (2016), so, case will go on for years and
the debtor will remain in possession of asset. This
leads to erosion of asset-value (machinery,
vehicles) even when DRT allows auction at a later
time.
▪ In some businesses, auction or liquidation may
not yield the best returns for the banks e.g. hotel
resort in remote area, where no other hoteliers are
keen to invest.
▪ In such cases, if the loans were restructured, then
banks could salvage more value. But, SARFAESI
act doesn’t facilitate such arbitration.
3.11. PUBLIC CREDIT REGISTRY (PCR)
▪ RBI is planning to setup a Public Credit Registry,
based on recommendations of Y.M. Deosthalee
committee.
▪ PCR is a database of credit information which is
accessible by all the stakeholders.
▪ It will capture all relevant information in one
large database on both individual & corporate
borrowers.
▪ It will be managed by a public authority as RBI
and the lenders will have to mandatorily report the
loan details.
▪ PCR will assist RBI in 🡪
1. Credit assessment and pricing by the bank
2. Risk-based, countercyclical and dynamic
provisioning of bank
3. Supervision and early intervention by regulator
4. Understanding the transmission of monetary
policy working and its bottlenecks
5. Restructuring the stressed bank credit
3.12. SETTING UP OF PSBN NETWORK –
ECO. SURVEY 2020
▪ Government should create a new organization
named PSBN (PSB Network), which will act as a
Financial Technology Hub and information
depository.
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 ▪ Whenever a borrower applies for a loan to a public
Sector Bank (PSB) then details will be sent to
PSBN.
▪ PSBN will verify the credit worthiness and risk
profile of the applicant through 🡪 Artificial
Intelligence (AI), machine learning (ML) and Big
Data Analytics
▪ E-KYC-Aadhar Verification 🡪 cross checking his
Aadhar number against Financial data from
Ministry of Corporate Affairs, SEBI, Income Tax
Department, GST, etc.
▪ Advantages of PSBN - fraud prevention, reduced
the burden of NPAs, quicker decision making,
process loan applications faster, cost saving for
individual banks as all of them can use a single hub
instead of spending on separate servers/technology.
3.13. FUGUTIVE ECONOMIC OFFENDERS
ACT 2018
▪ The Fugitive Economic Offenders Act, 2018 seeks
to confiscate properties of economic offenders
who have left the country to avoid facing criminal
prosecution.
▪ Offences involving amounts of Rs. 100 crore or
more fall under the purview of this law.
▪ Some of the offences listed in the schedule of the
bill are-counterfeiting government stamps or
currency, cheque dishonour for insufficiency of
funds, money laundering, transactions
defrauding creditors etc.
▪ The Bill allows the central government to amend
the schedule through a notification.
WHO IS FUGITIVE ECONOMIC OFFENDER ?
▪ A fugitive economic offender has been defined as a
person against whom an arrest warrant has been
issued for committing any offence listed in the
schedule of the proposed bill.
▪ Further the person has -
o Left the country to avoid facing prosecution.
o Refuses to return to face prosecution.
UNITED NATIONS CONVENTION AGAINST
CORRUPTION
▪ The United Nations Convention against Corruption
is the only legally binding universal anti-
corruption instrument.
▪ It was adopted by the General Assembly in 2003
and entered into force on December 14, 2005.
▪ The Convention covers five main areas:
preventive measures, criminalization and law
enforcement, international cooperation, asset
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recovery, and technical assistance and information
exchange.
3.14. DICGCI ACT
▪ Deposit Insurance and Credit Guarantee
Corporation came into existence in 1978 after the
merger of Deposit Insurance Corporation (DIC)
and Credit Guarantee Corporation of India Ltd.
(CGCI) after passing of the Deposit Insurance and
Credit Guarantee Corporation Act,1961 by the
Parliament.
▪ It serves as a deposit insurance and credit
guarantee for banks in India.
▪ It is a fully owned subsidiary of and
is governed by the RBI.
▪ DICGC charges 10 paise per ₹ 100 of deposits held
by a bank.
▪ The premium paid by the insured banks to the
Corporation is paid by the banks and is not to be
passed on to depositors.
▪ DICGC last revised the deposit insurance cover to
₹ 1 lakh on May 1, 1993, raising it from ₹ 30,000
since 1980. The protection cover of deposits in
Indian banks through insurance is among the
lowest in the world.
▪ The Damodaran Committee on ‘Customer
Services in Banks’ (2011) had recommended a
five-time increase in the cap to ₹5 lakh due
to rising income levels and increasing size of
individual bank deposits.
▪ Banks, including RRBs, Local Area Banks,
foreign banks with branches in India, and
cooperative banks, are mandated to take deposit
insurance cover with the DICGC.
▪ Recently, the failure of the Punjab and
Maharashtra Co-operative (PMC)
Bank reignited the debate on the low level of
insurance against the deposits held by customers in
Indian banks.
Presently, in case of a bank collapse, a depositor can
claim an amount up to a maximum of ₹ 1 lakh per
account as the insurance cover (even if the deposit in
their account is greater than ₹ 1 lakh).
PROPOSAL FOR INCREASING BANK DEPOSIT
INSURANCE LIMIT
▪ Following the recent fraud at Punjab and
Maharashtra Cooperative Bank (PMC Bank),
the government is considering a proposal from
DICGC to increase the deposit insurance limit.
o DICGC has sent a proposal to the government
for increasing the deposit insurance cover to
 between ₹3 lakh and ₹5 lakh (presently ₹1
lakh since 1993).
o For deposit insurance to increase, DICGC Act
needs to be amended.
▪ Under bank deposit insurance scheme, in case of an
unlikely bank failure, deposits up to just Rs 1 lakh
is insured and paid back to the depositor.
▪ There are some exemptions like deposits of foreign
governments, deposits of central/state governments
and inter-bank deposits.
▪ DICGC insures all bank deposits, such as savings,
fixed, current and recurring.
3.15. FRDI BILL
▪ The Government has decided to withdraw the
Financial Resolution and Deposit Insurance (FRDI)
Bill after concerns were raised over the security
of bank deposits.
▪ The Bill was brought in to create a single agency
for resolution of financial firms such as banks,
insurance companies, non-banking financial
companies (NBFCs) and stock exchanges in case of
insolvency.
CONTROVERSIAL CLAUSES IN THE BILL
▪ Bail-in provision- This provision stipulated that if
a bank fails, depositors will have to bear part of the
liability.
▪ Insurance on deposits- The Bill proposed to delete
the legal provision for the present insurance system
wherein deposits are insured up to Rs. 1 lakh and
empowered a newly created body the Resolution
Corporation to decide the deposit insurance
amount.
▪ The Bill, introduced in August 2017, was referred
to a Joint Parliament Committee (JPC) which is
consulting all stakeholders.
JOINT PARLIAMENTARY COMMITTEE (JPC)
▪ It is an ad-hoc body.
▪ It is set up for a specific object and duration.
▪ Joint committees are set up by a motion passed in
one house of Parliament and agreed to by the other.
▪ JPC recommendations are not binding on the
government and have only persuasive value.
3.16. URGE FOR A ROBUST RESOLUTION
REGIME
▪ The current resolution regime is especially
inappropriate for private sector financial firms
in the light of significant expansion and many of
these acquiring systemically important status in
India.
▪ FRDI Bill intended to provide a comprehensive
resolution regime that would help ensure that, in
the event of failure of a financial service provider,
there is quick, orderly and efficient resolution in
favour of depositors.
▪ The provision of a single agency for resolution of
financial firms is in line with the recommendations
made by the Financial Sector Legislative
Reforms Commission (FSLRC), 2011 headed by
Justice B N Shrikrishna.
▪ The Insolvency and Bankruptcy Code, 2016
along with the FRDI bill would have streamlined
the procedure for the winding up or revival of an
ailing financial sector firm.
4. SWIFT SYSTEM
▪ The Society for Worldwide inter - bank
Telecommunication (SWIFT) is a messaging
network which connects banks and financial
institutions across the world. International
transactions of the banks and institutions are
ultimately based on this network.
▪ The network was in news in India after the LoU
(Letter of Undertaking) related banking fraud
occurred with the Punjab National Bank by
February 2018.
▪ Meanwhile, the RBI has enforced (February 2018)
a new guideline under which all banks and financial
institutions of India need to link their core
banking system to the SWIFT to protect
themselves from occurrence of any future financial
fraud.
5. BLOCKCHAIN TECHNOLOGY AND
BANKING FRAUDS
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 6. BUSINESS CORRESPONDENT
The RBI has allowed banks to appoint
entities and individuals as agents for
providing basic banking services in
remote areas where they can’t practically
MEANING start a branch. Business Correspondents
are instrumental in facilitating financial
inclusion in the remotest areas of
country. Business Correspondents are
hence instrumental in facilitating
financial inclusion in the country.
Identification of borrowers, collection of
small value deposit, disbursal of small
value credit, recovery of principal,
FUNCTIONS collection of interest, sale of micro
insurance, mutual fund products, pension
products, other third party products and
receipt and delivery of small value
remittances, other payment instruments,
creating awareness about savings and
other products, education and advice on
managing money and debt counselling,
etc.
Small Savings Accounts, Fixed Deposit
TYPES OF and Recurring Deposit with low
PRODUCTS minimum deposits, Remittance to any
BC customer, Micro Credit and General
Insurance.
Individuals like retired bank employees,
retired teachers, retired government
employees and ex-servicemen,
individual owners of kirana / medical
WHO CAN /Fair Price shops, individual Public Call
ACT AS BCs Office (PCO) operators, agents of Small
Savings schemes of Government of
India/Insurance Companies, individuals
who own Petrol Pumps, authorized
functionaries of well-run SHGs which
are linked to banks.
Q. What is/are the facility/facilities the beneficiaries
can get from the services of Business Correspondent
(Bank Saathi) in branchless areas? (CSE-2014)
1. It enables the beneficiaries to draw their subsidies
and social security benefits in their villages.
2. It enables the beneficiaries in the rural areas to
make deposits and withdrawals.
Select the correct answer using the code given below.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
7. VOCABULARY
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BASIS POINT
▪ Changes in interest rates and other variable are
expressed in terms of basis points to magnify and
express the importance of changes. One basis
point is 1% of 1%.
WEAK BANK
A ‘Weak Bank’ has been defined by the Narasimham
Committee II as - where a total accumulated losses of
the bank and net NPA amount exceed the net worth of
the bank.
BANK RUN
▪ A bank run is a type of financial crisis. It is a panic
which occurs when a large number of customers of
a bank fear it is insolvent and withdraw their
deposits.
NO FRILLS (ZERO FRILL) ACCOUNTS
▪ Account either with nil or very low minimum
balance as well as charges that would make such
accounts accessible to vast sections of population
along with extending financial inclusion policy
stance.
CORE BANKING SOLUTION
▪ Core Banking Solution (CBS) is networking of
branches, which enables Customers to operate
their accounts, and avail banking services from
any branch of the Bank on CBS network, regardless
of where he maintains his account.
▪ The customer is no more the customer of a
Branch. He/she becomes the Bank’s Customer.
Q. The term ‘Core Banking Solutions’ is sometimes
seen in the news. Which of the following statements
best describes/describe this term? [CSE-2016]
1. It is a networking of a bank’s branches which
enables customers to operate their accounts from
any branch of the bank on its network regardless of
where they open their accounts.
2. It is an effort to increase RBI’s control over
commercial banks through computerization.
3. It is a detailed procedure by which a bank with huge
non-performing assets is taken over by another
bank.
Select the correct answer using the code given below.
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
SUBORDINATE DEBT
▪ It is also known as junior debt. It is a finance term
to describe debt that is unsecured or has a lesser
priority than that of other debt claim on the same
asset.
▪ A subordinated debt therefore carries more risk
than a normal debt. Subordinated debt has a
higher expected rate of return than senior debt due
to the increased inherent risk.
BANK STRESS TEST
▪ A stress test is an assessment or evaluation of a
Bank’s balance sheet to determine if it is viable as
a business or likely to go bankrupt when faced with
certain recessionary and other stress situations-
whether it has sufficient capital buffers to withstand
the recession and financial crisis.
▪ European banks were recently subjected to such
stress tests.
EVERGREEENING OF THE LOAN
▪ Evergreening in banking is a practice of providing
a fresh loan to repay an old loan. For example, a
bank can lend money to a company to pay another
bank’s loan.
▪ In this way, the first bank can maintain its balance
sheet and reduce its non-performing assets (NPAs).
SIPHONING OF FUNDS
▪ Means that funds were used for purposes that were
not related to the borrower and which could affect
the financial health of the entity.
RECAPITALISATION
▪ Bank recapitalisation, means infusing more
capital in state-run banks so that they meet the
capital adequacy norms.
▪ The government, using different instruments,
infuses capital into banks facing shortage of capital.
▪ As the government is the biggest shareholder in
public sector banks, the responsibility of bolstering
banks' capital reserves lies with the government.
LAND DEVELOPMENT BANKS
▪ This term is used for the banks which provide long
term loans to promote use of land, agriculture etc.
NPA DIVERGENCE
▪ Divergence is the difference between RBI’s
assessment and that reported by the lender/ banks.
▪ Divergence takes place when the RBI finds that a
lender has under- reported or not reported at all
bad loans in a particular year and hence asks the
lender to make disclosures if under-reporting is
more than10% of bad loans or the provisioning.
PRO-CYCLICAL & COUNTER - CYCLICAL
LENDING
▪ A 'procyclical lending’ means that the banks
keep the lending rates low & reduce buffers
during an economic boom and therefore, promote
increase in the credit uptake. Similarly, they lend
less during a recession.
▪ Under ‘countercyclical lending’, banks tend to
maintain higher buffers during the period of
boom, limit lending and thus ‘cool down’ the
economy and stimulate the economy when it is in a
downturn.
INTEREST RATE SPREAD
▪ Spread refers to the difference in borrowing rates
and lending rates of financial institutions.
▪ In other words, it is the interest yield on earning
assets such as a loan minus interest rates paid on
borrowed funds.
PEER TO PEER (P2P) LENDING PLATFORM
▪ P2P lending is a form of crowd-funding which
enables individuals to borrow and lend money
without any financial institution as an
intermediary. The borrower can either be an
individual or a legal person.
▪ All P2P platforms are considered NBFCs and are
regulated by the RBI.
CONSORTIUM LENDING
▪ Consortium lending is a process under which
several banks finance a borrower based on
common appraisal and documentation, and
conduct joint supervision and follow-up
exercises.
▪ Consortium lending has often led to inordinate
delay in loan appraisal because of inability of
banks to share data with each other in timely
manner which delays funding for borrowers.
▪ It also resulted in adding more non-performing
assets (NPAs) to the banking system.
INDIAN BANK ASSOCIATION (IBA)
▪ It is an association of Indian banks and financial
institutions formed, in 1946.
▪ It aims to promote and develop in India sound
and progressive banking principles, practices and
conventions and to contribute to the developments
of creative banking.
REPCO BANK
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 ▪ It is a multi-state cooperative society established
in 1969 by the central government for rehabilitation
of repatriates from Myanmar and Sri Lanka.
▪ It is operated only in the South Indian states of
Andhra Pradesh, Karnataka, Kerala and Tamil
Nadu.
▪ It is controlled by the Ministry of Home Affairs.
OPERATION TWIST
▪ It was US Federal Reserve Bank’s monetary
policy which involved buying and selling of
government bonds to provide monetary easing for
the economy.
▪ On similar lines, RBI also announced a
simultaneous sale and purchase of government
bonds under the Open Market Operations (OMO)
mechanism.
‘NEAR’ MONEY
▪ Near money functions similar to the money but is
not actually money as it is not universally
acceptable such as credit cards 'also known as
plastic money), drafts and debit cards.
MORATORIUM PERIOD
▪ The Moratorium Period is the time during the loan
term in which the borrower in not required to
repay the loan.
▪ It is the relaxation time given to the borrowers
before beginning with the loan repayment in the
form of EMIs. RBI is offering this in COVID-19
pandemic to various segments.
LINE OF CREDIT (LOC)
▪ Line of Credit is the agreement between the
financial institution (bank) and the individual
(company or government) with respect to the
maximum loan amount that an individual can
borrow from a bank any time he wants, provided
the loan amount does not exceed the set limit in the
agreement.
▪ Line of credit is the credit limit of customer, i.e.
maximum amount of credit the customer is
allowed.
the bank comes to the village where the person can
make the transactions.
HAIRCUTS
▪ It refers to the difference between the loan
amount and actual amount recovered by the
Bank from their defaulting customer.
▪ Under the RBI's provisioning norms, the banks
are required to set aside certain percentage of their
profits in order to cover risk arising from NPAs. It
is referred to as "Provisioning Coverage ratio"
(PCR).
BANCASSURANCE
▪ Bancassurance (banc + assurance) or Bank
Insurance Model refers to the distribution of the
insurance and related financial products by the
Banks whose main business is NOT insurance.
▪ Bancassurance term first appeared in France in
1980, to define the sale of insurance products
through banks’ distribution channels.
SOURCES REFERRED
Sriram IAS, Ramesh Singh, Vision mains 365
(2018,19), Sanjeev Verma, key concepts in economy
(Shankar Ganesh), Mrunal handouts 2020, Vision PT
365 (2018,19,20), RSTV, www.iastoppers.com,
Investopedia, www.rbi.com, www.iasexamportal.com,
GK today, NCERT- Macro Economics (Class XII),
www.drishtiias.com, https://businessjargons.com, RBI
website, IAS baba 2020, https://www.nabard.org/,
Vision monthly 2020 – March, April, May, June,
Economic survey 2020

KIOSK BANKING
▪ The Kiosk Banking is the initiative taken by the
RBI for those living in villages or other remote
areas who are deprived of banking services due to
the non-availability of a bank branch in their
locality.
▪ In such arrangement, the person is not required to
go the bank to avail the banking services. Instead,

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 CH-4 FINANCIAL MARKETS
FINANCIAL MARKET
Financial market refers to a place where buyers and
sellers participates in the trade. It is platform that
facilitates traders to buy and sell financial
instruments/securities.
Importance • Helps in acceleration of economic
growth of country
• Helps savers to become investors
• Helps businesses to raise
money/capital to expand their
businesses.
Functions • Price determination and
discovery
• Mobilization of funds
• Capital formation
• Ensures liquidity
• Saves time and money
• Determines capital formation rate
Important Definitions :
Money Market for overnight to short-term
Markets funds and instruments having a
maturity period of 1 or less than 1
year.
Capital Market for long-term funds–both
Market equity and debt–that have maturity
period greater than year
Equity Market where equities (stocks)are
Market traded or issued
Debt Market where debt instruments
Market/Fixed (bonds, debentures, etc) are issued
Income or traded
Markets
A ‘Security’ means
certificate/document indicating
Securities that its holder is eligible to receive
a certain amount of money at a
particular time. This could be a
debt (bond/debenture) or equity
(Share certificates)
Types of financial (or securities) market
Tenure 1. Money Market (for period of less
than 1 year of maturity)
2. Capital Market (one year or above
maturity)
Freshness 1. Primary Market (where new
securities are issued for the first
time). Helps a company
/government to connect with the
investor. It has no separate
physical existence but classified
as such for economic analysis.
2. Secondary Market (where the
old securities are resold). It has
physical existence such as
Bombay Stock Exchange (BSE)
at Dalal Street, Mumbai. Provides
liquidity & confidence to
investors to buy new securities in
Primary Market.
On the 1. Future Market - Where parties
basis of write contract today to buy/sell
Settlement something at specific price on a
future date
2. Spot Market - if bought & sold
for immediate delivery.
Asset • Depending on what asset is
traded, market can be divided into
Bond (Debt) market, Share
(Equity) market, Gilt-Edged
Securities Market, Foreign
Currency Market, Commodity
Market etc.
• If there was a supermall where all
these products were available in
one place it will be called
“Universal Exchange”. SEBI
permitted BSE & NSE to launch
such thing (2018).
Nature of 1. Equity market
claims 2. Debt market
a
Financial Markets
Money Markets Capital Market
Debt Equity
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 Money Market Capital Market • These instruments accrues assured interest
• Short Term, less than • Long Term in Nature irrespective of profit of company. These debt
365 days • Long term debt instruments can be classified into –
• Short term fixed instruments or equity
is traded, ex. Bonds,
income instruments DEBT
debentures, equity INSTRUMENTS
are traded. ex. T- shares etc
Bills, bill of • Players involve
exchange, banks, listed
promissory notes, companies, brokers, Short-term Long term
call money etc insurance
• Players involve companies,
underwriter, stock Short term debt instruments
financial companies, • Short-term debt, also called current liabilities, is a
exchanges, investors
banks, central bank, etc firm's financial obligations that are expected to be
Government, chit • More formalized, paid off within a year.
funds etc (limited generally exchange • Tenure for short term debt instruments are less than
players) traded 1 year.
• Informal in nature • Less Liquid • Short term debt instruments are usually
and over the counter • High Risk ‘unsecured’ because not backed by any asset.
• Creates investments • These instruments usually sold at discount and re-
• More liquid
and maintains purchased at Par value/Face value.
• Low Risk stability in market • The difference between these two prices is the
• Maintains liquidity • Regulated by SEBI interest earned by investor. Another synonym for
in businesses this process: “rediscount the bills.”
(mainly financial • Short term debt instruments are traded at Money
system) Market and are (usually) ‘negotiable and
transferable’ in nature i.e. lender can sell to third
• Regulated by RBI
party, and third party can demand money from
borrower.
Debt Equity • Near Money is an asset that is highly liquid and
• Bonds • Shares can be readily converted into cash.
• Fixed • Variable
Income/Interest Income/Dividends
• Principle has to be • Nothing returned
returned • Ownership loss
• No Ownership Loss • Considered more
• Considered Less risky
Risky • Only Long Term
• Short and Long • Lower Preference
Term while liquidation
• Higher Preference
while liquidation Borrower Short term debt instrument
Government • State govt’s treasury bills (14
DEBT INSTRUMENTS days). However it was stopped
• Debt Market deals with Bonds/Debentures since 2001.
• Debt instruments are creditors to company. This • Union govt’s treasury bills
instruments facilitates and ensures the first claim (91, 182 and 364 days)
during liquidation of an asset. • Cash Management bills
(CMB: upto 90 days, started in

129
 2009) – Issued by RBI on
behalf of GOI to meet the
temporary mismatches in the
cash flow of the Government.
Issued at a discount and
redeemed at face value at
maturity. Investment in
CMB’s is also counted in
investments for SLR.
• WMA (ways and means
advances): It is the mechanism
through which RBI lends
money to Govt, for temporary
short term needs when there is
mismatch in receipt and
expenditure of Govt. This
WMA is not counted in Fiscal
Deficit formula.
Company • Bill of Exchange- A bill of
exchange is defined as an
instrument in writing
containing an unconditional
order, signed by the maker,
directing a certain person to
pay a certain sum of money
only to, or to the order of a
certain person or to the bearer
of the instrument.
• Hundi – A Hundi is written
order made by a person
directing another to pay a
certain sum of money to a
person named in an order –
bearer of the communication.
• Commercial Papers – CP is
issued by a corporation, also
called unsecured promissory
note since the issuer makes a
promise to pay back the face
value after the maturity period
but that promise is unsecured.
CP is issued at a discount to
face value.
• Promissory Notes - A
promissory note is a legal,
financial tool declared by a
party, promising another party
to pay the debt on a particular
day. It is a written agreement
signed by drawer with a
promise to pay the money on a
specific date or whenever
demanded. Currency Note is a
‘Promissory Note’ issued by
RBI Governor however, he is
not bound to pay any interest.
Just promises to exchange it
with other currency notes and
coins of equal face value.
Merchant to Commercial Bill - CBs are drawn
bank by the seller (drawer) on the buyer
(drawee) for the value of goods
delivered by him. These Bills are
of 30 days, 60 days or 90 days
maturity.
If the seller is in need of funds
before the maturity date, he can
also approach the bank to accept
the bill.
Banks / NBFC Certificate of Deposits – A type
of tradable Certificate against time
deposit issued by Commercial
Banks and Financial institutions.
CD is tradeable and transferable.
Offers slightly higher yield than T-
Bills due to risk of default present
in case of banks. CDs are issued by
banks during periods of tight
liquidity, at relatively high interest
rates. Banks resort to CD when the
deposit growth is sluggish but
credit demand is high.
Call Money Call Money is required mostly by
Financial Intermediaries
(Banks/Non-Banks) to borrow
money without collateral from
other banks to maintain a
minimum cash balance known as
CRR(Cash Reserve Ratio). Under
call money market, funds are
transacted on overnight basis. An
over-the-counter (OTC) market
without the intermediation of
brokers.
Notice Money Under notice money market, funds
are borrowed/lent for a period
between 2-14 days.
LIBOR London Inter-Bank Offered Rate
(LIBOR) is the average interest
rate at which banks in London
give short term loans to each other.
It serves a benchmark, using
which Global banks decide their
call money /notice money rates.
MIBOR NSE developed and launched the
NSE Mumbai Inter-Bank Bid Rate
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 (Mumbai (MIBID) and Mumbai Inter-Bank
Inter-Bank Offer Rate (MIBOR) for the
Offer Rate) overnight money market in 1998.
The MIBID/MIBOR rate is use as
benchmark rate for majority of the
deals.
CBLO Clearing Corporation of India Ltd
(Collateralized (CCIL) helps Financial
Borrowing Intermediaries (FI) to get short
and Lending term loans through this instrument.
Obligation)
• Repo – It is an instrument for
Repo and borrowing funds by selling
Reverse Repo securities with an agreement
to repurchase the securities on
a mutually agreed future date
at an agreed price which
includes interest for the funds
borrowed.
• Reverse Repo - It is an
instrument for lending funds
by purchasing securities with
an agreement to resell the
securities on a mutually
agreed future date at an agreed
price which includes interest
for the funds lent. Used for
absorption of liquidity.
TReDS An online mechanism. MSME
(Trade sellers pledge their (unpaid)
Receivables invoices made to corporates →
Electronic MSME receive (short-term)
Discounting finance from Banks and NBFCs.
System) Budget-2019 – we will make
amendments in Factoring
Regulation Act, 2011 to allow all
NBFCs to directly participate on
the TReDS platform.
Q. Find Correct statements:(CSE-2018)
1. The Reserve Bank of India manages and services
Government of India Securities, but not any State
Government Securities.
2. Treasury bills are issued by the Government of
India and there are no treasury bills issued by the
State Governments.
3. Treasury bills offer are issued at a discount from the
par value.
Ans Codes:
(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3
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Long Term Debt Instruments
• Long Term Debt Instruments have tenure 1 year
or above. Further sub-division based on who is the
Borrower.
Methods by Colonial era Govt. to borrow money :
Coupon Contain detachable coupons. Coupons are
Bonds presented to the issuer to claim the
interest. Therefore, bond interest rate is
also called ‘coupon rate’.
Zero These bonds are sold on discount and
Coupon repurchased at face value, do not have any
Bonds coupons.
Bearer Not linked to a PAN card, Aadhar card or
Bonds passport, voter card or social security
number. Anyone who presents it to the
issuer, will get interest and principal.
Usually issued during the war time.
Modern methods to borrow money
• Dated Securities – Dated G-Sec are long
term securities or bonds of the government that
carries a fixed or floating coupon (interest rate).
• Government Securities – G-Sec are financial
instruments and securities issued by a government
towards raising a loan from the public. It is also
called Gilt Edged Securities because repayment is
assured by Government. (But then, they give lower
interest rate because of low risk to the investor).
• Sovereign bonds – It is a specific debt instrument
issued by the government. They can be
denominated in both foreign and domestic
currency.
• Global Credit Rating Agencies gives ‘rating’ to
sovereign bonds. “AAA” is the best and highest
given to US Treasury Bonds. India’s rating is
~“BAA” which implies moderate risk of default.
• World’s top three credit rating agencies - Fitch,
Moody’s and Standard &
Poor have pro- US/EU
allegiance. Critics allege
these 3 agencies do not give
adequate upgradation to the
Govt bonds of India, China, Russia despite the
economic growth.
• Pertaining to above issues, India has proposed the
BRICS group to set up its own independent
credit rating agency.
Bonds by Govt. to Reduce Gold Consumption (so
import)
Real Interest Rate is Nominal Interest minus Inflation. Irredeemable Will pay only interest but no
When Real Interest is negative, purchasing power Bonds principal returned. Sometimes
decrease despite increase in money quantity in bank issued by PSB to meet BASEL-
account. Then people prefer to park money in gold/real capital requirements. Although
estate- which is not very beneficial to economy. in reality they offer ‘redemption’
after 5-10 years when holder has
Inflation RBI launched in 1997, 2013, 2018 to ‘option’ to redeem principal &
Indexed provide positive real interest rate to exit.
Bonds household, thereby reducing the Gold Non-convertible Cannot be converted into shares.
consumption & Current account Deficit Bond/Debenture
(CAD) & weakening of rupee against Hybrid Issued as “Bond” but can be
dollar. instruments converted into Share. E.g.
Sovereign They are denominated in gold grams. Optionally Fully Convertible
Gold Annual interest 2.5-2.75% (depending Debentures (OFCD).
Bond on which year you bought), and after 8
(2015) years you get the amount equivalent to Other issuers of Long Term Debt Instruments
prevailing gold prices at that time.
Issuers Objective
Long term debt instruments by Companies: Urban Local Urban Local Bodies Issue
Bodies Municipal bonds to borrow
Bonds Debentures money from public.
(British Term) (American Term) BRICS Bond 2014- BRICS Nations had
A financial instrument A debt instrument used setup the New Development
showing the to raise long term Bank (NDB, HQ:
indebtedness of the finance. Shanghai, China). Later it
issuing body towards its launched BRICS Bonds to
holders. mobilize money for its
Generally secured by Can be secured or infrastructure loans.
collateral unsecured (Denomination in US
Low interest rates High rate of interest Dollars)
Issued by Govt. financial Issued by companies. World Bank • 2018: launched world’s
institutions and first Blockchain Offered
corporations, etc. New Debt Instrument
SIMILARITIES called Bond-i.
Source of debt finances • Sold in Australia using
Periodical payments ETHEREUM
blockchain technology.
Junk Bonds A junk bond is debt that has been • Local Manager:
given a low credit rating by a Commonwealth Bank of
ratings agency, below Australia (CBA)
investment grade. As a result, • Tenure of 2 years at ~ 2%
these bonds are riskier since interest. Denomination in
chances that the issuer will Australian Dollars, hence
default or experience a credit also called “Kangaroo
event are higher. Bond”.
The Credit Rating Company will
mark it as Junk Bonds (“BB to Other Long term debt instruments:
D” Grade) e.g. IL&FS. Such
company will have to offer a Masala Bonds
very high interest rate when • Masala Bonds are rupee-denominated bonds, i.e,
issuing bonds next time. the funds would be raised from overseas market
Redeemable Will repay regular interest and in Indian rupees.
Bonds will return principal on maturity.

132
 • World Bank’s sister agency International
Financial Corporation (IFC) launched ‘Masala
Bonds’ to help Indian public sector and private
sector companies.
• According to RBI-
o Any corporate and Indian bank is eligible to
issue rupee denominated bonds overseas.
o The money raised through such bonds cannot
be used for real estate activities other than
for development of integrated township or
affordable housing projects.
o It also cannot be used for investing in capital
markets, purchase of land and on-lending to
other entities for such activities as stated
above.
o The rupee denominated bonds can only be
issued in a country and subscribed by a
resident of such country that is a member of
the financial action task force (FATF) and
whose securities market regulator is a member
of the International Organisation of Securities
Commission.
o The minimum maturity period for masala
bonds raised up to rupee equivalent of USD
50 million in a financial year should be 3
years and for bonds raised above USD 50
million equivalent in INR per financial year
should be 5 years.
2015 RBI allowed Indian entities to launch such
Masala Bonds.
2019 Kerala became the first state to issue
Masala Bonds. Its Kerala Infrastructure
Investment Fund Board (KIIFB) issued
Masala Bond at the London Stock
Exchange.
Q. With reference to `IFC Masala Bonds',
sometimes seen in the news, which of the statements
given below is/are correct? (CSE-2016)
1. The International Finance Corporation, which
issues them, is an arm of the World Bank.
2. They are the rupee-denominated bonds and are a
source of debt financing for the public and private
sector.
Answer Code:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither1 nor 2
Panda Bonds
133
• Panda bonds are Chinese Renminbi (yuan) -
denominated bonds from a non-Chinese issuer,
sold in the People's Republic of China.
• The first two Panda bonds were issued in October
2005 by the International Finance Corporation and
the Asian Development Bank on the same day.
Kangaroo Bonds
• A kangaroo bond is a type of foreign bond issued
in the Australian market by non-Australian
firms and is denominated in Australian
currency.
• The bond is subject to the securities regulations of
Australia. A kangaroo bond is also known as a
"matilda bond."
Maharaja Bond
• Better rating than Govt of India bonds but lower
interest rate.
• It is Rupee denominated bond.
• Tenure is 5 / 10 years.
• Issued within India's domestic financial market.
Long Term Debt Instruments - Special purpose
Bonds
Elephant Bonds (Proposed)
• A High Level Advisory Group on Trade Policy
(HLAG) headed by Surjit S Bhalla (Committee
‘to improve India’s share in global trade’) has
recently suggested the govt. to issue ‘Elephant
Bonds’.
• This will help India to recover up to $500 billion
of black money that is stashed overseas.
• An Elephant Bond is a Rupee denominated bond
with 25 years maturity; and its fund is to be
used exclusively for infrastructure.
• The committee has recommended making
investment in such bonds compulsory for the
people declaring undisclosed income.
• People declaring undisclosed income will have to
mandatorily invest 50% of that amount in these
securities.
• The move is also expected to bring down the real
interest rate. It will also strengthen the rupee.
Green bonds
• A green bond is a type of fixed-income instrument
that is specifically earmarked to raise money for
climate and environmental, renewable energy,
pollution control projects.
• There is no standard definition of green bonds as
of now.
• Green bonds are issued by multilateral agencies
such as World Bank, corporations, govt. agencies
and municipalities.
• Green bonds are open for investment by insurance
companies, mutual fund companies, pension funds
among others.
• SEBI’s indicative list for investment – clean
transportation, sustainable water management,
climate change adaptation, energy efficiency,
sustainable waste management and land use,
biodiversity conservation.
2007 World’s first Green Bond launched by
World Bank
2015 India’s first Green Bond launched by Yes
Bank
2016 BRICS Bank (New Development Bank)
issued Yuan- denominated green Bonds
2018 Indian Renewable Energy Development
Agency (IREDA) launched India’s first
Masala Green Bond at London Stock
Exchange
Blue Bond
• It is a debt instrument issued by governments,
development banks etc to raise capital from
investors to finance marine and ocean-based
projects.
• It will help in expansion of marine protected areas,
improved governance of priority fisheries and the
development of the blue economy.
• The blue bond is a sub-type of green bond.
• Seychelles issued world's first 'Blue Bond,' in
2018 to expand its marine protected areas and
fisheries sector.
Catastrophe Bond
• Catastrophe bonds, also known as Cat bonds,
allows the transfer of risks to bond investors.
• For the issuer - typically governments, insurers, and
reinsurers - cat bonds signify financial protection
in case of a major natural catastrophe, such as a
hurricane or an earthquake.
• For the investor, buying the bonds means they
may get high returns for their investment, which
is not subject to financial market fluctuations.
• In case a qualifying catastrophe or event occur the
investors will lose the principal they invested.
• If disaster doesn’t happen then principal will be
returned.
Social Impact Bonds
• A Social Impact Bond, also known as Pay for
Success Financing, a Pay for Success Bond or a
Social Benefit Bond is a contract with the public
sector in which a commitment is made to pay for
improved social outcomes that result in public
sector savings
• Social Impact Bond bonds will be offered to High
Net worth Individuals (HNI), Impact Investors
(rich people interested in ‘indirect’ social service)
etc. Investors will earn 3% annual interest rate
for tenure of 5 years.
• In 2019 SIDBI issued ₹ 300 cr. worth Women’s
Livelihood Bonds with the help of World Bank,
UN Women org etc.
Electoral bonds
• Announce in Budget 2017 (Dept. of Economic
Affairs, Finance)
• These bonds are on the lines of bearer bonds or
promissory notes wherein the issuer (bank) is be the
custodian and pays the one who holds the bonds
(political party).
• Characteristics of Electoral bonds
o These bonds are issued by notified banks (SBI
at present) in multiples of Rs.1,000,
Rs.10,000, Rs.1,00,000, Rs.10,00,000 and
Rs.1,00,00,000
o Only an Indian citizen or Company
registered in India can purchase bond by
depositing money in their bank account and
use that money to buy Electoral Bond. So,
Electoral Bond can’t be bought anonymously
or directly with cash.
o The political party has to encash it into the
account which is registered (Under RPA
1951) with the Election Commission of
India and which has secured 1 percent or
above votes polled in last Lok Sabha or
Vidhan Sabha elections.
o Validity of the bond will be only of 15 days
from date of purchase. Within that time, buyer
must donate, and political party must deposit
in its SBI (current) bank account. However, No
interest payable on the bond.
Relationship between Bond Price, Yield and
Interest Rate
• Price of bond is inversely related to Interest Rates
• Price of Bond is inversely related to yields
• Yields are directly related to Interest Rates
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 EQUITY INSTRUMENTS financially sound company with a
• Equity holders are called as owners of the company. history of generating good dividend.
If company makes profit, they will get dividend. Venture Venture capital is a type of private
However, during liquidation of an company, their capital funds equity, a form of financing that is
claim will be at last. (VCF) provided by firms or funds to small,
early-stage (seed), emerging firms
Shares and shareholders - Shares are the units into that are deemed to have high growth
which the absolute share capital of a firm is split into or potential, or which have
divided into. Therefore, the share is a fractional portion demonstrated high growth.
of the share capital and comprises the ground of Angel Group of individuals or an
ownership interest in a company. The persons who Investors individual itself who invest their
contribute money through shares are called own money in the early (concept)
shareholders. Stages of the company and in return
take a share in the company. They
Authorized It is the maximum amount of the invest typically less money than the
Capital capital for which shares can be Venture Capitalists
issued by the Company to Corporate Invests in start-up company with
shareholders. The Authorised Strategic goal of acquiring the company or its
capital is mentioned in the Investor technology at later date.
Memorandum of Association of Share When promoter of a company
company under heading of “Capital Pledging pledges his shares as collateral to
Clause” The Authorised capital can borrow loans from a bank / NBFC.
be increased at any time in future. Market Sum of the market value of all the
Paid Up Paid- up capital is the amount paid capitalization stocks derived by multiplying the
Capital by the shareholders for the shares price of the share by the number of
held by them in the company. It is equity shares out- standing
the actual fund that the company Full Market Capitalization
receives from the issue of shares Method - In this case the market
Ordinary Have voting power in the meetings capitalization is found out by total
shares of shareholders. Equity number of Shares * Price of Each
(Equity shareholders are given dividend Share
shares) only after paying it to the preference Free-Float Market Capitalization
shareholders. Last claim during - Shares which are not free float
liquidation. such as shares held by government
Preferential These are shares of an enterprise’s or promoters or locked under
Shares stock with dividends that are paid Employees Stock Option are
out to the members before equity excluded while calculating market
shares dividends are circulated. capitalization
During liquidation, these investors
will be given money before the Angel investor viz-a-viz Venture capital
ordinary (equity) shareholders.
Sweat Equity Sweat Equity Share given at ANGEL INVESTOR VENTURE CAPITAL
Share discount to directors & employees • They usually invest • They usually invest
for their value addition to company. less than one million more than one
Penny stocks Penny stocks are those that trade at dollar . million dollar
a very low price, have very low • They usually don't • They usually involve
market capitalisation, are mostly involve with with company
illiquid, and are usually listed on a company. • They unlikely to
smaller exchange. • They invest in early invest in start ups
Blue Chip A blue-chip stock is a huge stage of business or • They use fund
stocks company with an excellent we can say start ups providers money
reputation. Shares of a nationally • They use their own
recognized, well-established and money they don't

135
 demand board seat • They demand board face value or higher. If less
which leads to quick seat which leads to subscription, then underwriter will
decision making. delay in decision buy the unsold securities by
making. himself.
Further Already listed company generates
Public further funds (to obtain more capital) by
METHODS OF ISSUING SHARES Offer issuing shares.
• Share have printed price on the certificate called (FPO)
Face Value or Par Value. If they are sold at higher Rights issue: Company issues
price than face value, it’s called “Premium Value”. additional shares but gives first right to
• Share Price - Market Price of Trade based on existing shareholders to buy them, if
demand supply they refuse then offered to outsiders.
• Face Value - Book Value
• Discount - When share issued above face value Economic Survey 2020: No of IPO issuing Companies
have declined: 134 (2017) → 103 (2018) → 47 (2019).
Which indicates problems like protectionism (trade
war), NPA, slowdown in consumer demand are
Types of Market preventing some of the companies from expanding
further. Although the total amount of raised has
increased.
Primary Market Secondary Market
2019: Saudi Arabia’s public sector oil company
Aramco issued world largest IPO worth more than $25
Primary Market Secondary Market trillion USD. It was listed at Riyadh’s Tadawul Stock
Exchange.
• When Company • Market where one
directly issues shares person buy/sell
American Depository Receipt /Global Depository
to people or certain shares from another
Receipt
private individuals person
• It is an Indian shares in foreign (Videshi) locker.
• Enables company to • Leads to discovery
tap sources of of valuation of the • An Indian (or any non-American) company wants
funding for capital company to mobilize money from American share market but
requirement. does not want to go through the process of
registration with the American share market
• Leads to price
regulator.
Discovery
• Then Indian company gives the Indian shares to an
Public Issue - This issue is for retail investors to buy American bank. Based on those Indian shares, the
the shares of the company American bank will create American Depositary
Receipts (ADR) & sell them to American investors.
Denomination would be in USD.
Public Issue • Global Depositary Receipt (GDR): Same as
(methods) above, but when single bank issues receipts for
investors in multiple countries. Denomination:
Initial Public Offer Further Public Offer USD or Euro.
(IPO) (FPO)
Share issuing Deposits his That bank
Initial • When an unlisted company decides company company’s issues -- in
Public to go public. shares in a bank local market
Offer • Company hires an underwriter of → in -- currency
(IPO) (usually, a merchant bank, Non-American America ADR (in $)
investment bank) for a fee. Non-Indian India Bharat /
• Underwriter invites application Indian
from public & sells them shares at

136
 depositary
receipt (IDR)
(in Rupees)
Initial Coin Offering (ICO)
• Suppose, a company wants to raise investors’
money for launching new cryptocurrency, or
service/app related to an existing cryptocurrency.
• Then, it will issue Initial Coin Offering (ICO) →
Investor subscribes to it, and receives ‘tokens’ (and
not SHARES). Investors can use the ‘tokens’ to buy
companies coins/services or may sell it to a third
party.
• RBI has cautioned Indians not to invest in such
instruments, because of the dangers and issues.
Clearing House
• A organisation which registers, monitors, matches
and guarantees the trade of its members and carries
out all final settlements of all transactions on a stock
exchanges.
• Clearing corporations maintains fund for
guaranteeing trades, settlements and in case a seller
or buyer defaults.
• A clearing house is often central counterparty to all
trades, that is, the buyer to every seller and the seller
to every buyer.
• E.g. NSCCL, ICCL and MCX-SX clearing
corporation ltd.
• Clearing corp. are designed as Market
Infrastructure Institution (MII) for oversight
considering its systemic importance in security
markets regulated by SEBI.
• They are also subject to rules and regulations that
are based on International Organisation of
Securities Commission (IOSCO) principle.
DIFFERENCE BETWEEN FDI AND FII
• FDI is involved in setting up firms to produce goods
and services. Because of this, they called as “Direct
Investment”.
• Foreign Institutional Investment (FII) on other
hand, buys financial assets for profits.
• In order to remove the ambiguity that prevails over
what is FDI an what is FII, it was decided to follow
the international practice and laid down a broad
principle that, wherein an investor has a stake of 10
percent or less in a company, it will be treated as
FII.
• On other hand, wherein an investor has a stake of
more than 10 percent in a company, it will be
treated as FDI.
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STOCK EXCHANGES
• Share market or Stock Exchange is a stock market
place that facilitates buying and selling of stocks
either between Company and Shareholders
(Primary) or between different shareholders
(Secondary), commonly known as secondary
market.
• SEBI (Securities and Exchange Board of India)
regulator of stock markets in India.
• Stock exchanges also have their electronic
platforms for trading. E.g. BOLT (BSE's On-line
Trading System) and NEAT (National Exchange
for Automated Trading). They run using internet
facility from VSAT (Very Small Aperture
Terminal) Satellite.
World’s Oldest: Amsterdam Stock exchange,
Netherlands (1602)
Asia’s Oldest: Bombay Stock Exchange (1875).
SENSEX (Sensitivity Index) is the benchmark
index of BSE.
NSE (National Stock Exchange) - Setup in 1992
(HQ-Mumbai). NIFTY (National Fifty) is the
benchmark index of NSE. NIFTY comprises of 50
stocks from different sectors such as IT,
Automobile, Cement, Pharma, Electronic Goods etc.
with highest Market Capitalization. These are large,
well-established and financially sound companies
from main sectors.
Importance of stock exchange-
• Attracts foreign investments
• Another vehicle for investors savings
• Investment in backward regions for job creation
• An efficient medium for raising long term resources
for businesses.
• Help raise savings from general public by the way
of issue of equity/debt capital.
• Exercise discipline on companies and make them
strive to be profitable.
Stock exchanges in india
1. Bombay Stock Exchange (BSE)
2. National Stock Exchange (NSE)
3. United Stock Exchange (USE)
4. MCX Stock Exchange Ltd. (MCX-SX)
5. India International Exchange (INX)
Sensitive Index (SENSEX) is the weighted average of
Free Float Market Capitalization (FFMC) of 30
companies, selected by BSE’s “Index Cell”.

SENSEX - Up
RBI’s soft
monetary policy
facilitates cheap
loan & credit cards
which leads to more
spending by consumers.
So this resulted into more
profitability of company
All above developments
gives more dividend :
investor thinks “better I
buy more shares to get
more dividend” - Bullish
behaviour
Peace, Economic boom /
prosperity, Political
Stability
When govt. hikes foreign
investment limits
Merger-Acquisition,
New product launched,
Environmental clearance
given to factory.
Inter-Connected Stock Exchange of India (ISE) -
Stock exchange of exchanges i.e. many Regional Stock
Exchanges combined together to come up with ISE
• Depositary is an organization that stores the
SENSEX - Down physical securities in its vault and allows investors
RBI’s tight to trade them in electronic form.
monetary • Trading of the shares and bonds in paper-form leads
policy to sluggish transactions and prone to the risk of
theft, forgery and fire.
• Customer must open a “Demat” account in a
depository-partner (DP) which can be a bank or an
NBFC.
• SEBI is the regulator under the Depositories Act
1996. Notable examples are Central Depository
services Limited (CDSL) and National securities
depository Limited (NSDL).
• NSDL also has license of the RBI to operate as
Payment bank.
War, recession, political Investor Protection Fund (IPF) - Maintained by NSE
instability - Bearish for investor claims/payments arising out of non-
market. payment/non- receipt of securities to the investor from
Vice-versa the trading member who has been declared a defaulter.
The maximum amount of claim payable from the IPF to
CEO/MD arrest or FIR, the investor is Rs.10 Lakhs
Courts slapping fine,
media exposing scandal ISIN Number - International Securities Identification
and other detrimental Number (ISIN) is a Unique 12 characters, consisting
eventualities. of both letters and numbers. ISIN is a serial code to
identify securities. Prevents mistakes in buying/selling
shares/bonds of companies with similar sounding
names.

TYPES OF INVESTORS

Based upon buying capacity

Qualified QIBs are the institutional investors
Institutional who are perceived to possess
Buyers expertise and the financial muscle to
(QIB) evaluate and invest in the stock
markets. They must be registered
Broker – They bring the buyers and sellers to the stock
with SEBI as QIBs
exchange platform, to enabling trading in securities.
Anchor investors: -
These are sub-type of qualified
Budget-2019: Envisaged setting up a Social Stock
institutional buyers who buy a large
Exchange (SSE) under SEBI’s regulation. SSE will
chunk of shares a day before an IPO
help social enterprises and voluntary organizations to
process opens.
raise capital as equity, debt or mutual funds. SEBI setup
They help arriving at an approximate
Ishaat Hussain panel to study it.
benchmark price for share sales and
De-Materialized (D-MAT) Account

138
 generate confidence among retail
investors.
The anchor investor would be a
qualified institutional buyer (QIB)
and an issuer can allot up to 60 per
cent of Quota for QIBs
Retail An individual investor who is not a
Investors QIB. Underwriter will keep quota for
each category of investors, as per
SEBI norms.
Non- Investor which is neither Retail not
Institutional QIB would be called Non-
Investor Institutional Investor
Depending on Buying Behaviour
STAG He buys newly issued securities from
(Male Deer) primary market & sells them in
secondary market for quick profit.
Bull Optimistic speculator who hopes
share prices will rise, so purchases (to
sell them later at much higher price).
The bull speculator stimulates the
price to rise.
Jobbers Full time engaged in buying / selling
securities using money from their
own pockets. (Whereas brokers /
commission agents buy/sell using
money/shares of their clients).
Bear A pessimistic speculator who fears
prices will fall so, he sells. A bear
usually presses its victim down to
ground. Similarly, the bear
speculator tends to force down the
prices of securities.
Intra-day Individuals buy and sell shares over
trading the Internet over a period of a single
day's trading, with the speculative
intention of profiting from small
price fluctuations.
COMMODITY MARKET
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• A commodities exchange is an exchange where
various commodities and derivatives products
are traded. Most commodity markets across the
world trade in agricultural products and
contracts based on them. These contracts can
include spot prices, forwards, futures and
options on futures.
• E.g. Food grains, cotton, precious metals or energy
resources (oil / gas), jute, sugar, rubber, gold etc.
• Commodity Futures - It is a type of contract for
future delivery and settlement of commodity.
Commodity exchanges were under a statutory
regulator Forward Market Commission (FMC)
under the Ministry of Consumer Affairs and Public
Distribution. However, Jignesh Shah generated fake
receipts without any commodities in the warehouses &
traded at NSEL (commodity exchange). This led to
transfer of FMC to Finance Ministry initially and later
on, FMC ultimately merged with SEBI (2015).
INVESTMENT FUNDS
Mutual funds
• A mutual fund collects money from investors and
invests the money, on their behalf, in securities
(debt, equity or both). It charges a small fee for
managing the money.
• Mutual fund sectors are one of the fastest growing
sectors in Indian economy that have potential for
sustained future growth.
• The advantages of the mutual funds include
professional management, diversification,
variety, liquidity, convenience as well as strict
government regulations and full disclosure.
• Mutual funds are compulsorily registered with
SEBI.
• A mutual fund is run by a group of qualified people
who form a company, called an asset management
company (AMC-NBFC) and the operations of the
AMC are under the guidance of another group of
people, called trustees.
• Whatever dividend/ interest is generated from the
portfolio, it is distribute among investors in the
proportion of their units.
• Investor has to pay Entry Load (fees for joining)
and Exit Load (fees for quitting). SEBI regulates
these fees.
• Due to low deposit rates in banks, people invested
money in mutual funds however post- IL&FS
crisis, charm declining because mutual funds are
subject to such market risks.
TYPES OF MUTUAL FUNDS
Open Ended Fund Close-ended Fund
An open-ended fund is A close-ended fund
the one which is usually usually issue units to
available from a mutual investors only once,
fund on an ongoing when they launch an
basis that is an investor offer, called new fund
can buy or sell as and offer (NFO) in India.
when they intend to at a
Net Asset Value-based
price.
Exchange Traded Funds (ETFs) are a mix of
open-ended and close-ended schemes.
Hedge Fund
• Hedge fund is a private investment partnership
and funds pool that uses varied and complex
proprietary strategies and invests or trades in
complex products, including listed and unlisted
derivatives.
• Hedge fund is special type of Mutual Fund which
tries to hedge risks to investor’s capital against
market volatility by employing alternative
investment approaches.
• Hedge fund investors typically include high net
worth individuals (HNIs) and families,
endowments and pension funds, insurance
companies, and banks.
• The minimum ticket size for investors putting
money in these hedge funds is Rs 1 crore.
Sovereign Wealth Fund (SWF)
• SWF is a State owned investment fund, wherein
central bank, finance ministry and other public
sector financial intermediaries park their surplus
fund. Pooled/parked money is used for
investment.
• The SWFs are funded by the foreign exchange
reserves that are held by the central bank.
• E.g. Singapore's GIC sovereign wealth fund, Abu
Dhabi Investment Authority (ADIA)’s funds, Qatar
Investment Authority (QIA) etc.
• Some of the major objectives of the Sovereign
Wealth Fund (SWF) are mentioned below:
o Protecting and stabilizing the economy and
budget of a country from excess volatility in
exports.
o To earn greater returns than the foreign
exchange reserves.
o To assist the monetary authorities to dissipate
any unwanted liquidity.
o To increase savings for future generations.
o Providing funds for the social and economic
development of a country.
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 o To provide a sustainable long term capital
growth for the targeted countries.
InvITs
• The SEBI had first notified REITs and InvIT
Regulations in 2014, allowing setting up and
listing of such trusts which are popular in some
advanced markets.
• It is like a mutual fund, which enables direct
investment of small amounts of money from
possible individual/institutional investors in
infrastructure to earn a small portion of the
income as return.
• InvITs can be treated as the modified version of
REITs designed to suit the specific
circumstances of the infrastructure sector.
• They are similar to REIT but invest in
infrastructure projects such as roads or highways
which take some time to generate steady cash
flows.
REITs
• A REIT is roughly like a mutual fund that invests
in real estate although the similarity doesn’t go
much further.
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• The basic deal on REITs is that you own a share of
property, and so an appropriate share of the income
from it will come to you, after deducting an
appropriate share of expenses.
• Essentially, it’s like a group of people pooling
their money together and buying real estate
except that it’s on a large scale and is regulated.
• According to Indian regulation on REITs, these are
meant to primarily own finished and rented out
commercial properties - 80 per cent of the
investments must be in such assets. That excludes
a real estate that is under development.
Need of InvITs and REITs
• Infrastructure and real estate are the two most
critical sectors in any developing economy.
• A well-developed infrastructural set-up propels the
overall development of a country.
• It also facilitates a steady inflow of private and
foreign investments, and thereby augments the
capital base available for the growth of key sectors
in an economy, as well as its own growth, in a
sustained manner.
• Given the importance of these two sectors in the
country, and the paucity of public funds available to
stimulate their growth, it is imperative that
additional channels of financing are put in place.
CPSE - Exchange Traded Funds (ETF)
• An ETF is a basket of securities that trade on an
exchange, just like a stock.
• ETF reflects the composition of an Index, like
BSE Sensex. Its trading value is based on the Net
Asset Value (NAV) of the underlying stocks (such
as shares) that it represents.
• ETF share prices fluctuate all day as it is bought
and sold. This is different from mutual funds that
only trade once a day after the market closes.
• An ETF can own hundreds or thousands of stocks
across various industries, or it could be isolated to
one particular industry or sector.
• Besides being cost efficient, ETFs offer a
diversified investment portfolio to investors.
A bond is an instrument that represents a loan made by
an investor to a borrower (typically corporate or
governmental).
Disinvestment: government sells it shares from Central
Public Sector Enterprises (CPSE) but does not reduce
its shareholding below 51%.
If Govt’s shareholding reduced below 51%, then it is
called Privatization, although NITI prefers the term
‘Strategic Disinvestment’.
BHARAT-22:
• Bharat-22 ETF is the second ETF from Govt. of
India after CPSE-ETF, hence it is attracting
investors in the stock market.
• Bharat 22 is an ETF that will track the
performance of 22 stocks, which the government
plans disinvest.
• The index will be rebalanced annually.
• The Bharat 22 ETF has more than double the 10
stocks in the CPSE ETF and much wider sector
coverage.
• Investors response to Bharat-22 was initially
lukewarm attributed to NPA problem of PSB and
resultant poor dividends. So BHARAT-22 not
giving good returns.
Bharat Bond (Debt) ETF (2019-Dec)
• Bond ETFs are a type of ETFs which may include
government bonds, corporate bonds, and state and
local bonds—called municipal bonds.
• The ETF will comprise a basket of bonds issued by
the CPSEs, CPSUs, CPFIs, and other government
organisations.
• The unit size of the bond has been kept at just
₹1,000 so that even retail investors can invest.
• Each ETF will have a fixed maturity date and
initially they will be issued in two series, of 3 years
and 10 years. Each series will have a separate
index of the same maturity series.
• Index will be constructed by an independent index
provider – National Stock Exchange.
Advantages of Bharat bond ETF
• The Bharat Bond ETF will ensure broader
investor base through the participation of retail and
High Net worth Individuals (HNI).
• This will lead to an increase in the demand for
bonds, thus reducing the cost of borrowing for
borrowers i.e. government organizations.
• The Bond ETF will provide safety, liquidity and
predictable tax efficient returns.
• The launch of this ETF is expected to
eventually increase the size of bond ETFs in
India leading to achieving key objectives at a larger
scale - deepening bond markets, enhancing retail
participation and reducing borrowing costs.
Budget-2020: Given success of Bharat bond ETF, we
are planning to launch another debt-ETF containing G-
sec. This will help the retail investors to invest in G-sec.
Alternative Investment Funds (AIF)
• An alternative investment is a financial asset that
does not fall into one of the conventional
equity/income/cash categories.
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 DERIVATIVES FORWARD FUTURE
• Derivatives is a financial instruments that derive Not traded on the It is an exchange-traded
their value from some underlying asset. They are exchanges. contract.
usually generated by the process of Terms of the contracts Terms of the contracts
‘securitization’. E.g. NHB taking loan papers from differ from trade to trade are standardized
banks, using them to generate new Mortgage (tailor made contract)
Backed Securities. according to the need of
• Underlying Asset could be – the participants
Counter-party risk exists Clearing agency
associated with
Interest
Bond Currency exchanges becomes the
Rates counter-party to all
trades assuring guarantee
on their settlement
Commodities Equity Share Low Liquidity, as High Liquidity
contracts are tailor made
Price discovery not Efficient
efficient
Physical or Cash Only Cash
Types of Derivatives Settlement

OPTION CONTRACTS
• Option is a contract which gives the buyer (the
Forwards Futures Options Swaps
owner or holder of the option) the right, but not the
obligation, to buy or sell an underlying asset or
instrument at a specified strike price prior to or on
FORWARD CONTRACTS
a specified date, depending on the form of the
• Forward is bilateral contract between two parties -
option.
Buyer and Seller wherein buyer agrees to buy the
underlying asset at a future date on a price
Types of Option
agreed upon today.
• In such contracts, there is a risk of other party not
honoring commitment if he’s getting better deal
elsewhere in the future. Call options Put options
• So, for protecting (hedging) themselves, buyer/
seller may buy “Option” from a third party by
Call options Allow the holder to buy the asset at a
paying fees.
stated price within a specific
timeframe.
FUTURE CONTRACTS
Put options Allow the holder to sell the asset at a
• Futures contracts are like Forward contracts as in stated price within a specific
initial so the contract obligates the buyer to timeframe.
purchase an asset or the seller to sell an asset at a
predetermined future date and price with the
Spot Price Refers to the current price of the
only difference that these are traded on futures
underlying asset.
exchanges.
Future Refers to the price at which the two
• Contract is not sell directly between the parties as
Price participants in the forwards contract
in forwards. Futures mitigate Counter Party
agree to transact at on the Settlement
Risk.
Date
• Exchange takes margin money or initial margin
Final Refers to the date at which two
(performance bond margin) from the seller as well
Settlement parties have agreed to execute the
as buyer to participate in the futures trade. Futures
Date/Expiry forwards contract i.e. to buy or sell
Contract is a standardized contract designed by
Date the underlying asset
the Exchange.

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SWAPs
• A swap is an agreement between two parties to
exchange sequences of cash flows for a set period
of time. Swap originates from two different kind of
needs. Swaps are customized contracts. Swap
contains Counter Party risk. E.g. Currency Swap
Agreement between two countries to protect
themselves against dollar volatility.
• There are Credit Default Swap (CDS) agreement
against the risk of default, Interest swap agreement
to protect against volatility in interest rates.
Types of Swaps
Currency Swap Interest Rate Swap
PARTICIPATORY NOTES (P-NOTES)
• P-Notes are instruments used by foreign funds
and investors not registered with the SEBI to
invest in Indian securities.
• They are generally issued overseas by associates
of India based Foreign Institutional Investor (FPIs)
and domestic institutional investors.
• Technically, P-Notes are Offshore Derivative
Instruments (ODIs) issued by FPIs and their
subaccounts against underlying Indian securities
(like shares).
Q. Which of the following is issued by registered
foreign portfolio investors to overseas investors who
want to be part of the Indian stock market without
registering themselves directly? (CSE-2019)
a) Certificate of Deposit
b) Commercial Paper
c) Promissory Note
d) Participatory Note
Problems with P-Notes
• It hides the identity of the investor
• Hence is generally used as an instrument of
investing black money into Indian market.
• Hence norms pertaining to P -Notes have been
tightened continuously by SEBI.
• If P-Note owner sells his P-Notes to another foreign
investor, Government of India may be deprived of
taxes.
In May 2016, SEBI has extended the KYC norms and
anti-money laundering norms to the PN subscribers
also. Similarly, back in April 2014, SEBI banned
unregulated entities in foreign countries (so called
Category III FPIs in India) from subscribing P-Notes.
Regulation of Derivatives
• Currency and Interest Rate Derivatives are
regulated by RBI and SEBI
• Regulation of Stocks and Commodity Derivatives
is done by only SEBI.
• Foreign Exchange Management Act, 1999
regulates Currency Derivatives which comes under
the purview of RBI
• Trading of all the derivatives (currency, stock,
commodity and Interest rate) is governed by the
provisions contained in the Securities Contracts
(Regulation) Act- 1956, the Securities Exchange
Board of India Act-1992
TYPES OF COMPANIES
Chartered Setup by a charter given by a king /
Companies queen. E.g. East India Company in
1600.
Statutory Setup by special acts of Parliament
Companies or State legislature. E.g. SEBI, SBI,
RBI etc.
Registered Registered under the Companies
Companies Act, 1956 (and later 2013) E.g.
Wipro, Mahindra, TCS etc.
Holding A company that owns majority
Company shares in another company. E.g.
Tata Sons ltd. holds majority shares
of Tata Consultancy Services
(TCS), Tata Steel, Tata Sky etc.
Private Sector When private parties own 51% or
above. E.g. Mahindra
Government / When Government owns 51% or
Public Sector above shares. E.g. Steel Authority
of India (SAIL)
Subsidiary A company that is controlled by a
Company parent holding company. E.g. TCS,
Tata Steel, Tata Sky are
subsidiaries of Tata Sons.
SECURITIES AND EXCHANGE BOARD OF
INDIA (SEBI)
• SEBI was constituted by an executive order in 1988
as an interim administrative body under the
Finance Ministry.
• Four years later, on 4th April 1992 a notification
awarding statutory powers to SEBI was issued
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 (Securities and • CIRCUIT BRAKER System → Whenever the
Exchange Board of fluctuation in the share prices is more than “specific
India Act, 1992). percentage” than previous day then stock exchange
• Securities and must stop trading for “specific minutes or hrs”.
Exchange Board of • Discontinuing Carry forward system (Badla
India is a quasi- System) in 2001 and introduced (T+2) rolling
legislative, quasi- settlement system i.e. after trade is conducted, the
judicial and quasi- parties must settle it within two working days.
executive body • SEBI made PAN Card (issued by Income Tax
• SEBI can draft regulations, conduct inquiries, pass Dept) compulsory for opening DEMAT Accounts.
rulings and impose penalties. • ASBA (APPLICANT SUPPORTED BY
• Amendments in 2014 enabled SEBI to initiate order BLOCKED AMOUNT) - It allows the underwriter
search and seizure, attachment of properties, arrest to block the amount in IPO investor applicant’s
and detention. bank account, but only if shares allotted to the
• SEBI Board Composition: Chairman + 1 officer applicant, his bank money will be deducted
from RBI + 2 officers from Union Government + 5 • Investor Protection Fund - SEBI requires Stock
members appointed by Union Government. exchanges (BSE, NSE etc) and commodity
• Chairman: upto 5 years / 65 age, whichever earlier. exchanges (NSEL, MCX etc) to setup IPF. IPF
Reappointment is eligible. covers investors’ non-speculative’ type of losses.
• Securities Appellate Tribunal – SAT has been e.g. if the other party is not delivering shares
constituted to protect the interest of entities that feel because of some court case. IPF also promotes
aggrieved by any of SEBI’s decision - Endowed investor education and awareness.
with powers of civil court. Appeal against SAT lies • Dabba Trading (Bucketing / Box Trading) -
in Supreme Court. While share trade occurs at stock exchange linked
with DEMAT accounts, the Dabba Trades occur
Same SAT also hears appeals against the orders passed in the unofficial books/ledgers of an
by Insurance Regulatory Development Authority of unscrupulous broker. He may or may not execute
India (IRDAI) and Pension Fund Regulatory and those orders in actual DEMAT account. Investor
Development Authority (PFRDA). prone to scam, govt deprived of taxes. So, SEBI
declared it illegal.
“SCORES” → online portal for complaint • Insider Trading - Whenever company launches
management. new products, wins unique patents, or undergoes
merger and acquisition - its share prices will
SEBI Regulates increase. If a person associated with company uses
Process Regulates Process of issuing securities such confidential information for buying/selling
(Bonds, Shares, IPO, ETF, ReIT, shares to make windfall gains. Such insider trading
INVITs, etc.) using the Securities is illegal.
Contracts Regulation Act, 1956. • ALGO Trading - Some large brokers / companies
Places Depositories, Stock exchanges, use algorithmic trading computer programmes to
Commodity Exchanges etc. automatically buy / sell securities at a speed and
Persons Investors, Brokers, Fund Managers, frequency that is impossible for a human trader.
Public Limited companies etc. This can be misused for manipulating the share
Collective Any Collective Investment Scheme prices. While SEBI has not banned it, but issued
investment (CIS) of Rupee 100 cr or above (In technical measures e.g. a single broker / investor
scheme the aftermath of SAHARA scam & can’t place more than 100 online orders per second.
Chit Fund scams.)
Securities and Exchange Board of India distinguishes
Reforms Introduced By SEBI itself from other regulators in India as it is a financially
• De-materialization of share certificates (1999). independent regulator with its own sources of revenue.
• Banned entry loads for mutual fund schemes in
2009. NATIONAL FINANCIAL REPORTING
AUTHORITY (NFRA) - 2018

145
• NFRA is an Indian body provided in Companies
Act 2013 for the establishment and enforcement
of accounting and auditing standards and
oversight of the work of auditors.
• As per the Companies Act, 2013 the NFRA is
tasked with the job of recommending accounting
and auditing standards, ensuring compliance
with them and overseeing the quality of service of
the accounting and audit professions.
• Composition - Chairman + 3 full time members +
9 part time members. Tenure would be 3 year or 65
years which is earlier. Only one time
reappointment.
• Appeal against NFRA will be lies in NFRA
Appellate Authority (NFRAA)
• NFRA sets standards for Auditors and Charter
Accountants, in listed companies and large unlisted
companies.
• NFRA is endowed with powers of civil court
under CrPC.
• In case of any malpractices, NFRA investigate and
debar them.
INSTITUTE OF CHARTERED ACCOUNTANTS
OF INDIA (ICAI)
• ICAI is the national
professional accounting
body of India.
• It was established to
regulate the profession
of Accountancy.
• It is the only licensing
cum regulating body of
the financial audit and accountancy profession in
India.
• ICAI recommends the accounting standards to
be followed by companies in India to National
Advisory Committee on Accounting Standards
(NACAS).
• Members of the Institute are known as Chartered
Accountants (CA)
• The ICAI is the second largest professional body
of Chartered Accountants in the world, with a
strong tradition of service to the Indian economy in
public interest.
INDIAN ACCOUNTING STANDARDS (Ind AS)
• The RBI has deferred the implementation of the
new accounting norms, Ind AS, indefinitely, as
necessary amendments to the relevant law are yet to
be made.
• Ind-AS govern the accounting and recording of
financial transactions as well as the presentation
of statements such as profit and loss account and
balance sheet of a company.
• For long, there has been a heated debate about
Indian companies moving to the globally accepted
International Financial Reporting Standards
(IFRS) for their accounts.
• Ind AS has been evolved as a compromise
formula that tries to harmonize Indian accounting
rules with the IFRS.
GIFT City and IFSC
CONTEXT → The Union Cabinet has approved
establishment of a unified authority for regulating
all financial services in International Financial
Services Centres (IFSCs) in India through
International Financial Services Centres Authority
Bill, 2019.
• An IFSC enables bringing back to India the
financial services and transactions that are
currently carried out in offshore financial centers by
Indian corporate entities and overseas branches /
subsidiaries of financial institutions (FIs) by
offering business and regulatory environment
that is comparable to other leading international
financial centers in the world like London and
Singapore.
• It would provide Indian corporates easier access
to global financial markets.
• IFSC would also compliment and promote further
development of financial markets in India.
• The first IFSC in India has been set up at GIFT
City, Gandhinagar, Gujarat.
Need For Unified Regulator
• Currently, the banking, capital markets and
insurance sectors in IFSC are regulated by
multiple regulators, i.e. RBI, SEBI and IRDAI.
• The dynamic nature of business in the IFSCs
necessitates a high degree of inter-regulatory
coordination. The development of financial
services and products in IFSCs would require
focussed and dedicated regulatory interventions.
• It also requires regular clarifications and
frequent amendments in the existing regulations
governing financial activities in IFSCs
• Further, this would also be essential from an ease
of doing business perspective.
146
 • This would also generate significant employment • Corporate governance is the system of rules,
in the IFSCs in particular as well as financial sector practices and processes by which a firm is directed
in India as a whole. and controlled.
• Hence, a need is felt for having a unified financial • Corporate governance essentially involves
regulator for IFSCs in India to provide world class balancing the interests of a company’s many
regulatory environment to financial market stakeholders, such as shareholders, management,
participants. customers, suppliers, financiers, government and
the community.
Financial Stability & Development Council
is Chaired by – Union Finance Minister. Principles of corporate governance
Other members –
1. RBI Governor Sustainable development of all stakeholders
2. SEBI head
3. IRDAI head
Effective management and Distribution of wealth
4. PFRDA head
FSDC
5. IBBI head & govt officials
(2010)
Functions – Application of best management practices
Supervision of the economy & large financial
conglomerates,
coordination among the financial regulators, Discharging of social responsibility
financial literacy and financial inclusion.
Secretariat assistance offered by: Dept. of Adherence to ethical standards
Economic Affairs (Min. of Finance)
Financial Stability Board is a brainchild of
G20. Compliance of law in letter and spirit
HQ - BASEL (Switzerland)
Function - Financial monitoring at global Need of corporate governance
level, Coordination between national • Balancing the ownership structure
FSB
financial regulators bodies. • Wide spread of investor with various backgrounds
(2009)
India have 3 seats in FSB – • To prevent corporate scams or scandals
1) Secretary of Department of Economic
• Greater expectations of society from the corporate
Affairs (IAS)
sector
2) Dy. Governor of RBI
• Avoid and mitigate hostile take-overs
3) SEBI chairperson
• Huge increase in top management compensation
Financial Action Task Force is a brainchild
• Liberalisation, Privatisation and Globalisation
of
G7 • Deregulation and capital market integration
FATF
HQ - Paris.
(1989) Instances of failure of corporate governance in India
India became member in 2010.
Function - Combating Money laundering • Absence of Corporate Governance leads to fraud,
and terror finance. embezzlement, erosion of investors’ confidence.
International Organization of Securities
Case Issues involved
Commissions (IOSCO) is the international
Harshad Mehta case Role of regulator
body of world's securities regulators.
IOSCO SEBI is a member of IOSCO. Satyam Scam failure of auditing
It’s known for its IOSCO Guidelines for ICICI bank Conflict of Interest
Investors Protection and systematic risk in PNB fraud Internal Mechanism
global economy. Tata Case Role of promoter
Infosys Case Role of Independent
CORPORATE GOVERNANCE- ISSUES & Director
REFORMS
Corporate governance ensures following
compliances

147
 Compliances Example • Company Law Tribunal and
Legal- • Company obtaining Legal Entity Company Law Appellate
Regulatory Identifier (LEI) number as Tribunal.
mandated by RBI. The Companies • Addressing difficulties in
• Company setting up ‘Internal (Amendment) implementation of companies
Complaints Committee’ as Bill, 2017 act 2013
mandated by Sexual Harassment • Facilitating ease of doing
of Women at Workplace business in order to promote
(Prevention, Prohibition and growth with employment
Redressal) Act, 2013 / “POSH • Harmonization with the
Act” Accounting Standards, the
Technical • Companies keeping balance Securities and Exchange
sheets as per the Ind-AS Board of India Act 1992 and
accounting standards. the regulations made
• Automobile company producing thereunder, the Reserve Bank
car engines as per BHARAT- of India Act, 1934 and the
Stage emission norms. regulations made thereunder;
Moral- • Gillette scrapping the ad- • Rectifying omissions and
Ethical contract with cricketer Hardik inconsistencies in the Act
Pandya for his sexist comments
against women on koffee with Regulatory framework on corporate governance
Karan Show.
SEBI SEBI is a regulatory authority
Legislation to improve corporate governance Guidelines having jurisdiction over listed
companies and which issues
Legislation Details regulations, rules and guidelines to
The Companies All listed and unlisted companies companies to ensure protection of
Act, 1956 in India are governed by the investors.
Companies Act 1956 and itis Standard For companies whose shares are
administrated by Department of Listing listed on the stock exchanges.
Companies Act (now it is Agreement of
ministry of corporate affairs). Stock
The Securities It covers all types of tradable Exchanges
Contracts Act, government paper, shares, stocks, Accounting ICAI is an autonomous body,
1956 bonds, debentures, and other Standards which issues accounting standards
forms of marketable securities issued by the providing guidelines for
issued by companies. Institute of disclosures of financial
The SEBI Act, It established SEBI as an Chartered information.
1992 independent capital market Accountants of
regulatory authority. India (ICAI)
Indian • Maximum number of
Companies Act members (shareholders) Secretarial ICSI is an autonomous body, which
2013 permitted for a Private Standards issues secretarial standards in terms
Limited Company is issued by the of the provisions of the New
increased to 200 from 50. Institute of Companies Act
• Section 135 of the Act which Company
deals with Corporate Social Secretaries of
Responsibility. India (ICSI)
• Women empowerment in the
corporate sector Committees on corporate governance
• Fast Track Mergers and cross
border merger

148
 Rahul Bajaj The Confederation of Indian a listed entity into unlisted subsidiaries including
committee(1995) Industries (CII) had set up a task foreign subsidiaries.
force under Rahul Bajaj. The CII • The committee has also recommended that SEBI
came up with a voluntary code should have clear powers to act against auditors
called “Desirable Corporate under the securities law.
Governance” in 1998. • For government companies, the committee has
Kumar Committee was set up by SEBI recommended that the board have final say on the
Mangalam Birla Committee covers the issues appointment of independent directors and not the
committee such as protection of investor nodal ministry.
report (2000) interest, promotion of
transparency, building Challenges
international standards in terms • It is common for friends and family of promoters
of disclosure of information. The and management to be appointed as board
SEBI implemented the members.
recommendations of the Birla • In India, founders’ ability to control the affairs of
committee through the the company has the potential of derailing the entire
enactment of Clause 49. corporate governance system. Unlike developed
Naresh It extensively cover Auditor- economies, in India, identity of the founder and
Chandra company relationship. the company is often merged.
Committee • Women director appointed are primarily from
Report family in most of the companies which negates the
R. Narayana The committee was set up by whole reform.
Murthy SEBI to review the performance • Appointed independent directors is questionable
Committee of corporate governance in India as it is unlikely that Independent Directors will
(2003) and make appropriate stand-up for minority interests against the promoter.
recommendations. In the Tata case, these directors normally toe the
promoter’s line.
Uday kotak In light of Tata and Infosys • Conflict of Interest – The ICICI Bank Ltd fiasco
Panel (2017) corporate governance episodes, demonstrates the challenge of managers potentially
SEBI appointed Uday Kotak enriching themselves at the cost of shareholders in
panel to enhance corporate the absence of a promoter.
governance in India. • Data protection is an important governance
issue. In this era of digitalisation, a sound
Important recommendations of Uday Kotak understanding of the fundamentals of cyber security
committee must be expected from every director.
• A listed company should have at least six directors
on its board. Way forward
• The panel has suggested at least one independent • For the good corporate governance focus should be
director be a woman. shift from independent director to limiting the
• An independent director cannot be in more than power of promoters.
eight listed companies and a managing director can • Promote women from diverse background rather
hold the post of an independent director in only than from family as board of director.
three listed companies. • Strengthening the power of SEBI, ICAI, and ICSI
• Every board meeting would require the presence of to handle the corporate failure.
an independent director. • CSR projects should be managed with much
• The committee has proposed to increase the number interest and vigour.
of meetings to five a year. • The board must invest a reasonable amount of time
• The committee has recommended that the number and money in order ensure the goal of data
of independent directors on a company board be protection is achieved.
increased from 33% to 50%.
• An audit committee is being proposed with the
mandate to look into utilization of funds infused by

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 CH- 5 INSURANCE IN INDIA
1. MEANING
▪ Insurance refers to a contract
or policy by which an
individual or any firm or
entity receives protection
from financial loss or from
any other kind of damage.
▪ Insurance is a form of
hedging and risk
management system against
uncertain loss and damages.
▪ Insurance policy is a Debt instrument/Legal
contract against eventualities of death or damage.
▪ Two parties involved in this contract:
1. INSURER(Assurer)– the party which is
bearing the risk.
2. INSURED(Assured) – the person, group, or
property for which an insurance policy is
issued.
2. HISTORY AND EVOLUTION
In India, insurance has a deep-rooted history. It finds
mention in the writings of Manu (Manusmrithi),
Yagnavalkya (Dharmasastra) and Kautilya
(Arthasastra). The writings talk in terms of pooling of
resources that could be re-distributed in times of
calamities such as fire, floods, epidemics, and famine.
1818 Advent of life insurance business in India with
the establishment of the Oriental Life
Insurance Company in Calcutta, started by
Europeans
1870 Bombay Mutual Life Insurance was the first
Swadeshi life insurance company started in the
Bombay Residency.
1912 The Indian Life Assurance Companies Act 1912,
was the first statutory measure to regulate life
business. However, the norms were lax, that led
insurance industry to face problems in the
aftermath of Great Depression in USA.
1938 With a view to protecting the interest of the
public, the earlier legislation was consolidated
and amended by the Insurance Act, 1938 with
tougher regulatory provisions.
1956 Nationalising the Life Insurance sector and
Life Insurance Corporation (LIC) came into
existence. The LIC had monopoly till the late
90s when the Insurance sector was reopened to
the private sector.
early The process of re-opening of the sector had
1990s begun.
1993 The Govt. set up RN Malhotra committee to
propose recommendations for reforms in the
insurance sector.
1999 On recommendations of Malhotra committee,
Insurance Regulatory and Development
Authority (IRDA) (made statutory body in
2000) was constituted as an autonomous body to
regulate and develop the insurance industry.
2000 The subsidiaries of the General Insurance
Corporation of India (GIC) were restructured
as independent companies and GIC was
converted into a national re-insurer.
The insurance sector is a colossal one and is growing at
a rate of 15-20%. Together with banking services,
insurance services add about 7% to the country’s
GDP. A well-developed and evolved insurance sector
is a boon for economic development as it provides
long- term funds for infrastructure development at
the same time strengthening the risk-taking ability of
the country.
Like the banking industry, the insurance industry had to
be nationalized after independence due to scams,
irregularities, financial inclusion goal and Five-Year
Plans.
There are currently 57 insurance companies in India,
of which 46 are from the private sector. There are 24
life insurance and 33 non-life insurance companies in
India.
INSURANCE PRINCIPLES
▪ Uberrima fides- Good faith, hide nothing.
(Diabetic in case of Health Insurance)
▪ Indemnity- Only “real and actual” loss, not
imaginary (could not give UPSC CSE exam due to
fire).
▪ Subrogation- Insurer can recover from negligent
third party.
▪ Causa Proxima - Direct loss link.
▪ Insurable interest- If “risk-x” not happen, client
remains in same position, “risk-x” happens client in
bad position.
3. HOW INSURANCE IS DIFFERENT FROM
BANKING SECTOR?
▪ Insurance policy is a type of debt instrument.
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 ▪ Insurance companies are liability driven financial ▪ The overall market for insurance is expected to be
intermediaries. USD 280 Bn by 2020.
▪ Risk capital or solvency capital norms are relatively ▪ Gross premiums in India reached USD 94.48 Bn
higher. (Banks – CRR, SLR etc.) FY 2018. Of which -
▪ Policy premium is based upon statistics, probability
theory, demographic trends, return in financial Life Insurance Non-Life Insurance
market and prevalent market situations.
▪ Insurance is “Sold” but never “Bought” (barring
some compulsory insurances such as motor vehicle) USD 71.1 Bn USD 23.38 Bn

4. IMPORTANCE OF INSURANCE SECTOR

▪ Sector helps in mobilizing savings of public to 5. INSURANCE SECTOR IN INDIA
financial assets ▪ India currently accounts for less than 1.5 per
▪ Reduces fiscal burden on govt. to run schemes for cent of the world’s total insurance premiums and
social security – reduction in fiscal deficit. about 2 per cent of the world’s life insurance
▪ Insurance sector also act as a stabilizer and it helps premiums despite being the second most populous
people in the situation of crisis (health, accident, nation.
etc.) ▪ India’s life insurance sector is the biggest in the
▪ Spread of financial services in rural areas - world with about 360 million policies which are
IRDA Regulations provide certain minimum expected to increase at a Compound Annual
business to be done in rural areas, in the socially Growth Rate (CAGR) of 12-15 per cent over the
weaker sections. next five years.
▪ Insurance is a financial instrument which turns ▪ The insurance industry plans to hike penetration
saving into an investment–Circular flow of capital levels to five per cent by 2020.
▪ A well-developed insurance sector boosts risk- ▪ India had also increased FDI limit to 49 per cent
taking in the economy. from 26 per cent in insurance sector to increase
▪ Sector also provides much-needed support to the investments in insurance.
family members in the case of loss of life or
health. Non-life insurance Life insurance
▪ Insurance companies need to invest part of In sector, private In this, private
premium in social and economic infrastructure – companies had a companies had a market
promotes socio-economic development. market share of 54.68 share of 33.74 % in FY
▪ Insurance enables entrepreneurs to take bold and % in FY 19. 19.
big-ticket decisions.
▪ Assets under management of insurance companies The insurance sector is a 72 Billion USD industry and
represent long-term capital, they also act as a pool is growing at a speedy rate of 15-20%. Together with
in which to invest in long-term projects such as banking services, insurance services add about 7% to
infrastructure development. the country’s GDP.

Budget-2019→ Finance minister Nirmala Sitaraman in 6. BANKING SECTOR vs INSURANCE SECTOR

the Union Budget last year said that 100% FDI will be
permitted for insurance intermediaries. This will YEAR BANKING INSURANCE
facilitate more investment by foreign companies in SECTOR SECTOR
insurance sector, increased competition, better services Regulator RBI IRDAI
to consumer, better and robust economic growth. FDI in 1948-49 Nationalization of
RBI
the insurance sector was capped at 49% under the
1955 - 56 Nationalization of Nationalization of
automatic route. According to the policy, FDI for SBI the Life Insurance
insurance company is still capped at 49% sector and LIC
NOTE - The proposed change is only applicable to came into
insurance intermediaries while the cap on foreign existence.
ownership in insurance companies will remain at 49% 1969 Nationalization of
14 Private Banks
Market Size of Insurance Sector in India

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 1972 GIC Act - GIC and Administrators
its 4 subsidiaries (e.g. Hospital
tookover - 107 where treatment is
(private owned) given)
General Insurance
Companies. 7. TYPES OF INSURANCE
1980 Nationalization of 6
Private Banks LIFE GENERAL
Reforms Narasimham Malhotra
In 1990s committee I (1991) Committee (1993) ENDOWMENT
HEALTH INSURANCE
and II (1998) + + Private insurance INSURANCE
privatization and companies were
liberalization of allowed + FDI was WHOLE LIFE MOTOR VEHICLE
banking sector liberalized INSURANCE INSURANCE
Safeguards CRR, SLR, BASEL Investment Pattern,
Solvency Margin. TERM INSURANCE CROP INSURANCE
For instance,
Insurance UNIT LINKED HOUSE/FIRE/MARINE
companies must INSURANCE POLICY INSURANCE
invest minimum
“specified %” of
premium in G-Sec, 7.1 Life Insurance
they cannot invest Life insurance is insurance that pays out a sum of
more than money either on the death of the insured person or after
“specified %” of a set period.
premium in private
companies shares Endowment Insurance- An endowment policy is a
or debentures etc.
life insurance contract designed to pay a lump sum after
They must not
invest in
a specific term (on its 'maturity') or on death. It is shorter
companies having policy: (e.g. 10-20 years)
less than “AA”
credit rating etc. Whole Life Insurance- Whole life insurance provides
Exact norms not coverage for the life of the insured. In addition to
imp. paying a death benefit, whole life insurance also
Financial Priority Sector Rural & Social contains a savings component in which cash value may
Inclusion Lending (PSL) Obligation Norms- accumulate. It is long term policy (e.g. 35-40 years)
and goal of norms, 25% every year
Welfare branches in “specified” number Term Insurance- Term insurance is a type of
unbanked rural of policies must be
life insurance policy that provides coverage for a
areas sold in rural areas,
PH/backward etc. certain period of time or a specified "term" of years. It
Further Insurance is short policy with low premium e.g. PM Jeevan Jyoti
companies Bima Yojana
required to invest
minimum Unit Linked Insurance– It is a multi-faceted product
“specified” in issued by insurance companies that combine insurance
affordable housing coverage and investment exposure in a single offering.
projects, State In this, part of money goes in insurance, part in Mutual
Govt’s fire funds.
equipment etc.
Delivery Bank branch, Agents & brokers,
Type of Money returned
Channel Business Banks selling
Correspondence insurance insurance
Agent (Bank- (Bancassurance), On maturity On death
Mitra) Surveyor/Loss Whole life Yes, savings Yes
Assessors, Third returned
Party

152
 Endowment Yes, savings Yes
returned
Term No Yes
Unit Linked Yes, savings Yes
Insurance returned
Policy
7.1.1. Post Office Life Insurance
Initially started as postal life insurance for the postal
employees (1884), but later scheme was extended to
rural people as well. Presently, 6 schemes for
government employees and 6 schemes for rural
areas. These schemes usually start with prefix of
“GRAM” e.g. gram Suvidha / Suraksha / Santosh etc.)
7.1.2. Sampoorna Bima Gram Yojana (2017)
Scheme was started by Ministry of Communication.
In every district, atleast one village identified, and, in
that village, it covers all households with a minimum
of one Rural Postal Life Insurance policy. Moreover,
all villages under the Saansad Adarsh Gram Yojana
(SAGY) will also be covered.
7.1.3. Life Insurance Corporation of India (LIC)
▪ The life insurance
business/industry in the country
was nationalised by the GoI in
1956 and fully government-
owned company was setup by an act of
Parliament, to take over the private life insurance
companies.
▪ In 2018, LIC became majority shareholder in IDBI
bank.
▪ Further in 2019, RBI classifies IDBI as a ‘private
sector’ bank.
LIC HQ (Mumbai) and Corporate magazine→
“Yogakshema” (means well-being - Rigveda)
LIC motto→ “Yogakshemam Vahamyaham” (means I
ensure safety and well-beingof my devotees- Gita)
Twin objectives of nationalisation of LIC
a) To spread the message of life insurance for greater
social security
b) To mobilise people’s savings (collected as
premiums) for nation building.
7.1.4. Disinvestment of LIC (2020)
▪ Union Budget-2020 stated that LIC Act will be
amended. This move will convert LIC from a
statutory corporation into a listed company. This
will enable govt. to sell part of its shareholding
through Initial Public Offering (IPO)
153
▪ Insurance products of LIC come with a sovereign
guarantee by the Government. Hence, people
prefer to buy it over private sector insurance
policies. This led to distortion of perfect
competition.
▪ Reduction of shareholding by government will
result into independent functioning of LIC.
▪ Prior to these developments, IMF (2018) and
Financial Sector Legislative Reforms Commission
(Justice B. N. Sri Krishna) (FSLRC-2011) had
also advised the disinvestment to Government of
India.
RN Malhotra Committee (1993) was appointed by the
GoI to lay down a road map for privatisation of the
life insurance sector.
7.1.5. LIC - Aam Aadmi Bima Yojana (AABY)
Criteria -Age - 18-59 years
-Below Poverty Line
-Marginally above poverty line
people.
Policy INR 200 per year. (Rs. 100 by
Premium Union Govt. + remaining Rs.100
by either State Govt. or NGO).
Payment Children scholarship and INR30-
75k depending on natural death
accidental death / disability.
Administrative Ministry of Labour and
control Employment (since 2017)
Previously Janshree Bima Yojana for Unorganized
workers “group insurance” but merged with AABY
(2012).
7.1.6. IDBI Bank Purchased by LIC in 2018
▪ IDBI was setup as a Development Financial
Institution (DFI)in 1964 through the Industrial
Development Bank of India Act, (1964).
▪ RBI’s P.J. Nayak Committee (2014) suggested
that the Government should exit shareholding in
smaller PSBs, to enhance their efficiency.
▪ Henceforth, LIC now owns 51% shareholding in
IDBI.
▪ Though LIC itself is public sector entity but RBI
has declared IDBI as ‘private sector’ bank.
Positives Negatives
Govt. need not waste tax- LIC policy holders’
payers’ money in running money is going into a loss-
such loss-making banks. making Bank.
 Govt. no longer worry Consumers will be insurance, crop insurance, fire-theft-marine & vehicle
about BASEL III norms - deprived of better insurance.
recapitalization of IDBI. insurance-investment
products and services. 8.1 Public Sector General Insurance Entities in India
LIC can market its “Financial Repression of
insurance policies to IDBI Households” 1948 Employees' State Insurance Corporation
consumers through (ESIC) under Labour Ministry – through an act
bancassurance. of Parliament to protect selected category of
Budget-2020: Government of India will sell its workers.
remaining shares from IDBI Bank to private investors
1957 Export Credit Guarantee Corporation of
through the stock exchange
India (ECGC) under Commerce Ministry.
7.1.7. Life Insurance and Accidental (General) Gives insurance cover to exporters, and credit
Insurance guarantee to Bank/NBFC who loan to
exporters.
FEATURES PRADHAN PRADHAN 1961 DICGCI Act - banks must buy deposit
MANTRI MANTRI insurance from it- covers upto INR 5 lakh
JEEVAN JYOTI SURAKSHA Although not considered a General
BIMA (PMJJB) BIMA Insurance Company in textbook sense
YOJANA because does not directly sell insurance policy
(PMSBY)
to any individual household/business firm.
Age 18 to 50 years 18 to 70 years with
with bank account bank account in 1972 General Insurance Nationalization Act - 107
in India. NRIs India. NRIs (private) general insurance companies were
eligible but eligible but taken over by GIC and its 4 subsidiaries -
payment in rupee payment in rupee 1. National insurance,
currency only. currency only. 2. New India Assurance,
Purchase LIC or any Four Public Sector, 3. United India,
from empanelled or any empaneled
private life pvt. General 4. Oriental
insurance Insurance Later, Govt. took direct control over these 4
company. company. subsidiaries, and left GIC to take care of re-
Premium INR 330 per INR 12 per person/ insurance business.
amount person/ annum annum 2002 Agriculture Insurance Company Limited
(AIC), (formed with funding of GIC, above 4
Insurance Life Insurance General Insurance public sector General Insurance Companies
Type
and NABARD.)
Nature of 1 year “term” life 1 year “term” Budget Budget announced to merge National
Plan insurance. accident cum death 2018- Insurance Company, United India
insurance. Feb Insurance Company and Oriental India
Insurance Company, however the plan is yet
Return Any type of death:
Accidental Death, to materialize.
INR 2 lakhs will
murder, natural
2018- Dept of Financial service (Min. of Finance)
be returned disaster etc. INR 2
lakhs. However, Oct organized ‘Insurance Manthan’ for Public
suicide, alcohol- Sector General Insurance at Delhi.
drugs related death Six-point agenda endorsed→fully insured
will not be eligible society, customer orientation, digital-analytics
Neither PMJJB nor PMSBY covers hospitalization for future, sustainable-prudent business, reach
cost. for everyone and talent management.

8. GENERAL INSURANCE 8.2 Employees' State Insurance Corporation (ESIC)

An insurance policy other than ‘life insurance’, is ▪ Functioning under the aegis of Ministry of Labour
called General Insurance. e.g. accident insurance, health and Employment and Incorporated under the ESI
Act of 1948,

154
 ▪ ESIC is a self-financing health insurance and FIXED BENEFIT INDEMNITY BASED
social security initiative for all Indian workers Fixed payment will be In this type, benefits will be
earning less than ₹ 21000 per given depending on illness. upto to the “actual
month as wages. For instance, in fixed hospitalization cost” from
benefit case, if the Policy the total insured sum.
▪ ESI is applicable to agreement said “if you get For instance, Policy covers
any establishment with ten or TB, we will give you upto INR 5 lakh annual
more employees. INR10 lakhs.” So, even if a health insurance. So, if
▪ It is co-contributory patient spends ₹8 lakh on hospital bill came INR 1.5
initiative - “specified” percent of employee’s wages hospitalization, still the lakh then insurance
+ “specified” from employer’s side.
company will pay INR 10 company will pay ₹1.5.
Lakhs. Lakhs only (unlike in case
Benefits to an ESI subscriber
of fixed benefit case)
1. Medical insurance for the worker and his family from
Cashless policy: In this case, patient (nominee) simply
day one of joining
admitted to an empanelled hospital for free and cashless
2. Maternity Benefit to women employees treatment.
3. Monthly payment to family if worker dies by Non – Cashless policy: patient (nominee) will first pay
employment related injuries hospital bill from own capacities. After submitting bills to
4. Sickness benefit - partial wages during medical leave insurance company, nominee will get refund.
5. Monthly payment on disability
6. Unemployment allowance if involuntary loss of 9.1 Arogya Sanjeevani Policy (2020)
employment- through the scheme “Atal Bimit
Need Too many types of health insurance policies
Vyakti Kalyan Yojana”
with varied features and premiums confuses
Project “PACHDEEP” is associated with digitization common man in choosing best health policy
and automation of ESIC processes by WIPRO (2017) for him. So, IRDAI ordered health insurance
Project “ARROW” - Modernization of India Post entities to launch a Standard Health
(2008) Insurance Product (SHIP) to cover the basic
health insurance requirements of every
Q. Consider the following statements: (CSE-2012) person. Insurance Companies need to launch
1. Hotels and restaurants it from or before 1 April 2020.
2. Motor transport undertakings Features Name of the policy must be “Arogya
3. Newspaper establishments Sanjeevani Policy” followed by “name of the
4. Private medical institutions company”. Another name will not be allowed.
The employees of which of the above can have coverage Type Indemnity health policy insuring minimum
under ESIC? ₹1 lakh to maximum ₹5 lakhs.
Validity Minimum 1 year to lifetime
a) 1, 2 and 3 only
Entry age Minimum 18 to Maximum 65. Policy can be
b) 4 only availed for–
c) 1, 3 and 4 only 1. Self and/or
d) 1, 2, 3 and 4 2. Family Floater policies covering close
family members such as spouse,
9. GENERAL INSURANCE - HEALTH children, parents.
INSURANCE Costs Hospitalization cost + pre and post
A health insurance policy coverage hospitalization cost + Ayush treatment (such
is a contract between as Ayurveda, homeopathy etc).
insurance and individual
or group in which insurer 9.2 Niramya Health Insurance
agrees to provide specified
health insurance cover in Operated By Dept. of Empowerment of Person with
exchange of a regular by disabilities
Insuring Oriental Insurance Company
“premium”.
entity
Benefit Upto Rs. 1 lakh health insurance for
TYPES OF BENEFITS handicapped and mentally challenged

155
 Premium Orphan Minor Person with Disability (PWD) Rashtriya Swasthya Bima Yojana (RSBY) &
→ Zero; Senior Citizen Health Insurance Scheme
Other PWDs→₹250-500 (Subject to poverty (SCHIS).
and income status)
9.4.1 PM Jan Arogya Yojana (PMJAY) - 2018
9.3 Rashtriya Swasthya Bima Yojana (RSBY-2008) ▪ In this scheme, a free insurance
cover upto Rs.5 lakh per
Fee One-time registration for Rs. 30. Premium is family per year for secondary
paid by government and beneficiary need not
and tertiary hospitalization.
pay any premium.
▪ On positive note, all pre-
Benefits INR 30,000 for medical treatment (smartcard
+ cashless) →even for existing ailment and existing disease covered from
even in private hospital day one. Scheme will also cover Pre and post
INR 25,000 for accidental death. hospitalization & medicine expenses.
Senior Citizen If nominee is 60 years or above, ▪ PMJAY ensures cashless and paperless access in
Health Insurance they get additional INR 30,000 for empanelled hospitals.
Scheme (SCHIS) treatment ▪ Beneficiaries for PMJAY will be identified
Both RSBY and SCHIS are subsumed in PM- Jan Arogya through Socio-Economic Caste Census (SECC
Yojana (2018) 2011) data.
▪ Estimated coverage - Over 10.74 crore
9.4 Ayushman Bharat vulnerable entitled families (approximately 50
▪ According to NITI Aayog, crore beneficiaries) will be eligible for these
more than 80% of the benefits.
medical and hospital ▪ Scheme imposes no limit on family size or age of
expenditure are met by out of family members.
pocket (OOP), which is ▪ Treatment will be offered in all public hospitals
major cause of poverty on and empaneled private hospitals. Hospitals to
post hospitalisation. have Pradhan Mantri Aarogya Mitras (PMAMs)
▪ In-patient hospitalization in India has increased to help patients with the paperwork.
nearly 300% in the ten years. ▪ These PMAMs are trained using National Skill
▪ Medical emergencies and hospitalisation forced Development Corporation (NSDC) and Ministry
rural households to use hard earned household of Skill Development.
savings and borrowings which ultimately results
into vicious cycle of poverty. 9.4.2 National Health Authority (NHA)
▪ These all factors led government to announce ▪ Initially, it was conceived
Ayushman Bharat scheme in Union Budget 2018, as an “Agency”, then
with two components: restructured & renamed
1. 5 lakh Primary Health Care Centers (PHC) to into “Authority” (2019).
be transformed into Health & Wellness ▪ NHA oversees and
Centres. monitors the implementation of PM-JAY,
2. National Health Protection Scheme (AB- operational guidelines, collaborate with insurance
NHPS) which was later renamed ‘PM Jan companies & IRDAI, running web-platform etc.
Arogya Yojana (PMJAY)’. It has subsumed ▪ NHA is an attached office with the ministry of
health and family welfare. (i.e. Health Ministry
only looks after parliamentary matters like replying
PM Jan in question hour, tabling annual reports etc. thus
Arogya giving NHA more freedom in day to day
Yojana functioning)
▪ NHA has a CEO with status of Secretary to Govt
of India.
PMJAY- PMJAY-
National State
Health Health NHA→“Governing Board” Chaired by the Minister
Authority Authority of Health & Family Welfare, and Members: NITI
Aayog CEO, NHA-CEO & other govt officials and

156
 domain experts. States will be represented in the ▪ Lack of spirit of Cooperative Federalism. To
Governing Board on rotational basis. commence scheme, states have to sign MoU with
Union to begin operations.
9.4.3 State Health Agency (SHA) ▪ However, West Bengal already has state-govt
▪ Each State to form a trust/society/Not-for-Profit sponsored “Swasthyasathi” scheme in State with
Company/Nodal Agency which will act as State similar features so CM of West Bengal has left PM-
Health Agency (SHA) JAY (2019).
▪ SHA have two options: ▪ Similar issues encountered in other Non-BJP states,
1. SHA can directly implement the scheme by Kerala and Orissa for instance.
themselves or. ▪ Fiscal Challenges - Insufficient budgetary
2. SHA can tie up with an insurance company allocations led to borrowing of money by govt.
to implement the scheme. which could result into inflating fiscal deficit.
▪ Nexus between insurance company and hospitals
Cost Sharing mechanism of PMJAY - Private hospitals may perform unnecessary
Category Cost sharing surgeries & prescribe excessive amount of
medicines to extract more money from govt.
A "Special Category Union contributes ▪ Administrative Challenges - Beneficiary
States"→North-Eastern 90% and State govt. identification, poor doctor to patient ratio,
States, and Two Himalayan contributes 10% of the inadequate bed capacity, Physical and IT
States (Himachal cost for scheme
infrastructure, transport & connectivity upto village
Pradeshand Uttarakhand) implementation in the
given State. level.
▪ Issue of medical privacy of patient- data may be
B Other States - who are not in 60:40 leaked to pharma companies for their clinical trials
above category (UP, Bihar, and commercial motives.
etc.) ▪ Lack of coordination and integration with other
UTs with schemes–In 2019, NHA announced PM-JAY will
legislature→Delhi, not cover cataract surgeries, dialysis and normal
Puducherry, Jammu & deliveries because already there are other schemes
Kashmir. for poor people.
C UT without legislature - 100%
Ladakh, Andaman Nicobar
9.4.6 Conclusion (PM-JAY)
etc.
▪ SDG 3 –to ensure healthy lives and well-beings at
Prior the removal of Art. 370, State of J&K was previously
in special status category, so it got 90:10 funding. But all ages. PM-JAY is a right step in that direction.
given a UT with legislature, J&K will get 60:40. So, ▪ Disease burden has devastating impact on a poor
Central Government considering creating a new category person’s wages and savings. PM-JAY can greatly
‘Hill Union Territory’ so J&K may continue to received help in poverty alleviation and human capital
90:10 funding. development in India.
▪ PM-JAY can improve health outcomes,
9.4.4 Budget-2020 on Ayushman Bharat PM-JAY productivity, and efficiency of Indian population,
▪ Government will setup hospitals in aspirational thus leading to improvement in GDP and in
(115 districts identified by NITI) districts for quality of life and ensuring fruits of demographic
treatment of PM-JAY beneficiaries. dividends.
▪ Public private partnership (PPP) mode for hospital ▪ Taking states into confidence and taking them on
construction Funding. Public side’s funding will be board to ensure spirit of cooperative federalism
provided using revenue from taxation on medical is need of the hour.
devices.
▪ Government will use AI, Data analytics, Machine Q. Which one of the following is not a feature of the
Learning to take preventive actions against the Ayushman Bharat Scheme? (UPSC-CDS2020)
spread of diseases. a) There is no cap on family size and age.
▪ Total allocation of INR 6400 cr for PM-JAY. b) The scheme includes pre- and post-hospitalization
expenses.
9.4.5 Challenges To PMJAY c) A defined transport allowance per hospitalization
will also be paid to the beneficiary.

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d) The scheme provides a benefit cover of Rs. 10 - Farmer paid ₹200 of - Farmer pays ₹2 of the
lakh per family. the premium premium
- Union paid ₹400 + - Union pays only ₹25 to
Q. Centrally sponsored scheme Ayushman Bharat is State paid ₹400. 30 based on whether it
a national health insurance system for: (UPSC- - Union and States will is irrigated or un-
share their premium irrigated.
Geologist-2020) burden half-half - State may have to pay
a) Women (50:50). ₹68-73. So, states’
b) every citizen burden increased.
c) old age people - However, the Union
d) poor and vulnerable. will bear 90:10 of the
burden in case of
10. GENERAL INSURANCE - OTHER THAN North Eastern States.
HEALTH INSURANCE Compulsory for farmer in Voluntary for farmers.
case of loan from banks However, this may result in
higher premiums (e.g.
10.1 Pradhan Mantri Fasal Bima Yojana (2016)
₹200) if less farmers are
▪ Nodal Ministry – Ministry of agriculture and subscribing.
farmers welfare Multiple events coverage Single event coverage
▪ Public sector general such as flood, drought, insurance can be taken
insurance companies, and hailstorm. But farmers in e.g. “protection only
empanelled private sector Rajasthan had no fear of against drought.” This will
insurance companies floods. help reduce premium
▪ Intended beneficiary - All amount.
farmers including Government allotted a Minimum 3 years. In case
sharecroppers and tenant district/area to an Insurance of extraordinary
company for usually 1 performance by company,
farmers growing notified crops in a notified area
year. then more years may be
during the season who have insurable interest in the granted. This will
crop are eligible. encourage companies to
▪ Scheme covers damage against natural calamities, invest more in the
pests, diseases. Policy also protects before, marketing & insurance
during and after harvest. agent network.
▪ Premium paid by farmers against the total insured Updated methodology and
amount: use of technology for
o Rabi winter crops - 1.5% assessment of crop
o Kharif summer monsoon crops - 2% Loss.
o Horticulture & Commercial crops other than
oilseed & pulses - 5%. Issue - West Bengal implemented scheme from 2016 to
2018 but then stopped it & launched its own Bangla
Premium is paid by Union and State Govt in ratio of Fasal Bima Yojana (2019) which hampers spirit of
50:50. It is optional for States to join. Insurance policy cooperative federalism.
is compulsory for farmer to buy if he is seeking crop-
loan from banks. 10.3 Other Agriculture Insurance Schemes
▪ Apart from PM Fasal Bima, there is Restructured
Challenges→States are reluctant in paying their Weather Based Crop Insurance Scheme (RWBCIS,
contribution, exorbitant delays by private insurance 2016)- protects against weather only and not in case
companies in settling claims, poor assessment of of pests or diseases.
damages.
10.2 PM-Fasal Bima Yojana (2.0) – 2020 10.4 NIRVIC Scheme (2019)
▪ NIRVIK is an Export Credit Insurance Scheme
Before-2020 From 2020-Kharif (ECIS)operated by
Premium for kharif is 2% Premium for kharif is 2% Ministry of commerce
through Export Credit
For instance, a kharif crop For instance, a kharif crop Guarantee Corporation
insurance premium is insurance premium is ₹100. (ECGC).
₹1000.

158
 ▪ Exporter takes loan from a bank. But if he defaults
then ECGC will cover upto 90 percent of both of
his principal and interest losses to the bank. (earlier
version of NIRVIC scheme, it was only 60%)
▪ Exporters pay ‘premium’ to the bank in turn bank
pays it to ECGC.
▪ Premium rates vary across sectors. For instance,
premium is on higher side for gems, jewellery
sector attributed to risk/losses associated with it.
10.5 Third Party Motor Insurance
▪ Motor Vehicles Act (1988) requires all motor
vehicle owners to purchase it.
▪ Third party (TP) insurance
implies when your vehicle
hits another vehicle, person
or property, that victim (third
party) registers a case, gets
compensation.
▪ IRDAI is regulator as far as premium rates & other
norms are concerned.
▪ SC judgement (2019): Third Party insurance
validity should be 3-5 years, so even if owner
forgets to renew annually, the third party is
protected.
10.6 Own Damage Insurance
It protects owner of vehicle against theft, vandalism,
accident, fire.
10.7 Title Insurance
▪ “Title” implies a legal document showing
ownership of a property.
▪ Claiming ownership of the same property by
multiple persons results into “Title dispute”.
▪ “Title Insurance” protects the new buyer in case
of such legal disputes (by refunding the money he
had spent in buying land, construction, legal
expenses etc).
▪ Real Estate Regulation and Development Act
2016 (RERA) requires the builders to buy this type
of insurance to secure property from title disputes.
10.8 Catastrophe Insurance (Proposed)
▪ This type of insurance policy protects the client
from natural and
manmade disasters.
▪ Presently, farmers’
crops are protected
from natural disasters
through PM-Fasal
Bima Yojana. But, if his own home was destroyed
in floods, it will not be covered. In such situations,
159
Union & State Governments forced to use
taxpayers' money for paying compensation to
victims of floods, cyclones etc.
▪ 2019 - IRDAI planning to allow catastrophe
insurance (or CAT cover) for poor people.
11. RE-INSURANCE
▪ When an insurance company
buys insurance cover for its
insurance business, a new
segment comes into being i.e.,
re-insurance (Re-insurance is
like an umbrella above
umbrellas
▪ Reinsurance, or insurance for insurers, transfers
risk to another company to reduce the likelihood
of large payouts for a claim.
▪ DICGCI Act (1961) requires banks to take deposit
insurance from DICGCI. Similarly, Insurance Act
(1938) requires insurance companies take ‘re-
insurance’ on their business.
▪ Previously, only GIC was the sole-reinsurer, but
then norms liberalized (2015). New re-insurance
companies allowed. (e.g. India’s ITI Reinsurance
Ltd). Even foreign re-insurers such as Swiss Re,
Munich Re, General Reinsurance are permitted.
▪ Benefits of multiple re-insurance companies →
o GIC’s monopoly in dictating re-insurance
premium rates is gone.
o Reduction in cost of operations
o Business expansion
o Launch innovative products
Budget 2019: Norms relaxed to attract foreign
reinsurers to open branches in India.
FUNCTIONS OF RE-INSURANCE
• Risk transfer - With reinsurance, the insurer can
issue policies with higher limits than would
otherwise be allowed, thus being able to take on
more risk because some of that risk is now
transferred to the re-insurer.
• Income smoothing - Reinsurance can make an
insurance company's results more predictable by
absorbing large losses. This is likely to reduce the
amount of capital needed to provide coverage. The
risks are spread, with the reinsurer or reinsurers
bearing some of the loss incurred by the insurance
company.
• Reinsurer's expertise -The insurance company may
want to avail itself of the expertise of a reinsurer, or
the reinsurer's ability to set an appropriate premium,
in regard to a specific (specialised) risk. The
 reinsurer will also wish to apply this expertise to the
underwriting in order to protect their own interests.
This is especially the case in Facultative
Reinsurance.
MICRO-INSURANCE
• Micro-insurance refers to products offering
coverage to low-income households or to
individuals who have little savings and is tailored
specifically for lower valued assets and
compensation for illness, injury, or death.
• A general or life insurance policy with a sum
assured of Rs.50,000 or less is covered under
micro-insurance policy.
• Though it promises to support sustainable
livelihoods of the poor, its market penetration
remains low.
12. IRDAI – INSURANCE SECTOR
REGULATOR IN INDIA
Organisation Following the recommendations of the
Malhotra Committee report, IRDA
was setup in 1996, the statutory status
given in 1999.
In 2014, its name changed to Insurance
Regulatory and Development
Authority of India (IRDAI). It is
headquartered at Hyderabad
(Telangana). (SEBI and RBI are at
Mumbai)
Structure Total 10→ One Chairman (5yrs or 65
yrs) and 9 members (5yrs or 62 yrs)
They are eligible for re-appointment.
Functions - IRDAI gives separate licenses for
life, general & re-insurance
companies.
- Prescribes norms for insurance
companies for accounting,
solvency, audit, commission to
agents etc. It can penalize
companies, suspend or cancel
registration. (Appeal against order
lies in Securities Appellate
Tribunal (SAT).
- Norms for agents & brokers, banks
selling products (Bancassurance),
Surveyor/ Loss Assessor, and
Third-Party Administrators (e.g.
Hospital)
- Consumer grievance redressal via
Insurance Ombudsman.
- IRDAI is member of Financial
Stability and Development
Council (FSDC).
Key objectives of the IRDA - include promotion of
competition so as to enhance customer satisfaction through
increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market.
13. CHALLENGES TO INSURANCE SECTOR
▪ Low Awareness - A large majority of people in
India believe that health insurance is not a worthy
investment.
▪ Poor Distribution - Distribution outside large
cities is poor. The reason insurers and distributors
do not build a presence in small towns is that it is
unviable.
▪ Insurance is highly regulated, but healthcare is
equally unregulated, so it creates supply demand
mismatch between (doctors-hospitals) vs. patients.
Moreover, standardized medical treatment costs
difficult to ascertain (unlike car damage). This
problem further aggravated by delays in claim
settlement so discourages to renew health policy.
▪ Capital intensive industry- Private players not
generating enough profits due to poor returns in
share market. Soaring commission rates and
marketing reduces profitability further.
▪ Costly products – Lack of innovative custom and
tailor-made policies for MSME. This results into
under insurance (client not taking sufficient
insurance to cover losses)
▪ Lack of required skill set - with the insurance
agents. Need of more skill and network more than
banker.
▪ Rural folks – they are either disinterested or un-
served despite no. of schemes and & IRDAI norms
which are in place.
▪ Sales centric focus - Insurers have been focusing
on growing sales even if that creates a distortion in
pricing for individuals.
▪ Perception by influencers - Often, the life
insurance industry is portrayed (by media and
160
 influencers) in a negative manner and hence the Improving zigzag Improving steadily
consumers become skeptical. fashion. (0.94% in ($19 in 2018)
▪ Fewer product innovations - While many 2018)
essential products to mitigate risk are available, For India, these indicators are low compared to many
there are gaps in the insurance product portfolio developing countries due to aforesaid challenges.
that leaves large risks uninsured. Insurance Density (per capita) →Premium divided by
▪ Hesitation by peoples in buying House, Factory, total population
Fire, Theft insurance due to fear of discovery of Insurance penetration (%) →Premium divided by GDP.
‘asset value’ which could result into IT/GST raids
& ransom demands. As a result, India’s 15. REASONS FOR POOR INSURANCE
“insurance gap” is high i.e. total assets (in value) PENETRATION
divided by insured assets (in value). ▪ Complex and delayed claim settlement procedures
▪ Vague and incomprehensible rules and regulations
Way Forward of the insurance companies
▪ Promote Awareness - It is necessary to promote ▪ Lack of education and awareness among the masses
more awareness among public about benefits of ▪ Lower income levels of the population
insurance through videos, social media, ads, ▪ Socio-cultural factors – poor literacy and poverty
organizing campaigns etc. ▪ Lack of level playing field in the industry
▪ Evolving Multiple Channels of Distribution - ▪ Less vibrancy in the regulatory framework
Linking insurance with allied finance products
like housing loan, mutual fund investment, banks 16. SHOULD WE INCREASE FDI BEYOND 49%
credit cards etc are the new channels for life IN INSURANCE COMPANIES?
insurance. Presently, Government has allowed upto 49% Foreign
▪ Huge Untapped Market - The demographics and Direct Investment.
macro-economic factors in India are diverse and
insurance systems have to be aligned to other In favour of increase Against increase
programmes in the country in order to target every Indian insurancecompanies In case of increased FDI,
section. will get additional capital foreign investors will put
▪ Better regulation-Regulatory policies can be made from Foreign investors. pressure on Indian
to ensure that insurance companies focus more on This will help in mitigating insurance companies to
insurance targets than profitability. various challenges. generate more profit. This
▪ Use of Technology - Stakeholders will have to would results into:
Indian companies can - speculative trading&
leverage Internet, AI, ML and other technology
expandoverseas, mobilize investment in junk
options to provide single window service so as to money from other nations bonds that can offer
cross-sell and retain customers. insurance clients etc. higher return. This will
&invest it in Indian increase vulnerability
14. INSURANCE PROGRESS IN INDIA – ES2020 economy. to collapse.
- Insurance
Type of Insurance Insurance Density IRDAI prescribes companymay reject
insurance penetration (%) (per capita) “Investment pattern”, insurance claims for
Life there is ombudsman frivolous and
institution for unjustified reasons to
(2011-18) customercomplaints. increase its
Further, Companies Act profitability to keep
Insurance Insurance Density is has various norms for foreign investors
penetration is independent directors, happy.
improving in zigzag
declining in zig-zag auditing, whistle-blower
fashion. ($55 in protection.
fashion. (2.74% in 2018)
2018 CSR will also ensure socio-
Non-Life economic development of
(2011-18) India

China, Thailand,
Indonesia etc all have

161
 raised FDI limits in Technology (MeitY)’s UMANG App (Unified
insurance sector. We Mobile Application for New-age Governance).
should also follow their
roadmap. 17.1.1 EPF Commutation (2020)
▪ Employees’ Pension Scheme (of EPFO) in which
17. PENSION worker gets pension after retirement at 58 years.
▪ Pension – a person eligible to ▪ EPF Pension commutation- Worker can partially
receive “specified” monthly withdraw his pension in advance (before reaching
quantum when he retires. And retirement age). But, then EPFO will pay him less
when he dies, his wife eligible to pension afterwards when he reaches retirement age.
receive “specified” monthly
quantum. When she also dies, 17.1.2 Pradhan Mantri Rojgar Protsahan Yojana
scheme stops. (2016)
▪ Economic Survey (2018-19) observed that in ▪ Scheme is under the ambit of Ministry of Labour
future, we will have an ageing population and less and Employment
young people, so we should gradually raise the age ▪ Private sector employers hire workers informally,
of retirement. without registering them on official formal records
17.1 Employee Provident Fund Organisation otherwise they need to contribute to EPFO-funds
(EPFO) under statutory norms, with fear of harassment from
▪ EPFO was setup initially by an ordinance and later EPFO officials.
accorded statutory status in1952. ▪ Moreover, informally hired workers denied job-
▪ Ministry of Labour and Employment is nodal for security & social security.
organisation. ▪ To address this problem and to encourage private
▪ EPFO governed by Tri-partite “Central Board of companies to hire new workers ‘formally’, Govt.
Trustees” pays employer portion (12%) for the first 3 years.
o Government (Union + state) →15 nominees This scheme is called Pradhan Mantri Rojgar
o Employers (industrialists) →10 nominees Protsahan Yojana (Labour Ministry)
o Employees (workers)→10 nominees ▪ On similar lines, Textiles ministry announced
▪ They make policy decision about avenues for “Pradhan Mantri Paridhan Rojgar Protsahan
investing money (G-sec>C- Bonds>Shares; with Yojana” to encourage formal job creation in the
minimum and maximum slabs) and also decide textile sector.
how much interest should be paid to subscribers.
▪ 3 schemes - Economic Survey (2015-16) – recognise it as “EPFO
1. Provident Fund (1955), Regulatory Cholesterol” preventing formal-job
2. Deposit Linked Insurance (1976) creation.
3. Pension (1995).
▪ EPFO subscriber worker haspermanent Universal 17.2National Pension Scheme (NPS)
Account Number (UAN)- remains unchanged
even after switching jobs. Govt Employees (from Middle Class (from 2009)
▪ Unlike earlier, since 2019 EPFO allowed 2004)
employees to generate UAN online by simply In 2004, govt. renamed In 2009, the National
giving Aadhar & Mobile New Pension Scheme Pension System (of govt.
Number. (NPS) into National employee) was made open
▪ Factory owner has Labour PensionSystem. for all citizens (and NRIs)
Identification Number Subscriber to this scheme aged 18-55 on voluntary
will be those who joined basis. You contribute
(LIN)- which he uses while
govt. service on or after 01 money till age of 60 years,
uploading the compliance Jan 2004. as per your
documents on Shram Mechanismof scheme- capacityinvested→pension.
Suvidha web portal (Under Employees (10 % of basic Govt launched NPS-Lite
Labour Ministry) pay) + Govt. contribution (Swavlamban) in 2010→ If
▪ EPFO & ESIC transactions can be done through (14% of basic paysince poor person from
both public and private sector banks and through Interim-Budget- unorganized sector joined
Ministry of Electronics and Information 2019)→goes to NPS, then govt to co-
PFRDA→NPS

162
 Trust→empanelled NPS – contribute money for five 17.4 Pension Schemes for Poor People
Fundmanager →Invested years
G-sec, Corporate Bonds Atal Pension Yojana Pradhan Mantri Shram-
and Shares depending on (APY) Yogi Maandhan Yojana
your preferences. Operated by Dept of Interim Budget (2019) by
NPS subscribers have Permanent Retirement Account Financial Services, 2015 Ministry of Labour and
Number (PRAN), similar to UAN number of an EPFO Employment
subscriber. Only for age group of 18-40 NPS, Income-Tax payer,
years Indian citizen EPFO, ESIC will be not
residing in India (Not for eligible.
Before Govt. was entirely responsible for arranging
NRI)
2004 the pension money for its employees No minimum or Unorganized sector
Govt Employee’s salary is partially deducted maximum income limits workers with monthly
Post and invested in financial securities; his to join APY scheme. income upto INR 15kin the
2004’s pension is thus not fixed nor fully paid by Govt. Specially directed towards age group of 18-40 years.
NPS but it’s dynamically linked with dividend & unorganized workers
interest generated by those financial securities. outside EPFO security and
poor peoples
Jeevan Pramaan (2014) Monthly pay ranges from Monthly invest Rs. 55-200
▪ Previously, a pensioner (in any Govt / public sector Rs. 42-210 till the age of 60 (depending on age). Govt
org.) had to submit a physical life certificate in years to co-contribute equal
November each year to prove that he/she is alive. amount. Till the age of 60
▪ "Jeevan Pramaan" is an “Aadhar-based Digital years.
Life Certificate” by Ministry of Electronics & Rs. 1000 -5000 monthly Fixed Rs.3000 pension per
Information Technology (MeiTY) pension- depends on at month.
▪ Pensioner's Aadhar number authenticated with which age scheme has
joined and level of
biometric reading device on PC or Mobile will
contribution.
generate “Digital Life Certificate” eligible for One person one Same condition applies
submission to the authority - pension released. subscription only.
If husband dies after 60 If husband dies after
17.3 PENSION SCHEMES FOR SENIOR years, then wife continues 60years, wife gets Rs. 1500
CITIZENS to receive same quantum per month as family
of pension. pension. Once Wife dies,
17.3.1 Pradhan Mantri Vaya-Vandana Yojana If husband dies before age scheme stops. If husband
▪ Launched after demonetisation to protect the of 60, wife gets premium or dies/disabled before 60
if she continues to pay thenyears, wife can continue
senior citizens’ income, when banks were flush
she gets pension when she paying or withdraw with
with deposits which could result into fall of deposit reaches 60 years. interest. In case
interest rates. Both die, then beneficiary ofpremature exit before
▪ Scheme is operated by (DFS -2017) - LIC (child) receives the entire 60years, contribution will
▪ A60 years or above senior citizen can join, latest principal (premium). be returned along with
by 31 March 2020. interest.
▪ He can invest minimum INR1.5 lakhs to Note: 1) Atal Pension Yojana 2) PM Jivan Jyoti Yojana
maximum INR15 lakhs. and 3) PM Suraksha Bima yojana are collectively known
▪ LIC guarantees 8% interest on investment, which as Pradhan Mantri Jansuraksha Schemes
results into a monthly pension of INR 1000-10000,
for a period of 10 years. Then original amount Find correct statement(s) regarding ‘Atal Pension
returned. Yojana’: (CSE-2016)
▪ In between, if senior citizen dies then nominee 1. It is a minimum guaranteed pension scheme mainly
(spouse, children) gets original amount back. targeted at unorganized sector workers.
▪ If LIC unable generate guaranteed return, then Govt 2. Only one member of a family can join the scheme.
(Dept of Financial Services) will pay subsidy for 3. Same amount of pension is guaranteed for the
shortfall. spouse for life after subscriber's death.
▪ Other schemes on similar lines are - Senior Citizen Select code:
Savings Scheme, LIC Varistha Pension Bima a) 1 only
Yojana etc. b) 2 and 3 only

163
c) 1 and 3 only ▪ Most nation's which do not have strict laws
d) 1, 2 and 3 regulating the entry, employment or safety of
foreign workers are classified by GoI as
17.4.1 Maan-Dhan Yojana of 2019 Emigration Check Required (ECR) countries.
For instance: Saudi, Qatar, UAE, Libya, Malaysia,
Pradhan Pradhan Pradhan etc.
Mantri Shram- Mantri Laghu Mantri KISAN ▪ It is compulsory for Indian workers going ECR
Yogi Maandhan Vyapari Maandhan nations to join Pravasi Bharatiya Bima Yojana
(2019) Maandhan Yojana (2019) from the empanelled insurance companies.
Yojana (NPS- ▪ It will have insurance cover of Rs. 10 lakhs if
traders) (2019)
accidental death/permanent disability while abroad.
LIC (Fund LIC (Fund LIC (Fund
Manager) + Manager) ▪ It also covers Maternity expenses for women
+ Manager) +
Ministry of Ministry Ministry worker, Family Hospitalization etc.
of
Labour and Agriculture ▪ Premium for policy ranges between INR 275-375
Labour and
Employment depending on tenure of policy.
Employment
For unorganized Small trader / small / marginal 19. PFRDA - PENSION FUNDS’ REGULATOR
sector workers shopkeepers farmers with
with whose annual upto 2 hectare
monthlyincome land.
turnover does not
upto INR 15000
exceed Rs INR
1.5 crore, based
onself-
declaration.
NOTE- one person can join only one type of above
scheme. Income-Tax payers & those who joined
EPFO/ESIC are not eligible for any of these schemes.
17.4.2 National Social Assistance. Programme Organisation PFRDA (Pension Fund Regulatory and
(NSoAP) Development Authority) was setup by
▪ For Below Poverty Line (BPL) people an executive order in 2003. The
▪ Ministry of Rural development’s scheme launched statutory status was given in 2013.
in 1995 PFRDA headquartered at Delhi (like
▪ In this programme, direct money is given without IBBI, CBI).
asking for any premium from the beneficiary. Structure Total 6→ One Chairman (5yrs or 65
▪ NSoAP is a core of the core scheme with 100% yrs) and5 members (5yrs or 62 yrs)
cost is paid by Centre. They are eligible for re-appointment.
▪ Scheme is optional for state govt. to contribute Functions - Implement National pensionsystem
money. (NPS), select its fund-managers.
- Regulate all public and private
18. SOCIAL SECURITY FOR OVERSEAS
pension funds except EPFO,
INDIANS (PENSION / INSURANCE)
Seaman, Coal miners, Assam tea
These schemes are managed and looked by Ministry of
plantations related pension
External Affairs (MEA)
schemes as they’ve their separate
acts / mechanisms.
18.1 Mahatma Gandhi Pravasi Suraksha Yojana
- Protect Clients, Pensioners
(2012)
▪ Scheme was operational from 2012 to 2017. It was - Prescribe liquidity, auditing,
a voluntary and “insurance + pension” policy for investment norms for Pension
Indian workers in foreign countries. funds.
▪ However, but very few people subscribed to it - Powers of civil court.
which led to ultimate closure in 2017. - Documentation, financial
awareness generation
18.2 Pravasi Bharatiya Bima Yojana (2017) throughpensionsanchay.org.in

164
 - Pension FDI is linked with
insurance FDI (49%) so not
decided by PFRDA.
19.1 Separation of PFRDA And NPS Trust
▪ In 2008→PFRDA setup a body NPS Trust. NPS Trust manages the National Pension System (NPS) and Atal
Pension Yojana funds.
▪ Budget-2019→PFRDA is the pension sector regulator, soit should separate itself from NPS-Trust which is
doing pension business activity.
▪ Pattern of Government take over NHB from RBI is visible here- the financial regulators themselves should not
be involved in running financial products, so that they can work in a transparent, impartial manner without
conflict of interest.

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 CH-6 FINANCIAL INCLUSION
MEANING OF FINANCIAL INCLUSION
● According to the World Bank -Financial inclusion
means that individuals and businesses have access
to useful and affordable financial products and
services that meet their needs – transactions,
payments, savings, credit and insurance – delivered
in a responsible and sustainable way.
● Financial inclusion ensures financial literacy and
Financial democracy for the people.
● This ensures social, economic and transaction
security, improves social harmony, women
empowerment, helps reaping the benefit of “Less
Cash Economy”
Access
Usage Quality
● Financial inclusion or taking banking services to the
common man was the main driver of bank
nationalization in 1969 and 1980 powered by
three priority areas –
o Access to banking
o Access to affordable credit
o Access to free face-to-face money advice.
OBJECTIVES OF FINANCIAL INCLUSION
● Bank accounts: Ensuring universal access to bank
accounts, which are a gateway to all financial
services.
● Digital payment services: Providing access to
digital payment services and increasing its
penetration.
● Insurance: Ensuring universal coverage of
insurance for life, accidents, etc.
● Asset diversification: Allowing diversification of
asset portfolio of households through increased
participation in capital markets.
● Social Security: a system of payments / assistance
by the government to citizens who are ill,
handicapped, poor, aged or unemployed.
● Better access to credit at a reasonable cost for
those presently excluded
● Social Justice: distribution of wealth,
opportunities, and privileges within a society-
through reservation in jobs, admissions and election
and through legal safeguards for protection of civil
rights, prevention of atrocity and personnel laws.
Article 41 (DPSP)- State to provide public assistance
to its citizens in case of unemployment, old age,
sickness and disablement;
Article 42 (DPSP)- The State shall make provision for
securing just and humane conditions of work and for
maternity relief.
NEED FOR FINANCIAL INCLUSION
● Financial inclusion is a key enabler to reduce
extreme poverty and boost shared prosperity,
● An ambitious global goal (World Bank ) to reach
Universal Financial Access (UFA) by 2020.
● Financial inclusion has been identified as an
enabler for 7 of the 17 Sustainable Development
Goals (SDG)
● Development – financial inclusion would result
into higher savings, decrease in income inequality
and poverty, increase in employment opportunities.
● Growth – greater access to formal credit would
promote entrepreneurship in country
● Service delivery – reach targeted beneficiary
● Bank efficiency and economies of scale
● Financial inclusion has a multiplier effect in
boosting overall economic output, reducing poverty
and income inequality, and in promoting gender
equality and women empowerment.
● As per Census 2011, only 58.7% of households are
availing banking services in the country. However,
as compared with previous Census 2001, availing
of banking services increased significantly largely
on account of increase in banking services in rural
areas.
● At present, only about 5% of India's 6 lakh
villages have bank branches. There are 296
under-banked districts in states with below-par
banking services.
● Agriculture not only plays the central role for
achieving high growth but also inclusive growth for
the economy as a whole (generates about 16 per
cent of India’s GDP and provides employment to
nearly two-third of its population). However, a
very large segment of agricultural sector is starved
of formal credit, forcing the farmers to borrow
from the informal moneylenders at usurious interest
rates. This sets a cycle of indebtedness.
166

Education
Social Infrastructure
Quality Usage
Access
ADVANTAGES OF FINANCIAL INCLUSION
● Reduce the gap between rich and poor people
● Boosts the financial condition and standards of life
of the poor and disadvantaged population.
● Help in implementing social security schemes
● Lowers the transaction cost for daily economic
activity.
● Enables creation of economic buffers for exigencies
● Better monitoring and regulation of financial
transaction using digital technology
● Helps government plug leakage in public subsidies
and welfare programmes as govt. can directly
transfers the subsidy amount into the account of
beneficiary.
● Poor and downtrodden are encouraged to invest in
various financial products and can borrow from
formal financial channels.
● Increases the amount of available savings, rate of
capital formation and thereby allows tapping of new
business opportunities.
● E.g. PMJDY, Mudra loans, Atal Pension Yojana,
Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan
Mantri Suraksha Bima Yojana and Stand-up India.
COST OF FINANCIAL EXCLUSION
● The more a country is financialized, the more
people who have no access to financial products
face difficulties and will suffer from important
financial, economic and social consequences.
● Accepting a job can be more difficult, if there is
widespread financial exclusion, as most employers
167
insist on paying wages electronically into an
account.
● Getting access to other financial products
(insurance, credit) may depend on being able to pay
by direct debit and not having a bank account also
reduces credit scores.
● In the face of widespread financial exclusion, for
the affected people the only option in times of need
is illegal lenders. Such lenders apply default
charges that can be extortionate and arbitrary -
vicious cycle of perpetual indebtedness sets in.
● People who save informally (that is not in a bank
account) do not benefit from the interest rates
and tax advantages that people with savings
accounts enjoy. Savings kept in cash at home are
vulnerable to theft.
● If the SMEs sector, are affected by financial
exclusion then their potential contribution to the
overall economic growth is severely hampered.
Further, given the fact that about two-third of the
units in this sector are owned by the
disadvantaged section, such an exclusion results
into a form of social injustice.
● Financial inclusion broadens the resource base
of the financial system by developing a culture of
savings among large segment of rural population
and plays its own role in the process of economic
development.
● Financial inclusion also mitigates the exploitation
of vulnerable sections by the usurious money
lenders by facilitating easy access to formal credit.
Know Your Customer (KYC)
KYC is the due diligence and bank regulation that
financial institutions and other regulated companies
must perform to identify their clients and ascertain
relevant information pertinent to doing financial
business with them.
BANKING SECTOR AND FINANCIAL
INCLUSION
YEAR DEVELOPMENT
1955, Nationalization of Banks to improve its
1969, customer base, reach in various parts and
1980 financial inclusion.
1961 DICGCI Act – formation of corporation to
insure customers deposits in bank.
1966 Cooperative Banks under RBI’s Ambit
1969 Lead Bank Scheme (State Cooperative
Banks - Pvt or Public) given lead role in
 district. They prepared credit plan with
‘Service Area Approach’, and coordinate
with the efforts of Government, banks and
NBFCs.
1971 State level Bankers’ Committee to monitor
progress of financial inclusion
1972 Differential rate of interest was
introduced to provide bank finance at a
concessional rate of interest of 4% per
annum to the weaker sections of the
community for engaging in productive and
gainful activities so that they could improve
their economic conditions.
Regional Rural Bank (RRB) setup through
Act – expanded banking in rural pockets.
Further, RBI requires commercial banks to
setup atleast 25% of their branches in
unbanked rural areas. Similar norms for
White label ATM Companies.
1992 The Self-Help Group-Bank Linkage
Programme (SBLP) started as a pilot
programme on the basis of
recommendation of S K Kalia Committee.
2005 RBI permitted no-frills account with zero
balance
2006 RBI permitted Banking Business
Correspondent Agents to ensure banking in
rural and remote areas
2011 Government’s Swabhiman to increase
banking presence in rural area.
2013 e-KYC permitted.
2014 Jan-Dhan Yojana, new Private Commercial
Banks (Bandhan, IDFC First), Bhartiya
Mahila Bank.
2015 Small Finance Banks and Payment Banks.
2018 India Post Payment Banks
2020 The RBI released the National Strategy for
Financial Inclusion 2019-2024.
Q. Service Area Approach was implemented under
the purview of ___________(CSE-2019)
a) Integrated Rural Development Programme
b) Lead Bank Scheme
c) Mahatma Gandhi National Rural Employment
Guarantee Scheme
d) National Skill Development Mission
PRADHAN MANTRI JAN DHAN YOJANA
● PMJDY was launched by Dept of Economic
Affairs with two phases in 2014.
Objectives of PMJDY
1 Financial literacy
2 Banking within 5 kms
3 Account for every family with overdraft, with Ru-
pay ATM-cum- DEBIT Card
4 Credit Guarantee Fund (For Overdraft defaults)
5 Direct Benefit Transfer (DBT)
6 Sell Micro insurance & pension products through
bank.
● PM-JDY bank account can be opened in any
Commercial or Cooperative Bank provided
RUPAY that bank has CBS and bank is tied with
RuPay Payment Gateway.
● Basic Savings Bank Deposit Account–anyone of
Age 10 or above can open Zero balance account.
However, Chequebook will be issues only with
balance.
● There are restrictions on max. Number of money
withdrawals per month.
● Overdraft upto INR 10,000 depending on balance
history of min. 6 months. Overdraft given on only
one account holder in household (preferably
woman). Money has to be returned with interest
(more than 12 percent) within 3 years. Banks to
decide the loan interest rate on same.
● Every Jan Dhan account comes with free Rs.1 lakh
Accident Insurance which will be premium by
NPCI, it’s therefore necessary to regularly use card-
atleast for checking balance. Union Government
employees, and income tax payers not eligible
for this free insurance.
● Significance of Jan-Dhan Account 🡪JAM trinity
(Jan-Dhan, Aadhar, Mobile) for targeted and direct
transfer of subsidies, scholarship and payments to
beneficiaries.
Q. Pradhan Mantri Jan-Dhan Yojana’ has been
launched for__________(CSE-2015)
a) providing housing loan to poor people at cheaper
interest rates
b) promoting women’s Self-Help Groups in backward
areas
c) promoting financial inclusion in the country
d) providing financial help to the marginalized
communities
PM KISAN SAMMAN NIDHI (PM-KISAN)
● PM-KISAN Scheme inaugurated by the Prime
Minister on 24th February, 2019 which provides
for transfer of an amount of Rs. 6000/- per year
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 in three equal instalments each of Rs. 2000/- Govt Savings Post Office schemes: monthly, 5
directly into the bank account of beneficiary farmer Bank Act 1873 year, savings, time deposit
families. Govt Savings Senior Citizen Savings (2004)
● The Scheme initially covered only small and Bank Act 1873
marginal farmer families with land holding upto Government National Savings Scheme (NSC)
2 hectares as beneficiaries, subject to certain Savings
exclusion criteria for higher income status. 1959
Certificate Act
● The Govt. later extended the scheme with effect 1959
from 1st June 2019 to all farmer families Government Kisan Vikas Patra 1988-11, 2014
irrespective of land holding size, subject to Savings
applicable exclusions. Certificate Act
● Government Ministry- Ministry of Agriculture 1959
and Farmers Welfare PPF Act 1968 Public Provident Fund (PPF)
● Since the launch of PM Kisan till now about 8.12
No Act Sukanya Samriddhi Yojana 2015
crore farmer families have been benefitted under
the scheme. Deposited Money usually goes into National Small
● A new facility has been provided on PM-KISAN Savings Fund (NSSF) which extended as loans to
Web-portal (www.pmkisan.gov.in) Union and (selected States) with caveats.
through ‘Farmers’ Corner’ Link to facilitate the Interest rates are decided by Finance Ministry’s Dept
farmers for self-registration, edit his/her name in of Economic Affairs on quarterly basis.
PM-Kisan data base as per Aadhar Card, access the
beneficiary list and status of payment.
Dept of Post: POSB vs IPPB
● The farmers are being facilitated for self-
registration and data correction through
Common Service Centers.
Ministry of Communication
OVERDRAFTS TO WOMEN IN SELF HELP
GROUPS (SHGs)
● Initiative mentioned in Budget-2019 Dept. of
Dept. of Posts Telecommunications
● Launched by Ministry of Rural Development
under National Rural Livelihoods Mission
(NRLM) Post Office
India Post
Payments
● Women SHG interest subvention programme under Savings Bank
Bank
NRLM will be expanded to all districts.
● Every verified woman SHG member with a PM Jan ● Dept. of Post was setup by Lord Clive in 1766, and
Dhan account eligible for overdraft of ₹ 5,000. One was later expanded by Warren Hastings in 1774.
woman in every SHG will also be eligible for upto₹ ● Post Office Act was passed by Dalhousie in 1854.
1 lakh MUDRA loan. He also introduced first postal stamp and rates
were decided by weight and not by the distance.
JAN DHAN DARSHAK APP (2018) ● Project Arrow for modernization of Post was
● Jointly developed by Department of Financial launched in 2008.
Services (DFS) & National Informatics Centre ● Telegram was stopped by India Post in 2013, due
(NIC). to onset of SMS & emails in India.
● It helps people find the nearby financial touch
points such as Bank branches, ATMs, Post Offices Post Office Savings India Post Payments
etc. Bank (PoSB) Bank (IPPB)
Formed under Govt Under Companies act
INVESTMENTS OTHER THAN BANK FOR Savings Bank Act 1873 2013. Registered as
FINANCIAL INCLUSION Public Ltd company in
Poor and lower middle-class person may opt for other 2016
investment schemes for better returns than bank deposit Savings account only Both Current account
rates. and Savings account
Act Small Savings Schemes

169
Accept time deposits Given payment bank, Scheme runs for a definite Scheme is illegal and
does not accept time period of e.g. 12 months vaguely designed.
deposits from Jan to Dec-2020.
Can keep more than ₹1 No, because of payment Every month each There are no official
lakh balance bank. subscriber deposits equal documents or account
E-Banking and online UPI, BHIM, NEFT, amount, as stipulated in books.
bill payment not directly IMPS and BBPS (Bharat the scheme document
possible. Bill pay) available. Scamster will accept
Sukanya Samriddhi Not possible. Given Every month Foreman whatever small / large
(daughter’s fixed deposit payment bank, time draws ‘chit’. whichever amount is offered by the
account) can be opened deposits are not allowed. subscribers’ name comes poor person who falls
No loans to individual No loans until it becomes he may get loan / prize.(in prey.
Small Finance Bank next month, previous
Objective - Promote Objective - Remittance winners’ names may not Investor doesn't know
savings habits among & digital payments be added to the lottery with surety how much
poor. pool). This way, everyone is contributed by other
has an equal chance of investors.
SUKANYA SAMRIDDHI YOJANA (2015) winning.
● Sukanya Samriddhi Scheme is a small saving Even if you won in Feb- Not compulsory to pay
scheme under the Government of India targeting 2020, still you'll have tothe monthly deposits
the parents of any girl children. This scheme compulsorily pay monthly after you’ve won the
focuses on encouraging the parents of the female deposits until Dec-2020 prize. (Therefore the
child for building a fund for their future when the scheme is scheme will collapse
education and marriage expenses. officially over. eventually, when new
● The Sukanya Samriddhi Scheme provided an subscribers stop
interest rate of 8.4% and tax benefits to every coming).
account opened under it for July-September 2019. This is legal, under Chit This is illegal under
● The Sukanya Samriddhi Account can be opened at Funds Act Prize Chits and Money
any Post office or branch of authorised Circulation Schemes
commercial banks in the country. Banning Act, 1978
● Under ‘‘Beti Bachao Beti Padhao’’ , Sukanya
Samriddhi Account Scheme launched in January
2015 has been a great success.
● More than 1.26 Crore accounts opened across the
country under Sukanya Samriddhi Account scheme
● Parents open a (fixed deposit type) bank account in
the name of a 0-10 years girl child, and deposit
annually ₹ Rupee 250 to 1.5 lakhs till she reaches
age of 14.
● Finance Ministry’s Dept of Economic Affairs
announces 9.1% interest rate.
● Money (principal and interest) can be withdrawn
at the age of 18-21 depending on whether married
or not. So, it indirectly prevents child marriages
and empowers the grown-up daughter with money WHY PEOPLES PREFERRED CHIT FUNDS?
to pursue higher education, small business etc. ▪ Low rate of interest on small saving provided by
● One daughter - only one account can be opened commercial banks are usually not coherent with the
in this scheme. market rate.
● Maximum two daughters can be enrolled by ▪ Obtaining formal loan still remains a huge task
parents/legal guardians. for a common man as banks, financial institution
are plagued by stringent procedures.
CHIT FUNDS AND PRIZE CHIT
CHIT FUNDS PRIZE CHITS

170
 ▪ Less regulated regime at fairly competitive
interest rates prevailing in the market makes these
schemes easily accessible.
▪ Chit funds come handy to meet exigencies like
death or ill-health as well as joyous occasions like
marriages.
▪ These types of scheme promote savings culture as
each member is supposed to contribute a fixed
amount every month towards the fund.
CHIT FUNDS (AMENDMENT) ACT, 2019
● 2019 act aims to amend 1982’s Chit Funds Act.
● Amendment act will regulate the ‘Chit Funds’,
‘Kuri’, ‘fraternity fund’, ‘rotating savings and
credit institution’.
● Chit must be drawn in the presence of at least two
subscribers. Moreover video-conferencing is also
allowed.
● Chit Fund’s fund manager is called ‘Foreman’.
New act increases his commission in terms of
percentage.
● New Act also increases the maximum amount of
investment the foreman accepts from subscribers.
CHIT FUND SCAMS
● Chit fund is a type of “contract” and subject under
Concurrent list of seventh schedule of
constitution. So, Union has Prize Chits and Money
Circulation Schemes 1978, Chit Funds Act 1982
(amended in 2019)
● Moreover, states have their own acts / rules / State
regulator of Chit Funds.
● Saradha Chit Fund scam, Rose Valley Chit Fund
Scam🡪The scamsters ran multiple schemes in
West Bengal and neighbouring states, invested
money in share market, real-estate, shopping malls
etc. thus violating the chit-fund laws.
● Further, any collective investment scheme of ₹100
cr or more requires SEBI permission. Yet they
didn’t obtain permission.
● Moreover, they also engaged in Multi-level
marketing (MLM)/Pyramid /Ponzi Selling
● To avoid such scams in future, Union Govt
proposed “Banning of Unregulated Deposit
Schemes Bill 2018” and later ordinance in 2019.
NEED FOR STRICTER REGULATIONS OF
CHIT FUNDS
▪ Fraudulent companies - There have been raising
instances of people in various parts of the country
being defrauded by illicit deposit taking schemes
such as Saradha Chit Fund Scam, Rose Valley
Scam etc.
171
▪ Financial Illiteracy - Lack of financial literacy
results in people getting duped as they are
promised huge return on their investment which has
no substantial basis to fulfil.
▪ Non-Transparency - Chit funds, especially those
catering to a large number of members, are opaque
both in their operations and eliciting of bids.
▪ Administrative Loopholes - Companies running
such schemes exploit existing regulatory gaps and
lack of strict administrative measures to dupe
poor and gullible people of their hard-earned
savings.
▪ Lack of Accountability - There is no deposit
insurance for investors. If a registered chit fund
company files for bankruptcy neither the
government nor the Reserve Bank of India can help
the investors.
BANNING OF UNREGULATED DEPOSIT
SCHEMES ACT, 2019
● If an entity is soliciting public to deposit/invest
money, then it could be regulated by RBI (Bank,
NBFC-D), NHB (Home loan NBFCs), SEBI
(Mutual Funds, ReITs, InvITs etc), IRDAI &
PFRDA, Corporate Affairs ministry (NIDHI), State
Governments (chit fund), EPFO, Multi state
cooperative societies Register under Agriculture
Ministry.
● A deposit-taking scheme is defined as
‘unregulated’ if person is asking people to
deposit/invest money but he has not registered with
any of the above organizations. E.g. builders,
jewellers, etc. Act prohibits advertisement &
money collection in it.
● Penalty upto ₹50 crores and imprisonment upto 10
years along with attaching the assets to refund
depositors within prescribed timelines.
● Union to setup an online central database of
deposit-taking activities in the country.
CREDIT (LOANS) AND FINANCIAL
INCLUSION
Mudra (NBFC created in 2015)
● Mudra Units Development & Refinance Agency is
100% subsidiary of SIDBI and also receives the
funding from PSL (shortfalls via RBI and budgetary
support via Department of Financial Services.
● MUDRA aims to provides indirect lending via
Scheduled Commercial Banks, RRB, Cooperatives,
Micro Finance Institutions& other NBFCs through
refinancing.
● Targeted beneficiaries are - Non-Corporate type
Micro Enterprises from Agri-allied sectors,
manufacturing and service sector.
● Mudra loans are collateral-free. If borrower
defaults on loan, then lender’s losses are covered
through Credit Guarantee Fund for Micro Units
[CGFMU] which is operated by National Credit
Guarantee Trustee Company Ltd. [NCGTC,
2016]- which is a private ltd company by Dept of
Financial Services in Finance Ministry.
Pradhan Mantri MUDRA Yojana (PMMY)
Shishu Loans upto INR 50000
Kishor Above INR 50000 to 5 lakh
Tarun Above 5 lakh to 10 lakh
● Budget-2019: One woman in each self-help group
(SHG) will be made eligible for ₹ 1 lakh loan
under Mudra scheme.
Q. Pradhan Mantri MUDRA Yojana is aimed
at_____ (CSE-2016)
a) bringing the small entrepreneurs into formal
financial system
b) Providing loans to poor farmers for cultivating
particular crops.
c) Providing pensions to old and destitute persons.
d) Funding the voluntary organizations involved in the
promotion of skill development and employment
generation.
KISAN CREDIT CARD (1998)
● KCC was jointly launched by RBI and NABARD
in 1998
● Farmer gets credit card from PSB, RRB, State
Cooperative Banks.
● Card holder farmers can swipe it to buy farm inputs
(seeds, fertilizers, pesticides etc.)
● Moreover he can also withdraw cash (as loan).
● However, money to be repaid with interest.
Accidental insurance also given.
Budget-2018 Kisan Credit Card (KCC) extended
to Animal Husbandry and Fisheries
farmers
Budget-2019 Animal Husbandry and Fisheries
farmers will get the interest
subvention.
Budget-2019 Comprehensive drive with a
simplified application form to get all
farmers under KCC cards.
INTEREST SUBVENTION
● Government pays part of the interest rate for
borrower. (farmer, MSME, affordable housing etc)
such as:
o Farm loans upto 3 lakhs→ 9% Minus 2% (to all
farmers) minus 3% (regular paying farmers)=
only 4% loan interest farmer has to pay.
● Budget-2019🡪Animal Husbandry and Fisheries
farmers with KCC also eligible.
● MSME🡪 Incremental loans upto ₹1 crore to GST
registered MSME industry= 2% subvention. (As
such already announced by PM in 2018)
PAiSA Portal (2018)
● A centralized electronic
platform for processing
interest subvention on
bank loans to
beneficiaries under
Deendayal Antyodaya
Yojana – National Urban
Livelihoods Mission (DAY-NULM) named
“PAiSA – Portal for Affordable Credit
and Interest Subvention Access”.
● It has been designed and developed by Allahabad
Bank, the nodal bank under the scheme and
launched by Ministry of Housing and Urban
Affairs (MOHUA) in 2018.
● It aims to connect directly with beneficiaries and
ensure there is greater efficiency in the delivery of
services.
● PAiSA portal aims to connect with all scheduled
commercial banks, RRBs and Cooperative
Banks.
Before Interest subvention was released
this portal manually on a quarterly basis,
sometimes delays.
After this Released on a monthly basis, and can be
portal tracked through this portal, beneficiary
gets SMS information.
CREDIT GUARANTEE
● Credit guarantee means if borrower defaults to pay
interest or principle or both, then losses of
banks/NBFCs will be covered by credit guarantor.
● Credit guarantee facilitates confident without
requiring borrower to pledge collaterals.
● Earlier DICGCI used to give credit guarantee for
PSL borrowers, but now this work is done by
organizations such as:
172
 If the government provides say a 100% credit guarantee policy. Policy/Contracts are given in local
up to an amount of Rs 1 crore to a firm, it means that a language. e.g. LIC’s Jeevan Madhur and Jeevan
bank can lend Rs 1 crore to that firm; in case the firm Mangal
fails to pay back, the government will make good all of
Rs 1 crore. SOCIAL SECURITY SCHEME FOR GIG
If this guarantee was for the first 20% of the loan, then ECONOMY
the government would guarantee to pay back only Rs 20
lakh. A gig economy is a free market system in which
temporary positions are common and organizations
Organization Credit Guarantee Loans covered contract with independent workers for short-term
Fund engagements
SIDBI Credit Guarantee Loans to
+ fund trust for Micro & ● The draft Code on Social Security has proposed
Government Micro & Small Small that the Centre may formulate social security
Enterprise Enterprise schemes for gig workers.
(CGTMSE) ● The draft law has defined a gig worker as a
Dept. of National Credit MUDRA, “person who performs work or participates in a
financial Guarantee Trustee Stand Up work arrangement and earns from such activities
services (NCGTC) India Skill & outside of traditional employer-employee
Education relationship”. E.g. freelancers, independent
loans contractors, project-based workers and temporary
Ministry of Export Credit Exporters or part-time hires.
Commerce Guarantee ● Informal workers does not have formal job
Corporation of contracts with employers.
India fund ● While they may have some written contract to
(ECGC) deliver services to the company, but the contract is
worded in such manner they are not “regular
Refinance employees” of a company and not eligible for
● When an AIFI (or MUDRA) gives new finance to EPFO, ESIC benefits.
Banks/NBFCs based on the quantum of finance ● Labour Ministry drafting a “social security code
they (Bank/NBFC) have already given to end- for all informal & gig workers2019”.
borrowers. ● Such schemes would encompass issues like “life
● Usually works via the process of securitization of and disability cover”, “health and maternity
the previous loan papers. benefits”, “old age protection” and “any other
benefit as may be determined by the Central
INSURANCE, PENSION AND FINANCIAL Government”.
INCLUSION
Insurance Postal Life, ESIC, PM Jeevan Jyoti The report says there has been an increase in freelancers
schemes for & Surkasha Bima, PM-JAY, PM in India from 11% in 2018 to 52% in 2019, thanks to
financial Fasal Bima. various initiatives including Start-up India and Skill
inclusion India.
Pension EPFO, NPS, Atal Pension, PM
schemes for Maan Dhan, PM Vay-Vandana, OMBUDSMAN OF THE RBI
financial Rural Ministry’s National Social
inclusion Assistance Program. Banking NBFC Digital
Ombudsman Ombudsman Transactions
MICRO INSURANCE Ombudsman
● Insurance policy may be Life/General Insurance Estb. in 1995 2018 2019
with a very low premium. Banking powers to Payment &
● When small sum insured (upto ₹50k) & target Regulation regulate Settlement
audience is poor / villagers / farmers. It may be an Act,1949 NBFCs under Systems Act,
individual / group based insurance. Intermediaries RBI Act, 1934 2007
such as NGO, SHG, MFI help in selling such

173
 Customer can Any NBFC- Prepaid payment ● National Centre for Financial Education was
file free Deposit-taking instruments, established in 2017 to implement the National
complaint (e.g. Mahindra, Mobile wallets, Strategy for Financial Education.
against any type Sriram), OR Apps,
of bank. NEFT/RTGS Policies delivered at scale, such as universal digital ID
Any NBFC with and other digital - India and Aadhaar / JDY accounts - more than 1.2
assets size of ₹1 transactions billion residents covered
billion &
customer NATIONAL STRATEGY ON FINANCIAL
interface. INCLUSION(2019-2024) - RBI
Although
● The RBI released the National Strategy for
Exempt:
Financial Inclusion 2019-2024 on January 10,
Infrastructure 2020.
finance/debt ● It sets forth the vision and objectives of financial
companies, Core inclusion policies in India.
Investment ● The strategy was prepared by the RBI with inputs
Companies, from the central government and financial sector
NBFCs under regulators – PFRDA, SEBI, IRDA, etc.
liquidation. (for ● The report refers to financial inclusion as the
them NCLT, process of ensuring access to financial services, and
SEBI-SCORE). timely and adequate credit for vulnerable groups
For amounts For amounts For amounts and low-income groups at an affordable cost.
upto ₹20 lakhs upto ₹10 lakhs upto ₹20 lakhs
Ombudsman can order penalty upto ₹1 lakh for Common themes across these nations to improve
customer’s mental agony, waste of time and money include:
Higher Appeal lies with Dy. Governor of RBI ● Following a target-based approach (by targeting
specific sectors)
RECENT INITIATIVES BY GoI TO IMPROVE ● Strengthening requisite infrastructure of payment
FINANCIAL INCLUSION mechanisms
● JAM- Jandhan (banking), Aadhar (trinity), Mobile ● Strong regulatory framework
(transactions)Biometric Identity ● Focus on last-mile delivery and financial literacy
● To improve social security to all citizens – PM ● Use of innovation and technology
Suraksha Bima Yojana and PM Jeevan Jyoti Bima ● Periodic monitoring and evaluation of progress
Yojana made in financial inclusion
● Atal Pension Yojana – guaranteed monthly pension
to the subscriber Strategic objectives of a national strategy for
● To expand ATM network, the RBI has allowed financial inclusion:
Non-Bank entities to start white label ATMs
● Banks are deploying micro-ATMs in rural areas.
● Ru-Pay cards have significantly increased its
market share. Universal access to Effective
financial services coordination
● SHG-Bank linkage programme
● Financial Literacy Centres have started by
commercial banks at the request of the RBI
● Financial inclusion of women through the Customer
Providing basic
implementation of its biometric identification protection and
bouquet of
system “Aadhar”. grievance
financial services
● UPI platform built by NPCI. redressal
● Priority Sector Lending (PSL)
● Establishment of MUDRA bank Access to
● Financial literacy centres were launched by Financial literacy
livelihood and skill
commercial banks at the request of the RBI. and education
development

174
 CHALLENGES TO FINANCIAL INCLUSION IN
INDIA
● In India, where nearly one-fourth of population is
illiterate and below poverty line, ensuring financial
inclusion is challenging task
● Due to this, ensuring deposit operations in the Jan-
Dhan account is challenge.
● High volume of frauds due to financial literacy
● Money lenders continue to account for nearly 30
percent of total banking business
● Most of commercial banks operate in commercial
and urban areas. Hence rural population finds
difficult to access financial services.
● Lot of hidden banking charges have demotivated
and disincentivised poor customers.
● Making banks accessible for peoples with
disabilities
● Lack of credible, low-cost and high-quality
financial advice.
● Difficulty in understanding different product
offerings, financial terms, and conditions.
● The rising level of Non-Performing Assets (NPAs)
of banks due to the large corporates makes it
difficult to improve financial inclusion situation in
India.
● Gender inequality = Most women are being
excluded from the formal financial system.
Concerns w.r.t Financial inclusion
● PMJDY has ensured universal access to bank
account and India now has 180 billion accounts.
However, 48% of those accounts haven’t seen any
transaction in the last one year.
● Only 33 percent of all beneficiaries were ready to
use their RuPay cards.
● India is a cash-intensive economy, still India
remains among countries with the lowest access to
digital payments.
● Financial illiteracy, safety, and security concerns
prevent people from moving towards the digital
mode of payments.
● About 76% of the adult population in India does
not understand even the basic financial concepts.
● Misuse of SHGs - Panchayats are now competing
with NGOs and rural banks in forming SHGs due to
the qualification for government subsidy - Political
pressure and misuse of funds.
WAY FORWARD
● A financial inclusion strategy sensitive to regional,
demographic and gender related factors need to be
carefully crafted.
● Digitization of land record Bringing SHGs into
financial main streams
● Proper financial inclusion regulation in the country
to access financial services.
● Financial inclusion is necessary before
comprehensive success of mobile wallets.
● Financial services must be made accessible for
people with disabilities at par with non-disabled
persons.
● NABARD has an extensive presence across
country; it should be made the nodal and
accountable agency for financial inclusion.
● Requires grass root level research as to why people
prefer to go to money lenders, despite a network of
banks, cooperatives, MFIs and SHGs.
● As India uses Aadhar to advance goal of financial
inclusion the government must examine and put
into place a robust regime for data protection.

FINANCIAL INCLUSION: INDIA’S PERFORMANCE

● Annual report started in 2007, to measure financial inclusion levels, this report is prepared by
The Economist Magazine’s Economist Intelligence Unit, Accion global NGO & partners like
Bill & Melinda Gates Foundation, Metlife foundation etc.
● Ranking (2019) - Columbia (1), India at 5th rank among 55 nations.
● 2019’s report measures gender gap in financial inclusion for the first time.
Over the years, this report identified following challenges in India:
1. Lack of full interoperability across payment systems.
Global Microscope 2. Lack of financial literacy, no trust in financial system or buying insurance.
Report 2019 3. Pervasive digital divide, grievances redressal. Extreme poverty, no surplus to save/ invest.
4. Missing land/property records make access to loans difficult.
● Proposed by Department of Financial Services (DFS) in 2018.
● This annual index will have three measurement dimensions;
1. Access to financial services
Financial Inclusion 2. Usage of financial services
Index by DFS 3. Quality.
● It complies with the format prescribed by the G20.

175
 ● By World Bank with help of Bill & Melinda Gates Foundation
● It’s published every 3 years. It doesn’t give ranking but measures how many
percentage of people have access to banking, credit etc. in a given nation.
● 2017’s report appreciated PM-Jan Dhan, now we are parallel to China in percentage
of population with bank account. Financial inclusion helps bringing rich poor divide
through targeted delivery of subsidies via J-A-M (Jandhan, Aadhar, Mobile)

Global FINDEX
Database 2018

The gender gap in account

ownership remains stuck at 9
percentage points in
developing countries,
hindering women from being
able to effectively control their
financial lives. - World Bank

176
 CH-7 BUDGET AND TAXATION - I
Fiscal Policy
Meaning Neutral Fiscal Policy implies a balanced budget
Policy where Govt. spending is equal to
• Fiscal policy is the means by
the Tax revenue. It further means
which a government adjusts
that government spending is fully
its spending levels and tax
funded by tax revenue and overall
rates to monitor and
the budget outcome has a
influence a nation's economy.
neutral effect on the level of
• Using fiscal policy, Govt
economic activity
influences the savings, investment and
Contractionary Policy involves raising taxes or
consumption in an economy, to accomplish certain
(restrictive) cutting govt spending, so that
national goals such as income redistribution, socio-
Fiscal policy Govt spending is less than Tax
economic welfare, economic development and
revenue. It cuts up on the
inclusive growth.
aggregate demand and to reduce
• It is the sister strategy to monetary policy through the inflationary pressures in the
which a central bank influences a nation's money economy
supply.
Policy is generally used for
• Fiscal policy is result of several component policies giving stimulus to the economy.
or mix of policy instruments. These include, policy i.e. to speed up the rate of GDP
on taxation, subsidy, welfare expenditure, etc; growth or during a recession
investment or disinvestment strategies; and debt or when growth in national income
surplus management. is not sufficient enough to
Expansionary maintain the present standards of
Fiscal Policy living. A tax cut and/or an
Full increase in government
Employment
spending would be implemented
to stimulate economic growth and
lower unemployment rates. This
Economic Price is not a sustainable policy, as it
Growth stability leads to budget deficits and thus,
should be used with caution.

Objectives of fiscal policy

Fiscal policy is based on the theories of British • Full Employment - through rural employment
economist John Maynard Keynes (Keynesian programmes like MGNREGA and various similar
economics). This theory basically states that employment schemes.
governments can influence macroeconomic
• To Fight Inflation - Higher Income tax will
productivity levels by increasing or decreasing tax
reduces disposable income which will result into
levels and public spending. curbing demand. To fight deflation, we need to
reduce direct and indirect taxes to boost demand.
Types of fiscal policy
• To Boost Economic Growth - Provide income tax
benefits on household savings in LIC/Mutual Fund
Types of fiscal etc. this will ensure new investible capital to
policy industries which will help in factory expansion,
jobs, GDP growth.
• Inclusive Growth - Higher taxes on rich could
Neutral Fiscal Contractionary Expansionary
enable use of taxed money for health, education,
Policy Fiscal policy Fiscal Policy women, poverty removal programs.

177
• To Boost Regionally Balanced Growth - Give tax is required to present Annual Financial Statement
benefits to industrialists for setting up factories in containing receipt and expenditure of last year (and
North East, Left-wing Extremism (LWE) & other projections for the next year).
backward areas. • Finance Minister Nirmala Sitharaman (in 2019)
• Exchange Rate Stability - Give tax benefits to ended this colonial practice by presenting the
exporters to boost exports; while impose higher budget in a traditional four-fold red cloth ledger.
taxes on imported items to reduce imports which
will help containing Current Account Deficit Constitutional provisions
(CAD).
Fund (Art.) Description
Importance of fiscal policy in India Art. 266(1) - Incoming taxes, loans raised, loans
• In a country like India, fiscal policy plays a key Consolidated recovered. Withdrawal need
role in elevating the rate of capital formation Fund Of Parliament Permission (except
both in the public and private sectors. India for Charged Expenditure like
• Through taxation, the fiscal policy helps to Judges’ salaries).
mobilise a considerable amount of resources for Art. 267 - Unforeseen events INR500 cr by
financing its numerous projects. Contingency Finance Secretary on behalf of
• Fiscal policy also helps in providing stimulus to Fund of India President. Parliament approval is
elevate the savings rate. “subsequently” obtained, after
• The fiscal policy gives adequate incentives to the expenditure. Money refilled from
private sector to expand its activities. CFI.
• Fiscal policy aims to minimise the imbalance in Art. 266(2) - • Incoming provident fund,
the dispersal of income and wealth. Public small savings, postal deposit
Accounts Of etc.
India • Govt. acts like banker
transferring fund from here to
there so parliament
permission not necessary.
• If separate fund is to be created
for the first time, for a specific
expenditure, then needs
parliament permission to
create it e.g. Central Road
Fund Act 2000, where Road
Cess on Petrol, Diesel would
be deposited.
Budget (Annual Financial Statement) – Art. 112
Meaning Q. The authorization for the withdrawal of funds
• Budget is an annual from the Consolidated Fund of India must come
financial statement from______(CSE-2011)
(Art. 112) containing a) The President of India
estimated revenues and b) The Parliament of India
expenditures for the next c) The Prime Minister of India
financial year. d) The Union Finance Minister
• Budget is the primary
Objectives of govt. budget
tool used by Govt to implement its fiscal policy.
• Resource allocation in the best interest of society
• Budget comes from a French word 'bougette'
and the country.
which means a leather bag / suitcase.
• Allocating resources optimally for public welfare.
• Union Finance Minister would keep the documents
in it, & present them to the parliament. • Uplift downtrodden sections of the society by
reducing poverty levels and creating gainful
• While the term ‘budget’ is not given in our
employment.
constitution, but for each financial year, the Govt.

178
 • Creating programmes for citizens so that they get
basic need such as food, shelter, health, education
etc.
• Union budget takes steps to control inflation,
deflation and economic fluctuations thus ensuring
economic stability in the country.
• Union budget makes sure that there is fair
distribution of income through taxes and
subsidies.
• Union budget of any nation is crucial as it has
widespread implications on the country’s
economic stability and general life as such.
Financial Year (FY)
1867 British Indian Govt. started
financial year 1st April to 31st
March to align with their home
country’s financial year.
Constitutional Constitution has not specified
provisions any months for FY but we
continued the British legacy.
2016-17 Finance ministry had setup
Shankar Acharya Committee to
assess whether we should change
FY (like Jan-Dec or Rabi-Kharif
Cropping seasons). So we can get
better estimation of tax collection
and expenditure.
2017 All states not in favor because
accounting practices need to be
changed. Its challenges
outweighed the benefits. So, Govt
not implementing.
Three Documents related to Budget
Annual • AFS containing receipt and
Financial expenditure of last year (and
Statement projections for the next year).
(AFS) Article 1. The revenue expenditure must
112 be shown separately from
other expenditures.
2. No compulsion to show
railway budget separately
from general budget.
3. No compulsion to show plan
expenditure separately from
non-plan.
Finance Bill • To obtain Parliament's
Art. 264 permission to collect taxes.
179
•
Parliament can reduce or
abolish a tax proposed by the
Govt. but Parliament cannot
increase tax beyond what
Government has proposed in
the Finance bill.
Appropriation • To obtain Parliament's
Bill permission to spend money
Art. 114 from Consolidated Fund of
India (Art-266). Such
expenditure can be of two
types:
1. The expenditures ‘charged’
upon the Consolidated Fund
of India e.g. Judges salaries.
They can be discussed but
they are non-votable &
automatically approved.
2. The expenditure ‘made’ from
CFI. They are discussed and
voted upon.
The finance bill and appropriation bill are
considered money bills. Rajya Sabha approval is
necessary, at maximum they can discuss it for 14 days
and give suggestions to Lok Sabha for amendments, but
it’s not binding on the Lok Sabha to accept Rajya
Sabha’s suggestions. Whether a given bill is money
bill or not, Lok Sabha’s decision is final and it cannot
be enquired by any Court (Art.122).
Q. What will follow if a Money Bill is substantially
amended by Rajya Sabha? (CSE-2013)
a) The Lok Sabha may still proceed with the Bill,
accepting or not accepting the recommendations
of the Rajya Sabha.
b) The Lok Sabha cannot consider the Bill further.
c) The Lok Sabha may send the Bill to the Rajya
Sabha for reconsideration.
d) The President may call a joint sitting for passing the
Bill.
Find correct statement(s): (CSE-2015)
1. The Rajya Sabha has no power either to reject or to
amend a Money Bill.
2. The Rajya Sabha cannot vote on the Demands for
Grants.
3. The Rajya Sabha cannot discuss the Annual
Financial Statement.
Codes:
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Six stages of passing of Budget
The budget goes through the following six stages in the
Parliament:
Presentation of budget
General Discussion
Scrutiny by departmental committee
On demands for grants, cut motions, guillotine
Passing of Appropriation Bill
Passing of Finance Bill
Vote on Account
• Vote on account is the process by which an
incumbent govt. obtains votes from Parliament to
spend money on various items for a part of the
year.
• The Constitution does not mandate any specific
date for presentation of the Budget, but it is
presented to the Lok Sabha on such day as the
President directs.
Before 2017, it was presented in the last working day of
Feb. Then it will pass through aforementioned six stages
upto May month.
• But in between, on 31st March, the financial year
will be over so previous year’s Appropriation Act’s
validity will be over.
• Then government cannot withdraw money from
the consolidated fund of India even for the routine
expenditure like staff salary, administrative bills
etc.
• So, to avoid such crisis, government will put a
motion for vote on account.
• Here, parliament (practically Lok Sabha) will
allow the govt to spend some money from the
CFI, till the (next) Appropriation Act for next
financial year is passed.
• Vote on Account is generally granted for two
months for an amount equivalent to one-sixth of
the total budget estimation.
Relevance of vote on account
Vote on Account is no longer necessary because -
• No constitutional compulsion to put budget on a
specific date. So, from 2017, present Govt. began
tabling the budget on the first working day of
February.
• All the six stages are completed by the last week of
March.
• Appropriation bill gets passed and signed by
President before completion of 31st March. So they
did not require vote on account in 2017, 2018.
• In 2019’s Interim Budget, they demanded vote on
account because they planned to place full- budget
after general elections.
Interim Budget
• Our constitution does not
define or require interim
budget.
• But, during election year it’s
considered immoral and
unethical for such Govt. to make drastic changes
through budget like “1.5 x times MSP to farmer”.
• So, while they will present a budget in the regular
fashion i.e. 3 documents (AFS, Finance Bill,
Appropriation Bill) & 6 Stages of Passing. But it
not have grand populist announcements – e.g.
loan waiver.
• Similar to the Regular General Budget, an Interim
budget is valid for the whole financial year,
however in between if new government is formed
they may present another budget to change the
provisions, these budgets are called Interim
Budgets, and were presented in -
Interim Budgets
2004 – by Yashwant Sinha
2009 – by Pranab Mukherji
2014 – by Chidambaram
2019 - Piyush Goyal
FM Nirmala S. presented (Full) General Budget in
17th Lok Sabha.
Theme for budget 2020
180
 • CEA has control over Indian Economic Service
(IES)
Aspirational • Notable CEAs in Past:
India o Manmohan Singh,
o Raghuram Rajan,
o Arvind Subramanian (2014-
Economic
18).
Developmen
Caring o 2018-Dec: Krishnamurthy
t for all India o Venkata Subramanian became the new CEA.

Finance Ministry and its dept.

Dept of Economic Affairs
Economic Survey • DEA is responsible
• It is a document prepared by the Chief Economic for the fiscal policy,
Adviser (CEA) in the finance ministry. Preparation and
presentation of Union
ES - Vol - 1 ES - Vol - 2 budget including the
Shows prospects & Shows annual data of Railway component of budget.
suggestions for the future past year. • Also Budget for Union Territories without
years. legislature, budget for States under president rule.
There is no constitutional • DEA announces the Interest rates of small saving
obligation to prepare or schemes.
present it. But usually, it is • DEA assigns infrastructure status to a particular
tabled in the parliament a sector.
day before the Union
Budget. Organizations related to dept of economic affairs
Constitutional Finance Commission (Art. 280)
2019-Feb No economic survey was presented Body
2019-July presented before the (Full) General Statutory Board for Industrial and Financial
Budget Body Reconstruction (BIFR) – abolished
2014 Interim Budget without Economic after the coming of another
Survey Feb-2014, then (General) statutory body- Insolvency and
Budget with Economic Survey July- Bankruptcy Board of India (IBBI)
2014. under Corporate Affairs Ministry.
Chief CEA that we have covered in above
While Budget is labelled after next financial year Economic section.
(e.g. 2020-21), the Economic survey is labelled after Advisor
previous Financial Year. e.g. The survey tabled on Financial FSDC is neither Constitutional nor
Feb-2018 is labelled as “Economic Survey 2017-18”. Stability and statutory body. FM is chairman.
Development Members include the chiefs of all
Since 2014-15, Adopted Two Volume Systems similar Council financial regulatory bodies- such as
to the “IMF’s World Economic Outlook”. (FSDC) RBI, SEBI, IRDAI etc. and the
Vol-1 = future suggestions chief of IBBI- Insolvency and
Vol-2 = Past data. Bankruptcy Board of India.
PSU Security Printing and Minting
Corporation of India Ltd.
Chief Economic Advisor (SPMCIL). Registered under the
• Falls under Department of Economic affairs, Companies Act responsible for
Ministry of Finance. printing currency notes, coins,
commemorative coins, cheques,
• Usual tenure 3 years, reappointment possible, but
postage stamps, non-judicial
not a constitutional or statutory body.

181
 stamps, passports/visa and other
travel documents etc.
Q. Which one of the following is responsible for the
preparation and presentation of Union Budget to the
Parliament? (CSE-2010)
a) Department of Revenue
b) Department of Economic Affairs
c) Department of Financial Services
d) Department of Expenditure
Dept of expenditure
• Here the Controller General of Account (CGA)
prepares the estimate of how much money will have
to be spent from the consolidated fund of India.
• It also deals with Pay Commission reports, Pension
Accounting office.
Dept of revenue
Looks after the taxation matters using bodies:
Statutory •
Central Board of Direct Taxes
Bodies (CBDT) under the ambit of
(Quasi- Department of Income Tax
judicial • Central Board of Indirect Taxes
bodies) and Customs (CBIC). Before-
2018, March, it was known as
Central Board of Excise and
Customs (CBEC). After GST
was introduced, excise duty was
replaced by central GST,
because excise was levied by the
central govt. It implements GST
from 1st July 2017, under the
101st Constitutional
Amendment Act, 2016.
• Various Tribunals and appellate
bodies related to taxation.
Attached / • Enforcement Directorate
Subordinate • Central Economic Intelligence
bodies Bureau(CEIB)
• Central Bureau of Narcotics
• Financial Intelligence Unit
Associated Goods and Service Tax Network
PSU (GSTN) is a non-profit company.
Originally its 51% shareholding was
with HDFC, ICICI etc. In 2018
Government decided to make it
100% owned by Union & State
Governments.
Q. Find correct Statement(s): (CSE-2015)
1. The Department of Revenue is responsible for the
preparation of Union Budget that is presented to the
Parliament.
2. No amount can be withdrawn from the
Consolidated Fund of India without the
authorization from the Parliament of India.
3. All the disbursements made from Public Account
also need the authorization from the Parliament of
India.
Codes:
a) 1 and 2 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3
Dept of financial services
• Various schemes for Financial Inclusion, PSB
supervision and recapitalization, Public Sector
Financial Intermediaries, including their regulators
(Except EPFO, ESIC etc.)
• Employee Provident Fund Organisation (EPFO)
and Employees State Insurance Corporation (ESIC)
Organizations under/related to DFS
Bank Neither Constitutional / statutory.
Board Setup through gazette notification for
Bureau selection of top officials (MD, CEO,
Chairman and full-time Directors) for
PSBs, LIC and other public sector
financial institutions. Actual
appointment done by Finance ministry
Department of Financial Services →
DFS appoints.
PSU National Credit Guarantee Trustee
Company (NCGTC): For providing
credit guarantee for Mudra Loans and
Stand up India, loans related to
education and skill development.
Dept of investment and public asset management
(DIPAM)
• Department of Investment and Public Asset
Management (DIPAM) looks after Disinvestment
of CPSE.
The highest official in each of above 5 departments is
called ‘Secretary’ (usually an IAS), and among those 5
182
 secretaries, the senior-most is designated as the Finance minister will present General
Secretary, who signs ₹ 1 note. Budget.
NITI Aayog’s o No constitutional requirement
Bibek Debroy o During coalition government,
Types of budgets committee Rail budget was used for
Revenue Versus Capital Budget recommends its populism, cheap fares which
abolition eroded the profitability of
Revenue budget Capital Budget because:- Railways.
It is associated with the Capital budget is o During the British time,
income and associated with the railway revenue used to be
expenditure that are of income and quite large compared to other
temporary in nature (1 expenditure that are of sources of revenue, but after
year or less), and/or do long term nature and/or independence, Railway
not result into creation of results into creation of revenue is quite small
permanent / capital / permanent / capital compared to overall General
physical / financial /financial assets, such as budget- So it does not
assets. land, buildings, deserve a special
machinery, equipment, presentation.
shares, bonds, G- sec. Therefore, Govt merged Railway budget with
Taxation, revenue from Borrowings, General budget from 2017.
selling goods and disinvestment, and
services, interest expenditure on assets Plan Vs Non-Plan Expenditure Budget
payment on previous creation. This budgeting is a method of classifying the
loans, salaries, pension, expenditure side of budget.
subsidies and other non-
developmental Plan (expenditure) Non-Plan
expenditure. budget (Expenditure) Budget
• Central Plans (the • Expenditure related
Q. Which of the following is/are included in the Five-Year Plans) to general, economic
capital budget of the Government of India? (Asked • Central assistance and social services of
in CSE-2016) for State Five Year the government;
1. Expenditure on acquisition of assets like roads, Plans. Interest payments,
buildings, machinery, etc, • It is further defence services,
2. Loans received from foreign governments subdivided into subsidies, salaries
3. Loans and advances granted to the States and Union revenue expenditure and pensions.
Territories (e.g. teachers salary • It is also further
Ans Codes: under Sarva Shiksha subdivided into
(a) 1 only Abhiyan) and capital revenue expenditure
(b) 2 and 3 only expenditure (e.g. (e.g. soldier salaries)
(c) 1 and 3 only new school buildings and capital
(d) 1, 2 and 3 to be constructed expenditure (e.g.
under Sarva Shiksha Building new
General Budget Vs Railway Budget Abhiyan) aircraft carrier).

Background Acworth Committee (In 1920-

21) recommends separate Since Budget-2017, incumbent govt stopped the
Railway Budget. This practice practice of displaying the plan and non-plan
continued even after expenditure separately because-
Independence, first the railway 1. No such constitutional requirement
minister would present the 2. Government had dissolved the planning
Railway budget in parliament, commission in 2014-15
and after a few days finance 3. 12th Five Year Plan (2012-17) was ending in 2017
anyways.

183
Balanced, Surplus and Deficit Budget
Balanced A government Budget is assumed
Budget to be balanced if the expected
expenditure is equal to the
anticipated receipts for a fiscal
year.
Surplus Budget A Budget is said to be surplus
when the expected revenues
surpass the estimated expenditure
for a particular business year.
Here, the Budget becomes
surplus, when taxes imposed, are
higher than the expenses.
Deficit Budget A Budget is in deficit if the
expenditure surpasses the
revenue for a designated year.
BUDGETING
Traditional / • In this type, simply calculating
Line-item the income and expenditure
Budgeting without measuring the
underlying benefit or
performance
• For instance, Allot INR 100000
to buy a new computers in
government department
Performance • Calculating the income and
Budgeting expenditure tied with
underlying benefit or
performance
• Allot INR 50,000 to buy a new
computer with target that it
should result in 30% the faster
clearance of RTI-applications
compared to pen and paper
based office system.
• Such budgeting helps
measuring cost : benefit and
efficiency.
Zero based • In a traditional budgeting, the
budgeting approach is “automatic and
incremental” e.g. “Last year we
allotted INR 100000 crore to
educational schemes, so this
year we should allot 55,000
crores, lest the opposition
parties create controversy.”
• Whereas in Zero Based
Tribal Sub-Plan & SCSP
Budgeting the budget is
viewed as a fresh exercise from
zero base. So, each
department has to justify its
budget demands to finance
ministry. E.g. if last year ₹
50,000 crores given to education
schemes but still 60% of class 5
kids cannot read class 2 books,
then we will delete / modify that
scheme.
Gender • This system was started from
based Budget-2005.
budgeting • It is not a separate budget but
rather within the general budget,
Finance Ministry will put a
separate expenditure document
showing women specific
schemes, targets, and
commitments- in two parts:
1. Part A - Women Specific
Schemes, i.e. which have 100%
allocation meant for women.
E.g. Nai Roshni scheme
(Minority Affairs Ministry) for
leadership development in
Minority Women.
• Part B - Pro Women Schemes,
i.e. atleast 30% allocation
meant for women. E.g.
Samagra Shiksha (Min of HRD)
for pre-nursey to Class12 both
boys & girls covered.
Sunset • In a traditional budgeting, once
Budgeting a scheme is launched it runs
perpetually, even after regime
change e.g. MNREGA, Mid-day
Meal.
• In a zero based budgeting,
schemes are reviewed every
year and then they may get
discontinued or continued (with
or without modifications).
• In Sunset Budgeting, scheme are
announced with deadline. e.g.
MEITY to give MDR subsidy
for a period of two years starting
from 1/1/2018. Thus, this
scheme will self-destruct after
deadline just like the sun will set
after the sunset time.
184
 From 1970s, Govt required individual ministries to
earmark funds for SC/ST within their overall funds,
under the titles:
Scheduled Castes Social Justice Ministry
Sub-Plan (SCSP) monitors via e-utthaan.gov.in
Ministry of Tribal Affairs
monitors via stcmis.gov.in.
Although not required by the
Constitution, but Govt. also
Tribal Sub plan tables separate documents
(TSP) showing
1) allocation for children
2) allocation for North Eastern
Areas.
Lapsable Funds → March Rush
Appropriation act allows the govt to spend funds from
consolidated fund of India for a period of one year
(ending in 31st March).
• If any allotted funds remain unutilised, then by the
‘Rule of Law’, they must be returned (govt. will
have to again seek Parliament approval for the next
financial year using next appropriation bill).
• This led to rush in March among the Govt
organisations to spend money lest they have to
return it back.
2017-18: Finance ministry issued directive that in “In
the fourth quarter (Jan to March) and in the March-
Month, Govt organizations shall not spend more than
“specified%” of funds”. This helps controlling the
March Rush.
Non Lapsable Funds → No March Rush
• The money in such fund will not lapse on 31st
March, so it can be used in future without getting
another approval from parliament.
• E.g. Nirbhaya Fund under Department of Economic
Affairs for safety of women related projects.
• Criticism-
o Because the fund is non lapsable, Departments
become sluggish in utilising it. Budget 2013
started Nirbhaya fund in the aftermath of
Gangrape (2012) at Delhi. The successive
budgets kept adding of corpus into it. By 2018:,
the fund was about INR 3000 crore but not even
50% utilized for any women safety activities.
o 2018: Defence ministry demands “non-lapsable
defence modernization fund”, but Finance
ministry rejected for similar same reason.
(money will remain unspent.)
185
Taxation in India
• Tax is the money paid
by the taxpayers to the
government. Tax is
compulsory payment
and not voluntary
payment or donation
made by the taxpayers.
• It is compulsory as it is extracted by the
government through legislation. If taxpayers fails
to pay the taxes or evade taxes, it is punishable by
law.
• The tax system in India is mainly a three tier
system which is based between the Central, State
Governments and the local government
organizations (such as Municipality and
Panchayats).
• Thus, Taxes in India are levied by -
Central Government
State Government
Local authorities
such as panchayats
and Municipalities
Distribution of Taxation Power
Article 246 (schedule VII) of the Indian Constitution,
distributes legislative powers including taxation,
between the Parliament and the State Legislature.
Schedule VII provides for the three lists:
List – I It provides for areas on which only
parliament is competent to make laws
List – II It provides for areas on which only
parliament is competent to make laws
List – III the areas on which both the Parliament
and the State Legislature can make laws
upon concurrently
Art 248 mentions that the residual powers of
Legislation are vested in the Parliament. It means
that Parliament has exclusive power to make any law
with respect to any matter not enumerated in list II
and III. Such power shall include the power of
making any law imposing a tax not mentioned in
either of those lists.
NOTE - Separate heads of taxation are provided under
List- I & List – II of Seventh Schedule of the
Constitution. However, there is no head of taxation in
the Concurrent List (It means that Union and the
States have no concurrent power of taxation)
The 73rd and 74th constitutional amendment act
have provisions to levy taxes by panchayats and
Municipalities respectively. A State may by law
authorise a Panchayat (or Municipality) to levy, collect
and appropriate taxes, duties, tolls etc.
Types of
Tax
Direct tax Indirect tax
Direct taxation Direct tax is imposed directly on
the taxpayer. Also, it is paid
directly to the government by
the person on which it is imposed.
Direct tax cannot be shifted by
the taxpayer to someone else.
Thus, in case of Direct tax, the
incidence of tax, and impact of
tax is on the same person.
Examples of Direct Tax – Income
tax, Corporate tax etc.
Indirect tax An indirect tax is a tax collected
by an intermediary (such as a
retail store) from the person who
bears the ultimate economic
burden of the tax (such as the
customer). An indirect tax is one
that can be shifted by the
taxpayer to someone else.
Thus in case of Indirect tax, the
incidence of tax and impact of
tax do not lie on the same
person.
Direct tax Indirect tax
Incidence and impact of Incidence and Impact of
tax fall on the same tax fall on two different
person. persons.
It is levied on the It is levied on goods and
income. E.g. – Income services. E.g.- GST etc
tax, Corporate tax etc
It is progressive in It is regressive in nature
nature- higher taxes are i.e. all persons (rich and
levied on persons earning poor) will bear the same
higher income taxes on goods and
services, irrespective of
their capability to pay.
Types of
taxes acc. to
fairness
Proportional Progressive Regressive
Proportional A tax that takes the same
taxation percentage of income from all
income groups
For example – if the Government
decides to have a single slab in
Income tax rate (let us assume
30%). Then the percentage of
income paid in taxes will be same
for the low income group, middle
income group and high income
group.
Progressive A tax that takes a larger
taxation percentage of income from high-
income groups than from low-
income groups.
For example – Income Tax rate
India. (tax rate goes up as
income level rises). Rich people
pay a larger portion of their
income as tax in comparison to
poor people.
Regressive A tax that takes a larger
taxation percentage of income from low-
income groups than from high-
income groups.
E.g. An indirect tax on soya oil
(suppose – 18%). Lower income
group pay high proportion of their
income as tax while buying it in
comparison to higher income
group.
Canons of taxation – By Adam Smith
186
 -Gift Tax
(Abolished)
-Fringe Benefit
Tax (Abolished)
Econom Convenienc i.e. When the
y e employer give
benefits to
employee apart
from salary.
Certaint Union Budget-2020: (Expected collection)
Equality
y Corporation Tax > Income tax > STT

Minimum
Income Tax Corporate Tax Alternative Tax
(MAT)
• Canon of Equality - Tax should be equal and
proportionate to income. Rich people should pay
Securities and
more taxes than poor. Dividend
Capital Gains Tax Transaction
Distribution Tax
• Canon of Certainty – Dates, slabs, percentages (DDT)
(CGT) tax/Commodities
should be definite and told in advance. Randomly Transaction Tax
govt should not demand “any%” tax to build statue,
temple or mosque.
Fringe Benefit tax
• Canon of Convenience - taxpayer should not be Wealth Tax Estate Duty
(FBT)
made wait for a mile long queue & fill-up 50 pages
worth tax forms.
• Canon of Economy – to collect INR1000 crore tax, Union Tax, Cess And Surcharge
govt shouldn’t be spending INR9900 crores in
salaries of tax officials. Union Tax Computed on taxable income, profit,
transaction.
Union tax goes to Consolidated
DIRECT TAXES
Fund of India.
Direct Tax Union govt State govt Later divided between Union and
On income -Corporation Tax, -Agriculture states as per the finance commission
-Minimum Income tax formula. (except if IGST: divided on
Alternate Tax -Professional Tax GST Council’s formula.)
(MAT) (Constitutional Surcharge Computed on Tax amount. So, it is
-Income Tax ceiling of max a ‘tax on tax’. This amount will also
-Capital Gains Tax ₹2500 per year)
go to CFI. It is not shared with
(CGT)
-Dividend States using Finance Commission
Distribution Tax Formula.
(DDT) (Abolish) Usually cess does not have any
On assets -Securities -Land Revenue clear objective in ‘prefix’ so it may
transactions Transaction Tax -Stamp or be used for any purpose.
-Commodities Registration duty Exception is 10% Social Welfare
Transaction Tax -Property tax in Surcharge on the custom duty on
-Wealth Tax urban areas imported goods. This will
(Abolished) specifically use for social welfare
-Banking Cash
schemes of the union.
Transaction Tax
(Abolished) A cess is a tax on tax, levied by the
-Estate Duty govt. for a specific purpose. It is
(Abolished) levied on the tax payable and not
On -Hotel Receipt Tax on the taxable income.
expenditure (Abolished) Cess

187
 In a sense, for the taxpayer, it is Tax holiday for them. E.g. Abu
equivalent to a surcharge on tax. Dhabi Investment Authority
A cess can be levied on both direct
and indirect taxes. Clear objective Revision of corporate tax in sept 2019
is mentioned. Proceeds of the cess
cannot be spent on any other kind Corp. tax Before After
of govt. expenditure. E.g. the Existing Indian 25-30% 22% tax + 10%
proceeds from the education cess companies depending on surcharge on
cannot be used for cleaning the turnover + 0- (tax) + 4% cess
environment and vice versa 12% surcharge (on tax +
To meet specific socio-economic depending on surcharge)
goals, a cess is preferred over a tax profit + 4% = 25.17%
because it is relatively easier to health, Edu cess
introduce, modify, and abolish. New Indian - 15 % +
Computed on [(Tax) + (Surcharge, manuf. surcharge &
if any)] company cess as given
Recent examples of cess are: registered from above
Infrastructure cess on motor 1/10/2019. = 17.01%
vehicles, Clean environment cess, Budget-2020:
Krishi Kalyan cess (for the new Indian
improvement of agriculture and electricity
welfare of farmers), education cess. companies also
By default, cess goes to CFI→ from eligible in this
there, to a specific fund in Public Foreign 40% + no change
Accounts e.g. Central Road Safety Company’s surcharge +
Fund etc. profit from cess
Cess is not shared with States using India
Finance Commission Formula. Zero profit 18.5% MAT 15% MAT
(Although some of the cess money companies
will invisibly go to states as a part of
scheme implementation e.g. Pradhan Corporation tax for foreign company’s profit from India
Mantri Fasal Bima Premium share, is highest among emerging economies.
etc.)
GST Compensation Cess is shared Corporation Tax on Start-ups:
with States, as per GST formula.
Startup is a company not older than 10 years and
Corporation Tax not having turnover more than 100 cr. Govt helps
Also known as Corporate Income Tax (CIT), levied them through Startup India Scheme.
on Company’s profit, under the Income-tax Act, 1961. Startup can claim 100% deduction
on its profits, for 3 years out of the
Additional tax benefits to companies first 10 years of incorporation. (as
producing solar power, electric such they get tax benefits under
Budget-2019 batteries, computer server, laptop Startup India scheme, but new
etc. in any part of India. Companies Budget-2020 budget fine-tuned those technical
operating from GIFT-city-IFSC definitions further.)
given 100% exemption from Start-ups generally use Employee
Corporation Tax for 10 years. Stock Option Plan (ESOP) to
Budget-2020 Tax holiday for developers of attract talented employees. But
affordable housing extended till 31 ESOP was subjected to various
march 2021. direct taxes → New budget gave
- If a Sovereign Wealth Fund invests some technical reliefs to them
in Indian infrastructure projects →
Corporation Tax Cut on Cooperative Societies:

188

Before Budget 2020
30% + surcharge + cess 22% + 10% surcharge +
4% Cess
Equalisation Levy / Google Tax
• Equalization Levy (Direct Tax) was introduced in
India in 2016, with the intention of taxing the
digital transactions i.e. the income accruing to
foreign e-commerce companies from India.
• It is aimed at taxing business to business
transactions.
• If a foreign company makes profit in India, they
have to pay 40% Corporation Tax.
• If an Indian businessman purchases digital
advertisement slots in google-ad sense or facebook
then those (foreign) e-ad companies are making
profit. But earlier, they did not pay tax on that
profit, claiming their business activity (of
displaying digital-ads) is done outside India on
global servers.
• Budget-2016 imposed 6% tax on such income of
foreign technology companies.
• Officially called “Equalisation Levy”, not part of
“Income Tax” or “Corporation Tax” under the
Income Tax Act 1961, but a separate levy
altogether imposed by the Finance Bill 2016.
• Foreign Company cannot escape it saying we are
protected under the Double Taxation Avoidance
Agreement (DTAA) in our home country.
Q. With reference to India’s decision to levy an
equalization tax of 6% on online advertisement
services offered by non-resident entities, which of
the following statements is/are correct? (CSE-2018)
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement
services in India can claim a tax credit in their home
country under the “Double Taxation Avoidance
Agreements”.
Answer Codes:
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Significant Economic Presence (SEP): Concepts
basically means if a foreign company is making money
from Indians through digital ads / streaming services
(e.g. NETFLIX videos from overseas servers) then the
company has ‘SEP’ in India, therefore, Indian govt has
powers to tax it.
189
‘Tax challenges of digitisation’ - OECD has used a
phrase to denote above type of problems where digital
services type MNC companies are avoiding taxes.
GAFA Tax - France has implemented tax on large
technology companies called Google Apple Facebook
Amazon from 1st Jan 2019.
Minimum Alternate Tax (MAT)
• Some industrial houses
use tax-deduction-
exemptions-
depreciations and
accounting tricks to
become “Zero Profit
Companies” & escape
paying Corporation
Tax.
• Budget-1996 introduced 18.5% MAT on book
profit using a different type of formula.
Budget 2018 If such company is in GIFT city
IFSC, then for them MAT only 9%.
September The government reduced the MAT
2019 tax rate from 18.5 per cent to 15 per
cent.
AMT (Alternative Minimum Tax): Concept similar to
MAT but for Non-Corporate assesses e.g. Individual or
Hindu Undivided Family (HUF) or Cooperative Society
who are earning more than INR “x” lakh but not paying
direct tax. Both MAT and AMT subjected to the
surcharge and cess.
Dividend Distribution Tax (DDT)
• FM Chidambaram in 1997 started to levy DDT on
a shareholder’s dividend income.
• In reality, company (source) will cut that much
income portion from shareholders’ dividend, and
directly deposit that particular amount to the govt,
as DDT.
• Shareholder did not have to pay Income tax on
it.
DDT Rate → 15% + cess + surcharge = 20.56% on
dividend paid.
Budget-2019 Companies in GIFT-city-IFSC given
some exemptions from DDT.
Budget-2020 Abolished DDT. But, dividend will
be taxable in the hands of
shareholder (i.e. he will pay income
tax on it)
 Benefits Previously even lower middle-class
shareholder’s around 20% dividend
was cut in the name of DDT.
But now he may have to pay barely
0-5% income tax on income from
dividend.
Thus, Shareholders get to keep more
money for spending → shopping
spree → demand, production,
economic growth.
Foreign investors will be attracted
to invest in Indian companies’
shares.
Buyback Tax
• Profit making companies sometimes repurchase
their own shares back from shareholders.
• Impact - These many shares are eliminated from
company’s liability side.
• Benefit to company - No need to pay dividend on
these shares in future.
Budget 2013 Government ordered unlisted
companies to pay “20% Buy back
tax” they buy back their own shares
from the market
Budget-2019 Made this applicable on listed
companies as well.
Capital Gains Tax (CGT)
• When an owner makes profit by selling his capital
assets such as non-agro-land, property, jewellery,
paintings, vehicles, machinery, patents, trademarks,
shares, bonds & other securities- then he has to pay
CGT.
• Depending on how long did the owner keep that
asset before selling it, he will pay:
o Either short capital gains tax (LCGT) or
o Long capital gains tax (SCGT)
• In practice, the buyer will deduct that much amount
from the payment to seller, and deposit to the govt.
To avoid CGT, some people form shell companies
abroad & do transactions from there to avoid paying
taxes to India.
Budget-2018 Earlier Listed companies Shares,
Mutual Funds Units etc. were
exempt from LCGT. But, since large
amount of money is invested here
and owners make good profits by
selling them, so govt decided to
apply the Long Term Capital Gains
Tax system on them at 10%.
Budget-2019 If Startup entrepreneurs unable to
secure capital from investors → they
sometimes have to sell their house
arrange money for starting business.
So, Govt. had exempted their house-
selling-profit from CGT. This
scheme extended it till 31 march
2021.
- Companies operating from GIFT-
city-IFSC given some exemptions
from CGT.
Q. In which of the following circumstances may
‘capital gains’ arise? (CSE-12)
1. When there is an increase in the sales of a product.
2. When there is a natural increase in the value of the
property owned.
3. When you purchase a painting and there is a growth
in its value due to increase in its popularity.
Answer Codes:
a) 1 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3
Income Tax On Individuals
• James Wilson (financial member of the Council of
India, founder of the Economist magazine and
Standard Chartered Bank) introduced income tax
in India on 24 July 1860 to compensate the British
losses during 1857’s Sepoy mutiny.
• Suppose the gross income of an Indian Resident
(age less than 60) is INR 9 lakhs.
• Out of this gross income, first we have to subtract
the tax-deductions and tax- exemptions like income
from agriculture, investments made in Provident
Fund, NPS, LIC, Medical Insurance etc (upto a
certain limit), house rent allowance (HRA),
repayment of home/education loan, money donated
in eligible charitable funds etc
• After subtracting such things, suppose taxable
Income is: INR 5,50,000/-
• From this amount, Salaried individuals get standard
deduction of INR50000. (Previously, it was
INR40000 but Interim-Budget-2019 raised it to
INR50000).
• Hence, INR5,50,000 – 50,000 = ₹5 lakh is the
taxable income.
Additional tax deduction given:
190
 • if took loans to buy electric expenditure → rising in demand → production,
Budget-2019 vehicle economic growth etc.
• if someone is taking home loan
for the first time. Shopping spree and increase disposable income with
people will increase indirect tax collection e.g. Mobiles
New slabs for Income Tax in Budget-2020 (18% GST).
If we give up exemptions and deductions such as :
• Salaried employees’ standard deduction, HRA, Direct Tax Code (DTC) Task Force (2017-2019)
Leave Travel Concession (LTA) • Finance Ministry in 2017, setup DTC taskforce
• Section 80C deduction (e.g. investments made in under CBDT member Arbind Modi.
LIC/NPS etc upto ₹1.5 lakh per year) Etc. • Taskforce had noted IRS officer, Chartered
• Then you can opt to pay with new (reduced) income Accountant, Tax Lawyer, Corporate Consultant etc.
tax slabs viz. Chief Economic Advisor Krishnamurthy
Subramanian was also a member of this taskforce
Taxable New slab, if Old slabs, if u • Report was submitted in Aug 2019 to the Finance
Income (per you give up don’t give up Ministry.
annum) deduction & • While Govt is yet to release this report in public
exemptions) domain, but according to journalists, it contains
Upto ₹2.5 lakh Nil / 0% Nil / 0% following suggestions:
1. Replace the Income Tax Act 1961 with a simpler
>₹2.5 lakh-₹5 5% (But 12500 5% (But 12500 Direct Tax Code.
lakh rebate so in rebate so in 2. Reduce the corporation tax further.
(meaning from reality ₹0) reality ₹0) 3. Tax rates for domestic and foreign companies
2,50,001 to should be same. This will encourage ease of doing
5,00,000) business in India.
>₹5 lakh to 10 % 20% 4. Give additional tax relief for the start up companies.
₹7.5 lakh 5. Increase the number of tax slabs from present three
>₹7.5 lakh to 15% (5%, 20%, 30%) to four (10%, 20%, 30% and 35%
₹10 lakh for super-rich earning INR 2 crore and above).
>₹10 lakh to 20% 30% 6. Abolish Dividend Distribution Tax (DDT). [done in
₹12.5 lakh Budget-2020]
>₹12.5 lakh to 25% 7. Setup Litigation Management Unit (LMU) to
₹15 lakh look after the tax related court cases in an efficient
manner.
>₹15 lakh 30%
Surcharge & Yes Yes
FINANCIAL TRANSACTION TAXES (FTT)
cess
applicable?
Tobin Tax (Robinhood Tax)
E.g. An ₹1.95 lakh** ₹2.73 lakh
• Nobel recipient American economist James Tobin
employee with
proposed (1970s) a small tax every time currency
annual salary
is converted into another currency (e.g. from
₹15lakhs will
Dollar to Rupee and vice versa).
pay total
Income Tax • Such tax will discourage short term speculative
investment and flight of capital from one country
**It is left to individual’s discretion whether he
to another.
wants to stay in old / new system. But if all people
opted for the new slabs then Govt will hypothetically • Tobin tax helps stabilizing the global economy and
get ₹40,000 crore less (compared to old system). currency exchange rates.
Technically, it’s called “Revenue forgone” • In India, foreign currency conversions are subjected
to (previously Service Tax) & now GST
Reduction in Income tax paid will increase disposable
income with people → shopping spree and increase in Securities Transaction Tax (STT)

191
• SST is levied on the sale and purchase of shares,
ETF-units, derivatives and other securities at
stock-exchanges.
• It's rate (0.001%-2%) varies as per the nature of
the securities.
Budget-2019 relaxed certain STT norms on Option
contracts.
Commodities Transaction Tax (CTT)
• CTT is levied on non-agricultural commodities
traded at Commodities-Exchanges. (Rate about
0.01%).
Capital Applicable when share (or any
Gains Tax capital asset) is “sold at profit” by
its previous owner.
Securities Applicable on the selling price of
Transaction share (or other types of securities).
Tax Irrespective of whether seller is
making profit or loss.
Dividend Applicable on the dividend which is
Distribution given by company to a shareholders.
Tax And Budget-2020 abolished this tax
DIRECT TAXES: MISC. CONCEPTS
Hindu Undivided Family (HUF)
• A Hindu, Buddhists, Jains, or Sikhs family
members can come together, pool their assets and
form an HUF under the Income Tax Act.
• HUF is taxed separately from its members, &
helps saving taxes due to certain
provisions/loopholes of Income Tax Act.
Presumptive taxation
• Salaried employees can easily compute their
taxable income from their annual salary, & pay
income tax.
• Companies hire full time Chartered Accountants to
compute their taxable income and pay
Corporation tax.
• But self-employed freelance consultants and
professionals such as lawyers, doctors, fashion
designers etc. face difficulty in keeping such
account books. So, for them Income Tax Act has
Presumptive Taxation System i.e. their
‘income/profit’ is computed as “x%” of their gross
receipts, and on that amount they have to pay
income tax (depending on slabs) + applicable cess
and surcharges, if any.
Budget- To encourage less-cash-economy,
2017 2017 budget had given benefits in this
presumptive taxation calculation
formula, If the entrepreneur received
payments in cashless format - NEFT,
RTGS, Cheque, Card etc.
Advance taxation
• New financial year starts from 1st April 2019 and
ends on 31st March 2020.
• Rational → If everyone paid all of their direct taxes
at 11:59PM on 31st March 2020, then govt. will
face money-shortage for the whole year till 31st
March midnight comes.
• Advance Tax mechanism requires people to pay
their Income tax and Corporation tax in advance-
instalments on quarterly basis, if their annual tax
liability is INR 10,000 or more.
Tax Deduction at source (TDS)
• Suppose a college pays ₹10,000 to a freelance
visiting faculty or a bank/NBFC/post- office pays
₹10,000 as interest to a depositor, then how to
ensure that payment- recipient (visiting faculty)
reports his income to the tax authorities, otherwise
he could avoid paying taxes.
• Hence, Income Tax Act requires such organizations
to deduct a portion of the payment at source and
deposit it to IT-dept along with PAN card number
of the recipient.
• Then, payment-recipient will be forced to file his
tax return, to unlock his TDS amount.
• On one side, TDS helps fighting tax evasion but
on the other side, TDS also creates hardship for
lower middle-class persons, because part of their
payment is cut in advance.
Budget TDS on cash withdrawal to encourage
2019 digital payments-
• 2% TDS if total cash withdrawn
during a financial year exceed one
crore from a single user-account in
bank or post-office. This will
encourage digital payments.
• Agricultural Produce Market
Committee (APMC) Mandi traders
protested that lot of their transaction
is cash based. They have to withdraw
crores of rupees to pay the farmers,
because farmers in remote areas don’t
have easy access to banking facilities.
192
 • Govt. exempted APMC traders government may increase the direct tax and vice
from 1 Jan 2019 from above TDS on versa.
cash withdrawal. • Certainty – A person liable to pay direct tax knows
with certainty how much he has to pay and when he
has to pay
Tax Collection At Source (TCS) • Equity – It is generally progressive (based on
Tax Collected at Source i.e. collected by receiver or ability to pay principle). Through it rich people can
payee or seller. e.g. Jeweller selling jewellery would be made to pay more taxes than poor. Similarly, in
collect TCS and pay to the IT department. Tax payee case of necessity, low income group people can be
will have to file tax-return to unlock this amount. given relaxation and the super-rich can be made to
pay more. Thus, an important tool to reduce income
Budget-2020: Authorized Forex dealers will have to cut inequalities.
5% TCS while converting Indian Rupee into foreign • Important tool in Fiscal policy of the government.
currency. Similar norms on foreign tour operators. For example – In case of high inflation, the
government may increase the direct tax rate to
Parameter TDS TCS reduce money in the hands of people so as to bring
Meaning TDS implies the TCS refer to an down the consumer demand. Similarly, to boost
amount deducted amount demand and improve employment, the government
from the accumulated by can reduce rates of direct tax.
recipient’s the seller or • Can reduce volatility in International currency
income in the company as tax. exchange rates by imposing Tobin Tax.
form of Tax
Nature Expenses Income Tobin tax is a tax on all spot conversions of one
Imposition Specified Sale of specified currency into another. The initial concept of the tax put
expenses crosses items is made. a penalty on short-term financial ventures into
the prescribed another currency. Rather than the consumers paying a
Responsible Deducted by Deducted by tax, the Tobin tax would be paid by market players
person payer or buyer payee or seller as a method for controlling the stability of a
Occurrence Crediting the Debiting the country’s currency.
account of the account of the
payee or during buyer or during DEMERITS OF DIRECT TAX
payment, receipt, • Tax Evasion – People try to evade direct taxes by
whichever is whichever is using different means (such as submitting false
earlier. earlier returns, etc). Thus it is also prone to excessive
litigation. For example – Govt has come out with
Tax refund Direct Tax Vivad se Vishwas Bill 2020, to provide
• A person is eligible to receive income tax refund for a mechanism for resolution of pending tax
from IT-dept if he has paid more tax to the govt disputes related to income tax and corporation taxes
than his actual tax liability. • Disincentive to work – Direct tax may be
• In above case, Income Tax Department will refund disincentive to work. In case of high direct tax rate,
money along with interest. a large part of the income earned will be given to
• Similarly, GST refund can be claimed by an the government in the form of taxation. Thus It may
entrepreneur from GSTN web portal. disincentive people to work hard. It may reduce
people’s willingness to work. Further, high direct
MERITS OF DIRECT TAX tax may act as hurdle to Foreign Direct Investment
• Progressive Tax – related to ability to pay to the country.
principle. So an important tool to reduce • Sectoral Imbalance – Certain sectors such as
inequalities of income and wealth. corporate sector is heavily taxed. Whereas,
• Elasticity – A direct tax can be varied according to agriculture sector is tax free. Even rich farmers are
the needs of the government as well as according to exempted from personal income tax.
the changes in the income of the people. For • Narrow base because large staff will be required if
example – if the income of the people rises, the we try to collect Income taxes even from poor
people.

193
• Externalities not counted - Academic Books Ad- Valorem Taxes based on the value of
Company vs Film star promoting cigars (30% Tax tax something. E.g. 35% Customs
on both) Duty on import of Tropicana
• Hardship not counted: Working Carpenter (5%) vs juice. So, if juice priced at ₹100
sleeping landlord (5%) imported, then ₹35 as tax.
• Prone to litigation & loopholes, tax evasion, Easier to administer.
avoidance. Specific Tax Tax based on quantity of items.
per unit E.g. ₹ 260 Excise duty on
production of every 1000
INDIRECT TAXES cigarettes of 65-70mm length.
Here we are taxing them
• An indirect tax is a tax collected by an
irrespective of their
intermediary (such as a retail store) from the
manufacturing price or selling
person who bears the ultimate economic burden of
price.
the tax (such as the customer).
Difficult to administer, leads to
• In the indirect taxes, tax incidence and tax impact inspector-raj & litigation. But,
does not fall on the same person. E.g. Customs if slight increase in this tax, then
Duty on import and export, Excise duty on greater burden passed on to the
manufacturing of goods, Service tax on services, consumer so it helps reducing
Sales Tax, Value Added Tax (VAT), and Goods and harmful consumption.
Services tax (GST).
• Indirect taxes fall under the Ambit of Finance Pigouvian TAX
Ministry, Central Board of Excise and Customs
• Pigouvian tax is the one used/imposed in order to
(CBEC)
diminish the negative fallouts of externalities.
• Budget-2018 renamed it as Central Board of For instance, it is generally imposed on high
Indirect Taxes and Customs (CBIC) polluting industries which not only causes harm to
environment but poses health risks to the people
Source of Indirect tax Source of Indirect tax living nearby.
revenues for the Union revenue for the states • An externality is a positive or negative consequence
• Customs Duty • Sales Tax of an economic activity experienced by unrelated
• Central Excise Duty • Excise duty on third parties. E.g. Cement company, whereas
• Central Sales tax alcoholic liquors unrelated third parties (local community, flora and
• Service Tax • Taxes on luxuries, fauna) are harmed by cement company’s air-
• GST entertainments, pollution.
amusements, betting • English economist Arthur C. Pigou proposed
and gambling taxing the companies that create such negative
• Electricity Tax externalities. E.g. polluting industries, cigarettes
• Entry Tax (passive smoking), alcohol (social disharmony).
Note – With the implementation of GST, Several of • India has high level of indirect taxes on petroleum,
the above taxes has been subsumed in it. We will be tobacco and alcoholic products.
coming out a separate article on GST. • Prior to GST, we had “Clean environment cess”
on Rs 400 per tonne of coal.
Tax incidence → It is on the person from whom govt
collects the tax. (e.g. shopkeeper) Cascading Effect Of Indirect Taxes
Tax impact → It is on the person who finally bears the If a government levies 10% indirect tax every time an
tax & cannot pass its burden on further. (e.g. Consumer) item is sold, then buyer will have to pay tax on tax. This
‘cascading effect’ of indirect taxes raises the price of
Types of indirect
final product.
taxes
Case Price 10%tax Total
Specific Tax per on price
Ad- Valorem tax ₹100 ₹10 ₹110
unit Retailer
bought

194
 from
wholesaler
Retailor ₹120 ₹12 ₹132
sold to
customer
with ₹10
profit
• In case of cascading effect, both buyer and seller
will prefer to do transaction without bills, to
entirely avoid tax liability and so the cascading
effect . this will result into decrease in Govt.’s
revenue collection, increase in Fiscal deficit and
rise in black money.
• Solution - This problem can be solved, if govt gives
some type of cashback, reward points or input tax
credit (ITC) to the sellers, on the indirect taxes they
have already paid in previous stage.
• To claim such input tax credit, the sellers will have
to show the bills and invoices for each stage. Self-
policing could reduce black money.
• Uncertain – Indirect taxes are often rather
uncertain. Taxes on commodities with elastic
demand are particularly uncertain, since quantity
demanded will greatly affect as prices go up due to
the imposition of tax.
• As Indirect Taxes increases the prices of the
commodity, they are considered as Inflationary.
• High level of corruption, evasion, cascading
effect if input credit is not given e.g. erstwhile sales
tax system.
• Indirect taxes increase → product becomes
expensive → reduction in demand so uncertainty
involved in how much rupee will Government
actually earn from taxation.
• This tax is hidden in the price. Customers do not
always feel the pinch of paying indirect tax so it
promotes less civic consciousness than direct taxes.

MERITS OF INDIRECT TAX

• Wider Coverage and Broad Based – The effect of
Indirect taxes are felt by more or less all the people
in the society. It has to be paid (both by rich and
poor) when they purchase tax imposed
commodities. (In case of direct taxes, low income
group may not be required to pay taxes)
• Sin Tax/Consumption Control – It can be used as
a tool to discourage consumption of undesirable
goods. For e.g. By Imposing taxes on luxury goods
and making them more expensive, the government
can divert resources from these sectors to sectors
producing necessary goods.
• Convenience - Govt imposes indirect taxes on
manufacturers. However, they are finally paid by
consumers. They are convenient in the sense that
tax payers (consumers) pay taxes in small amounts.
Also they are convenient to government as they
collect these taxes in lumpsum from the
manufacturers.
• Elastic – It is elastic in nature. Since it has wider
coverage, so any small increase in tax will bring in
large revenue.
DE-MERITS OF INDIRECT TAX
• Regressive in Nature - Not equitable in nature.
The rich and the poor have to pay the same rate of
indirect taxes on commodities of mass
consumption. This may further increase income
disparities among the rich and the poor. They
impose a heavier burden on the poor.

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 CH-7 BUDGET AND TAXATION - II
Cascading effect of indirect taxes
Goods and Service Tax Meaning - Cascading effect is when there is tax on tax
• It is a tax levied when a consumer buys a good or levied on a product at every step of the sale. The tax
service. It is meant to be a single, comprehensive is levied on a value which includes tax paid by the
tax that will subsume all the other smaller indirect previous buyer, thus, making the end consumer pay “tax
taxes on consumption like service tax, etc on already paid tax.”
• It is a single tax on the supply of goods and If a government levies 10% indirect tax every time an
services, right from the manufacturer to the item is sold, then buyer will have to pay tax on tax. This
end consumer. ‘cascading effect’ of indirect taxes raises the price of
• This is how it is done in most developed countries. final product. Observe:
More than 160 countries have implemented this
system of taxation. Case Price 10% tax Total
on price
Why we need GST regime? Retailer ₹100 ₹10 ₹110
Pre-GST indirect taxation regime in India was marred bought from
by - wholesaler
• Poor compliance rate → leads to less revenue Retailer ₹120 ₹12 ₹132
realisation due to tax avoidance, lack of technical sold to
intervention and dismal database management. consumer
with ₹10
Compliance is an externally imposed constraint to profit
follow social or organizational or legal norms. Breakdown – 132 = 100 (price of original
product)+10 (tax paid by retailer to wholesaler)+10
• Narrow taxation base (as retailer’s profit margin)+11 (tax paid by customer
• Multiplicity of taxes results into confusion and to buy from retailer) + 1#
complexity. This also increases operational and • 1# → this one rupee is 10% of 10 (tax paid by
compliance cost. retailer to wholesaler). So, it’s “Tax On Tax
• Lack of single market and single tax hinders ease paid at previous stage” / cascading effect of tax
of doing business in india on the end-customer.
• High human interface in taxation system → • Then, both buyer and seller will prefer to do
harassment, license and inspector raj and high level transaction without bills, to entirely avoid tax
of corruption. liability and its cascading effect. The result will
be decrease in Govt.’s revenue collection, rise in
• Pre-GST indirect taxation system had cascading
Fiscal deficit, rising black money among others.
effect → results into multiple layers of taxation,
inflation and economic in inequality.
Objectives of GST
• Lack of quantifiable and verifiable taxation data
pertaining to poor integration and database • To establish the highest standards of co-operative
management. federation in the functioning of the Council.
• Lack of use of technology → poor assessment and • Evolving by a process of wider consultation, a
compliance rate. More vulnerable to frauds, fake GST structure, which is information technology
claims etc. driven and user friendly.
• Lack of cooperative federalism in fiscal regime • The Council is to be guided by the need for a
→ envisaged in GST in terms of GST Council. harmonised structure of GST and the
development of a harmonised national market for
• Lack of uniformity in returns, refunds,
goods and services.
registrations and procedures for registration of
taxpayers,
GST Council is considered as a federal
• Uncertainty in system of classification of goods
institution where both the centre and the states get due
and services, refunds and taxation rates. representation. The Economic Survey 2017-18 also

196
 hailed the GST Council for its cooperative federalism Ultimately, it was passed & became 101st
technology which brings together the Center and States Constitutional Amendment Act, 2016
and can be applied to many other policy reforms.
• 102nd amendment 2018→Constitutional status to
National Commission for Backward Class
• 103rd amendment 2019→ Economically Weaker
Sections Quota
• 104th amendment 2020→Anglo Indian
reservation removed in LS & Vidhan sabha, but
SC/ST continued till January 25, 2030

Provisions Of 101st Constitutional Amendment Act,

Evolution of GST in India 2016

246-A States given power to tax goods and

services. (previously, they couldn’t tax
services.)
But only Union will have the power to
tax inter-state supply of goods and
services in the form of “IGST”
269-A IGST (on inter-state trade) will be
distributed between Union and states, as
per the formula by the GST Council
270 CGST (New indirect tax of the union,
which has replaced excise duty and
service tax). CGST will be distributed
between union and state govt. as per the
formula set by finance commission.
2004 Vijay Kelkar Task Force on Fiscal 279A President of India to appoint a
Responsibility and Budget Management constitutional body, “GST Council”
(FRBM) recommends GST. headed by Finance Minister.
2006 In Budget speech, P. Chidambaram 366 Alcoholic liquor for human
announces the launch of GST from 2010 consumption is kept out of GST. (i.e.
2011 UPA government introduces 115th State govt continue to levy State Excise
Amendment Bill 2011 to implement on its production and State VAT on its
GST but it lapsed with the dissolution of sale.)
15th Lok Sabha.
2014-16 Modi govt. introduces 122nd GST COUNCIL
Constitutional Amendment Bill 2014 in
16th Lok Sabha. Since GST aimed to Composition
change federal financial relations, so Union representatives States’ representatives
under Art.368, this constitutional bill (2) (total 31)
required: - Finance Minister as - Each state
• Lok Sabha and Rajya Sabha each: 50 the Chairman government
% majority of the total membership, - Union Minister of (including UT with
and 2/3rd majority of all members State for finance or legislature: J&K,
present and voting. revenue. Delhi &
• State Vidhan Sabha: approval by Puducherry) can
majority of state assemblies (i.e. nominate one
15Vidhan-Sabhas of India at that minister to GST
time) council- it may be
their minister of

197
 finance or Dy.CM or
any other minister as A. Parliament has passed following laws:
per their wish. 1. Central Goods &Services Tax Act (CGST)
- One of them will be 2. Integrated Goods &Services Tax Act (IGST)
selected as the Vice- 3. Union Territory Goods & Services Tax Act
Chairman of GST (UTGST)
council. 4. Finance Act 2020 amends UTGST Act to update
Voting power – 1/3 rd Voting power – 2/3 rd list of UTs:
NOTE - If all members do not unanimously agree a) (new) Ladakh without legislature.
over a proposal then it will be put for voting. b) (merged) 1) Dadra and Nagar Haveli + 2)
Daman and Diu →treated as single UT
However in such case, minimum 3/4 votes required
(because Govt merged them in 2019).
to pass the proposal. 5. Goods and Services Tax (Compensation to
QUORUM- Council Meetings to proceed only with States) Amendment Act. Parliament originally
quorum of 50% of total membership. passed them in 2017, later amended in 2018 As
per the recommendations of the GST Council.
Functions of GST Council B. State Legislatures have passed State Goods and
The GST Council shall Service Tax Acts. (SGST)
make recommendations to C. Jammu & Kashmir passed SGST Act on 8th July
the Union and the States on- 2017 then only GST system became effective
• The taxes, cesses and there as well. Jammu And Kashmir
surcharges levied by the Reorganisation Act, 2019 has not abolished
Union, the States and this SGST act. Present status is:
the local bodies which - SGST applicable on J&K (UT with
may be subsumed in the goods and services tax; Legislature)
• The goods and services that may be subjected to, or - UTGST on Ladakh (UT without Legislature)
exempted from the tax;
• Model GST Laws, principles of levy, GST MODEL IN INDIA
apportionment of GST levied on supplies in the Dual system of GST model, to protect the autonomy of
course of inter-State trade or commerce under states
Art. 269A and the principles that govern the place 1. CGST- levied by Central.
of supply; 2. SGST- levied by State.
• The threshold limit of turnover below which 3. IGST- levied by Central, in case interstate trade.
goods and services may be exempted from goods
and services tax;
• The rates including floor rates with bands of
goods and services tax;
• Any special rate or rates for a specified period,
to raise additional resources during any natural
calamity or disaster;
• Special provision with respect to the States of
Arunachal Pradesh, Assam, Jammu and
Kashmir, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Himachal Pradesh
and Uttarakhand;
• Any other matter relating to the GST, as the Council
may decide. CENTRE’S INDIRECT TAXES SUBSUMED IN
CGST
• Compensation to the states for their revenue loss in
switching from VAT to GST regime (through Cess
mechanism):
• Dispute settlement between Union vs state(s),
state(s) vs state(s).

198
 On Completely replaced by CGST
manufacturing (except 5 hydrocarbon fuels:
of goods: Excise petrol, diesel etc.)
duty and various - Excise on manufacturing
Cess / medicinal & toiletry
surcharges on it preparations containing alcohol
(e.g. Cough syrups, deodorants
and perfumes) also replaced by
CGST.
- Alcoholic Liquor for human
consumption- falls in States’
purview so Union Excise /
CGST not applicable on it.
Excise duty on It’s replaced with 14% CGST.
Tobacco Further, Union also levies +
products GST Compensation Cess +
Indirect Tax of Whether replaced by CGST? National Calamity Contingency
Union Duty(NCCD) on them.
For import- Customs Duty is not replaced Because 101st Constitutional
export: Basic with GST. It is separate from Amendment allows Union to
Customs Duty, GST-regime. So, imported tax tobacco products separately.
cess / surcharge goods are subjected to Custom NCCD money goes to Public
on it. Duty + IGST. Account → National Disaster
Previously, imported goods Response Fund set up under
were subjected to Customs Duty Disaster Management Act,
+ education cess but Budget 2005.
2018 replaced it with Customs Budget-2020: increase
Duty + 10% Social Welfare National Calamity Contingent
Surcharge. Duty on Cigarettes and other
Budget-2020→ 5% Health Cess tobacco products
on imported medical devices for Excise duty on Once GST council decides the
building hospitals. production/refini date they will be brought under
On imports: They are not ‘replaced’ with ng of Crude oil, GST-regime.
Special CGST, but simply abolished. Petrol (Motor Until then refineries / oil-
Additional Spirit), Diesel, drilling companies have to pay
Customs Duty Aviation excise duty+cess/surcharges to
(SAD), Turbine Fuel Union for production /
Countervailing and natural gas manufacturing of these items.
Duty (CVD) (and petrol pump owner, etc
Central Sales CST was the Union tax levied will have to pay VAT to states
Tax (CST on sale of items in inter- state on their sale.)
trade, and it was assigned to the Presently, Petrol & Diesel are
‘Origin state’. It’s replaced with also subjected to Union’s Road
IGST (CGST + SGST) and Infrastructure Cess which
On providing Completely replaced by CGST. goes into Public Account→
services: Service These previous cess / surcharge Central Road & Infrastructure
tax and Krishi are deleted. Fund setup under Central Road
Kalyan Cess and Fund Act 2000 (The word
Swatchh Bharat “Infrastructure” was added by
Cess Budget-2018).
Full-Budget-2019increases the
excise and road- infrastructure
cess on petrol and diesel.

199
GST Revenue Collection Figures 2. Petrol (Motor GST-regime. Until then,
Spirit), petrol pump owners,
2017 monthly 2017 monthly 2019 monthly 3. Diesel, LPG gas distributors etc.
avg. avg. avg. (Financial 4. Aviation Turbine will have to collect VAT
year yet to Fuel (+ any cess / surcharges)
finish) 5. Natural gas from the customers and
INR 89700 cr INR 98114 cr In some months deposit to the state
crossed INR 1 government.
lakh crore but State Excise on They are completely
more or less, production of liquor for kept out of GST. [unlike
zigzag pattern. human consumption above petro items where
State. GST council will
• GST registered suppliers have to deposit the GST at implement it after “any
the GSTN portal on monthly basis (except those VAT on sale of liquor specified” date]. Since
who opted for the GST composition scheme). for human inception of our
• In monthly collection of GST, there are ups and consumption. Constitution, the power
downs based on seasonality. to tax liquor was with
States, & it constituted a
Budget-2020 Projections for Union Taxes in major source of revenue
Descending order of Revenue: for them, so States were
unwilling to hand it over
Indirect taxes in ↓ GST > Excise > Custom in GST regime. Had
order of revenue: Modi govt tried to bring
Direct taxes in ↓ order Corporation Tax > liquor in GST-regime,
of revenue: Income Tax > STT then majority of the
Vidhan-Sabhas may not
STATES’ INDIRECT TAXES SUBSUMED IN have passed this
SGST Constitutional
Amendment Bill.
ElectricityDuty It is not replaced by
SGST
Road Tax on vehicles. It is not replaced by
SGST. Its status as
direct/indirect tax is
vague because in some
states/ vehicle
categories: buyer himself
deposits while in some
cases, seller required to
collect & deposit.
Purchase tax on Replaced by SGST
vehicle, boats, and
animals
Advertisement tax on Replaced by SGST
Indirect Tax of State Whether replaced by hoarding, banners etc
Govt. SGST? Luxury tax at Hotels, Replaced by SGST
On sale of goods: State Yes, By default VAT is Spas, Resorts etc.
Value Added Tax replaced by SGST, but Entry tax/Octroi for Replaced by SGST
(VAT) (also called read below: entry of goods in an
“Commercial tax”) area
State VAT on selling of: Once GST council Taxes on Lottery, horse Replaced by SGST.
1. Crude oil, decides the date, these race betting, gambling Since they’re
will be brought under etc.

200
 ‘sinful/demerit goods’,
they’re subjected to
28% = 14% CGST +
14% SGST
Entertainment Tax on Replaced by SGST
Cinema, Live unless levied by a local
Performance shows body. e.g. Kerala local
etc.- bodies 10% on movie
tickets.
GST - INPUT TAX CREDIT (ITC)
• GST is a ‘destination based’ indirect tax on
consumption of goods & services. It is applicable
on supply of goods or services as against the
previous indirect taxes that worked on the concept
of manufacture, sale, exchange, transfer etc.
• “Input Tax Credit” is an aggregate total amount of
tax paid by a registered dealer on the total
purchases made by him within the State from other
dealers.
• It can be adjusted against the tax payable by the
purchasing dealer on his sales.
• It is available for purchase of goods made within the
state by a registered dealer from another registered
dealer.
• It is allowed for both manufacturers and traders
• Even for stock transfer/consignment
transfer/branch transfer of goods out of the State,
input tax paid in excess of 2% will be eligible for
tax credit.
• In case of common goods used for taxable goods
and tax free goods, ITC is allowed proportionately
to the extent the purchases are used for the purpose
of taxable goods.
• Thus, credit relating to the goods used in
manufacture of exempted goods has to be reversed.
NOTE - Alcohol for human consumption, Crude oil,
Petrol (Motor Spirit), Diesel, Aviation Turbine Fuel and
Natural GasDoesn't comes under GST.

Goods / Services produced & supplied

In same the State (or UT In another State (or UT
without legislature)→ without legislature)
Intra-state supply →Inter-state supply
Union levies→CGST 1. Union levies IGST
State / UT without →CGST + (SGST or
legislature UTGST depending on Q. Consider the following items: (CSE-2018)
Levies→SGST / UTGST destination). 1. Cereal grains hulled
2. From this IGST→ 2. Chicken eggs cooked
CGST goes to Union, 3. Fish processed and canned
and the other portion 4. Newspapers containing advertising material Which
goes to the Destination of the above items is/are exempted under GST
State/UT without (Good and Services Tax)?
legislature. a) 1 only
b) 2 and 3 only
Salient features of Input tax credit: c) 1, 2 and 4 only
d) 1, 2, 3 and 4

201
GST COMPOSITION SCHEME
• It aims to rid the small taxpayers of tedious GST
formalities and pay GST at a fixed rate of annual
turnover.
• This tax has to be paid on quarterly basis.
• However, upon opting for this scheme, he cannot
issue taxable invoice under GST law and can
neither collect GST from his customers nor can
claim Input Tax credit on his purchases.
separately. This will provide relief to businessman,
GST (Regular) scheme GST Composition will improve the tax-surveillance and fight
Scheme against false ITC-credit claims through fake
If an industrialist or Such monthly invoices. E-invoice shall be compulsory from
seller is registered with compliance is very 1April 2020.
GST, he must collect the tedious for small
taxes at above varying entrepreneurs / small Reverse charge mechanism
rates, and deposit them merchants so they may • Normally, a seller must collect the GST tax from
on the monthly basis at opt for GST Composition buyer & deposit to the govt.
GSTN web-portal. scheme wherein instead • However, in selected cases when seller is not
of above (5-12-18-28%) registered with GST number, while buyer is
rates they’ll have to registered with GST number, then buyer will have
collect only flatrate GST to deposit the tax to government.
of 1% on goods, 5% on • ‘Reverse Charge Mechanism’ is associated with
restaurants, 6% on all GST, just like ‘E-way bill’ mechanism is associated
services. with GST.
Advantage: He will get Disadvantage: He will
input tax credit, not get Input Tax Credit.
Disadvantage: He’ll Advantage: He’ll not COMPENSATION TO STATES
have to deposit tax & have to deposit tax/forms
• GST is a destination-based tax, therefore
forms on monthly basis on monthly basis to
industrialized states are not happy with it. Consider
on GSTN web-portal GSTN web-portal. He’ll
a Nano car manufactured in Tata's Plant in Gujarat
have to do it on
and sold in Uttar Pradesh. (Destination) UP gets
Quarterly basis (3-3-3-
SGST, While (Source) Gujarat gets nothing.
3 months)
Compulsory if turnover Optional scheme, not • Although reverse is also true- UP's bicycle sold in
is above “specified” compulsory. Not every Gujarat, then Gujarat will earn SGST and UP will
lakhs / crores. supplier is eligible. Only get nothing. But the industrialized states such as
if turnover is below “y” Gujarat, Maharashtra, Tamil Nadu, Haryana feared
lakhs / crores, and doing they’d get less SGST revenue in absolute terms
“z” type of business, then compared to erstwhile VAT regime.
you will be eligible. • For the Union govt, largest source of tax
Registered taxpayers – Registered taxpayers- collection were corporate tax and personal
about1.12 crore Hardly 17 lakh taxpayers income tax. Both are direct taxes and therefore kept
out of the GST regime.
E-way bill system • For the state governments, VAT was largest
source of tax income, but it is to be subsumed
• An electronic bill generated by GSTN required in
under GST, along with other indirect taxes, cess and
moving the goods of value exceeding Rs. 50,000
surcharges levied by the states. Therefore, states
from one state to another.
were afraid their revenue income will decrease.
• It will eliminate the need for separate transit pass in
each state, thus, enabling hassle-free movement.
Notable States that Notable States that
• Related: GST council announced the E-invoice
witnessed revenue witnessed revenue
(bill generation) from January-2020 on pilot basis,
then E-way bill will not have to be generated

202
 increase in SGST decline in SGST
(compared to VAT) (compared to VAT)
Andhra Pradesh and Punjab, Himachal,
some NE states → Chhattisgarh,
Mizoram, Manipur, Uttarakhand, J&K,
Sikkim, Nagaland Odisha, Goa, Bihar,
Gujarat and Delhi and
others

Compensation to States: HOW?

Parliament enacted GST Compensation to States Act
2017
• Under its provisions, GST council recommended
Union Govt to impose “GST Compensation Cess”
(on specified luxury & demerit goods, like –
o pan masala (60%), tobacco products (cess
varies as per product),
o aerated water & Caffeinated Beverages (12%),
coal / lignite (₹400 per tonne),
o motor vehicles-aircraft-yacht (3-22%
depending on type of vehicle).
o The cess thus collected is used for
compensating States for their revenue losses
during the first five years since inception of
GST.
o The formula uses 2015-16 as base year to
measure states’ revenue, & assumes 14%
annual growth in VAT system. (Then
relatively, how much less rupee did state
receive in SGST? = compensation will be
given accordingly.)
o Liquor Taxes are outside GST-purview so
Bihar / Gujarat / Nagaland / Lakshadweep /
Parts of Manipur can’t ask more ₹ for
compensation from this fund for having liquor
prohibition.
• GST provides input credit for most of the indirect
taxes of the Union and State Government. So,
entrepreneur’s cost of production should reduce,
then he should also reduce the prices for consumers,
yet many companies had not reduced their prices
e.g. Domino’s Pizza, Nestle, Hindustan Unilever
toothpaste & detergents etc.
• To teach them a lesson, To curb their profiteering,
Union govt has set up NAA under Central Goods
and Services Tax Act, 2017.
• Depending on the case, NAA can order the
culprit company to:
1. Reduce prices
2. Refund money with interest to consumers
3. Deposit money to Consumer Welfare Funds at
union & state level
4. Impose penalty upto 10% of profiteered amount
5. Cancel registration.
• Further appeal→ High Court.
• This Authority shall cease to exist after two years
from its inception (2017), unless GST council
renews it.
• 2019-Jun: GST council extended it for another 2
years, which means all crooked companies have not
yet stopped profiteering.

Controversy→Union is supposed to release

compensation cess to states on monthly basis, but since
2019-August onwards payment pending. 2019-Dec:
only partial compensation released. FM Nirmala. S
says, “Sales are decrease, so we have not collected
enough rupee to release the cess.” Non-BJP states first
complained to GST council, but it did not help much.
So now those State Govts even thinking of moving to
Supreme Court, which hints that cooperative federalism
is in danger.

GST RELATED ORGANIZATIONS

National Anti-Profiteering Authority (NAPA)

Authority for Advance Ruling (AAR)

203
• Diabetic foods supplements are • GSTN Network ltd. also provides the IT
subjected to 12% GST whereas infrastructure and software services to GST
pasteurized milk is subject to 0% officials for monitoring the tax compliance, issuing
GST. If Amul plans to launch notices, data mining etc.
‘Amul Camel Milk' with bottle • In future, such data could also be shared with the
label: "Camel milk is easy to RBI’s public Credit registry so the lenders can have
digest, high in an insulin-like a 360 degree profile / complete picture of the
protein, hence beneficial for borrower’s business.
diabetic person."
• So, whether Amul’s product be subjected to 0% GST Suvidha Providers (GSPs): These are selected
GST or 12% GST? An entrepreneur would like to private IT/Fintech companies that develop apps /
such have clarification from Tax authorities before software to help the taxpayers interact with GSTN
starting the production, lest he gets tangled in raids portal.
and litigations afterwards.
• So, CGST Act, 2017 provides for a statutory body Project Saksham: Digital integration (2016)
called Authority for Advance Ruling (AAR), where
entrepreneur can seek such advance clarification. Union Indirect CBEC’s Web- Post- GST?
• Higher appeal→ Appellate Authority for Advance Tax portal
Ruling (AAAR) Service tax & ACES Service tax
• Benefits→ Excise duty (Automation of subsumed
o Reduces litigation & harassment afterwards Central Excise - Excise only on
o Ease of doing business & Service Tax) selecteditems.
o Attract Foreign Direct Investment (FDI). Customs Duty SWIFT (Single Customs duty
Window not subsumed
GSTN (Not for Profit Company) Interface for in GST.
• GSTN is a not-for- Facilitating
profit company Trade).
governed under
section 8 of the HSN and SAC Codes
Companies Act
2013. Harmonized System HSNdeveloped by the
• Earlier, the centre of Nomenclature World Customs
held 24.5% equity and the States (including UTs (HSN) Organization (WCO) is
Delhi & Puducherry) hold 24.5% equity in used for classifying goods
GSTN. for GST rates. e.g. Jarda
• 51% equity is with non-Government financial scented tobacco = HAC
institutions (like HDFC Ltd, HDFC Bank Ltd, code 24039930 = 28%
ICICI Bank Ltd, NSE Strategic Investment Co and GST.
LIC Housing Finance Ltd.)
Service Accounting SAC are used for
• The Company has been set up primarily to provide
Code (SAC) classifying services for
IT infrastructure & services to Central and State
GST rates. e.g. coaching
Governments, tax payers and other stakeholders for
services = SAC Code
implementation of the Goods and Services Tax
999293 = 18% GST.
(GST).
• 2018-May: GST Council approved acquisition of
entire 51% equity held by non- Governmental
institutions & distribute it equally between Centre Benefit HSN-SAC coding helps in
and the State Governments. computerised accounting,
• This company runs the GSTN online portal, where billing, digitization,
the suppliers register themselves, paytheir GST, surveillance & big data
claim input tax credits, generate e-way bills etc. analytics by Tax
[Infosys ltd. helped developthe web-portal.] authorities.

204
 PAN VS GSTIN
PAN GSTIN
Permanent Account Goods and Services Tax
Number issued by the Identification Number
Income Tax issued by the Central
Department Board of Indirect Taxes
& Customs (CBIC)
E.g. Suzlon Energy ltd: E.g. Suzlon Energy ltd:
AADCS0472N 24AADCS0472N1Z8
10-digit alphanumeric 2-digit state code+ 10
number (containing digits PAN number + 3
both alphabets and characters = total 15
numbers) characters (containing
both alphabets and
numbers)
Every income tax If Individuals / firms
assesses - individual, registered under the Pre-
HUF, firm, company, GST law (i.e., Excise,
trust (internal different VAT, Service Tax etc.)
not imp.) or
- If your biz. turnover is
above a threshold limit of
“x” lakhs for ordinary
states or “y” lakhs in
Special Category States.
OR
- Merchants who sell
through e-commerce
aggregators like
Amazon.
Every PAN card holder Every GSTIN holder is
is not required to have required to have PAN
GSTIN. (e.g. a salaried card number. (Because
employee) its format is like that,
observe “format” row
above).
Only single PAN If firm operates from
number allowed per more than one state,
individual. then a separate GST
registration is required
Only single PAN for each state.
number allowed per
company. If a firm has multiple
subsidiaries, they have
Subsidiary firms will to get GST number for
have to get separate PAN each.
numbers.
Prevent evasion of Prevent evasion of
direct taxes GST, and help the
entrepreneurs claim their
input credits.
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PAN number is required for various activities like
opening of bank account, opening of demat accounts
(for trading in securities), obtaining registration for
GST, VAT-Excise registration (for Petrol-Liquor
dealers) etc. So, PAN is slowly becoming a Common
Business Identification Number (CBIN) or simply
Business Identification Number (BIN).
PAN/GSTIN vs UID (=Aadhar Card)
PAN and GSTIN UID (=Aadhar Card)
Issued by the direct andIssued by a Statutory
indirect tax authoritiesbody- Unique
that function under Identification
Ministry of Finance. Authority of India
(UIDAI) that functions
under Ministry of
Electronics and
Information Technology
(MeitY).
These Tax authorities Aadhaar Targeted
derive powers from: Delivery of Financial and
- Income Tax Act 1961 Other Subsidies, Benefits
- Goods & Service Tax and Services) Act, 2016
Acts in 2017.
Primary objective of Primary objective is to
these id-numbers is to eliminate bogus
reduce tax evasion by beneficiaries in
tracking the government schemes &
transactions. reduce subsidy leakage.
Auxiliary benefits:
Identifying dead bodies,
tracking criminals,
mobile number
ownership, tax evasion
etc.
Their format contains Unique Identification
both numbers and number (UID) or
alphabets. Aadhaar is a 12-digit
number. No alphabets.
Issued for individual Only for living resident
humans, of India. Not given for
HUF/firms/companies/tr companies. Resident is
usts**. defined as person who
lived in India for 182
days or above in last 12
months.
Full-Budget-2019: we
will consider giving
immediate Aadhar card
to NRIs with Indian
 Passport, so they don’t • GST Input credit system reduces the cascading
have to wait till about 180 effect of taxes, this reduces cost of manufacturing
days. It will help them &selling, while its anti-profiteering authority
get through KYC ensures that such benefits are passed on to the
bank/share market customers in the form of reduced MRP.
transaction. • Federal nations such as Canada and Australia
One human → one same shifted from VAT to GST regime. It helped
PAN number only. No boosting their revenue, GDP and exports.
age limit. Minors can • Thus, GST will help to create a unified common
also join. national market for India, &catalyse “Make in
About INR110 Fees to No fees to get Aadhar. India”.
get PAN card. • State government charged VAT on sale of goods,
but VAT rates were not uniform throughout
No fees to get GSTIN India. For instance, a laptop bag might attract
Compulsory to enrol if Voluntary to enrol. 12%VAT in one state and 18%VAT in another.
your income or turnover This provided scope for ‘rate arbitrage’(buying
is beyond “specified” from another state for profiteering, even if same
rupees**. item available in home state). Then State
They contain Demographic info: government will have to deploy more officials at the
-Name -Name, Date of Birth, check posts, leading to bribery, harassment,
-Photograph & Date of Gender, Address. inspector-raj.
Birth (in case of -Mobile & Email • SGST/UTGST rates are uniform throughout
“Human”) (optional) Biometric India, so there is no scope of rate arbitrage.
- Address. info: Whether you buy a laptop from Chennai or Mumbai
- Ten Fingerprints, Two the GST% tax rate will be same.
Iris Scans, and Facial
Photograph. GST Benefit: Zero Rated Exports
** Full-Budget-2019: More than 120 crore Indians • When company buys raw material or intermediate
Aadhaar card but all don’t have PAN card. Earlier, it goods it will have to pay GST but if final product is
was compulsory to give PAN card number when exported outside India (or sent to Special Economic
filling income tax. But if you don’t have PAN Card Zone/SEZ in India), it will be subjected to 0%
you can simply quote your Aadhaar number to file IGST.
Income Tax returns. • So, whatever GST the company had paid on the
- Later IT-department clarified that whoever quotes inputs, all of that will become its “Input Tax
Aadhar number because he doesn’t have PAN card Credit” (and company can use this ITC to pay for
→ we’ll issue him PAN card on suo-moto basis later the taxes on the purchase of raw material and
on. intermediate goods in the next time), thus reducing
Budget-2020 added technical reforms in this process. its cost of production. This will improve price
competitiveness of Indian products in foreign
GST BENEFITS markets.
• GST covers both goods and services, with • Australia and other GST countries also follow
standard rates, minimal number of cess/surcharges. similar “zero rated export” regime.
• GST online portal and e-way bill system reduces
the interface between tax-officials and the Q. What is/are the most likely advantages of
assesses, thereby reducing the scope of harassment, implementing ‘Goods and Services Tax (GST)’?
bribery and Inspector Raj. (CSE-2017)
• Improving the Ease of doing business and business 1. It will replace multiple taxes collected by multiple
environment overall. authorities and will thus create a single market in
• GST provides input credits to suppliers thereby India.
incentivizing them to sell with invoice at every 2. It will drastically reduce the ‘Current Account
stage. Thus, GST will expand our tax base and Deficit’ of India and will enable it to increase its
improve tax collection, and deter tax evasion. foreign exchange reserves.

206
 3. It will enormously increase the growth and size of
economy of India and will enable it to overtake
China in the near future.
Select the correct answer using the code given below:
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
GST: CHALLENGES
• High Rates and Multiple Slabs
- If Union and States abolished existing indirect
taxes (Excise, Custom and VAT), then their
revenue income will obviously decline.
Therefore, GST rate needed be high enough
to sustain any fall in revenue collection. Such
‘ideal’ rate of GST is called Revenue Neutral
Rate (RNR). In, Singapore GST only 7%,
Australia GST only 10%.
- Whereas India has four slabs→5-12-18-28%
slabs. Many daily necessities are in 18% GST
slab. Indirect taxes regressive in nature &
harm purchasing power of poor.
• Petrol, diesel, electricity are not subjected to
GST regime yet. So, businessman cannot claim
GST-input credit on them. Even when crude oil
prices are declines in the international market, the
Union and State governments do not reduces their
Union excise and state VAT on the petroleum fuels,
which further aggravates the inflation and business
cost.
• Frequent changes harming long term business
planning
- Frequent changes in GST rates makes it
difficult for the companies to plan long term
business strategies. E.g. In 2019-Sept, GST on
Caffeinated beverages hiked from 18% →
28%. This will decrease the sales. If any soft-
drinks company had invested in expansion of
plant-production capacity, it would suffer.
- 15th Finance Commission Chairman NK Singh
criticized frequent changes in GST rates.
• Fall in collection - For GST system to sustain,
every month minimum INR 1 lakh crore must be
collected, but this is not happening every month,
Due to →
- Protectionism by USA, EU and China affects
and reduces Indian exports which results into
poor manufacturing and service sector
production. Overall reduction in GST
collection.
207
- Automobiles, consumer durables (TV, fridge
etc), real estate reduces due to variety of
factors.
- Unscrupulous traders setup shell companies
and generate fake invoices to claim input tax
credit through Circular Trading. As a result,
States are complaining that GST compensation
cess amount is not released in a timely fashion
by the Union Government. This affects State
funded welfare schemes.
• Inconvenience to Small Traders
- In GSTN web-portal, the traders have to
deposit the GST on monthly basis, upload
various forms & invoice details, generate e-
way bills. While government has tried to keep
these online forms/ mechanisms as simple as
possible, but since many small traders are not
proficient with computer, excel / accounting
software, internet, digital payments –
GSTcompliance creates inconvenience to
them, and forces them to hire full time
accountants, raising their cost of operations.
Counter argument: Even in erstwhile VAT system
they had to upload similar things so, it’s not entirely
new or alien system imposed upon them. Besides, they
can opt for the GST composition scheme where they
have to upload things on quarterly basis instead of
monthly basis. GSTN portal also provides free
accounting software to small traders so they don’t have
to spend rupee in buying proprietary software like Tally.
• GSTN server crashes often so traders can’t upload
things on time, and then they’ve to pay penalty for
crossing monthly deadlines.
Counterargument: GST Council has reduced the late-
fees, GSTN portal has been given technical upgrades to
reduce the glitches/outages.)
GST: CONCLUSION
• With the aforementioned features and benefits,
GST will help India progress towards “One
Nation, One Tax, One Market”.
• Indeed, the introduction of GST is truly a game
changer for Indian economy as it has replaced
multi-layered, complex indirect tax structure
with a simple, transparent and technology–
driven tax regime.
• Thus, GST eliminates cascading of taxes and
reduces transactional and operational costs,
thereby enhancing the ease of doing business and
catalysing “Make in India” campaign.
Finance Commission (Art. 280)
• Fiscal Federalism refers to the division of
responsibilities of–
o Taxation
o Expenditure between the different levels of the
government.
• While the 7th schedule assigns many
responsibilities to the States, but their taxation
power is relatively lower than Union’s. So, Finance
Commission plays a key role in transferring
union’s revenue resources to the state.
Article 280: President of India forms a Finance
Commission (a quasi-judicial body) every 5th Year or
earlier, with 1 chairman and 4 members. Eligible for
re-appointment. Recommendations are not binding
on the government but usually not rejected.
1st Finance The First Finance Commission of
Commission India was appointed in 1951, for the
period1952-57 by the President of
India and was chaired by K. C.
Neogy.
14th Headed by Y.V Reddy.
Finance Recommendation Period: 1st April,
Commission 2015 to 31st March, 2020
15th Setup in 2017-Nov. Originally, it was
Finance meant to cover: 1st April, 2020 to
Commission 31st March, 2025. But later, Govt
ordered it to submit two reports.
15th FC Terms of Reference (TOR)
President of India has ordered them to study and
recommend following:
• Union Taxes’ vertical devolution to the states,
and its horizontal distribution among the states.
(except cess, surcharge and IGST).
• Union’s grant – in - aids to the states.
• Ways and means to augment State Govts’
Consolidated funds to help their PRI/ULBs
• Any other matters referred by the President of India
such as:
- Use Census-2011 for your calculation.
- Keep in mind Union’s responsibilities for New
India 2022 vision.
- Recommend measures for Fiscal discipline,
Fiscal consolidation for the Union and State
governments. Whether union government
should continue to provide revenue deficit
grants to States?
- How to finance the disaster management
initiatives?
- Performance based incentives to the state
governments.
- (2019-Jul) suggest ways for allocation of non-
lapsable funds for defence and internal
security.
- (2019-Oct) Award for the UT of J&K. (This
term of reference required under Jammu And
Kashmir Reorganisation Act, 2019)
15TH FC’S TOR: APPREHENSION OF THE
STATES
Apprehension 1: New India 2022
• 15th FC is required to keep New India 2022 vision
in mind (aims to double the farmers’ income,
provide housing for all, achieve 175GW of
renewable energy etc.).
• 15th FC also required to keep in mind Union’s
additional burden regarding defence, internal
security, infrastructure, railways, climate change,
commitments towards administration of UTs
without legislature etc.
• TOR indirectly implying that 15th FC should give
less than 42% to state governments because
union government needs more resources for
aforementioned activities. So, Non-BJP states are
angry- “Tax devolution is our constitutional
right”.
Apprehension 2: Performance based incentives
15th FC asked to recommend performance-based
incentives based on (list not exhaustive)
Performance Concerns of the state
parameter
State’s - Manipur cannot do as much as
Efforts in Maharashtra in deepening the
expansion of GST tax net, owning to the
tax-net variety of economic,
geographic and political
factors (frequent bandh and
blockades).
- Constitution provides for a
separate GST council with
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 representatives of state reduce their autonomy in raising loans from the
governments. FC does not have market.
state representatives. • 15th FC will also examine whether to abolish
State’s Gangetic plain states’ total revenue deficit grants given to the States. (although
Efforts in fertility rate higher, so they’re 15th FC has continued this grant)
population apprehensive that Kerala & other
control Southern States will get more 15th FC TOR: Conclusion
money.
State’s efforts Southern states have been running Economic Survey 2016-17 had observed ‘aid-curse’ in
in controlling populist schemes for free TV, context of Redistributive Resource Transfer (RRT) i.e.
the Fridge, Mixer, Idli at rupee 1 etc. over the years, Special Category States received large
expenditure Similarly, Northern states run amount of funds via Planning Commission and Finance
on populist schemes for farm-loan waiver, free Commissions yet couldn’t perform well in poverty
measures bicycle, mobile & laptop schemes. removal or economic growth due to lack of
They fear they will be reviewed accountability and poor governance.
negatively, and union will get to • The 15th FC TOR aims to link the fund transfers
keep more money for itself. with performance and accountability
State’s Electricity theft is a rampant parameters. While states are apprehensive, but
Efforts in problem in certain Gangetic states, such measures are the bitter pills that we’ll have to
controlling but their ruling parties turn blind swallow eventually to enhance India’s human dev.
power sector eye because of electoral populism & economic growth.
losses of farmers and villagers. Now they
are apprehensive of getting less TAX DEVOLUTION BY FINANCE
money. COMMISSION
Behavioral States resent that Swatchh Bharat
changes to Mission is ‘imposed upon them’.
end open FC devolution is their TAX DEVOLUTION FROM UNION TO
defecation. Constitutional right, and not tied to STATES
their implementation of central
schemes.
VERTICAL HORIZONTAL
Apprehension 3: Census-2011
• For horizontal distribution of taxes among states,
14th FC had used Census-1971 data. Census-
VERTICAL TAX DEVOLUTION FROM UNION
1971 population was given 17% weight i.e. more
TO STATES
populous state will get more funds.
Finance Commission recommends the vertical
• 15th FC’s Terms of Reference (TOR) requires NK
devolution from the ‘divisible pool’ of union taxes.
Singh to use only Census-2011 data.
(Here IGST, Cess, Surcharge not counted.)
• But Southern states have reduced their fertility
rate between 1971 to 2011, whereas Northern Finance Chairperson States Share
states could not- due to poverty, illiteracy and Commission
lack of healthcare infrastructure. So, Southern
12th (2005-10) C. Rangarajan 30.5%
states fear Northern states will get proportionately
more funds if Census-2011 is used. 13th (2010-15) Vijay Kelkar 32%
14th (2015-20) VY Reddy 42%
Apprehension 4: Debt and Grants 15th (2020-21) NK Singh 41%*
• Article 293: States can’t borrow without consent of *15th FC’s justification: Compared to 14th FC, 1%
the Union. So, what additional conditions should extra Union should keep for UTs of J&K &Ladakh
the Union impose on the states when they (states) security & other needs.
borrow from market / external sources?
• TOR even requires 15th FC to make HORIZONTAL TAX DEVOLUTION AMONG
recommendations in this regard. States fear it will STATES

209
 Parameter Weightage
Population: as per Census 1971 17%
Demographic Change as per Census 10%
2011 (To consider the migration
angle.)
Income-Distance: Based on per capita 50%
income of a state (GSDP ÷ its
population). Accordingly, poorer states
get more weight
Area: more area more weight 15%
Forest-Cover: more forest cover more 8%
weight because of Opportunity cost
(State can’t allow industries there, else
it could have obtained some taxes)

15th FC horizontal distribution formula

components

Income Distance: State GSDP divided 45%

by its Population = per capita GSDP.
For most states, Haryana’s per capita 15th FC: Horizontal devolution: States’ share in
GSDP is taken as benchmark. How decreasing order
poorer is your state compared to
Haryana that much more rupee state UP 17.93%
will get.** Bihar 10.06%
Area: More area then more rupee 15% MP 7.88%
Population (as per Census-2011): 15% West Bengal 7.51%
More population will transfer more Maharashtra 6.13%
rupee. Mizoram 0.50%
Demographic Performance: States 12.5% Sikkim 0.388%
that have reduced Total Fertility Rate Goa 0.386%
(TFR), will get more rupee. ANY type of UT 0% here
Forest and Ecology: More forest will 10%
result into more rupee. Finance Commissions & the fate of UTs of J&K &
Tax efforts - States who have improved 2.5% Ladakh
their per capita (State) tax collection in • Until 10th Finance Commission, the FC would also
the last 3 years will get more ₹₹ prescribe the revenue sharing formula between
Total 100% the Union Government and Union Territories
• However, this practice stopped since 11th finance
** Note: computing income distance: the Highest per commission i.e. Finance ministry itself decides
capita GSDP: 1) Goa 2) Sikkim 3) Haryana 4) how much revenue will be shared with Union
Himachal. But since Goa, Sikkim are very small states Territories based on its own discretion. Finance
with a unique economic situation, so it’ll distort Commission no longer prescribed formula in this
statistical formula. So, there are some internal fine regard.
tunings done in formula. Long story cut short: Haryana • 31st October 2019: The state of Jammu Kashmir
taken as benchmark for most states. If you’ve more was officially split into the union territories of
intellectual curiosity about how above indicators are Jammu Kashmir and union territory of Ladakh.
calculated in real life, you may spend waste time
reading the original report -https://fincomindia.nic.in/ Whatever amount the
former state of J&K was
supposed to receive

210
 between 31/10/2019 to
31/3/2020 (as per 14th
FC formula) ...It will be
distributed between these
two new union territories
on the basis of
Jammu and Kashmir population ratio and
Reorganization Act, other parameters.
2019 mandates that: President of India shall
require 15th FC to make
award for UT of J&K.
However, looking the
15th FC report, no
separate share is given in
vertical / horizontal tax
devolutions. Simply 1%
extra kept with Union to
look after J&K &
Ladakh.
GRANTS FROM UNION TO STATES
Apart from the tax devolution, FC would also suggest
Union to give grant to the states (grant are different
from loans, grants need not return with interest).
14th FC suggested following types of grants→
• For All States: Grants for Panchayati Raj
Institutions (PRI) and Urban Local Bodies (ULB).
These grants will be subdivided into two parts:
basic grant and (10-20%) performance-based
grants.
• For All States: Disaster Management Grants.
• For 11 States: Post-Devolution Revenue Deficit
Grants for ~11 States.
15th FC suggested following types of grants (in
decreasing order, 2020-21)
Local Bodies Grants
Post-Devolution Revenue Deficit Grants
Disaster Management Grants
Sector Specific grants - Nutrition
Special Grants
Performance-based incentives
211
15th FC: Performance Indicators for Performance-
Based Incentives
Development of Aspirational
Implementation of
Districts (=backward districts
Agriculture Reforms
identified by NITI Aayog)
Power (Electricity) Sector Enhancing Trade including
Reforms Exports
Promotion of Domestic and
Education, esp. of girls
International Tourism.
If States perform well in above areas, they will get more
financial grants than other States in subsequent years.
15th FC: Other recommendations to Govt
• Some States have requested special category status.
But it’s not part of our mandate/Terms of
Reference. So we’ve nothing to say on this matter.
• Reform the direct taxation system which would
increase tax collection.
• Reform GST’s operational challenges, slabs and
rates.
• ReviewtheoutcomesofallGovernmentschemes.Mer
ge/abolishnon-essential schemes → reduce
Expenditure.
• We need a law on “Public Financial Management
System” PFMS will prescribe the budgeting,
accounting, internal control and audit standards to
be followed at all levels of government.
• Govt should follow FRBM Act in letter and spirit.
Avoid off-budget borrowings through parastatal
entities.
15th FC Report for 2020-21: conclusion
• Sustainable Development Goal-10 (SDG): reduce
inequality within the country.
• SDGGoal -16 requires nations to build effective,
accountable and inclusive institutions at all levels.
• In this regard, 15th FC has tried to provide a
framework for
o Equitable distribution of revenue
o Incentives tied with performance.
o It will greatly help to improve India’s human
development and economic growth.
PERMANENT STATUS TO FINANCE COMMISSION
Introduction: Shaktikanta Das, the Governor of RBI
and a member of the 15th Finance Commission
(FC), has recommended giving a permanent status to
the FC, wherein the old commission continues to
implement & monitor the recommendations till the next
commission starts functioning.
Arguments against giving permanent status to FC
• India already have a GST Council where states &
union can deliberate on issues related to indirect
taxes. If there is an economic crisis they can
finetune the GST formula and GST-distribution to
address it.
• We already have a NITI Aayog acting as a
permanent think-tank on all the matters related to
economy and governance.
• Both NITI Aayog and GST Council provide a
platform for cooperative federalism.
• Indian economy and Indian Union has functioned
successfully for over 70 years with this mechanism,
so there is no need for such constitutional
amendments and experimentations.
• Even if the Finance Commission is given a
permanent status, the states ruled by opposition
parties will continue to allege injustice &
partiality, just like they allege with the functioning
of Election Commission. Then, the Union Finance
Ministry’s precious time will be wasted in filing
counter-responses to the States at FC.
• Further, we already have the CAG to audit the
accounts of the Union and the States.
• Therefore, giving permanent status to Finance
Commission will result in overlapping
responsibilities and duplication of efforts.
Argument in favour of giving permanent status to
FC
• Election Commission has a permanent status even
though elections are to be conducted every 5 years.
Previous Lok Sabha’s speaker continues to hold
position until new Lok Sabha meets for the first
time. Following this rationale, Shaktikanta Das’s
suggestion that “Previous Finance Commission
should continue to function & oversee the
implementation of its recommendations until
new FC is formed” is a valid suggestion.
• Finance Commission recommendations are
valid for a block of 5 years. Even if there is a war,
disaster, famine or an economic crisis which may
affect the revenue collection of the union vs. the
demands by the States, still, the FC-
formula/recommendations cannot be
modified/finetuned in-between the five years. So,
even if Union/states are feeling any injustice in the
FC-formula, they have to wait for five years to
make pleas to the next Finance Commission.
• If FC has a permanent secretariat/office, dedicated
staff will keep all the records and knowledge
bank for future reference, and a few officers will
act as ‘Resource Persons’ to assist the new panel.
Then, there will be more consistency in the FC
recommendations.
• Such permanent body can keep a constant vigil on
the Union and State finances & revenue
collections and hold them accountable for any
transgressions or lethargy.
Present approach of the union governments is if they are
not getting enough taxes, they will simply borrow
more money and changing the FRBM targets as per
their convenience.
• Previously, Union and States designed their five-
year plans, and so it made sense to have a ‘five-year
formula for tax distribution’. But now the five-
year planning system has been discontinued.
Conclusion:
Give permanent status to FC or not?
In-favor Considering the aforementioned
benefits, Finance Commission should
be given a permanent status for better
monitoring, accountability, grievance
redressal in the matters related to fiscal
federalism.
Against Considering the aforementioned issues,
the present constitutional and
institutional mechanisms are
adequate for fiscal federalism; they do
not merit any changes for the time
being.
FC VS PC VS NITI
Finance Planning NITI Aayog
Commission Commission
Art. 280- Created by executive resolution, so
Constitutional neither constitutional non statutory.
body Both headed by Prime Minister as
the chairman.
1951: 1st FC 1951: PC set 2015: Formed.
setup under up and over - Three Year
KC Neogy the years Action Agenda
designed 12 (2017-20).
212
 Five Year - Seven Year 1992 The National Development Council
plans (12th StrategyDocument. (NDC) was set up, consisting of PM,
FYP: 2012- - Fifteen Year CMs and other representatives to
2017) Vision Document approve the five-year plans prepared by
- 2014: (2017-32). the Planning Commission. But became
Dissolved by obsolete with establishment of NITI
Modi Aayog.
Government. 1969 5th Finance Commission
Vertical and PC would use It is not in its scope recommended giving extra funds and
Horizontal Gadgil- of work to decide tax-relief to certain disadvantaged
Devolution of Mukrjee how much money states. Over the years, NDC added more
taxes + any formula should be given to states into the Special Category List
other matters (designed in each state. That based on -
referred by 8thFYP)- component is 1. hilly and difficult terrain
the President based on decided by the 2. low population density and / or
in TOR population, Finance Ministry. sizeable share of tribal population
- Each FC per capita - NITI’s primary 3. strategic location along borders
arrived at its income, objective is to with neighbouring countries
own special serve as the think 4. economic and infrastructural
methodology. problems etc. tank of the backwardness
E.g. 14th FC: of a state. Government of 5. non- viable nature of state finances.
42% vertical, India, Examples 8 North Eastern states and 3 Himalayan
and 5 factor - Helps in policy States (JK, Uttarakhand, HP).
formula for design.
horizontal - Helps in Benefits of Special Category status
distribution. monitoring • Industrialists will be given benefits in Union-taxes
schemes through for setting up factories in these states.
its dashboard e.g. • In Centrally Sponsored Schemes (CSS), Union will
‘School Education bear higher burden (90:10).
Quality Index’, • FC & PC would assign more weightage in their
‘SDG India Index’, formulas to give them more funds.
‘Digital
Transformation 14th FC: Previous Finance Commissions would assign
Index’ extra weightage & funds to Sp .Cat states, but 14th FC
stopped this practice. So, at present, Sp. Cat states don’t
Q. In India, which of the following review(s) the get additional revenue/grants in FC’s formula.
independent regulators in sectors like Although, Union upon its own discretion continues to
telecommunications, insurance, electricity etc. ? give them certain benefits in CSS. - But, whenever
(CSE-2019) elections are near, W. Bengal, Bihar and Andhra CMs
1. Ad Hoc Committees set up by the Parliament. would demand Sp. Cat. status & blame Union for
2. Parliamentary Department Related Standing ‘injustice’.
Committees 15th FC: Some States have requested special category
3. Finance Commission status. But it’s not part of our mandate/Terms of
4. Financial Sector Legislative Reforms Commission Reference
5. NITI Aayog
Answer Codes: Economic Surveys and Sp. Cat States
(a) 1 and 2
(b) 1, 3 and 4 Economic survey Noted that Sp. Cat states
(c) 3, 4 and 5 2016-17 have received lot of
(d) 2 and 5 funds & grant from
previous FCs and PCs,
SPECIAL CATEGORY STATES and yet they have not
made any tangible

213
 progress in improving
public administration or
removing poverty (Aid
Curse). Similar problem
with the States having
abundant mineral
resources (“Resource
Curse”).
Economic Survey Noted that compared to
2017-18 Brazil, Germany and other
countries with federal
polity, India’s State
Governments and Local
Bodies are collecting less
amount of tax for two
reasons:
1. Constitution has not
given them sufficient
taxation powers.
2. Even where
constitution gave
them powers like
collection of
Agricultural Income
Tax, Land Revenue,
Property Tax: The
States/Local Bodies
are shy of collecting
taxes due to electoral
politics. Result? Poor
quality of Public
Schools, Public
Transport, Police,
Drinking Water and
Sanitation.
Hill Union Territory Status for J&K:
While Finance commissions no longer give extra
weightage to ‘Sp. Category States’ in horizontal tax
distribution formula, but Union provides them
additional funding for their welfare schemes from
Union’s own pocket.
Category → Welfare Cost sharing
schemes
"Special Category Depending on the
States" scheme, union may
- North-Eastern States, contribute 80-90% of
- Two Himalayan Hilly the scheme cost, rest
States→Himachal will be borne by the
Pradesh and Uttarakhand State.
Other States: who are Union may bear lower
not in above category burden than Sp. Category
(UP, Bihar, etc.) states e.g. 50:50, 60:40
Union territory (UT) etc.
with legislature: Delhi,
Puducherry, Jammu &
Kashmir.
UT without legislature 100% funded by Union
Ladakh, Andaman
Nicobar etc.
Before removal of Article 370, the State of J&K was
previously in Special category. But as a UT with
legislature, J&K will get lower assistance from Union
in the welfare schemes. So since 2019-Aug, Central
Government considering creating a new category
‘Hilly Union Territory’ so J&K may continue to
received 90:10 funding.
PREVIOUS YEAR QUETIONS
Q. Explain the salient features of the constitution (One
Hundred and First Amendment) Act, 2016. Do you
think it is efficacious enough ‘to remove cascading
effect of taxes and provide for common national market
for goods and services’? – CSE GS2-2017
Q. Comment on the important changes introduced in
respect of the Long-term Capital Gains Tax (LCGT)
and Dividend Distribution Tax (DDT) in the Union
Budget for 2018-2019. - CSEGS3-2018
Q. Enumerate the indirect taxes which have been
subsumed in the Goods and Services Tax (GST) in
India. Also, comment on the revenue implications of the
GST introduced in India since July 2017 - CSE GS3-
2019
214
 CH-7 BUDGET - III
Black Money
• Black Money is a money that
concealed from the tax
authority. It is an income or
transaction that is taxable yet
not reported to the tax
authorities.
• There have been several estimates regarding the
extent of black money economy also called as
parallel economy. Some of the estimates suggest it
to be as high as up to fifty to hundred percent.
• Although black money in India is decades old
problem, it has become real threat post
liberalization.
• Illegal activities such as crime and corruption,
non-compliance with taxation requirements,
complex procedural regulations, cultural and
social practices, globalization along with weak
institutional policy, legal and implementation
structures have further augmented the black
money economy.
Data/fact – As of May 2019, the total untaxed foreign
assets mined was ₹12,500 crore.
Sources of Black Money
In particular following are some of the mechanisms
through which black money is circulated, utilized and
the profits earned are further invested in other sectors
to generate further money.
• Real estate: Due to rising prices of real estate, the
tax incidence applicable on real estate
transactions in the form of stamp duty and capital
gains tax can create incentives for tax evasion
through under-reporting of transaction price.
• Bullion and jewellery market: The purchase
allows the buyer the option of converting black
money into gold and bullion, while it gives the
trader the option of keeping his unaccounted
wealth in the form of stock, not disclosed in the
books or valued at less than market price.
• Financial markets transactions: IPO
manipulations, Rigging of market such as use of
shell companies.
• Public procurement: Public procurement has
grown phenomenally over the years – in volume,
scale, and variety as well as complexity. The
Competition Commission of India had estimated
total public procurement figure for India at around
10 to 11 lakh crore per year and provides ample
215
scope of corruption due to rigged procurement
process.
• Non-profit organizations: Taxation laws allow
certain privileges and incentives for promoting
charitable activities which are misused and
manipulated. Used to park funds of corrupt
politicians and businessmen.
• Informal Sector and Cash Economy: Cash
transactions, large un-banked and under-banked
areas contribute to the large cash economy in India.
• External trade and transfer pricing: Transfer
profit/income to no tax or low tax jurisdictions by
MNCs.
• Tax Havens: Tax havens are typically small
countries/ jurisdictions, with low or nil taxation
for foreigners who decide to come and settle there.
• Offshore Financial Centres: Describe themselves
as financial centres specializing in non-residential
financial transactions but are logical extensions
of the traditional tax havens.
• Hawala: It is an informal and cheap method of
transferring money from one place without using
banks etc. It operates on codes and contacts and no
paperwork and disclosure is required.
• Investment through Innovative Derivative
Instruments: Such as Participatory Notes.
Causes of Black Money
• Crime.
• Corruption.
• Non-compliance with tax requirements.
• Complex procedural regulations.
• Money laundering.
• Smuggling.
• High tax rate
• Bureaucrats-political leaders nexus
How black money is detrimental to economic
health?
• There is a distortion in investment in economy.
With black money the investment is made in high
end and luxury goods.
• Huge loss of taxes amounting to billions.
• Black money leads to further corruption by
creating a vicious cycle.
• Generating black money means that quality is
compromised in public sector projects where
black money is used to manipulate tenders and offer
kickbacks.
• Investments that must have been made in the
country giving the necessary boost to economy are
invested elsewhere.
• Since, RBI cannot control the black money cash
flow in economy, it dilutes its policies targeting
inflation.
• High prices of real estate especially in big cities
are due to deep pockets filled with black money.
• Forward trading of goods by cash rich speculators
cause fluctuation in prices due to hoarding.
• National security is threatened because black
money is used to finance criminal activities.
• Black money generated from drugs and smuggling
is being used to operate terror networks.
Black money estimates - No clear estimate of black
money owned by Indians and stashed abroad is
available. In 2019, the National Institute of Financial
Management reported to the Lok Sabha Standing
Committee on Finance, that the estimate is about $216
billion-$490 billion. This is one-seventh the estimate
quoted ahead of the 2014 elections.
Steps taken by government to curb black money
generation and flow
• Tax Reforms:
o Rationalization of income tax with greater tax
base and lower taxes.
o Tax Deduction at Source (TDS) in which the
tax is deducted from the payment itself by the
payee.
• Voluntary Disclosure Schemes: The government
allows reporting black money generated through
tax evasion in a given time frame, as government
has given in the Black Money Bill passed this year.
• Removing currency after certain time
(demonetisation): So that unaccounted wealth is
either brought into economy or becomes useless.
• Encouraging Cashless transactions: Government
has recently announced tax benefits for making
online payments for amount greater than twenty
thousand rupees.
• Legislative Framework:
o Prevention of Money Laundering Act, 2002
o Benami Transactions Prohibition Act, 1988
o Lokpal and Lokayukta Act
o Prevention of Corruption Act, 1988
o The Undisclosed Foreign Income and Assets
(Imposition of Tax) Bill, 2015
• International Cooperation:
o Multilateral Convention on Mutual
Administrative Assistance in Tax Matters
o Financial Action Task Force
o United Nations Convention against Corruption
o United Nations Convention against
Transnational Organized Crime
o International Convention for the Suppression
of the Financing of Terrorism
o United Nations Convention against Illicit
Traffic in Narcotic Drugs and Psychotropic
Substances
o Egmont Group for international intelligence
gathering regarding money landing and
terrorism Financing
o Cooperation through G20, Bilateral
agreements
Way Forward
• Appropriate legislative framework related to:
Public Procurement, Prevention of Bribery of
foreign officials, citizens grievance redressal,
whistle blower protection, UID Aadhar.
• Setting up and strengthening institutions dealing
with illicit money: Directorate of Criminal
Investigation Cell for Exchange of Information,
Income Tax Overseas Units- ITOUs at Mauritius
and Singapore have been very useful, Strengthening
the Foreign TAX, Tax Research and Investigation
Division of the CBDT.
• Developing systems for implementation:
Integrated Taxpayer Data Management System
(ITDMS) and 360- degree profiling, Setting up of
Cyber Forensic Labs and Work Stations,
implementation of Goods and Services Tax and
Direct Tax Code.
• Imparting skills to personnel for effective action:
Both domestic and international training pertaining
to the concerned area. For instance, the Financial
Intelligence Unit-India (FIU-I) makes proactive
efforts to regularly upgrade the skills of its
employees by providing them opportunities for
training on anti-money laundering, terrorist
financing, and related economic issues.
• Electoral Reforms: Elections are one of the biggest
channel to utilize the black money. Appropriate
reforms to reduce money power in elections.
Thus, a holistic and all round attack from within and
outside the country is the need of the hour.
Terminologies related to taxation and black money
Tax Evasion When person hides income or
transaction from tax authorities,
216
 and thereby evades paying taxes.
It is illegal and punishable
offence.
Tax Avoidance When person discloses his
income and transactions to tax
authorities but uses legal
loopholes to avoid paying taxes.
It may not be illegal in every
case, but still unethical.
Tax Haven It is a country that demands little
taxes from foreigners and
offers legal loopholes for Tax
Avoidance & opportunities for
Tax Evasion. E.g. Mauritius,
Marshall Islands, Cayman
Islands, Panama etc. These
countries are geographically
small, & without viable
economy. So they offer such
mechanism to attract foreign
investors and foreign tourists.
Money Money laundering is the process
laundering of disguising the source of
money, as if it came from a
legitimate activity, & then
channelize it into banks, share
market and other financial
intermediaries.
When drug trafficking, ransom,
corruption and other criminal
activity generates substantial
profits, the criminal tries to
spend/ invest/ hide the money
without attracting attention.
Hawala Hawala is an illegal money
transfer or remittance system.
Money is paid to an agent who
instructs an associate in the
relevant country or area to pay the
final recipient.
Although used by Indian
workers in middle east because
lower commission than post-
office/bank transfers. Hawalas
have better network in remote
areas.
Shell firms, They do not have any active
Post-box/ business operations. Created
Letter-box with sole objective of money
companies laundering/tax evasion/avoidance
E.g. Mishail Packers and
Printers Pvt Ltd. allegedly setup
by Misa Bharti Yadav to launder
217
₹1.2 crores (as per Enforcement
Directorate).
Panama Papers International Consortium of
(2016) Paradise Investigative Journalists is a
Papers (2017) USA based non-profit
Mauritius organization.
papers (2018) They released these
incriminating documents from
certain law firms in tax havens &
showed how notable people
across the world engaged in tax
avoidance/ evasion.
TDS/TCS Tax Deduction at Source (TDS)
and Tax Collection at Source
(TCS) are the mechanism to
discourage tax evasion.
PAN Card 10 letters alphanumeric
numbered assigned to all
taxpayers in India by Income Tax
Dept.
Tax Planning / When person invests money in
Tax Mitigation LIC/PPF/Pension funds etc. in
such manner that he can claim
various deductions legally
available in the Income Tax Act.
It is neither illegal nor
unethical.
Tax Terrorism When tax authorities put undue
pressure on an honest taxpayer
to pay more taxes.
In 2012, Vodafone won a case
against income tax department in
the supreme court related to
Capital Gains Tax on purchase of
Hutch mobile company.
Afterwards, UPA government
amended the Income Tax Act
with retrospective effect and
issued fresh notices against
Vodafone.
National and International organisations dealing with
Black money
Enforcement Ministry of Finance (Department
Directorate of Revenue) → ED is a Specialized
financial investigation agency to
enforce following laws
Foreign Exchange Management
Act,1999 (FEMA)
Prevention of Money Laundering
Act, 2002 (PMLA)
 Directorate Ministry of Finance (Department of
of Revenue Revenue) → CBIC → DRI is an
Intelligence agency against Customs, Narcotics,
(DRI) Wildlife, Arms related smuggling &
illegal activities.
Financial It analyses the suspected financial
Intelligence transactions in domestic and cross-
unit border levels & reports directly to
(FIU-2004) the Economic Intelligence Council
(EIC) headed by the FM
Financial FATF is a brainchild of G7,
Action Task Combating Money laundering and
Force terror finance. HQ - Paris. India
(FATF-1989) became member in 2010.
Grey list → Nations that safe haven
for terror financing and money
laundering. E.g. Pakistan, as of Jan-
2020.
Blacklist → Nations that are not
cooperating in the global fight
against money laundering, terrorist
financing. Iran and N. Korea
Org. For Works for International
Eco. Coop. cooperation in the matters of
& economy and taxation. Known for
Development Base erosion and profit shifting
OECD (BEPS) Norms. India is not a
(1961) member of OECD, yet.
HQ - Paris
Tax Evasion (Hiding Income / Transaction)
Prevention Of Money Laundering Act (PMLA-
2002)
• UN General Assembly (UNGA) declaration on
Money Laundering in 1998. Following this, in
2002, India enacts this law to combat money
laundering with search-seizure-arrest-penalty.
Nodal agency is Enforcement Directorate.
• Cases are heard at PMLA Adjudicating Authority
→ PMLA Appellate Tribunal → High Court
• It also empowers the RBI, SEBI, IRDAI and other
regulators to make norms for Banks/NBFCs &
punish the errant parties.
• E.g. RBI’s Know Your Customer (KYC) norms
and Anti-Money Laundering (AML) standards.
Undisclosed Foreign Income & Assets (UFIA)-2015
• It requires Indian residents to disclose their
foreign assets (e.g. bungalow in Dubai, Bank
account in Switzerland) and income coming from
foreign sources (e.g. shell company in Cayman
Island) in their income tax returns.
• Foreign source income will be subjected to 30%
income tax. No deduction, exemption or rebate will
be given on it.
• Violation → Penalty + upto 10 years jail time. If a
company is found violating the Act, then every
person responsible to the company shall also be
liable for punishment unless he proves that it was
done without his knowledge.
• It also empowers the Union to enter into
agreements with other countries for the tax
exchange of information.
Budget-2019: If a person was resident in India at the
time of acquiring an undisclosed asset (and later ran
away from India, acquired citizenship elsewhere like
Nirav Modi, Mehul & Mallya), still his properties will
also be subjected to this law.
Benami Transactions Prohibition Act (BTPA-
1988/2016)
• Benami refers to properties that buyer registers in
the name of his relative, personal staff (Driver,
Gardner) or a non-existent/ fictitious persons to
avoid tax authorities’ attention.
• Original act of 1988 failed to deliver robust results.
So govt. amended in BPTA in 2016.
• Nodal Agency - Income Tax Department.
• Cases are heard at PMLA Adjudicating Authority
→ PMLA Appellate Tribunal → High Court
• Violation → Confiscation of property + penalty +
upto 10 years jail time.
Q. With reference to the ‘Prohibition of Benami
Transactions Act’, find correct statement(s): (CSE -
2017)
1. A property transaction is not treated as a benami
transaction if the owner of the property is not aware
of the transaction.
2. Properties held benami are liable for confiscation
by the Government.
3. The Act provides for three authorities for
investigations but does not provide for any
appellate mechanism.
Answer Codes:
(a) 1only
(b) 2 only
(c) 1 and 3 only
(d) 2 and 3 only
Tax Evasion And Budget-2019
218
 • Govt. provides (indirect tax) credits to exporters Income Offer was 45% (30% tax + 7.5%
for the inputs used in the manufacturing of export Declaration surcharge + 7.5% penalty).
products. However, some miscreants generate fake Scheme (IDS) of the undisclosed income shall
invoices to claim such credits. If the amount is ₹ be taken away by govt.
50 lakh or above, it will be made a non-bailable Validity - 2016 June to Sept.
and cognizable offence. Around INR 67,000 cr black
• Cash-based economy - more opportunities for tax money was declared.
evasion and avoidance. So, need to encourage less- Pradhan Launched after Demonetization
cash economy Mantri Garib Validity - Dec 2016 To April
• If a businessman has annual turnover more than ₹ Kalyan Yojana 2017
50 crore → No MDR on him or his customer. RBI (PMGKY) Around 50% of the undisclosed
and Banks will absorb these MDR costs. Govt. will income shall be taken away by
amend Payments and Settlement Systems Act, 2007 Govt. as Tax + Penalty + Pradhan
to implement this. Mantri Garib Kalyan Cess.
• 2% TDS on cash withdrawal exceeding ₹ 1 crore Further, 25% of the undisclosed
in a year from a bank account from a single user income shall be deposited in
account in post office / bank. RBI’s ‘Pradhan Mantri Garib
• Often, businessman deposits black money in his Kalyan Deposit Scheme, 2016’. It
wife’s account and when/if raided, wife feigns will be a fixed deposit for 4
ignorance about who deposited money in her years with zero % Interest rate.
account. So, Nirmala S. promised to initiate The PM Garib Kalyan cess, and
technical reforms so that no one can deposit deposit will be used for schemes
money in others’ account without the account related to irrigation, housing,
holder’s permission. toilets, infrastructure, education,
• Sabka Vishwas (Legacy Dispute Resolution) health etc. The scheme was not so
Scheme, 2019 successful, hardly around INR
5000 cr. declared.
Tax (Evasion) disclosure schemes Sabka Vishwas Above ₹ 3.75 lakh crore tax
• Under such amnesty schemes, a tax-evader can (L.D.S) revenue is locked in the service
declare his undisclosed income, pay the taxes Scheme in tax and excise duty related cases.
and penalty. budget-2019 Budget-2019: Launched Sabka
For Service & Vishwas (Legacy Dispute
Excise Duty Resolution) Scheme, 2019
Businessman accepts his fault,
Tax officials gives a
‘discount/relief/waiver’ in the
penalty/late-fees, and the matter
is settled instead of litigating in
courts for years & years.

Vivaad Se Vishwas Scheme for Direct Taxes →

• Then, Income Tax Department will not pursue
case against him. (Although Police may still
pursue case if income is from narcotics, kidnapping,
extortion etc.)
Budget-2020
• Presently, more than ₹9 lakh cr worth direct tax
cases are pending before Appellate Forums viz. IT
Commissioner (Appeals) → Income Tax Appellate
Tribunals (ITAT) → High Court → Supreme Court.
• In Budget-2020 announced “Direct Tax Vivad se
Vishwas Bill/Act, 2020”.
• Scope: Appeal related to Income tax or Corporation
Tax, pending before a forum as of 31 Jan 2020.
• Taxpayers can settle with IT dept in following
manner :

219
 o If IT dept filled appeal → he has to pay 50% Banking A proposal by a Pune based
of disputed tax amount Transaction think-tank to Baba Ramdev that
o If Taxpayer filled appeal → he has to pay Tax (BTT) all the direct and indirect taxes
100% of the disputed tax amount (Suggested) of the Union and the states
• In both situations, he will get a complete should be abolished and
waiver/relief from interest and penalty. replaced with 2% tax on
• Scheme has certain variations if tax amount is banking transactions.
settled but interest/penalty/arrear is disputed. Impracticable because such
• Above scheme is valid upto 31 March 2020. experiments were tried and
Afterwards, there is modified formula upto 30 Jun failed in Australia and other
2020 wherein he may have to pay some small extra countries as people shifted to
amount. using barter system, diamonds
and gold for transaction.
Scheme is Person is under prosecution for 2017: Govt clarified they are not
not criminal activities. considering any such proposal.
applicable If black money is hidden in foreign SC’s SIT on Chairman: Retd. SC Justice M.
if: countries. Black Money B. Shah, and senior tax officials.
2014 They recommended various
Controversies associated with scheme measures against Black Money
• Southern India’s Members of Parliament angry that hidden in India, in overseas
Hindi scheme name is used. banks, P-Notes etc. SC ordered
• Both honest and dishonest tax payers are treated Govt to implement its
equally. Even dishonest tax payer can now settle recommendations.
without paying interest/penalty. Project CBIC/CBEC’s project for
• Income Tax officials’ job-transfer etc will be linked Saksham digital re-engineering related to
to how many cases they solve in this scheme. They 2016 GST.
are also asked to work on weekends to fulfill these It’s not a ‘drive against black
targets. This could result into resentment and money’ but for ‘Ease of Paying
demotivation among staff. Taxes’.
Aaykar Setu CBDT’s mobile app to pay
Income Tax.
Operation Income Tax Dept. verified large
Clean Money bank deposits made in the
2017 aftermath of demonetization.
Project Insight Income Tax Dept. hired L&T
2017 Infotech Ltd. to develop an
integrated platform for data
mining & tracking tax evaders.
Restrictions on Budget 2017 → Finance Act,
Cash 2017 entails that if anyone
Transactions, accepts ₹ 2 lakh and above cash
2017 in a day / in multiple transactions
related to one ‘event’, then
penalty by Income Tax Dept will
Other Initiatives w.r.t Tax Evasion be 100% of the cash received.
Banks, post office, government
Banking Cash A 0.1% direct tax levied on cash organisations are exempted.
Transaction withdrawals from banks. Started
Tax (BCTT) by Chidambaram but later
2005-09 withdrawn (2005-09). TAX-AVOIDANCE
Objective was to encourage
less-cash economy and data
mining of transactions.

220
 Here, people will not hide the transaction, they will
declare transactions in their official records, but will use
legal loopholes to avoid paying taxes.
Double Taxation Avoidance Agreement (DTAA) &
Round Tripping
• It is a tax treaty signed between two or more
countries.
• Objective - A taxpayer resides in one country and
earns income in another, then he need not pay
(direct) tax twice in two countries for the same
income.
• E.g. India Mauritius DTAA (1982): If a Mauritius
person / company buy shares in India and sells them
at profit, then he need not pay Capital Gains Tax
(CGT) in India. Only the Mauritius government can
ask CGT from him. And vice-versa.
• Loophole - India has around 10-20% CGT
whereas Mauritius has around 0-3% CGT
(depending on nature of asset, how long the buyer
kept asset before selling etc). So many Indian
Politicians, Businessmen and Bollywood actors
would transfer the money using Hawala to their
shell companies in Mauritius, and then make those
Mauritius shell companies to invest back in Indian
assets & avoid paying Indian CGT. This process is
called Round Tripping i.e. money that leaves the
country through various channels and makes its
way back into the country as foreign investment.
• Similar loophole in India Singapore DTAA.
• In 2016, the government amended the treaties,
even Mauritius and Singapore investments in India
will be subjected to Indian taxes.
Tax Avoidance through Non-Resident Status
If a person is Has to pay his Has to pay IT
IT on income on global
coming from income e.g.
India? income
coming from
the
USA/China?
Ordinarily Yes Yes
resident of
India
Non-residents Yes No
If India has a double taxation avoidance agreement
(DTAA) with other nation, then above things may
differ (e.g. recall erstwhile Mauritius CGT-round
tripping example)
221
Changes by Budget-2020
Definition in Before Budget- 2020
Indian Tax Budget- 2020
laws
Ordinarily 182 days or 120 days or
Indian Resident above in a year above
is a person who
stays in India
for:
Non-resident is 182 days or 246 days or
a person who above in a year above
stays outside
India for:
Implications → Person will have to stay out of India
for a longer period if he want to be treated as “Non-
Resident” to avoid taxes on his global income.
Budget-2020: A citizen of India (even if he is staying
abroad), but if he is not liable to tax in any other country
then he will have to pay tax in India. E.g. United Arab
Emirates and Bahrain where no income tax is payable.
Place Of Effective Management (POEM)
• A PoEM is aimed at ensuring that sufficient
economic activity takes place in a particular
country and determining a foreign company’s
residential status.
• It also helps to assess if companies are setting up
shell subsidiaries abroad to evade taxes.
• In other words, it has been defined to mean a place
where key management and commercial decisions
that are necessary for the conduct of the business of
an entity as a whole are, in substance made.
• PoEM guidelines in India became applicable from
FY16-17.
• The shift to PoEM signifies a shift from an
objective criterion for tax residence to subjective
criteria.
• Bollywood Producer “A” forms a shell company in
Mauritius (because it has a very low rate of
corporation tax). He gives this company
international movie distribution rights for his Indian
movie at ₹ 10 only. Then, Mauritius company
makes ₹ 50 crore profits, but he would not pay any
taxes in India saying it’s a foreign company making
profits from foreign territories, so Income Tax
Department of India has no jurisdiction.
• But, here the Place of Effective Management is
India, from where the Bollywood producer was
really taking the decisions of this shell company.
• Budget-2015 introduced the concept of POEM.
Such overseas / foreign company will be subjected
 to India’s 40% Corporation tax + cess +
surcharge.
Base Erosion & Profit Shifting (BEPS)
• When MNCs shift profit from its source country to
a tax-haven to avoid / reduce paying taxes, its
known as “BEPS”.
• 2019-July: India ratified the OECD’s joint
Multilateral Convention to Implement Tax Treaty
Related Measures to Prevent Base Erosion and
Profit Shifting (commonly referred to as MLI)
• Multinational Company (MNC) “A” opens fast
food outlets in India & makes ₹ 50 crores profit. By
default, it should be subjected to 40%
Corporation tax in India.
• But then MNC shows its Indian outlets had taken
loan / raw material / patented technology from
MNC’s shell firm in Singapore (where Corporation
tax is 0-2%). So, after deducting these operating
costs, it has zero profit, so in India, it will pay only
18.5% Minimum Alternative Tax (MAT),
instead of 40% Corporation tax.
Transfer Pricing
• Transfer pricing happens whenever two
subsidiary companies that are part of the same
multinational group, trade with each other.
• Suppose Coca Cola’s (Indian Subsidiary company)
buys Sosyo Company’s shares or soda formula at ₹
10 crores, and then sells it to Coca Cola’s (Cayman
Islands subsidiary company) at ₹ 10 rupees. Then ₹
10 is the transfer price.
• Coca Cola (Cayman Islands) further sells Sosyo’s
shares / Soda-Formula to other companies at very
high price. Yet, Indian tax authorities will not get
any Capital Gains Tax (CGT) even though Coca-
Cola (USA holding company) may be making profit
(Capital Gains) of billion$ from this ‘Indian Asset’
(Sosyo).
• 2001: Transfer pricing related provisions added
in the Income Tax Act. But they were quite strict
leading to ‘tax terrorism’ by IT officials who would
slap notices on every transaction, resulting into ‘No
ease’ of doing business for MNCs.
Authority for Advance Rulings (AAR)
• After above episode, Pepsi (India) would like to
know in advance whether its transfer price of ₹ “y”
or its imported / exported item worth ₹ “z” is
agreeable to tax authorities or not? lest it suffers
from notices, raids and litigations afterwards.
• For this purpose, Authority for Advance Rulings
(and their Appellate bodies) have been set up
under the Income Tax Act, Customs Act and
even GST Act.
• Advance Pricing Agreement (APA) → If in
previous example, Coca Coal approached AAR and
an agreement was signed between taxpayer and a
tax authority that “Transfer price of ₹ y is agreeable
to both of us, and will not attract any notices / raids
/ litigations afterwards.”
General Anti Avoidance Rule (GAAR)
• Till now we learned how Indians and foreigners
avoid tax payment in India through loopholes like
DTAA, POEM, BEPS, Transfer Pricing etc.
• So, UPA Govt setup economist Parthasarathi
Shome panel who suggested General Anti
Avoidance Rules (GAAR), they were
incorporated in Income Tax Act in 2012.
• GAAR empowers Income Tax officials to send
notices to both Indians and foreigners for
suspected Tax Avoidance. For Tax evasion, we
have separate laws- PMLA, UFIA, BTPA.
• However, critics alleged GAAR will result in tax
terrorism, harassment, no ease of doing business.
So successive Budgets kept delaying the GAAR-
implementation. Finally done on 1/4/2017.
Angel Tax on Startup Investments (2012)
• Angel investors are the rich people who
occasionally invest equity-capital in start-up
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 companies. (Whereas Venture Capital Companies
do the same thing but on regular & serious basis)
• Startup Entrepreneur Sunder Yadav registers a
phony “Sunder Construction” as an (unlisted)
Public Limited Company with ₹ 10 Face Value
Shares, and sells them to Angel Investor Sadhu
Yadav at a premium price of ₹ 1,000 per share.
• But, even construction sector’s (listed) public
limited companies like DLF’s shares are selling
around for ₹ 230.
• Thus, Sundar-startup’s shares are above ‘fair
market price’. So, this is not a genuine “Angel
investment” but rather a facade for laundering
Sadhu Yadav’s money from construction,
corruption or extortion business.
• So, UPA Budget-2012 required Sunder
Construction (the Startup Company) to pay 30%
Tax + Penalty on the investment they received
from Angel investor Sadhu Yadav. This is dubbed
as ‘Angel Tax’.
• Norms were further tightened by Modi-regime, but
then controversy that Angel Tax will discourage the
growth of startup companies so norms relaxed-
‘Angel Tax will not apply if Startup’s turnover is
less than ₹ “x” crores or if startup was registered for
upto “y” years & other technical ball by ball
commentary’
Budget-2019: If Start-ups and their investors provide
the required declarations and information, then IT dept
will settle the matter, and will do no further scrutiny.
Reforms To Reduce Tax Terrorism / Harassment
At the same time, IT dept. also needs to become more
friendly towards honest taxpayers, while reducing the
scope of tax avoidance. Here notable measures are →
Rajaswa Organised by CBDT & CBIC for
Gyan idea exchange between policy
Sangam makers and senior tax officers.
2016 & 2017 2016: Modi gave them RAPID
Mantra: R for Revenue, A for
Accountability, P for Probity, I for
Information and D for Digitization.
Direct Tax This bill aimed to replace the Income
Code 2010 Tax Act, 1961 with simpler
provisions. But, lapsed with 15th
Lok Sabha dissolution in 2014.
Easwar To simplify the provisions of IT Act,
Panel on 1961, to remove ambiguities that
Direct Taxes cause unnecessary litigations &
2015 hardships to Taxpayers.
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Direct Tax 2017: Setup by CBDT to draft New
Code Direct Tax Legislation (Law) to
Taskforce replace IT Act 1961.
2017 - 2019: Chairman Akhilesh Ranjan
submitted report
Aaykar Setu 2017: CBDT’s mobile app that helps
you calculate and pay Income Tax,
claim TDS refunds etc.
Ease in Indian Customs Electronic Gateway
paying (ICEGATE) web portal for e-
Customs services related to the Customs duty.
Duty: ICEDASH web portal: public can
Portals/Apps view daily data on customs
by CBIC clearance at seaports and airports.
(launched 2019-Nov)
ATITHI mobile app: for
international travelers to file the
customs declaration in advance (e.g.
‘we are leaving or coming with “x”
gms of gold/diamonds/electronics
etc on which y% customs duty is
applicable/exempted’). So, they
don’t have to waste time at airport
queues in filing such declarations.
(launched 2019-Nov)
Budget-2019: Ease of paying taxes & reducing tax-
terrorism → Pre-filled online forms for Tax Payers
• Govt. will extract our financial data from Banks,
Stock exchanges, Mutual Funds, EPFO,
Employers’ TDS submissions etc. and provide you
with a Pre-filled tax returns containing your salary
income, capital gains from share/bond, bank
interests, etc.
• This will help in two ways:
1. Personal income tax payers’ time and energy
saved
2. Accuracy of reporting income and paying taxes
Faceless interaction between Tax payers and Tax
official
• In case of personal interaction between the assessee
and Income Tax official, there will be more
chances of harassment or bribery. So, Govt. has
launch two reforms:
1. Cases will be allotted in random
computerized lottery basis to IT officials
without disclosing the name, designation or
location of the Officer.
2. Faceless assessment in electronic mode. E.g.
assessee received a notice about discrepancy in
his reported income vs TDS submitted by his
banker, then at initial stage assessee need not
 visit IT-office, simply give clarification in web-
portal.
Budget-2020: Faceless appeal process introduced. So,
even in appeal stage, assessee need not physically visit
IT commissioner / tribunal.
Document Identification Number (DIN)
Whenever Tax official sends letters to taxpayers
regarding search authorisation, summons, arrest memo,
inspection notices etc. All such documents will have
computer generated ‘Document Identification
Number’ (DIN).
2019-Oct Central Board of Direct Taxes
(CBDT) implemented DIN system.
2019-Nov Central Board of Indirect Taxes and
Custom (CBIC) implemented DIN
system
It will create a digital directory
of communication between tax
authorities and taxpayers.
Transparency, accountability,
Benefits of DIN efficient and faster clearance of
system cases, because all the information
available at the click of a mouse.
If a document doesn’t have DIN
number, it will be treated invalid.
Thus, DIN system will prevent
the corrupt tax officials from
sending fake notices to
harass/blackmail taxpayers for
bribes.
Director Identification Number (DIN): Director of
every company is required to obtain this number from
the Ministry of Corporate Affairs under the
provisions of Companies Act. It helps monitoring the
company act provisions related to “one person can’t be
director in more than ‘n’ number of companies” etc.
Taxpayers’ Charter in Budget-2020
• A citizens’ charter is a document of commitments
made by a government agency to the citizens in
respect of the services being provided to them.
• Budget-2020 → CBDT will declare a Taxpayers’
Charter. So, Tax payer will easily know what
services / complaint redressal mechanisms are
available to him. This will result into reduction in
taxpayer’s harassment.
1991 Citizen charter system first started in
UK by PM John Major
1997 Introduced in Indian union
ministries/departments
Global Treaties, Agreements & Indexes
Tax Information Exchange Agreement (TIEA)
• India has signed such agreements with multiple
countries. It enables mutual sharing of information
to detect tax avoidance and tax evasion. Example,
• 2019-May: India has notified a tax information
exchange agreement (TIEA) with the Marshall
Islands whose Capital is Majuro; it’s the first
country in the world to launch sovereign
cryptocurrency named, Sovereign Coin.
• Nodal agency → On Indian side, CBDT is the
Nodal agency for such agreements.
USA’s Foreign Account Tax Compliance Act
(FATCA-2010)
• USA’s FATCA Act requires foreign financial
Institutions (such as Indian Banks, Pakistani
Insurance Companies, Chinese Mutual Funds etc)
to report the assets held by Americans.
• This helps US Tax authorities to detect tax
avoidance / evasion by Americans who are hiding
income outside USA.
Global Financial Secrecy Index
• Prepared by London based Think Tank ‘Tax
Justice Network (TJN)’.
• It uses 20 indicators to measure the countries on
their financial secrecy, opportunities for Tax
Avoidance, BEPS etc.
• 2020 Ranking: 1st rank Cayman Islands > USA >
Switzerland…
• India ranks at 47th position.
Economic Survey On Taxation And Fiscal Capacity
Observations of The Economic Surveys of 2015,
2016, 2017-
1. Democracy is a contract. Taxation is the
economic glue that binds government and
citizens into this contract.
2. But, whenever government delivers poor quality
of service in public schools, hospital etc. →
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 middle class and rich citizens will “EXIT” Tax Morale
towards the private school and hospitals → Then Tax morale is the intrinsic motivation of taxpayers to
they also feel ‘moral right’ to evade / avoid taxes, pay taxes. When tax morale is down → motivation for
because they are no longer using public services. tax evasion increases.
Result? hardly 4 percent voters are taxpayers
(23% is desirable, as per our level of Table. Tax Morale is affected by two types of fairness
development against BRICS nations.)
Fairness Vertical Horizontal
3. Govt gets less taxes → poor fiscal capacity → Fairness Fairness
poor services → vicious cycle continues and
Tax What I pay in There should not
results in decline of govt’s accountability
Payer’s taxes is be a great
towards citizens.
thought commensurate to difference in the
process → the benefits I taxes paid by the
The reasons for poor Tax: GDP in India receive as ‘similar’ sections
• Lack of civic sense among people that paying taxes services from the of society
is their basic duty. Government.
• Presence of informal sector, parallel economy, His Tax He sees If a salaried
cash based economy. morale is taxpayers' money employee and a
• Low per capita income, high level of poverty. lowered wasted in public shopkeeper are
Concentration of income in the hands of few- who when → expenditure (like earning ₹8 lakhs
are greedy to engage in tax evasion & avoidance. Mayawati’s per annum, still
• Election funding as the mother source of elephant statutes) the salaried
corruption, and therefore black money instead of better employee is forced
• Politician-Builders-Mafia nexus. quality of water, to pay more taxes
• Due to political considerations, state governments road, education than this
and local bodies do not levy all the taxes or electricity. shopkeeper,
authorised by the constitution e.g. tax on because
agricultural income. So our (direct) tax base is -TDS on salary
narrow. whereas
• Loopholes in the tax laws which encourage tax shopkeeper
avoidance using Domestic and Offshore channels. underreports his
• Direct taxes like wealth tax, gift tax and estate sales in cash
duty suffered from loopholes, lax monitoring and payment.
evasion. They didn’t yield much revenue. Hence -Shopkeeper
even referred as ‘paper taxes’, and had to be shows less profit
abolished ultimately. through fictitious
business
Tax base: means the total value of all the income, expenditures.
property, etc. on which tax is charged. Solution(s) under- SMS, billboards
constructions highlighting self-
Economic Survey 2019 - “Use Behavioural projects should employed
Economics to improve Tax Compliance” show signboards individuals who
• Plato said, “What is honoured in a country, is “Your tax money pay good amount
cultivated there.” Indians join military because: at work” of tax.
1. Salary -Reminding tax -Public shaming of
2. Because serving in the armed forces is payers that public individuals who
considered ‘honourable’. goods can only don’t pay taxes. It
• So, we should use the principles of Behavioral be provided in will scare other
Economics enhance tax compliance. We have to return for tax tax-evaders that
modify the social norm from “evading taxes is compliance. the probability of
acceptable” to “paying taxes honestly is Most people in their detection has
honourable.” your local increased.
community pay

225
 their taxes on -Avoid Tax
time. Amnesties. Give
stringent
punishment to tax
evaders.
Recommendations by CEA Subramanian K.
• In Hinduism, Islam and Christianity → unpaid
debt is considered a sin. So, advertisements should
highlight how tax evasion is a violation of such
“spiritual/religious norms”.
• Top 10 highest taxpayers within a district →
They should be given VIP-treatment such as faster
boarding privileges at airports, special “diplomatic”
type lanes at immigration counters, fast-lane on
roads and toll booths, etc.
• Highest taxpayers over a decade → Important
places should be named after them e.g. roads, trains,
schools, universities, hospitals and airports.
• Ease in Paying Taxes → Pre-populated Income
Tax forms with easy to understand terms. Even if a
person’s tax liability is zero, he should be required
to fill Income Tax form.
• Automated TDS as and where possible and timely
release of Tax refunds.
MISC. TERMS w.r.t. TAXATION
Laffer • American economist Arthur
Curve Laffer → if (direct) tax rates are
increased above a certain level,
then tax revenue collection will
fall because higher tax rates
discourage people from working
and/or encourage them to engage
in tax evasion and tax avoidance).
• So, tax-cuts could lead to higher
tax revenue collections.
• Budgets from 2017 onwards →
The lowest Income Tax slab was
cut from 10% to 5%; The
corporation tax on small sized
companies was also brought down
from 30 % to 25% in a phased
manner.
• Budget-2020 → new optional
Income tax slabs.
• USA Budget-2017 → Lakh cr) + Non-Tax receipts (~4 Lakh cr) = ~20 Lakh
Corporation tax cut down from
35% to 15%
Tax • If GDP grew by x%, then how
buoyancy much % Income tax collection
will grow?
• E.g. if income tax collection
growth rate is 11% when GDP
growth rate is 10%, then Income
Tax’s tax buoyancy is 1.1
Tax If first income tax slab increased from
elasticity say 5% to 15%, then in absolute terms
how much more IT-revenue will be
generated?
Non-Tax Revenue Receipts
Notable sources of Non-Tax revenue 2020-21
(In descending order)
• Interest receipts received on ~1.7 lakh
Union’s loans to states, railways, cr.
CPSE, foreign countries.) is a
revenue receipt. [Had those
borrowers repaid loan-principal,
then that portion is ‘Capital
Receipt.]
• Dividends and profits received
from CPSE, PSBs, RBI. [Had
Union sold its shares to a third party
(disinvestment / privatization), then
that will be ‘Capital Receipt’].
• Union’s income from (Dividend
& Profits) >> from Interests.
• Income from selling various goods ~2.2 lakh
& services such as railways, postal cr.
services, selling of India Yearbook,
Yojana-Kurukshetra magazines,
fees that CISF charges for giving
protection to Private Airports,
auction of spectrum & mining
rights, selling of commemorative
coins etc.
• Grant in Aid/ Donations received 812 cr.
by Union. (Had Union received
‘loan’, it will be ‘Capital Receipt’.)
• Similar Non-tax revenue earned by ~ 2300 cr.
UT without Legislature
• Sum of Above = Total Non-Tax ~4 lakh cr.
Revenue Receipts
Total Revenue Receipts = Net Tax receipts (~16.0
cr. This implies the fact that revenue budget: the tax
receipts >> non-tax receipts
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 Revenue Expenditure generating financial asset and hence counted under
Capital Expenditure
Revenue-expenditure are usually associated with:
• Expenditures spent on day to day functioning of
the organs of the state such as salaries & pensions, Revenue expenditure And Subsidies
stationery, electricity bill, phone bill etc. in
Executive, Judiciary, Legislature; Various
Constitutional & Statutory bodies. Tax (₹ ~16 lakh croresSubsidies (₹ ~ 2.6 lakh
• Expenditures that do not create income in Budget 2020) cr. in Budget 2020)
generating assets or permanent assets or Tax is a compulsory A subsidy is a benefit
financial assets. So, money spent on loan-interests, contribution imposed by
given to an individual or
subsidies, scholarships, grants etc. are Revenue State. firm by the government
Expenditure. Refusal to pay the tax is
to reduce some type of
punishable. burden. A person may
Notable Revenue Expenditures of the Govt. refuse to accept the
(descending order) subsidy, he will not be
• Interest to be paid on previous loans is punished.
“Revenue Expenditure”. Wherein Union Tax does not promise A specific benefit is
repays loan-principal, it categorised as ‘Capital specific and direct promised.
Expenditure’ goods/services to the
• Grant-in-Aid to States & Local Bodies for taxpayer.
Disaster Management, Panchayati Raj
Development etc. as per Finance Commission Types of subsidies
recommendations.
• Additionally, Govt also gives grants to foreign Type Examples
countries for its soft diplomacy. Given in direct PM Kisan Rupee 6000/year in
Subsidies: cash (or bank three installments, LPG Pahal
• Food subsidies transfer) about Rs. 200 per cylinder.
• Fertilizer (Urea > Others) Given in kind Free school bags, uniform and
• Fuel (LPG > Kerosene) books to the poor children, free
• Interest Subsidies on loans → Farmers (highest), medicines in public hospitals,
MSME, Affordable Housing, LIC Vay-Vandana free insurance.
Yojana etc. Indirect Cheap fees in government
• Other (Price stabilization fund, Cotton & Jute subsidies colleges, cheap kerosene, cheap
etc.) urea, cheap crop insurance
• Defence revenue expenditure (e.g. soldier premium etc. Here govt. is
salaries, fuel for tanks) paying some money to an
• Pension to retired employees (In the last 3 years organization so they may
it has kept rising.) provide goods/services at cheap
• Economic services related revenue expenditure rate to the beneficiary.
(Agriculture, energy, transport, communication, Regulatory E.g. If State Electricity
Science technology) subsidies Regulatory Commission directs
• Social services related revenue expenditure companies- that electricity to
(health, education, social security) farmers must NOT to be beyond
• Expenditure on Administrative machinery ₹ “Specified” per unit.
(Police, Jail, External Affairs etc.), Elections, Procurement E.g. FCI purchasing at food
Parliament, Judiciary subsidies grains from farmers at
• Revenue expenditures of UT without Legislature minimum support price (MSP).
Interest Govt pays “Specific%” interest
Grant → Amount does not have to be returned with subsidies / on agriculture, MSME,
interest by the receiver. Whereas, if Govt gave ‘loans’ subvention affordable housing loans.
to States/CPSE/Foreign Countries then it is an income
Impact of Subsidies

227
• Merit Goods - Healthcare, education, scientific
research, LPG, solar panels, wind mills etc. Here
subsidies can increase the positive externalities.
Cheap LPG led poor’s don’t use firewood. This
would result into more trees & less indoor pollution.
• Subsidies on diesel, kerosene generate negative
externalities on the environment.
• Urea subsidies to industries makes urea cheaper to
farmers. This led to excessive consumption which
results into soil & water pollution, algae-blooms.
• Subsidy leakage : When ghost/proxy beneficiaries
(non-existent persons propped up by corrupt
officials), and ineligible (rich) people are receiving
subsidy.
Past Economic Surveys on subsidy delivery
Economic We should use Jandhan Aadhar
survey Mobile (JAM) trinity to reduce the
2014-15 subsidy leakage.
Economic Direct benefit transfer (DBT) can’t
survey be a panacea in every case, because
2015-16 males of the house may waste DBT-
money on liquor & tobacco. So, in
some cases, Biometrically
Authenticated Physical Uptake
(BAPU) mechanism will be better
i.e. beneficiary goes to a grain /
fertilizer shop and uses his Aadhaar
& fingerprint to purchase subsidized
goods.
Economic The present subsidy delivery
survey mechanism suffers from two errors:
2016-17 • Inclusion Error: Non-poor
(=affluent people) are receiving
~40% of subsidies
• Exclusion Error: 50% of the real
poor are not getting subsidies
due to corruption.
So better to abolish all type of
subsidies and directly deposit a
specific sum of money into
beneficiary’s bank account to help
him buy goods/services from open
market = Universal Basic Income
(UBI)
Economic Survey 2019: Use ‘Behavioural economics’ to
reduce subsidy bill
To reduce Government’s subsidy burden, Above the
Poverty Line (APL) households should be
encouraged to voluntarily surrender their LPG
subsidies. North eastern states have shown higher
rate of subsidy surrender as compared to other states.
Following reforms required:
• People have a strong tendency to go with the status
quo. So, ‘Default ticked option’ in LPG
registration forms should be ‘I wish to give up the
subsidy’, so a person will be ‘forced’ to untick the
option to avail the subsidy benefit.
• Similarly, income tax forms should contain extra-
fields with pre-ticked options like ‘I want to give up
LPG subsidy’.
• The online /SMS-based ‘subsidy giving up
process’ should be quick and hassle-free. It should
not take more than a few minutes. Because every
additional minute required to complete the
formalities will increases the chances that person
drop out in the middle of the process.
• People act positively when they see others act
positively, and particularly when they can relate to
such individuals. So, online “scroll of honour”
should show name/photos/social media-profiles of
others in their area who gave up subsidies.
• Advertisements to highlight that “Rich people are
helping in poverty removal by giving up
subsidies”.
• When people are watching a movie with social
message (such as Padman, Toilet Ek Premkatha
etc), it should contain ad asking people to give up
full / partial subsidy.
• Once a person gives up subsidy, he should be
shown the photos of poor people benefitting
from his act / or a video with a beneficiary saying
‘thank you’.
Revenue expenditure And 7th Pay Commission
• Setup by Ministry of Finance (Department of
Expenditure).
• First Pay Commission: Srinivasa Varadachariar
(1946).
• 7th pay commission - (Retd) Justice A.K. Mathur
(2014). Its recommendations became effective from
1 January 2016. Major highlights were:
o New system of “Pay Matrix” instead of
previous system of pay band and grade pay.
o Regulatory bodies salaries increased:
Chairman ₹ 4.50 lakh/ month, members ₹ 4
lakh/ month
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 o Minimum pay in Central service increased to ₹
18k / per month (Group-D).
o Maximum pay: ₹ 2.25 lakh per month for
Apex scale (e.g. Secretary of a Dept.), and ₹
2.50l (for Cabinet Secretary)
o It adopted Dr. Aykroyd formula to
computing wages at periodic interval. So,
critiques believe there will not be an 8th Pay
Commission because salaries will be updated
automatically at regular interval, using this
formula.
o It abolished various type of ‘interest free
allowances’ e.g. Purchase of bicycle etc.
o It continued ‘interest-bearing advances’ for
purchase of computer, house building (upto ₹
25 lakhs).
o Various reforms for defence and CAPF
services.
o Made stronger rules in Modified Assured
Career Progression (MACP) system so lazy
officials don’t get promoted.
Dr. Aykroyd formula tracks the changes prices of the
commodities used by a common man.
Associated Terminologies
Dearness It is given by an employer to
Allowance protect the employees against
(DA) rise in inflation. In government
services, both working employees
and retired pensioners are given
dearness allowance.
House Rent Rent allotted by the employer for
Allowance employee's accommodation
(HRA) (house).
Gratuity It is a lump sum monetary
amount given by an employer to
the employee for rendering
services continuously for
“specified” number of years.
Usually given at retirement. Norms
governed under Payment of
Gratuity Act, 1972
One Rank In 2015, govt. promised equal
One Pension pension to military personnel
(OROP) retiring in the same rank with the
same length of service, regardless
of the date of retirement. Although,
Ex-servicemen unhappy about the
base year & calculation formula.
National Recruitment Agency (NRA)
229
Present Multiple recruitment exams
regime conducted by multiple agencies at
different points of time throughout
the year.
Future • NRA will conduct Common
mechanism Eligibility Test for recruitment
to Non-Gazetted personnel in
Government and PSBs.
• SSC and IBPS will conduct
Mains exams for respective
posts.
• This will save both time and
cost for both candidate and
recruiting agencies.
Budget-2020 Govt. will set up NRA & open a
(computerized) test centre in every
district.
Revenue Deficit (2.7% of GDP for 2020)
• When government spends more than its income in
revenue account, it incurs Revenue Deficit.
• Revenue deficit = Revenue expenditure – Revenue
receipts.
• Since a major part of revenue expenditure is
committed expenditure - like Interest repayment
on previous loans, staff-salaries & pensions which
Govt cannot avoid - so it is quite difficult to reduce
the revenue deficit.
• So, when revenue deficit increases, government
will be forced to borrow more money or cut
down the expenditure in the capital part – Such as
less new schools, bridges, hospitals and other
critical infrastructure. This will result in lower
human development and lower economic growth
• For instance - less new bridges could reduce the
demand of steel/cements, so poor employment
opportunities for workers and eventually reduction
in growth of those sectors.
Effective Revenue Deficit: (1.8% of GDP for 2020)
• Effective Revenue Deficit = Revenue Deficit -
Grants to various bodies which were spent for
creation of Capital Assets.
• We have counted Grant-in-Aid to States, Local
Bodies as ‘Revenue Expenditure’, but some
portion of that fund may have been spent by the
States, Local Bodies for building Panchayat-
Bhavan, Disaster Management Training Institutes,
Cranes and Bulldozers for Disaster rescue
 operations etc. which are actually “Capital 2.68 lakh crores so if we borrow a little more from
Assets”. external sources it will not harm.
• This led to evolution of new Concept of ERD which
was introduced in Budget 2011 (By Chidambaram) Crowding out - This refers to a phenomenon where
increased borrowing by the government to meet its
spending needs causes a decrease in the quantity of
Capital Part: Receipts (₹ ~10 lakh Cr for 2020) funds that is available to meet the investment needs of
the private sector. However, government spending does
Capital Debt Receipts Capital Non-Debt
not always lead to a crowding out of private
Receipts
investment in the economy.
~ INR 7.40 lakh cr from ~ INR15,000 cr Loan
Internal Borrowing Principal recovered
Arguments Against
increased: reduced (i.e. Union
• Risk of Exchange Rate - If rupee weakens against
• From RBI, government would have
the dollar during the bond’s tenure (for instance,
• From market (Banks, given loans to state
USD1: INR60 → INR70), the government would
NBFCs) governments, foreign
have to return more rupees to pay back the same
• From small savings countries, public sector
amount of dollars. Then the loan may turn out to
(Post-Office Savings companies etc.). so when
be 'more expensive' than originally anticipated.
Accounts, Kisan they return Principal
amount back that is • It’s true that presently Indian Government's
Vikas Patra, etc),
external borrowing is very low, but once this 'door'
• From Provident counted here.
is opened, subsequent governments may get
Funds (EPFO, PPF) tempted to borrow more and more from the
~ INR 57,000 cr External INR 2.10 lakh cr foreign sources to finance their (populist) welfare
borrow increased: from Disinvestment: schemes, ultimately it can result into crisis when
foreign countries & i.e. Union selling its exchange rates turn volatile.
international institutionsshares from Public • Better to increase the foreigners' investment
like IMF World Bank, Sector Undertakings limit in G-Sec (in ₹ currency) and attract them to
BRICS bank etc. (PSUs) / Central Public come to India, rather than we going 'abroad' to get
Sector Enterprises their money in USD currency.
(CPSEs).
Bigger portion of Capital Smaller portion Conclusion
Receipts come from this Against From the aforementioned analysis,
side it's evident that challenges outweigh
the potential benefits. Noted
economists such as Dr. Raghuram
Budget-2019: Foreign Borrowing in Foreign Currency
Rajan are apprehensive about
Budget-2019 - Finance Minister Nirmala S. announced, sovereign borrowing from external
"India’s sovereign external debt to GDP is among the markets in foreign currency.
lowest (about 5%). The Government would start raising Therefore, this idea, though well-
a part of its borrowing programme in external markets intended, requires more deliberation.
in external currencies." In favor Considering above points, sovereign
borrowing from external markets in
Arguments in favor foreign currency may not be a bad
• In domestic market, the 'crowding out of private idea, provided that it's done in a
corporate borrowers' will decline. judicious and prudential manner.
• Corporates will be able to mobilize more funds
from local market. This will facilitate factory
expansion, jobs, GDP growth. CAPITAL RECEIPTS : DISINVESTMENT
• In the advanced economies such as USA, EU the Public sector enterprise = Any commercial or industrial
loan rates are very low, so our government may be undertaking owned and managed by the government to
able to get cheaper loans. maximise social welfare and uphold the public interest.
• Total (cumulative) internal debt of Union is about
INR 96 lakh crores, whereas external debt is INR

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 They can be Classified into three parts:
Departmental Statutory Govt. Public sector Undertaking (PSU) = PSU is a
Undertakings Corporations Companies collective term for Centre’s + State’s + Local Bodies’
Public Sector Enterprises.
Directly part of Created by an
Registered
a ministry e.g. act underof the Significance of corporations and companies →
Postal, Parliament or
Companies Development of infrastructure, affordable services,
Railways, state Act, Govt’s regional balance, prevent concentration of economic
Ordnance legislature. E.g.
shareholding power in the hands of Corporates and MNCs,
Factories. RBI Act, SBI
is 51% or employment opportunities, national development.
They can be Act, LIC Act,
more. Coal
created easily, FCI Act, EPFO
India ltd, Challenges → Political interference, lack of innovation
no laws Act. etc, SIDBI,
GAIL, SAIL, and consumer responsiveness, employee unions, loss
required, no NABARD, NTPC, IOCL, making enterprises.
registration NHB, EXIM..
BHEL &
required various Public
Sector Banks Ratna Companies
and NBFCs • Ministry of Heavy Industries & Public
which are not Enterprises decides the norm for Ratna
statutory Companies.
corporations. • “Ratna Companies” given for the flexibility in
High level of Middle of both More operations like hiring more professionals,
ministerial sides operational acquisition of other companies etc. without
interference flexibility, less requiring government approval for every small
interference decision.
by Ministers
Category Condition and examples
CAG will audit Some of these Companies Act Mini • Made profits in the last 3 years
directly Acts provide for requires them Ratna continuously, further subdivision
internal audit & to produce Cat-I and in Cat-I & Cat-II depending on
exclude CAG audited reports. Cat-II how much profit is generated.
from auditing CAG will
• Examples: National Film
the Corporation. empanel the
Development Corporation ltd,
E.g. RBI, LIC. (private)
Mazagaon Dock ltd, Airports
auditors for
Authority of India, Mishra Dhatu
them.
Nigam ltd, NHPC ltd, WAPCOS
Their earning Their profit earning goes to
ltd, ONGC Videsh Ltd, Rail Vikas
will go shareholders in the form of
Nigam ltd,
directly in dividend.
Nav-Ratna • A Mini Ratna company fulfilling
Public
“specified” conditions.
Account / CFI
Answerable in Answerable in Answerable in • Other Govt companies fulfilling
RTI Act RTI Act RTI Act “specified” conditions such as
Manpower cost to total cost of
Their Not considered govt employees.
production etc.
employees are Their service /discipline conditions
considered are governed by the respective • Examples: Power Grid
govt. organizations’ internal manuals. Corporation of India ltd, Rashtriya
employee Ispat Nigam ltd, Rural
subjected to Electrification Corporation ltd,
service and Shipping Corporation of India ltd,
discipline rules Oil India ltd, National Aluminium
framed by the Company ltd, Neyveli Lignite
government. Corporation ltd, Mahanagar

231
 Telephone Nigam ltd, Hindustan
Aeronautics ltd, Container
Corporation of India ltd, Bharat
Electronics ltd,
Maha- • Already a Navratna Company, and
Ratna fulfilling “z” conditions such as
min. ₹ 5000 crore profit per year
in last 3 years, listed at a Stock
exchange, significant global
presence etc.
• Very few companies here
- Bharat Heavy Electricals,
- Bharat Petroleum Corp,
- Coal India,
- GAIL (India) ,
- Hindustan Petroleum,
- Indian Oil,
- NTP
- Oil & Natural Gas Corporation
(ONGC)
- Power Grid Corporation,
- Steel Authority of India (SAIL)
*Above examples are taken on 1 January 2020. Their
status is subject to change and updation.
BSNL - MTNL Merger
• Bharat Sanchar Nigam Ltd (BSNL, 2000, HQ
Delhi)
• Mahanagar Telephone Nigam Ltd (MTNL, 1986,
HQ Delhi) to provide services in Delhi, Mumbai;
later also providing services in Mauritius.
• But both of them suffering from heavy losses,
unable to compete against the private telecom
sector.
• 2019: Telecom Ministry decided to merge MTNL
with BSNL. Existing employees are offered
voluntary retirement scheme (VRS) to reduce the
staff cost.
Government policy towards disinvestment
• Disinvestment implies reducing the govt
shareholding upto 51% in a Government company.
• Privatization / Strategic Disinvestment -
Reducing the government shareholding below
50%.
Arguments in Reduced govt. shareholding will
favour facilitate entry of private
investors in the board of
directors. This will impart more
efficiency, innovation and
autonomy. Disinvestment
proceeds can be used for welfare
schemes, and reducing the fiscal
deficit.
Argument MNC monopolies, exploitation of
Against worker, job loss among others.
Disinvestment & Privatization from 2014-19
Depending on the Company, following methods of
Disinvestment could be use:
1. Converting Private Limited Company to public
limited company and issuing Initial Public Offers
(IPOs) e.g. Indian Railway Catering and Tourism
Corporation (IRCTC) and Rail Vikas Nigam Ltd
(RVNL)
2. Exchange Traded Funds (ETFs): CPSE-ETF,
Bharat-22-ETF
3. Institutional placement Programme (IPP): offer
shares only to non-retail investors.
4. Offer for sale (OFS): offer shares to both retail and
non-retail investors
5. Share Buyback i.e. Govt. company itself buys the
shares owned by Government, thereby decreasing
Government's shareholding portion viz a viz private
sector's shareholding.
Incumbent govt. shut down many sick Govt companies
such as HMT watches, Hindustan Photo Film etc.
Budget-2016 renamed Finance Ministry’s Dept. of
Disinvestment into Dept. of Investment & Public Asset
Management (DIPAM). Further, Finance Minister led
Ministerial panel called Alternative Mechanism (AM)
decides which govt companies should be disinvested /
privatized.
Disinvestment targets since last 4 budgets:
Budget 2017 2018 2019 2020
232
 Target 1 0.80 1.05 2.10 five public sector strong presence in fuel
(Lakh cr) lakh cr lakh cr. units (PSUs): retail outlets.
Target Yes Yes No - 2. Shipping Corporation of
achieved India
or not 3. Container Corporation of
India (CONCOR)
Budget-2019: Govt planned to earn ₹1.05 lakh cr from 4. Tehri Hydro
disinvestment but hardy 65,000 cr earned, because Development Corp of
investors’ response lukewarm, due to slowdown in India and
economy. 5. North Eastern Electric
Power Corporation
(NEEPCO) will be sold to
Strategic Disinvestment (from 2014-2019) National Thermal Power
• Strategic Disinvestment: It implies selling a Corporation (NTPC, a
substantial portion of Government shareholding in public sector company).
a CPSEs along with transfer of management control
to a private party. In true sense, it means 51% or Q. Why is the Government of India disinvesting its
higher shareholding with private players and equity in the Central Public Sector Enterprises
49% or lower with Government. (CPSEs)? (CSE-2011)
• For this action, NITI Aayog prefers to use the term 1. The Government intends to use the revenue earned
‘strategic disinvestment’, ‘strategic sale’ instead from the disinvestment mainly to pay back the
of ‘privatization’, lest the opposition parties create external debt.
uproar about it. 2. The Government no longer intends to retain the
• NITI Aayog has identified Air India, Pawan Hans, management control of the CPSEs.
Dredging Corporation, Scooters India, Bharat Ans Codes:
Pumps Compressors, Hindustan Fluorocarbon, (a) 1 only
Hindustan Newsprint, Cement Corporation of India (b) 2 only
etc. for strategic disinvestment. List has been (c) Both 1 and 2
approved by DIPAM. (d) Neither 1 nor 2

• Tried to sell-off 74% shareholding from

Economic Survey 2020 - Privatization And Wealth
2018 Air-India but no investors found.
Creation
• IDBI sold to LIC.
Strategic Disinvestment (privatisation) to enhance
Budget-2019 → Finance Minister Nirmala S. profitability
announced: • In 1980s, UK PM Mrs. Margaret Thatcher
• Govt. will again try for strategic disinvestment of started privatization of the Govt companies such as
Air India & other selected CPSEs. British Telecom, British Airways, water and
• Govt. will monetize the unused land assets of electricity companies etc. It resulted in enhancing
CPSEs (e.g. selling / renting). → Government Land profitability for those companies.
Information System (GLIS) portal launched to keep • Economic Survey 2020 → analysed 11 Indian
track of all such land assets. Govt companies that were privatized during
• Govt. will relax foreign investment limits in the BJP/NDA PM Atal Bihari Vajpayee tenure (1998-
CPSEs. - Even for non-strategic-disinvestment, 2004) such as Hindustan Zinc, Bharat Aluminium
Govt. will change the policy in following manner: Company Ltd. (BALCO), Maruti Suzuki, Indian
Petrochemicals Corporation Ltd. (IPCL), Modern
1. Bharat Petroleum Corp Food India Ltd. (MFIL) etc.
In Nov 2019, Ltd (BPCL). Big • After strategic disinvestment (privatization) these
Govt. announced international oil Indian companies’ sales, profitability etc. greatly
plans for strategic companies including increased because of:
disinvestment of Saudi Aramco are keen to
buy BPCL, given its

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 Government transferred its shares of PSUs to THC.
Technology Up-gradation However, THC sold them in market and this makes
privatization complete.
• Govt. of India has 264 CPSEs under 38 different
Efficient management practices by Private professionals.
Ministries/Departments.
• Economic Survey 2020 → suggested, we should
Better human resource management also create a Holding Company just like Singapore,
for our strategic disinvestment (privatization) drive.
• Benefits - Professionalism and autonomy to the
Adoption of best practices and efficient work culture. disinvestment programme. If an individual ministry
tried individual company’s privatization then:
• Conclusion – Privatized PSUs help in economic o Ministry's officers may not have experience
growth & employment generation. for it.
o Internal resistance by employee unions to sell
Strategic Disinvestment (Privatisation) and it off.
adoption of Singapore Model o So, better let a separate holding company look
• In 1974, Singapore Govt. set up a holding company after this process.
“Temasek Holdings Company” (THC). Then the

Capital Expenditure
Its notable components in decreasing order are:
• Capital assets for various schemes, ministries, departments (Building, vehicles..)
• Giving debt/equity finance to PSUs & foreign institutes, giving loans to State Govt & Foreign Govt. Finance
Ministry - Dept of Economic Affairs (DEA)’s Indian Development and Economic Assistance Scheme (IDEAS)
gives such funds to foreign nations.
• Union repaying loan principal for Internal Debts
• Union repaying loan principal for External Debts.

234
 CH-7 BUDGET- IV
Types of Deficits 1. Tax revenue as a percent of GDP of India has
A deficit occurs when a resource, money, in steadily increased in the last decade.
particular, is less than the amount required. A 2. Fiscal deficit as a percent of GDP of India has
budget deficit and a trade deficit are the two main steadily increased in the last decade.
types of deficits. A deficit adds to one's debt, which Codes:
most do not consider financially healthy. a) 1 only
b) 2 only
Surplus budget If government’s income is more c) Both 1 and 2
than its expenditure d) Neither 1 nor 2
Balanced budget If government’s expenditure is
equal to its income Fiscal Deficit
Deficit budget If government’s expenditure is • Fiscal Deficit = Budget
more than its income Deficit + Borrowing.
• This borrowing includes
Types of
Deficit
internal borrowing [such as
through Small Savings Scheme, and the G-Secs
subscribed by Banks/NBFCs + Borrowing from
Effective
Revenue Budget Primary RBI] + External Borrowing.
Revenue Fiscal Deficit
Deficit Deficit Deficit
Deficit
• As per Sukhmoy Chakravarti Committee report,
it was implemented in 1997-98.
Deficit Formula Budget-2020
Revenue Revenue 2.7% of GDP Primary Deficit
Deficit expenditure • Primary Deficit = Fiscal deficit minus the interest
minus Revenue to be paid on the previous loans.
receipts
• Mentioned in Finance Minister Manmohan Singh’s
Effective Revenue Deficit 1.8% of GDP
minus Grants for
budget speech of 1993.
Revenue
Deficit creation of • If the government continues to borrow year after
capital assets year, it leads to accumulation of debt and the
Budget Deficit Budget - government has to pay more and more interest.
expenditure • These interest payments themselves add more
minus Budget burden to borrow next year.
receipt • So, to get a clearer picture of how much is the
Fiscal Deficit Budget Deficit 3.5% of GDP government borrowing for new programs, they look
plus Borrowing
at another indicator, known as primary deficit.
Primary Fiscal Deficit 0.4% of GDP
Deficit minus interest to
be paid on
previous loans Deficit Financing
• When the revenue of the government is shorter
than its expenditure then this situation is dealt by
printing more currency, buying from public and
foreign institution. This temporary arrangement
of the money is known as the deficit financing.
• Taxes cannot be increased beyond a point
because it may force people to evade taxes /
discourage their motivation to work (Laffer Curve).

It is worth to mention that deficit financing is equal to

fiscal deficit of the country.
Q. Find Correct Statement(s) (CSE-2017)

235
Sources of Deficit Financing
• Printing new currency notes.
• Borrowing from internal sources (RBI, General
Public, Ad-hoc Treasury Bills & government bonds
etc.)
• Borrowing from External Sources (like borrowing
from developed countries and International
institutions like World Bank, IMF, etc.)
Purposes of Deficit Financing
• To overcome the problem of lack of funds for
speeding up the country's development.
• Promote additional investment in the country to
side away the adverse impacts of depression period
of the country.
• To arrange fund for ensuring the holistic
development of the country.
• To arrange fund for the unforeseen events and
arrange resources for wartime expenditure.
• To upgrade the infrastructure of the country so
that the taxpayers of the country are convinced that
the tax paid by them is spent on the right things.
Negative Consequences of Deficit Financing
• Increase in deficit which leads to increased
borrowing by Govt.
• Adverse Impact on Saving - Deficit financing
leads to inflation and inflation affects the habit of
voluntary saving adversely.
• Increase in inflation due to the increase in the
supply of money in the economy.
• Decrease in average consumption level due to
higher inflation.
• Increase in income disparities, because rich get
more opportunities due to higher supply of money
in the economy. In fact it is not possible for the
people to maintain the previous rate of saving due
to rising prices.
• Adverse Impact on Investment - Deficit financing
effects investment adversely. When there is
inflation in the economy trade unions/employees
demand higher wages to survive.
• Economist David Ricardo argued that during high
deficits, people save more, because they become
precautious about future hike in taxes. It’s called
“Ricardian equivalence” (and if people begin to
spend less and save more, then companies will face
unsold inventories, a new problems for economy)
• If government borrows more money from
households & financial intermediaries (LIC, EPFO,
Banks via SLR), then that much less money will be
available for loans to private corporate
borrowers → Crowding Out Effect
• Financial repression of the households - If
Government forces SBI, LIC, EPFO to buy its G-
sec using public deposits and thereby depriving
households of the optimal return.
• Erosion of operational freedom - Govt (forcing)
NABARD to buy its ₹ 15,000 crore Swachh Bharat
Mission (Gramin) Bonds with maturity period of 10
years. Govt (forcing) RBI and others to pay higher
dividend.
• High level of fiscal deficit - International Credit
Rating Agencies will downgrade the sovereign
rating for India. Investors will demand more
interest from govt for buying new G-Sec, if unsold
then RBI forced to buy G-Sec (and print more
Money to give to Govt). It is called “Monetization
of Deficit”. It can result in hyperinflation
Deficit financing leads to inflation. A high price level
as compared to other countries will make the exports
more expensive and thus they start declining. On the
other hand rise in domestic income and price may
encourage people to import more commodities from
abroad. This will create a deficit in balance of
payment and the balance of payment will become
unfavourable.
Famous economist Keynes was the strong supporter
of the deficit financing in the developing countries so
that these countries can be pulled out from the vicious
circle of poverty, unemployment and under production
Laffer Curve – The
Laffer curve shows how
tax revenues change when
the tax rate is either
increased or decreased.
Typically, it has an
inverted-U shape.
Extra-Budgetary Resources
• Extra Budgetary Resources (EBR) are loans taken
by public sector undertakings and Govt.
organizations. For example:
- Govt not releasing food subsidy to Food
Corporation of India (FCI) and thereby FCI to
borrow money from National Small Savings
Fund (NSSF) for its food schemes.
- Ministry of Housing and Urban Affairs →
(Autonomous body) Building Materials and
Technology Promotion Council → they
236
 borrowed ₹ 60,000 crores in next 4 years to
finance the PM Awas Yojana (Urban).
- Here repayment of the entire principal and
interest is done from the Central Govt Budget
eventually, behind the curtains.
- EBR measures are announced after passing
of budget so, they may escape the same general
level of media-reporting, parliament debate or
audit. This practice widely considered
detrimental for financial transparency &
accountability.
Economic Survey- 2020:
From Budget 2016 to 2019, govt raised more than
₹1.45 lakh cr through EBR. These EBRs are not
taken into account while calculating the Fiscal
Deficit. However, they’re counted while calculating
Govt debt or public debt.
Deficit Financing: Associated Terms
Redemption Repay the loan principal and
interest at regular interval. Also
known as Terminal Annuity
Sinking Fund Govt. creates a special fund and
keeps depositing money in it
regularly. So at the time of G-sec
maturity, it has enough ‘buffer’
money to honor the loan
repayment. First introduced in
England
Conversion / Converting old loan into new loan
restructuring with modifications in interest /
tenure.
Evergreening Taking new loan to repay the old
loan
Repudiation Govt. does not recognize its
obligation to repay the loan. E.g.
After Russian Revolution (1917)
Lenin’s Govt. refused to pay the
loans taken by the previous Czar
regime from Britain & France.
Fiscal Consolidation (Fiscal Prudence)
• Fiscal Consolidation refers to the policies
undertaken by Governments (national and sub-
national levels) to reduce their deficits and
accumulation of debt stock. It is not aimed at
eliminating fiscal debt.
• Fiscal Consolidation involves reduction in
government expenditure to control its Fiscal
Deficit. Such as:
237
1. Reducing the leakages of subsidies and funds by
targeted delivery of schemes and subsidies through
Direct Benefit Transfer (DBT) through Jan-Dhan
Aadhar Mobile (JAM) trinity.
2. Reducing the quantum of subsidies: e.g.
a) Deregulation of Petrol prices (2010) and later
Diesel (2013)
b) 2016: Oil Ministry began to block LPG-Pahal
subsidies to persons with annual taxable
income of ₹ 10 lakh and above.
c) 2017: Oil Ministry asked oil companies to
keep raising prices of subsidised kerosene by
25 paise every fortnight until the subsidy is
eliminated.
3. Shutting down loss making PSU. E.g. Hindustan
Photo Films, HMT Bearings, HMT Chinar
Watches, Tungbhadra Steel, Hindustan Cable &
HMT Watches (2014).
4. Privatization of loss making PSU and PSBs. e.g.
2018- IDBI → LIC, 2018- Tried to sell off Air
India, but unable to find any buyer.
5. 2014-16: Government setup an Expenditure
Management Commission under Bimal Jalan to
suggest ways to reduce its Expenditure.
6. Austerity measures e.g.
• 2018- W. Bengal govt issued directives to its
departments banning flower bouquets and
mementoes in public functions, banning
officials meetings at private hotels, frequent
installation of AC, car purchases, office
renovations etc. & restricting the number of
foreign tours by Ministers / IAS etc., More use
of video-conferencing instead of physical
travel.
• 2019: PM’s Cabinet Committee on Investment
and Growth (CCIG) ordered all Union
ministries to reduce wasteful expenditure
on travel, food and conferences by 20%.
Q. There has been a persistent deficit budget year
after year. What can be done by the government to
reduce the deficit? (CSE-2015)
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Answer Codes:
a) 1 and 3 only
b) 2 and 3 only
c) 1 only
d) 1, 2, 3 and 4
Fiscal Stimulus
• When government reduces taxes and/or increases
public procurement to boost the demand & growth
in economy, it is called “Fiscal Stimulus”.
Manmohan’s Fiscal Stimulus (2008)
• Post-subprime crisis in USA, PM Manmohan
announced Fiscal Stimulus (2008) such as :
1. Cut in the Excise duty & Custom Duty on
exports
2. Businessman were given additional
depreciation benefits in Income Tax &
Corporation Tax, if they purchased new
commercial vehicles.
3. Hiked the Minimum Support Prices (MSP) for
farmers.
• However, the economic surveys observed that such
Fiscal Stimulus create new set of problems by
increasing the fiscal deficit in the subsequent years.
Fiscal Stimulus of 2019
Aug 2019 - Car sales and GDP growth sharply
decreased. Foreign investors exiting on large scale from
India. So, Finance Minister Nirmala. S announced in
2019-September:
• Reduced tax burden on companies
o Indian companies corporation tax slabs
decreased from 25-30% to 15-22%.
• Reduced tax harassment
o No start-ups will be subjected to 'angel tax'.
o All tax notices to be issued from centralised
system to 'end harassment of taxpayers' by
individual officials.
o GST refunds would be given to entrepreneurs
within 30 days.
o Violation of Corporate Social Responsibility
(CSR) will be treated as a civil offense and not
a criminal offense.
Budget-2019 had hiked surcharge on the income tax
paid by Super-rich. As a result, Foreign investors were
exiting from India, fearing extra tax burden. So, Govt.
will undo that budget announcement.
• Govt. will fix the issues concerning PSBs
o Govt. will infuse ₹ 70,000 crore to public
sector banks, order them to link loan interest
rates with repo rate or other external
benchmarks so, loans may become cheaper
especially for home, auto sector. This will
boost sales, revive economy
• Govt. will encourage car sales & other
consumption
o Vehicle depreciation increased from 15% to
30% (meaning Businessman will get more tax
benefits in Income Tax and Corporation Tax).
This will encourage businessman to buy new
vehicles.
o Government departments will buy new petrol/
diesel vehicles.
o GST council will reduce GST rates on 5 star
hotels, outdoor catering, GST compensation
cess on passenger vehicles etc.
Plus many other fragmented reforms to
decrease taxes, or to enhance Government
spending on highway projects etc. are done
every now and then.
Q. Which one of the following statements
appropriately describes the “fiscal stimulus”? (CSE-
2011)
1. It is a massive investment by the Government in
manufacturing sector to ensure the supply of goods
to meet the demand surge caused by rapid economic
growth.
2. It is an intense affirmative action of the Govt. to
boost economic activity in the country.
3. It is Govt’s intensive action on financial institutions
to ensure disbursement of loans to agriculture and
allied sectors to promote greater food production
and contain food inflation
4. It is an extreme affirmative action by the
Government to pursue its policy of financial
inclusion
Fiscal Discipline
• Fiscal Discipline refers to a state of an ideal
balance between revenues and expenditure of
government, in an economy.
• If the fiscal discipline is not maintained, then the
government expenditure exceeds government
receipts.
• Under this condition, the government would have
to borrow funds or incurred deficit financing from
the central bank. This may depreciate the currency
and create inflation in an economy.
Fiscal drag
• Fiscal drag happens when government’s net fiscal
position (minus taxation) fails to cover the net
savings desires of the private economy, it is also
called the private economy’s spending gap.
• The resulting lack of aggregate demand leads to
deflationary pressure, or drag, in the economy,
essentially due to lack of state spending or to
excessive taxation.
238
 • One cause of fiscal drag is bracket creep, where • So, he constituted a panel under NK Singh (former
progressive taxation increases automatically as IAS, 15th FC chairman) to review the FRBM act.
taxpayers move into higher tax brackets due to RBI Governor Urjit R. Patel & CEA Arvind
inflation. This leads to moderation of inflation, Subramanian were also in the committee.
and can be characterized as an automatic
stabilizer of the economy. Fiscal drag can also be Recommendations FRBM Panel:
a result of a hawkish stance towards govt. • Replace the existing FRBM act with a new act, with
finances. an “Escape clause” i.e. During a war, drought or
economic crisis, the government should be
temporarily allowed to cross breach targets. Govt.
Fiscal Slippage amended FRBM act for this.
For instance, if government has targeted to keep the • Set up an independent “Fiscal Council” for
fiscal deficit within 3.3% percent of GDP, but if it monitoring. Yet to setup such council.
crosses that limit, it is called as fiscal slippage. • Adopt a fiscal road map for the union from 2017
to 2023 gradually reduce Union Debt to GDP,
Fiscal Deficit and Revenue Deficit So, citing NK
FRBM Act 2003 Singh report (as an excuse), Budget 2018 amended
the FRBM targets:
• Fiscal Responsibility and Budget
Management Act aims to make the Central Indicator (% of 2018- 19 2019-20 2020-21 2024-25
government responsible for ensuring inter- GDP)
generational equity in fiscal management and
long-term macro-economic stability. Fiscal Deficit 3.4% 3.3% 3.1% 3.0%
(reality (reality
• Originally it required Union and States to control 3.8%) 3.5%)
their deficits with following targets: Primary Deficit 0.2% 0.2% 0.1% 0.0%
(reality (reality
By 2008 Reduce Fiscal Deficit to 3% of 0.7%) 0.4%)
GDP (for Union) and 3% of GSDP Union Debt: GDP 2017→ ~ 46.5%, 2018→ 40%
reduce it 48.4%;
(for States). gradually: 2019→ 48.0% (reality- 2019
By 2008 Eliminate Revenue deficit i.e. above 50%)
make it 0% of their respective General (Union + Gradually reduce to- 60%
GDP or GSDP. State) Debt to
GDP:
While some of the state governments achieved them,
but successive union governments struggled to
FRBM - Trigger Mechanism and Escape Clause
meet these targets so they kept amending the act
FRBM Act
to extend the deadlines and targets.
E.g. Amendment 2012: No need to have 0% • Section 4(2) of FRBM act provides for a trigger
Revenue deficit. Instead it required 0% Effective mechanism to escape the deficit control related
Revenue Deficit by 2015. These deadlines were clauses in the act i.e. Govt. can over-cross the
extended even further in subsequent Finance Bills. targets in following situations:
o National Security / Act of War
o National calamity
FRBM Review Panel under N.K. Singh (2016-17)
o If agriculture output and farm incomes
collapse
Jaitley felt FRBM Act targets
o Fall in GDP growth rate beyond x% level
were too rigid and did not allow
o Structural reforms in the economy with
any room for the government to
unanticipated fiscal implications.
address any crisis e.g. farm loan
Budget-2016 waivers during drought period or
FRBM Act Section 4(2):
unemployment allowance during
Govt may over cross/
global financial crisis are not
deviate the fiscal deficit
possible if government strictly
target by upto 0.5% of GDP
wants to control fiscal deficit at 3%
as recommended by NK
of GDP.
During above Singh’s FRBM review
‘trigger conditions’ Committee.

239
 Individual State Govts may
also do similar (e.g. over
cross by 0.5% of GSDP),
but they’ve to amend their
state FRBM Act accordingly
FRBM Act requires the Union Government to present 3
documents along with the budget:
FRBM Documents

with this provision

Budget-2020: Finance Minister cited “Structural Fiscal Policy Macroeconomic Medium-term

reforms in the economy with unanticipated fiscal Strategy Framework Fiscal Policy
Statement Statement Statement
implications” to escape the FRBM targets for 2019-20
and 2020-21.
Fiscal Policy To explain how Govt. is
Fiscal deficit Original target Over crossed Strategy Statement controlling the deficits, and
After Trigger whether there is going to be any
Mechanism
deviation from the target.
2019-20 3.3% 3.8% increase
Macroeconomic To show economic data - GDP,
2020-21 3% 3.5% increase Framework growth rate, import-exports,
Statement and government’s receipts and
• Primary deficit target 0% (2020-21): shifted to
expenditure etc.
2022-23.
Medium-term For next 3 year projections, as
• Revenue Deficit and Effective Revenue Deficit also Fiscal Policy shown in following table:
over crossed but anyways FRBM Act has Statement
abandoned targeting them since 2018’s
amendment.

ES19 Had suggested Government to reduce

deficit through fiscal prudence.
To revive growth in the Indian
economy, the Govt. should relax fiscal
deficit targets, putting differently, give
fiscal stimulus to revive economic
growth.
ES20 Identified following challenges
ES20 in 2020-21 in reducing deficit:
• Slowdown in Indian and global
growth
• Rising trade protectionism,
• Geopolitical situations in West
Asia, Oil price and resultant tax
collection will be affected.
In 2018, instead of immediately reducing the Fiscal
deficit to 3.0% Finance Minister Jaitley promised to
reduce it to 3% in 2020-21 like a glider gradually
descending on its landing target. Hence subsequent
Finance Ministers keep reiterating that we will continue
on that ‘Fiscal Glide’ path.
Although Budget-2020 Finance Minister Nirmala. S
used FRBM-trigger to escape it, temporarily.
FRBM Act: Documents
Bodies Associated With Fiscal Responsibility
Expenditure Ministry of Finance setup EMC
Management under Dr. Bimal Jalan.
Commission Commission gave suggestions on
(2014) how to reduce fiscal deficit, how to
reduce subsidy bill etc
Public Debt RBI decides on the repo rate and
Management also undertakes open market
Agency operation for buying and selling of
(PDMA) G-sec. Most of the G-sec are
purchased by public sector banks,
insurance and pension funds. As
Banking-regulator, the Reserve
Bank is able to nudge PSBs to
subscribe to G-sec. So, this creates
a ‘conflict of interest’ for RBI in its
role as → Banking regulator vs
Public Debt manager.
Budget-2015 Proposed creating an independence
Public Debt Management Agency

240
 to takeover these functions of RBI. becoming difficult for
But later plan was put on a back government
burner due to RBI’s objections.
2019 NITI Aayog Vice Chairman Rajiv
Kumar again reiterated the need to Private sector
setup PDMA.
Pre-LPG Post-LPG (1991)
Share of private sector in - Drastically increased.
India's economic growth - Private sector requires
Public Expenditure Management: Challenges and employment ₹20 lakh crores every
generation was limited year for sustaining the
• Public expenditure management deals with due to the License Quota current level of
allocation of Government’s economic resources Inspector Raj. Economic Growth and
into three channels:
Employment generation
a) Public administration
- Therefore, if the
b) Economic growth
government does not
c) Welfare schemes.
control fiscal deficit →
• Post Liberalization, Privatization and Globalization
crowding out of the
(LPG) reforms in 1991, the management of public
private investment =
expenditure is facing challenges on the following
challenges for India’s
fronts:
growth story.
Banking
Public Sector Undertaking
Pre-LPG Post-LPG (1991)
Pre-LPG Post-LPG (1991)
Nationalisation of banks, Twin balance sheet
Loss making public - Difficult to sustain the
International economy syndrome, government
sector undertakings were PSUs against the heavy
was not so greatly required to recapitalise
supported by the competition of private
interconnected Basel the public sector banks
Government as white sector be it Air India or
norms less stringent. because they cannot do it
elephant. BSNL.
on their own → Financial
- Govt unable to pay
burden has increased
salaries, even no buyers
for their privatization
Monetary Policy and Fiscal Policy
Infrastructure
Pre-LPG Post-LPG (1991)
High level of fiscal - Private sectors
Pre-LPG Post-LPG (1991)
deficit. RBI’s monetary investment demand,
Population was sparse. - Population has
policy which mandated consumerism has
Most people didn't have increased.
high level of SLR to increased therefore RBI
access to TV, fridge, - Aspiration of people
finance Government’s is forced to cut down the
mobile, internet or social have increased
borrowing using bank SLR to increase the
media. Their demand for - They want clean water,
depositors’ money. loanable funds.
electricity was low. 24/7 electricity, good
- Since high level of
quality of roads; - Lot of
fiscal deficit was one of
money required for
the reasons for BOP
infrastructure finance,
crisis, now Government
- Railway alone requires
has statutory FRBM
50 lakh crore between
requirements to control
2016-30.
fiscal deficit.
- Govt. can’t spend more
- RBI has statutory
than 1.6 lakh crore a
requirement to control
year.
inflation - So rampant
borrowing from RBI is
Welfare

241

Pre-LPG Post-LPG (1991)
Right to education, right - Now they have become
to food, right to work legal rights so the govt. is
(MGNREGA) were not required to allocate large
yet ‘legal rights’ amount of funds for
them.
- food subsidy costs more
than ₹ 1.8 lakh crore,
MGNREGA ₹ 60k crore
- Post-LPG era, the level
of education and demand
for various amenities,
and even per capita
income has increased,
but that has not been a
corresponding increase
in our tax to GDP (11%,
whereas countries with
similar growth have
more than 20%).
- This puts further strain
on Public Expenditure
Management
Public Administration
Pre-LPG Post-LPG (1991)
Small size of Govt. staff - Public aspirations have
Their salary levels were increased, number of
also low. welfare schemes
increased, Border
Security challenges
increased → employees
have increased
- 6th pay commission
and 7th pay commission
→ salaries have
increased.
Challenge → ‘Contracting
out of the jobs’ to keep
revenue deficit minimal.
NPS where Employee
himself is largely
responsible for his pension
etc.
Conclusion:
Thus, in the aftermath of LPG reforms:
• Nation's per capita income has increased, Govt’s
expenditure has increased, demands for
infrastructure investment has increased.
• But there has not been an adequate increase in the
tax to GDP levels.
• As a result, public expenditure management has
become a challenge to the government.
Types of Schemes
• Not too long ago, there were hundreds of centrally
sponsored schemes (CSS) with overlapping
objectives and duplication of efforts.
• 2015-16: NITI Aayog forms Shivraj Singh
Chouhan Panel for rationalization of CSS →
Ultimate outcome is:
Central Sector Schemes
• Central Sector Schemes are 100% funded by
Union Govt.
• Examples: Urea Subsidy, MDR Subsidy, Jan
Aushadhi Scheme, Bharat NET, Pradhan Mantri
Gramin Digital Saksharta Abhiyan
(PMGDISHA) etc.
• In the union budgets, collectively more outlay
allotted for these type of schemes.
Centrally Sponsored Schemes
In Centrally Sponsored Scheme, states may have to
bear some cost.
Subtypes
Core of the Core Core Scheme
Scheme
Core of the Those schemes deal with social
Core Scheme protection and social inclusion
are given first priority in the
funding for National Development
Agenda.
Only 6 schemes: MNREGA,
NSoAP (100%), Umbrella schemes
for SC, ST, Minorities & other
vulnerable groups. For these
schemes, UPA-era funding pattern
will continue.
Core Scheme E.g. PM Gram Sadak Yojana, PM
Awas, Swachh Bharat, AMRUT &
Smart cities etc. Here funding
pattern could be 50:50, 60:40,
70:30, 75:25, 80:20 or 90:10
depending on a particular scheme
and depending on whether it’s a
general / special category state.
242
 For any union territory without legislature: 100%
funding by Union for any scheme in any category. We
will look at the schemes’ features in the respective
pillars.

To disburse scheme money & monitor it in effective

manner, Finance Ministry’s Dept of Expenditure
Controller General of Accounts (CGA) created Public
Financial Management System (PFMS) web-portal.

243
CH-8 BALANCE OF PAYMENT

244
 • It is a systematic record of all economic Travel > Transport).
transactions made between the residents and non- $208 Export - $126
residents of a country for a specific time period, Import= +82 Billion
usually a year. surplus.
• Central Banks of each country prepare BoP Our Surplus has
records as per the format given in IMF’s BPM-6 increased in last 3
manual, all the figures are expressed in Dollar ($). years
• Since any country’s debit (outgoing money) is a Income: Profit, -28
credit (incoming money) for another country Interest, Dividend.
→World’s NET Balance of Payment is zero. Transfer: +70
• BoP is further sub classified into two parts → Remittance, Gift,
Current Account and Capital Account, based on the Grants, Donations.
nature of transactions. Subtypes: Pvt
transfers > Govt.
Net Current Account Balance (if -57 (-2.1% of
BoP negative: “Deficit”) GDP)

Current Account Capital Account

RBI’S METHOD OF CLASSIFYING BOP

Current Account Capital & Financial

Account
Goods and services 1. Direct Investment From 2001-04: we had Current Account Surplus
Primary Income: wages, (FDI) because, it was a time before the subprime crisis when
dividend, interest 2. Portfolio Investment global economy boom had increased our exports. But
Secondary income: (FPI) since then we are having deficit. The Current Account
remittance, gift, donation 3. Loans / ECB Deficit has increased in last 3 years (2016-19) because:
4. Non-resident’s - Crude oil price increased
investment in Bank, - US/EU protectionism= our exports decreased.
Insurance, Pension
schemes.
5. RBI’s foreign Balance of Trade (BoT)
exchange reserve • It is the difference between the value of import and
export (of goods and services).
BoP - CURRENT ACCOUNT • Export (+330 Goods + 208 Services) MINUS
Component Amount in billion NET Import (-510 Goods – 126 Services) = MINUS (-)
dollars (2018-19) Incoming 98 billion.
• If +ve = Trade Surplus (i.e. Export > Import);
Visible Trade in Goods: -180 • If -ve = Trade Deficit (i.e. Import > Export)
$330 billion worth
goods exported vs
Net Terms of Trade
$510 worth
imported.
Compared to last 3
years, trade deficit
has increased.
Invisible Trade in Services +82
(Highest export:
Software services >
Business Services >

245
 Telecom
Instruments,
Electronics
Components,
Organic
Chemicals, Iron
And Steel,
Industrial
Machinery.
Services
Services: Top Top Exports (in decreased
Gross (Barter) Terms of Trade (GTT) Imports (in share)
decreasedshare)
1. Business 1. Software service
service 2. Business service
2. Travel 3. Travel
In terms of quantity (kg, litres) we are exporting (Indian going 4. Transport
more than importing. This is possible because on foreign
exported Indian rice’s quantity (kg) could be large even trip)
though its value ($) will not be very large. 3. Transport (of
cargo/goods)
Income terms of trade (ITT) 4. Software
service

India’s top trading partners for 2018-19 were as

following:
Top Import and Exports: ES20 DATA
Top Import sources Top Exports
• Trade deficit as a % of GDP has continuously decreasedshare) destinations
increased in the last 3 years (2016-19). (decreased)
• For 2018-19, our top-import and exports were as 1. China (14%) 1. USA (16%)
following: 2. USA 2. United Arab
3. United Arab Emirates
Goods Emirates 3. China
Goods: Top Top Exports (in 4. Saudi Arab 4. Hong Kong
Imports (in decreasedshare) 5. Iraq 5. Singapore
decreasedshare)
1. Petroleum: 1. Petroleum Products (14%) Other notable: Other notable:
Crude (22%) 2. Pearl, Precious & Semi- Switzerland, Hong UK, Bangladesh,
2. Gold (6%) Precious Stones Kong, S. Korea, Germany, Netherland,
3. Pearl, 3. Drug Formulations, Singapore, Indonesia Nepal
Precious, Biologicals
Semi- 4. GoldandotherPreciousMetal
Precious Jewellery
Stones 5. IronAndSteel Trade Deficit Trade Surplus
4. Petroleum
Products Other notable:
5. Coal, Coke Organic Chemicals, Cotton,
and Motor Vehicle/Cars, Electric
Briquettes Machinery
China (cheap electronics, toys USA (Chemicals,
etc. textile, services etc.),
etc.) Switzerland (Gold, Luxury
items), Middle Eastern nations UAE (Tea, Spices,
Other notable: (Oil). textile etc.).

246
 India’s top five trading partners highest imports in terms of value in the last five
India have largest amount of import and export years? ? (CSE-2019)
relations with following five nations. (a) Spices
(b) Fresh fruits
(c) Pulses
(d) Vegetable oils
Saudi Hong
USA China UAE
Arabia Kong Remittance: World Bank’s Remittance Report
• According to 2018’s data, India receives largest
amount of remittance (about USD 80bn).

China Mexico,
Largest importer and exporter in world – India Year India (USD 67 Philippines Egypt
bn)
Book 2020

2018: In The Largest Largest • In quantitative figures too India received more
World Importer Exporter amount compared to previous years.
Goods USA (India – China (India – • Because higher oil prices → Arabian Sheikhs are
(Merchandise) 10th) 19th) earning more and spending more → Indian workers
Services USA (India – USA (India – in middle east are earning more overtime → more
10th) 8th) remittance to India.

Q. The balance of payments of a country is a
systematic record of (CSE-2013)
a) All import & export transactions of a country during
a given period of time, normally a year.
b) Goods exported from a country during a year.
c) Economic transaction between the government of
one country to another.
d) Capital movements from one country to another.
World Bank also noted: remittances have a direct
impact in poverty removal for many households:
o But Post Offices charge very high fees in
remitting the money to household.
o So, Financial inclusion, UPI/BHIM/IMPS
blockchain Technology led money transfer
mechanism are important in that context as well.

Q. With reference to Balance of Payments, which of Remittance: Global migration report 2020
the following constitutes/ constitute the Current • Report released by→The International
Account? (CSE-2014) Organization for Migration (IOM)is a related
1. Balance of trade. organization of UN.
2. Foreign assets. • HQ: Geneva, Switzerland
3. Balance of invisibles. • As per its latest Global migration report 2020:
4. Special Drawing Rights o Top amount of remittance received to 1) India
Answer codes: 2) China 3) Mexico.
(a) 1 only o Top number of international migrants are from
(b) 2 and 3 1) India 2) Mexico 3) China
(c) 1 and 3 o Top destination country of migrants is USA.
(d) 1, 2 and 4
Pravasi Bharatiya Diwas (PBD)
Q. Among the following, which one of the following • Pravasi Bharatiya Divas (PBD) is celebrated on
is the largest exporter of rice in the world in the last 9th January every year to
five years? (CSE-2019) mark the contribution of
(a) China Overseas Indian
(b) India community in the
(c) Myanmar development of India.
(d) Vietnam • January 9 was chosen as
the day to celebrate this
Q. Among the agricultural commodities imported by occasion since it was on
India, which one of the following accounts for the this day in 1915 that

247
 Mahatma Gandhi, the greatest Pravasi, returned to
India from South Africa, led India’s freedom
struggle and changed the lives of Indians forever.
1915 9th January: Gandhi-ji returned from
South Africa to Bombay (India).
2003 NDA-I (PM Vajpayee) decides to
celebrate Pravasi Bharatiya divas (PBD)
annually every 9th January. First
summit was at New Delhi.
2020 At New Delhi. But just a small scale
video conference type of event.
CURRENT ACCOUNT AND IMPORT OF OIL
• Govt’s target of reducing the oil import by 10% by
2022 (compared to 2015).
• Therefore, boosting domestic oil exploration &
production is necessary in india.
Domestic Oil Exploration Policies
• Meaning - company can pick and choose the blocks from
Hydrocarbonexploration (or oil andgas exploration
) is search
by petroleum geologists and
geophysicists for deposits of
hydrocarbons,
particularly petroleum and
natural gas, in the Earth
using petroleum geology.
• Nodal Agency→
Directorate General of Hydrocarbons: (DGH) -
Ministry of Petroleum & Natural Gas.
• Before the 1991’s LPG reforms - only ONGC and
other Public sector companies were allowed to
explore the oil, gas and hydrocarbon reserves in
India. But under 1991’s Liberalization norms, this
sector was opened for the private sector players as
well.
• 1997: New Exploration Licensing Policy (NELP) to
award contract to public and private sector
companies using bidding / auction system.
to check account books. No ease of doing
business at all.
HELP Policy
• In 2016, NELP was replaced with Hydrocarbon
Exploration and Licensing Policy (HELP).
• Advantages of HELP:
o Single uniform license sufficient to explore
and produce all type of hydrocarbons from the
given area. (oil, gas, coal bed methane, shale
gas, tight gas and gas hydrates etc)
o Govt. to receive a share from gross revenue
from sale of oil / gas etc, irrespective of
company’s profit
o Govt. not to interfere in the marketing and
pricing of the oil and gas.
o Relaxed norms for exploration in offshore
areas, because they have higher risk and higher
cost of production.
o Open Acreage Licensing Policy (OLAP) -
the designated area, even if no specific bids are
invited by Govt before. Then Govt will invite
other companies for auction.
o By July 2019: Govt finished auctioning
process of HELP-OLAP round 2 and 3.
India’s Strategic Oil Reserves

Limitations of NELP
• Separate license required for each type of
hydrocarbon.
• NELP worked on production sharing contract
(PSC), wherein the Oil Explorer will pay a share to
Govt from the profits from production. However,
o whenever the oil prices decreases in the global
market, Indian producers will also decreases
their production.
o Indian producers exaggerate their
production costs to show less profit. So, Govt
earned less, and will do more ‘inspector raj’

248
 • According to the agreement on an International
Energy Programme (I.E.P.), each International
Energy Agency (IEA) country has an obligation to
hold emergency oil stocks equivalent to at least
90 days of net oil imports.
• India became an associate member of the
International Energy Agency in 2017.
• India’s strategic crude oil storages are currently
located at Visakhapatnam (Andhra Pradesh),
Mangaluru (Karnataka), and Padur (Karnataka).
• In the second phase, The Ministry of Petroleum &
Natural Gas (MoPNG) is planning to create 12.5
MT storage capacity at Padur, Chandikhol
(Odisha), Bikaner (Rajasthan) and Rajkot (Gujarat).
• They are stored in underground rock cavern
facilities so they are more secure / safe during
airstrikes, more economical and environmental
friendly than conventional ‘Above Ground Storage
Tanks’.
• The construction of the Strategic Crude Oil Storage
facilities in India is being managed by Indian
Strategic Petroleum Reserves Limited (ISPRL).
• Objective - (When crude prices are low) India
should buy and store crude oil for strategic- cum-
buffer stock → use during war & other emergency.
Crude Oil prices & OPEC
• 1961: Organization of the Petroleum Exporting
Countries (OPEC) is a group of oil producing
countries Saudi, UAE, Venezuela, Iran, Iraq etc.
• Total 14 members, HQ at Vienna city of Austria.
• Qatar withdrew from 1 January 2019. Russia is not
a member.
• Depending on these factors of supply versus
demand, there have been ups and downs in the oil
price movement in the last 3 years.
249
• 2016 onwards OPEC and Russia agreed to reduce
their oil production. For a while, it resulted increase
the crude oil prices.
• Oct 2018onwards: oil prices decrease because:
o Nigeria etc. produced more oil due to USA
pressure. USA also increased its own domestic
oil and shale gas production.
o Chinese tariff war on American cars which
decreased car sales so, less oil demand in
China.
• Dec 2018oilpricesraised because:
o All major currencies weakened against US
Dollar so purchase cost increased.
o OPECandRussia started even more stricter
output reduction.
• Sept 2019 - Houthi (Shia rebel group of Yemen
with Iran’s backing) attacked Abquaiq- Khurais
oil field ofSaudi Arabia’s Armaco company
using drone.
• Oil production suspended, global oil prices
increased further.
• 2020 March: oil prices decreased and fell to$20 per
barrel, because:
o OPEC and Russia couldn’t agree for
production cuts.
o Corona air travel ban led to less fuel
consumption so the less demand and prices
decreased.
• This impact is not felt by Indians because as oil
prices fall, Govt. keeps raising Excise + VAT on
the petrol and diesel. Economic survey appreciate it
as “this Excise and VAT led high price helps
reducing fuel consumption so it’s like a Carbon tax”
Cartel is an association of manufacturers who collude
to keep prices high, and keep the competitors away.
Sweet crude oil = Low Sulphur content.
Sour crude oil = High Sulphur content.
BRENT Index is an index that measures price of crude
oil.
Fall Of Crude Oil Prices In Negative Figure
• USA’s crude oil prices are monitored through West
Texas Intermediate (WTI) contracts.
• Oil demand reduced due to Corona lockdown on
vehicle/aviation traffic. But, American oil drilling
companies can’t stop production because it’s more
expensive to ‘restart’ the production after
shutting it.
• And merchants/intermediaries can’t hold stock
because their storage capacity is limited.
• 2020-April: sellers are (temporarily) paying $ to
buyer to take the stock of oil barrels.
• Hence negative minus $40 per barrel price.
• India may not benefit, since we mostly import
from the middle-east and not the USA.
• Further, our Government will increase taxes on
petrol diesel, so even if crude oil gets cheap for oil
refineries, the resultant petrol-diesel may remain
costly for Indian families.
Petrol & Diesel Prices in India
1970s to 2002 Administered Price Mechanism
(APM) Wherein the government
fixed the prices of petroleum fuels
and paid subsidy to the oil
marketing companies (OMC) for
their losses
2002-2014 Government gradually began
decontrolling the fuel prices, to
reduce its own subsidy burden
Present Present system Dynamic Fuel
system pricing system wherein OMCs
decide the prices of petrol and diesel
on daily basis, based on the
movement in international prices.
Benefit of dynamic pricing → In
theory, If the oil prices lowered in
the international market, petrol
diesel should become cheaper in
India.
Corona crisis reduces the transportation and hence
decrease in demand of crude oil. This resulted into
prices have fallen or remained moderate. But, Corona
crisis also reduces direct tax and GST collection.
Government required more fund to run the schemes. So,
continuously govt. try to increasing excise & VAT.
Consequently, by 2020-Jul: Petrol and diesel costing
around ₹80/litre in Delhi
CURRENT ACCOUNT AND IMPORT OF GOLD
• From 2010 onwards, Indian economy was suffering
from high level of inflation (8-12%)due drought
and Food & Pulses shortage among others.
• MNREGA → higher wages in the hands of
villagers without proportional growth in supply of
commodities etc.
• So households earned ‘Negative Real Interest
Rate: on their bank deposits and started investing
in gold.
• However, high level of gold consumption leads to
more trade deficit, current account deficit which
makes Indian rupee gets weaker.
• Gold transactions also help in the storage of black
money and tax evasion.
• India is the second largest consumer of Gold
after China. Therefore, RBI and Indian
government launched following schemes to reduce
gold consumption:
RBI’s 80:20 Scheme (2013-14)
• RBI mandated that minimum 20% of the
imported gold must be exported back. Until then
the Jeweller/ bullion dealers will not get permission
to (convert their rupees into dollars / foreign
currency) to import next consignment of gold.
• RBI gets such powers under Foreign Exchange
Management Act (FEMA).
• 2014: Scheme was stopped as the gold craze had
declined.
Sovereign Gold Bond Scheme (2015)
• RBI (on behalf of Union Government) issued Gold
bonds in the denominations of one gram and its
multiples. One person can buy upto 4 kgs.
• They can be purchased from commercial banks,
post offices and authorised agents. RBI continued
to release them in 2018 and 2019 as well.
• Tenure - 8 years. (But investor can exit from 5th
year).
• Fixed about 2% interest every year. On the
redemption date you get the principal equivalent of
the latest price of gold in grams. So, if gold price
increased then you get more profit.
• Bonds can be tradable in stock exchange. Can be
used as collateral for loans.
• They are exempted from the TDS and Capital
Gains Tax.
• Benefit - People were investing in gold with
speculation that when gold prices increase they’ll
profit. Gold Bonds offer them similar without
actually giving them gold. So it helps reducing gold
import.
250
 Gold Monetization Scheme (2015)
• Under this scheme, RBI
allows commercial banks
accept customers’ idle
gold /jewellery for 1 year
to 15 years tenure.
(2019- RBI also allowed
Charitable Institutions
and Central Govt to deposit their gold in the
commercial banks)
• Commercial Banks pay the depositor ~2% interest.
• Min. 30gm to maximum any amount of gold can
be deposited.
• Gold goes to the Metals and Minerals Trading
Corporation of India:
o Gold sold to jewellers, electronic circuits
companies
o Some of the gold used for Minting “Indian
Gold Coin.”
• Upon maturity you can redeem deposit in the form
of gold coin/bars or cash equivalent. The profit
exempted from Capital Gains Tax.
Indian (Sovereign) Gold Coins (2015)
• Issued by a Govt company
“Metals and Minerals Trading
Corporation of India”.
• Available in denominations of
5, 10, 20 grams.
• These gold coins are not fiat
money because not issued
under the powers of Coinage act, they don’t bear
any markings indicating rupee denominations.
Their markings only indicate gold grams. And since
they’re not ‘fiat money’ they are not ‘legal
tenders’.
• Benefit→Trusted Purity, Easily resold, Easy
liquidity, and Profit if any increase in gold price.
Q. What is/are the purpose/purposes of
Government's 'Sovereign Gold Bond Scheme' and
'Gold Monetization Scheme’? (CSE-2016)
1. To bring the idle gold lying with Indian households
into the economy.
2. To promote FDI in the gold and jewellery sector.
3. To reduce India's dependence on gold imports
• Indian banks reduced fixed deposit interest
rates. People shifting towards gold investment for
a better "positive real" interest rate.
• Mutual funds not giving good returns post-ILFS
crisis and Franklin Templeton MF crisis → some
investors prefer gold
• Geopolitical tensions like Iran-US, China-US,
India-China have negative impact on share market
→ some investors prefer gold
• 2020 Corona-Crisis: Shares and bonds have
become risky due to heavy losses faced by
companies. Investors prefer a 'safe assets' i.e.
increase in demand of gold so the price rise.
• Corona also reduced workers at gold mines /
refineries which results into decrease in gold
production, result is price.
GI Tag
• A Geographical Indication (GI)
is a sign used on products with
specific geographical origin and
unique qualities due to that
origin. E.g. Darjeeling tea from
West Bengal- It was the first to
obtain GI tag from India.
• Benefits of GI Tag→GI tag
adds premiumness to a product, helps fetching
higher prices in the international market and
resultantly better income for farmers and artisans.
GIs are governed under:
• WTO’s Trade Related Intellectual Property Rights
Agreement (TRIPS) and India’s Geographical
Indication of Goods Act, 1999.
• Once a product gets GI tag, it’s valid for 10 years
(and can be renewed further.)
• GI name cannot be used for products that are
manufactured outside of the designated region, else
party can be punished under the law.
• International Nodal Agency→UN’s specialized
agency World Intellectual Property Organization
(WIPO). HQ at Geneva, Switzerland
• Indian NodalAgency→Ministry of Commerce,
Controller General of Patents, Designs and
Trademarks - Geographical Indications Registry in
Chennai.

Answer codes: GIControversies

(a) 1 only • 2010: GI status given to the Basmati rice grown
(b) 2 and 3 only in Punjab, Haryana, Delhi, Himachal Pradesh,
(c) 1 and 3 Uttarakhand and parts of western Uttar Pradesh and
(d) 1, 2 and 3 Jammu & Kashmir.

Gold price in Corona

251
• Madhya Pradesh state government had been
fighting to get GI-status for its Basmati rice as well,
but 2018 rejected by GI Registry (Chennai).
• 2017-19: WestBengal and Odisha were fighting to
get GI for Rasagola, ultimately they are given
separate GIs: ‘BanglarRasogolla (2017)’ and
‘Odisha Rasagola (2019-July)’.

New Indian GI tag during From April 2018 till Now:

• DPIIT will not charge any no fees.

GI Logo
‘Invaluable Treasures of Incredible India’ →
Commerce Ministry’s logo for GI products to make
them more attractive to foreign buyers.
2019-June: Commerce Ministry’s Department for
Promotion of Industry and Internal Trade (DPIIT)
issued guidelines for its usage:
• DPIIT’s prior permission required before using this
logo.
• Permission duration will be decided on case-to-case
basis.
• DPIIT would not be responsible for the authenticity
or quality of the products with these logos.
• Foreign GI products are not allowed to use India’s
GI logo
Exports and SEZ

252
 • Special Economic Zones (SEZ) is a specifically
demarcated area of India which is deemed as
foreign territory for the purpose of Tax laws and
Trade laws.
• SEZs work as an engine for economic growth
supported by quality infrastructure
complemented by an attractive fiscal package,
both at the Centre and the State level, with the
minimum possible regulations.
• Thus, exempted from aforementioned taxes or
subjected to lower rate of taxes of Union and State
Govts. This relief is for a specific time-period only,
which is called “Tax holiday”
Sector Ordinary area SEZ area
Manufacturing Excise / GST Nil
Import/export Customs Duty Nil
Profit Corporation Nil
Tax/ Income
Tax
SEZ “Sunset clause” in Income Tax Act 1961
• Income Tax Act (Section 10AA) provides for a
tax-holiday for SEZ firms for a period of 15
years.
• But it is available if only the firm starts activity
by March 31, 2020.
• Economists suggest this deadline should be
extended to attract more foreign companies in
India.
Benefits given to SEZ
• They get single window clearance for various
import, export licenses or permissions.
• Government will bear the cost of developing the
roads, sewage, affluent treatment, weighing –
packaging-labelling etc infrastructure within the
SEZ.
• They are regulated under SEZ policy (2000) and
Special Economic Zone Act, 2005.
• State Govt forwards the proposal to create SEZ
whereas Union’s Commerce Ministry approves.
Asia's first SEZ was set up in 1965 at Kandla,Gujarat
(At that time it was called Export Processing
Zone/EPZ). Currently we have 220+ SEZ in India.
Benefit of SEZ More exports, employment,
economic growth, world class
infrastructure.
253
Challenges SEZ entrepreneurs use legal
loopholes → Tax avoidance,
Workers deprived of
EPFO/ESIC/Maternity benefit.
When entrepreneurs’ Tax holiday
is over in one SEZ, they
shutdown operation and move to
another SEZ with new
name/registration. Agricultural
and forest lands diverted to
build SEZs → future challenges
in food security, pollution control
and climate change.
Solution Ministry of Commerce had setup
Baba Kalyani committee in
2018 to look into SEZ issues
Baba Kalyani report on SEZ
• While the number of SEZ & SEZ-led employment
has increased, but their export growth rates were not
encouraging in the last decade.
• Instead of giving blanket-general-tax-holiday,
SEZ-units should be given tax benefits linked to
how many job created, how much FDI
investment attracted, how much goods/services
exported etc.
• SEZs should be converted into Employment and
Economic Enclaves(3Es) with efficient transport
infrastructure, uninterrupted water and power
supply. (So, both domestic-consumer-centric
entrepreneurs and export-centric entrepreneurs can
operate from same locality, supply each other with
intermediate goods/services. While exports sector
get further tax benefits in Customs Duty & Direct
Taxes.)
• Encourage MSMEs in 3Es, so we can create more
jobs. Simpler entry and exit processes using time-
bound online approval and dispute resolution for
entrepreneurs.
• Develop infrastructure: High Speed Rail, Express
roadways, Passenger/Cargo airports, shipping
ports, warehouses etc. near SEZ/3Es zones.
• Focus on electronics for domestic production for
domestic consumers, and need to have a plan for
import substitution (i.e. encourage Swadeshi
electronics companies in 3Es, so Indians buy import
less videshiproducts).
2019-July: SEZ Act amendment, allows even ‘trusts’ to
open units/offices in SEZ.
Conclusion
Government of India has set a target of creating 100
million jobs and achieving 25% of GDP from the
manufacturing sector by 2022, as part of its flagship
‘Make in India’, so above reforms / recommendations
will help achieving these targets.
• Although 2020-March: economist and experts
believe due to the new policy may be postponed due
to Coronavirus slowdown.
• 2018: Commerce Ministry launched a separate
policy for Agriculture Exports.

Exports and Foreign Trade Policy (2015-2020) Tax Credit for Exporters: MEIS/SEIS and RoDTEP
• India's export in goods and services in 2013-14 was
aboutUSD465 billions. This FTP Policy aims to
almost double it to USD900 billion by 2020.
Tax Credit for Exporters
• Nodal - Director General of Foreign Trade (DGFT)
under Ministry of Commerce.
• Introduced new schemes / streamlined previous
schemes such as: MEIS/SEIS.
• Interest Equalization Scheme: MSME exporters Services Exports from Merchandise Exports from
India Scheme (SEIS). India Scheme (MEIS)
given interest subsidy on loans.
• Duty free import of capital goods (machinery • Nodal - Commerce Ministry
required for production)
• They provide tax credit to exporters, which they
• Advance Authorization Scheme allows duty free can use for paying Union’s Customs Duty.
import of inputs, along with fuel, oil, catalyst, etc.,
required for manufacturing export product. Tax Credit for Exporters: RoDTEP
• NiryatBandhu Scheme: Govt mentors the new and • Nodal - Commerce Ministry
potential exporters and mentor them through
• 2020-March: govt announced Remission of Duties
training, counselling, orientation programmes
and Taxes on Exported Products (RoDTEP).
• Towns of Export Excellence (TEE)and Trade
Infrastructure for Export Scheme (TIES): where
MEIS RoDTEP
Union gives ₹ for infra development for export
(warehouses, transportation, packaging facilities
Goods Customs Following taxes he paid
etc.)
Exporter Duty in previous stage:
gets Input 1. Customs Duty
E-governance CBIC → Single Window
tax credit 2. Transport fuel,
initiatives Interface for Facilitating Trade
for: Excise and VAT
(SWIFT) for importers and
3. Agriculture raw
exporters through icegate.gov.in.
material, State Mandi
Within that, e-governance
tax (it’s not a ‘tax’
modules like E-Sanchit, Turant
but rather a fees
etc for document approval etc.
charged by APMC
Commerce Ministry & FIEO Mandi.)
(Federation of Indian Export 4. Electricityduty
Organisations) launched India
Trade webportal and Niryat Mitra
WTO- No, so Yes. RoDTEP will
App.
compliant WTO replace MEIS scheme.
? ordered to
Challenge to Foreign Trade Policy stop it
• While policy has lofty goal of doubling Indian
exports to $900 billion by 2020. But US/EU Economic Survey 2020: “Assemble in India” -
protectionism could derail target. Talks about doing “assemble in India for network
• 2019-Oct: Government planning to launch new products” to encourage our exports.
foreign trade policy as existing policy will expire on
31 march 2020. Port Logistics: Authorised Economic Operator
(AEO)

254
 • An importer/exporter/cargo company can apply to
the Central Board of Indirect Taxes and Customs
(CBIC) to get this ‘status’.
• Subject to conditions like:
1. Minimum 3 years experience
2. Never filed bankruptcy
3. Never caught in fraud / smuggling etc.
• Benefits - Faster clearance times, fewer physical
examinations on cargo etc.
• At International level, World Customs
Organization (WCO, HQ: Brussels, Belgium)’s
“SAFE Framework” guides this program.
CAPITAL ACCOUNT: FDI / FPI
Investment
Foreign Portfolio Foreign Direct
Investors (FPI) Investment (FDI)
Foreign Portfolio Investors (FPI)
• It is a foreign entity registered with SEBI, and who
buys upto 10% in equity / shares of an Indian
Company.
• For Corporate Bonds and G-Sec these percentages
are different.
• Originally, these were called Foreign Institutional
Investor (FII) and Qualified Foreign Investors
(QFIs), but in 2013 SEBImerged them all into a
single category- FPI, based on
recommendations of K.M. Chandrasekhar
committee.
• FPI’s primary objective is make money from
buying and selling of shares through the capital
market / share market. They even help the SEBI-
non-registered foreign investors by issuing them
Participatory notes (P-Notes).
• FPIs are not involved in the actual operations /
production / management / business policy
making of a company (unlike Walmart is for
Flipkart).
• If FPI investor is hopeful to get better returns in the
other countries’ share/bond market, he may
quickly sell his Indian securities and run away.
The flight of such money is called ‘hot money’, It
results into weakening of Indian Rupee and
falling of Sensex.
255
Before The aggregate limit of all FPIs in an
Budget- Indian company was 24%. Otherwise if
2019 10 different FPIs invest 9-9% each in a
company then 90% of company’s
shareholding will be owned by
foreigners, even though a given
industrial sector may not be open for
90% foreign direct investment.
From 24% cap is removed. Now, aggregate
Budget- limit of all FPIs in an Indian Company
2019 = total foreign investment sectoral cap
for that industry e.g. Broadcasting of
News TV-channels =49% Foreign
investment allowed. So, FPI cap will be
49%. So, NDTV India ltd could be FPI-
I (upto 10%) + FPI-II (upto 10%)+.... As
long as 51% shareholding is with
Indians.
Foreign Direct Investment (FDI)
• FDI is the (more than 10% equity / share)
investment made by a foreign entity into an Indian
company, with the objective to getinvolved in the
management / production of that Indian company.
• e.g. 2018: Walmart-USA bought 77% stakes in
Flipkart at $16 billion.
Foreign Investment is prohibited in atomic energy,
railway operations (except Metro & infra dev.);
Tobacco Products, Real Estate Business, Farm Houses,
Chit Funds, Nidhi Companies, Betting Gambling
Casino & Lottery.
• For the remaining sectors, Foreign Investment is
the
permitted either through:
Foreign Direct
Investment (FDI)
Automatic Route Approval (Govt.) Route
Automatic Route Foreign entity doesn’t require
Indian Govt’s approval.
Government Prior to investment, they’ve to
Route get approval from the Govt of
India’s respective
Administrative Ministry/
 Department (and Commerce Sectors and Foreign Investment limits in India
Ministry).
Sectors Automatic Approval
100% Foreign Investment by Automatic route Banking - Public - 20%
permitted in: Sector
• Agriculture, Animal Husbandry, Plantation Sector,
Food Processing companies Printing / Publishing - 26%
• Asset Reconstruction Companies (ARC), Credit newspaper, current
Information Companies, Core Investment affairs magazines;
Company, White Label ATM Operation and Other uploading/
Financial Services streaming of News
• Pharma & Biotechnology(Greenfield), Healthcare & Current Affairs
(Greenfield), Medical Devices through Digital
• Satellites, Broadcast of non-NEWS TV Channels, Media
Printing of scientific and technical magazines; Broadcasting of - 49%
Wholesale Trading, Single Brand Retail, E- News TV-channels
Commerce (market-place) Multi Brand Retail - 51%
• IT and Business process management (BPM); Trading
Township Construction, Housing, Infrastructure; Insurance, Pension, - 49%
Gems & Jewellery, Duty Free Shops, Tourism & REITs / InvITs
Hospitality Infrastructure
• Leather, Textiles & Garments, Manufacturing, Companies
Capital Goods, Industrial Parks Petroleum Refining - 49%
• Mining and Exploration of metal and non-metal, (by PSUs), Power
• Petroleum & Natural Gas, Chemicals, Coal & Exchanges
Lignite, Thermal & Renewable Energy Banking (Private 49% Above 49%
• Civil Aviation (**Selected services), Airports Sector), Telecom
(Greenfield & Brownfield) Services, Defense,
• Ports and Shipping, Railway Infrastructure, Roads Private Security
& Highways Agencies, Air
Transport Services
2019-Jul Insurance intermediaries (agents, Brownfield – 74% Above 74%
pharma, healthcare,
brokers, surveyors, 3rd party admin
Biotech
etc) Budget 2019: 100% N/A
2019-Sept Coal mining, coal sale & associated Insurance
activities; Contract manufacturing. Intermediaries:
-Agents/brokers.
Difference Between FDI & FII -Banks selling
Any Foreign investment is to bridge the gap between insurance
the saving and investment rates. These Foreign (Bancassurance)
investments occur for different time period and of -Surveyor/Loss
differing amount. One attempt to differentiate between Assessor.
was made by Arvind Mayaram Panel on FDI & FII. -Third Party
Administrators (e.g.
FDI FII Hospital where
Any investment in Below 10% in listed treatment is given
unlisted Company. firms. Its also called the for health insurance)
Investment more than “Hot Money”. Ex. Fed Defense (2020- 74% Above 74%
10% for listed Taper- Tantrum May/June)
companies.

Budget-2019 : FDI

256
 • Insurance intermediaries: 100% FDI through
automatic route.
• Govt. will examine suggestions of further opening
up of FDI in aviation, media (animation, AVGC:
Animation, Visual effects, Gaming and Comics)
and insurance sectors after consulting with all
stakeholders.
• Presently,100% FDI allowed in a Single Brand
Retail, but with condition they must procure at least
30% of their requirements from Indian MSME. We
will relax this norm.
Economic Survey 2019 : observed in 2018-19 there
was net ‘outflow’ of FPIs (i.e. more FPI money left
India than the amount of FPI money that came into
India)
India’s new FDI rules for E-Commerce
Definition - E-commerce means buying and selling of
goods and services over digital & electronic network.
Two subtypes:
Models of E-Commerce
Inventory based Marketplace
model based model
Inventory Company sells the inventory of
based model goods and services, which is owned
by them to consumers directly. E.g.
primeabgb.com (A computer
hardware site). FDI is not permitted
here.
Marketplace Company merely provides a web
based model portal/app to act as a facilitator
between buyer and sellers. E.g.
Amazon, Flipkart. 100% FDI
allowed here.
• Marketplace E-Commerce companies were
engaging in Anti-Competitive behaviour e.g.
Flipkart / Amazon would enter in exclusive
partnerships with top smartphone brands such as
Xiaomi and Oppo- Prohibiting them from selling
their mobile phones through other online or offline
channels → offline mobile shops suffer.
257
• Flipkart / Amazon run “Marketplace E-
Commerce model” i.e. they allow any merchant to
list their products on their website. However they
will also have their own merchant company (e.g.
Amazon’s cloudtail pvtLtd) who would offer deep
discounts / cashbacks to the customers. So Other
online merchants on the same web platform will
suffer. Offline brick and mortar shop merchants
will also suffer.
• So, Consumer Affairs ministry updated norms
on (Marketplace) E-Commerce WEF 1st
February 2019, using the powers under Consumer
Protection Act,1986:
o Such E-commerce companies can’t have
exclusive agreements with sellers. E.g.
Flipkart can’t compel Xiaomi ‘not to’ sell Mi
phones on other online/offline platforms.
o Tightened the technical norms related to
cashback and discounts.
o Tightened norms on E-commerce company
who were using their own subsidiary
companies/shell companies as “Online
Merchants” to sell products at deep discount.
India’s new rules for E-Commerce (2020-Jul)
• These rules applicable to all types of electronic
retailers (e-tailers) registered in India or abroad
- whenever they're offering goods and services to
Indian consumers.
• E-tailers must mention the 'expiry date', 'country
of origin' of goods, its policies on return, refund,
exchange, warranty and guarantee, delivery,
shipment, cancellation policy. E-tailer must
display sellers' geographic address, customer care
number, rating etc.
• Penalties - Consumer Protection Act, 2019.
Chinese FDI need Govt approval
• Govt decided this because → Corona-led
slowdown impacts Indian companies which are
suffering from losses. China may mis-use this
opportunity to takeover such Indian companies
at very low share price which will harm our
strategic & economic interests.
• Criticism → China says this is violation of WTO
norms related to foreign investment. Although
Australia and Germany also announced similar
restrictions with similar reasons.
Before From 2020-April
If any FDI proposal If any FDI proposal from
coming from Pakistan any country that shares
 and Bangladesh, it border with India → - Statutory Commodity Boards:
required approval from Indian Govt approval Coffee, Rubber, Tea, Tobacco,
Government of India. required. Spices Board
Means, Pakistan,
Afghanistan, China, FIPB Abolished in 2017
Nepal, Bhutan, • Foreign Investment Promotion Board (FIPB) was
Bangladesh and an inter- ministerial body in the Department of
Myanmar Economic Affairs in the finance ministry.
• FIPB processed the FDI applications where
Q. Both Foreign Direct Investment (FDI) and government approval was required. If investment
Foreign Institutional Investor (FII) are related to amount exceeded ₹ 5,000 crore then application
investment in a country. Which one of the following forwarded to Cabinet Committee on Economic
statements best represents an important difference Affairs (CCEA).
between the two?(CSE-2011) • FIPB was chaired by the economic affairs
a) FII helps bring better management skills and secretary,& members from other depts.
technology, while FDI only brings in capital. • 2017: Govt announced FIPB’s abolition. Now,
b) FII helps in increasing capital availability in individual ministries/departments are empowered
general, while FDI only targets specific sectors. to clear FDI proposals in consultation with
c) FDI flows only into the secondary market, while FII Commerce Ministry. e.g. FDI in Pen-drive factory
targets primary market. → MEITY + Commerce Ministry. (if proposal
d) FII is considered to be more stable than FDI above ₹5kcr →CCEA)
• FIPB’s web-portal was renamed into “Foreign
Yearbook: Ministry of Commerce and Industry: Investment Facilitation Portal” and transferred to
MoCI looks after Internal and External Trade, WTO, Commerce ministry.
Dumping, SEZ, FDI related issues. • However, Only Home Ministry will clear FDI
proposals coming from Pakistan and
Attached 1. Directorate General of Foreign Bangladesh; and FDI proposals related to private
offices Trade (DGFT) for promotion of security agencies, small arms manufacturing.
foreign trade.
2. Directorate General of Trade Cabinet Committees
Remedies (DGTR) to impose
anti-dumping duty on foreign Cabinet Headed Description
products. Committee by
PSUs 1. Export Credit Guarantee on
Corporation of India (ECGC: Appointments Prime finalizes the name for
NIRVIC scheme) Minister top level
2. MMTC Ltd.(Gold-coin) appointments like
3. Invest India: A ‘not for profit’ Cabinet Secretary,
company by commerce Indian ambassadors
ministry + FICCI + for each nation etc.
NASSCOM + other in 2009.
Technical Name: National Accommodation Home Giving house
Investment Promotion and Minister allocation to
Facilitation Agency of India. politicians, top
Autonomous Agricultural and Processed Food officials
Products Export Development
Authority (APEDA), under its Economic Prime FDI approval, Agri-
statutory act. Affairs Minister MSP approval, Bank
- Indian Institute of Foreign Trade merger,disinvestment
(IIFT)- a “Deemed University” that etc grand things
offers MBA, PHD & other
programs.

258
 Parliamentary Defense Defense Minister
Affairs Minister Rajnath Singh made
boss for his acumen in
parliamentary matters
Political Affairs, Prime Self-explanatory. If
Security Minister PM is in a cabinet
Committee, he
automatically
becomes its chairman.
Cab. Committee Prime These two are new countries. Independent judiciary not bound with
on Investment Minister committee formed local laws. Quick Visa etc.
and Cab. after 2019's General • Result - Such place becomes a hub / base of
Committee on Election. operation for international financial companies and
Growth investment bankers. It also creates trickle down
Employment benefits for local people e.g. Chartered
and Skill Accountants, Hoteliers, Golf club owners, Taxi
Development operators etc.
• London, New York, Hong Kong and Singapore
to have also grown by setting up such centres.
Taking their example, India too has set up Gujarat
International Finance Tec (GIFT) city international
financial services centre (IFSC) near Ahmedabad.
(2015)
• Although it not yet attracted good number of
international financial companies because the tax
benefits are not as great as Singapore, Hong Kong
etc.
• This ‘greenfield’ GIFT city was developed by
50:50 Joint venture of (the infamous) IL&FS +
Gujarat Urban Development Company Limited
(GUDCL). Together they were responsible for the
construction, electricity, water, sanitation and other
DIPP becomes DPIIT (2019) responsibilities of running this city. But post IL&FS
• Interim-Budget-2019: Govt renamed Commerce crisis, Government of Gujarat has decided to buy
Ministry’s Department of Industrial Policy and IL&FS’s 50% shareholding.
Promotion (DIPP) asDepartment for Promotion
of Industry and Internal Trade (DPIIT).
• It’ll function under Ministry of Commerce and Full-Budget-2019: Companies operating in operating
Industry IFSC were given additional benefits / tax holidays in the
• Objectives of DPIIT - Promotion of internal trade, direct taxes (with the hopes that it’ll attract more
including retail trade; welfare of traders and their companies here).
employees; matters relating to ease of doing
business; and start-ups. IFSC Authority Act, 2019
• IFSC (such as GIFT city) are setup under the SEZ
International Financial Services Centre (IFSC) Act.
• In such centre, a nation will not apply its local • IFSC get relief / exemption in the Indian tax laws.
taxation and investment norms. Further, RBI, SEBI, IRDAI and other regulators’
• E.g. UAE → Dubai’s IFSC centre: 100% FDI norms also apply in relaxed manner. E.g. Bank
allowed in any sector. 100% Capital Account branches in GIFT-city-IFSC are exempted from
Convertibility (i.e.Invest&pull-out money as & RBI’s CRR-SLR-PSL etc. norms.
when you please in any currency of your choice!), • 2019’s Act aim to setup a statutory International
0% income tax for 50 years. DTAA with most Financial Services Centres Authority (IFSC):

259
 o One Chairperson
o One member each nominated from RBI,SEBI,
IRDAI, PFRDA + few other members from
Finance ministry etc
o Tenure - 3 years.
o Re-appointment - Yes, possible.
• The IFSC Authority will regulate all financial
services, products, institutions in International
Financial Services Centres of India.
• 2020-April: Government announced its
headquarter will be at Gandhinagar, Gujarat.
(Since Gandhinagar is the only place with an IFSC
at present, i.e. GIFT City)
• Controversy - Maharashtra political outfits
demanding HQ should be in Mumbai.
Capital Account and Misc. Concept: NIIP
• Net International Investment Position (NIIP) -
value of overseas assets owned by a nation minus
the value of domestic assets owned by foreigners.
Positive NIIP value = creditor nation.
• Negative value = debtor nation. USA highest, India
at 8th position (in 2018)
• Positive NIIP value = creditor nation
Budget-2019: Indian Development Assistance Scheme
(IDEAS) provides concessional loans to developing
countries. We’ll revamp this scheme.
Q. Which of the following constitute Capital
Account? (CSE - 2013)
1. Foreign Loans
2. Foreign Direct Investment.
3. Private Remittances.
4. Portfolio Investment.
Answer codes:
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2, 3 and 4
(d) 1, 3 and 4
Composition of India’s external debt
• External borrowing by Pvt. Sector >> Government.
• Further, majority of India’s external debt is
denominated in USD currency > Indian Rupee >
IMF’s SDR > (Yen, Euro, Pound Sterling, etc)
Q. Find correct statement(s): (CSE-2019)
1. Most of India’s external debt is owed by
government entities.
2. All of India’s external debt is denominated in US
dollars.
Codes:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Sterilization
If there is a BoP situation, wherein RBI has to sell ₹ to
buy $ to get the net answer zero, but then then...
• Such RBI action would result in increased supply of
rupee currency in the Indian market which can
cause inflation if there is not sufficient supply of
goods for purchase.
• So, RBI must ‘absorb’ that excess rupee currency
back. RBI will it through Open Market Operation
(OMO) → sell government securities to buyback
Indian rupees. This entire process is called
Sterilization.
INDIA’S BALANCE OF PAYMENT CRISIS (1991)
• In the pre-1991’s Nehruvian Socialist Economy,
many sectors were nationalised (banking insurance)
and / or reserved for the public sector companies
only →mismanaged & inefficiency.
• Widening of trade gap due to rise in imports
against a small growth in exports and increased cost
of imports.
• The sharp rise in crude prices due to the Gulf
crisis
• Deterioration in the Exchange Rate of Rupee
• Rising Current Account Deficit.India’s current
account deficit (CAD)had already touched 2.7% of
the GDP in 1988-89. From mid-1990, financing the
CAD became arduous. Traditional sources of
financing started drying up. The main factor
contributing to the rising current account deficit
was decline in the growth of net invisible
earnings.
• Decline in migrants’ remittance from abroad
• Non-resident deposits, which contributed
significantly to bridge the CAD, had also started
flowing out.
• Private sector industrialists were allowed only in
selected sectors, and were subjected to Licence-
Quota-Inspector Raj → low level of competition,
low innovation = low exports.
• And our policy makers restricted foreign
investments (FDI /FPI) fearing that:
o It’ll bring USA-CIA’s invisible hand in Indian
Affairs,
o Our Swadeshi industries & our ‘Non-
Alignment Movement (NAM)’ will be
harmed.
260
 • By end-December 1990, foreign exchange reserves
were enough for only three weeks of imports.
End result –
• High level of “Deficit” in Current Account and not
enough surplus in Capital account to counter/offset
that Deficit. The situation could be like this:
o In 1991, RBI didn’t have enough forex
reserves to get India’s BoP zero → we had to
pledge our gold to IMF to borrow dollars.
o IMF also imposed certain conditions which
required India to open up its economy through
LPG reforms.
Measures taken by the then govt. to overcome the
crisis:
• The first decisive action of the new government was
with respect to the exchange rate. In 1991, rupee
was devaluated.
• The RBI shipped about 47 tonnes of gold to the
Bank of England as security to raise foreign
currency from England and Japan. The government
also sold 20 tonnes of gold to a Swiss Bank for
acquiring foreign currency, with the condition that
it would be repurchased after six months.
• In the short run,to relieve the pressure of foreign
exchange, imports were compressed through
certain monetary measures.
• Licenceraj was liberalized.Many industries were
delicensed.
• Import tariffs were lowered.
• Import restrictions were eased.
• Market determined exchange rate system was
introduced.
• Foreign investment was encouraged.
RBI’s Forex Reserve:
• Consists of Foreign Currency assets (in the form of
foreign currency and foreign G-Sec) > Gold > (SDR
& its Reserve Tranche Position).
• Total Value: $480+ billion as of 2019. India is 8th
largest after China ($3 Trillion)> Japan >
Switzerland > Saudi Arabia > Russia > ...
• The Forex Reserve component(s) in decreasing
order of size →
1) Foreign Currency Assets (includes foreign
currencies & G-Sec/bonds of foreign Govts
2) Gold
3) Reserve Tranche Position (RTP) in the IMF.
4) Special Drawing Rights (SDRs)
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Total Forex reserves of India = about 480 million
USD(2020-April)
Note - USA is not in the top-10 list, it barely keeps
about $125 billions in reserve.
Q. Which one of the following groups of items is
included in India's foreign- exchange reserves?
(CSE-2013)
a) Foreign-currency assets, Special Drawing Rights
(SDRs) and loans from foreign countries.
b) Foreign-currency assets, gold holdings of the RBI
and SDRs.
c) Foreign-currency assets, loans from the World
Bank and SDRs.
d) Foreign-currency assets, gold holdings of the RBI
and loans from the World Bank.
Factors responsiblefor disequilibrium in BoP
When Credit (Receipt, income money) = Debit
(Payment, outgoing money) then BoP will be zero. If,
not then BoP is in disequilibrium. This can happen
because of:
• Development disequilibrium:poor nations have to
import more grains, medicines etc. = adverse BoP.
• Secular or Long-term Disequilibrium: newborn
nation is usually poor & backward so imports >>
Export. E.g. Nehru’s India until it matured in the
90s.
• Consumerism and Demonstration Effect: Rich
Indians try to copy westernized lifestyles. So,
increased import of Switzerland wristwatches,
Sports Cars →adverse BoP.
• Structural Disequilibrium→if transport,
electricity infrastructure is poor or Technological
Backwardness = exports can’t improve.
• Cyclical Disequilibrium: When two countries may
be passing through different phases of business
cycle (Boom, slowdown...) , so there will be
mismatch in imports, exports, FDI etc.
 CH-9 EXCHAGE RATE SYSTEM
• The exchange rate of any currency is determined
by the supply and demand for the country's
currency in the international foreign exchange
market.
• For example, the value of Indian rupee with respect
to the dollar is determined by the demand of dollar
against the Indian rupee. If the demand for dollar
increases, its value increases, and dollar appreciate
while Indian rupee depreciates with respect to the
dollar.
• The price of one currency in terms of the other
currency is called exchange rate. E.g. $1 = ₹ 70.
Meaning, it costs ₹ 70 to buy one dollar.
• This is also called Nominal Exchange Rate
because it does not take into consideration
inflation or purchasing power in the respective
countries.
• Foreign Exchange Market is a place where
currencies are exchanged is called. Their dealers are
called Authorized (Forex) Dealers (AD). They
can be banks or non-banks. They have to get
registered with RBI under the Foreign Exchange
Management Act (FEMA).
• These dealers keep separate prices for buying and
selling, to make profit in between e.g. ICICI: $1
Dollar buying price ₹ 67.95 and $1 selling price is
₹ 72.76.
• Such currency transaction service is also subjected
to GST, however the rate depends on the quantum
of currency exchanged. (e.g. upto ₹ 10 lakh
exchanged in foreign currency then only about ₹
3000 of that 10 lakh will be taxable in GST → 18%
of 3000 → ₹ 540 GST Tax.)
American Economist James Tobin had suggested
0.1% to 0.5% Tobin Tax on currency exchange
transactions to discourage the speculative trading
and volatility in the International Financial Market, but
on that logic if ₹ 10 lakhs exchanged then 0.1-0.5% =
₹1,000 to 5,000 should be levied as ‘tax’, but since GST
amount is much lower, so in reality it can’t be labelled
as ‘Tobin Tax’.
Objectives Of Exchange Rate Management In India
• To ensure that the economic fundamentals of the
Indian economy are correctly reflected in the
external value of Indian rupee.
• To reduce the volatility in exchange rates for
ensuring that changes in the exchange rates take
place in a smooth and orderly manner.
• To maintain a sufficient level of foreign exchange
reserves to deal with any external currency shocks.
• To help in the elimination of market constraints
for ensuring the growth of a healthy foreign
exchange market.
• To help in the prevention of the emergence of any
destabilizing and speculative activities in the
foreign exchange market.
The exchange rate system in India has undergone a
systematic change since Independence. From the
system of the pegged exchange rate to the present form
of market determined exchange rate after liberalisation
in 1993.
Factors Affecting The Exchange Rate Of India
• Intervention of The Reserve Bank of India:
o During high volatility in the exchange rate,
RBI intervenes to prevent the exchange rate
going out of control.
o For example, the RBI sells dollars when Indian
rupee depreciates too much, while it purchases
dollars when the Indian rupee appreciates
beyond a certain level.
• Inflation rate:
o The increase in inflation rate can increase
the demand for foreign currency which can
negatively impact the exchange rate of the
national currency.
o For example, an increase in the inflation level
of petroleum oil can increase the demand for
foreign currency leading to the depreciation of
Indian rupee.
• Interest rate:
o Interest rates on government securities and
bonds, corporate securities etc affect the
outflow and inflow of foreign currency.
o If the interest rates on government bonds are
higher compared to other country forex
markets, it can increase the inflow of foreign
currency, while lower interest rates can lead
to the outflow of foreign currency. This
affects the exchange rate of Indian rupee,.
• Exports and imports:
262
 o Exports and imports affect exchange rate as Kerala, then, demand for dollars will be more than
exports earn of foreign currency while imports that of rupees. So, $1 = 50 → $1=70
require payments in foreign currency. • In this system, if rupees weakens, it is called
o Thus, if the overall exports increases, the “Depreciation” (e.g. 50 → 70); Makes the export
national currency appreciates, while look cheaper to the foreign buyer if ₹ strengthens it
increases in imports leads to the depreciation is called “Appreciation” (e.g. 70 → 50)
of the national currency.
o Apart from above, the Indian foreign exchange Challenge
market is also affected by factors such as the Currency When a person buys $ and other
receipts in the accounts of exports in invisibles Speculation foreign currency with the hopes
in the current account, inflow in the capital they become more expensive in
account such as FDI, external commercial future so he can sell at profit to
borrowings, foreign institutional investments, others. In other words, he would be
NRI deposits, tourism activities etc. hoping for ₹ to depreciate / $ to
appreciate. Such elements distort
the exchange rate by hording
Exchange Rate Regimes in India foreign currencies.
It is the set of rules governing the exchange of Interest Rates If US repo rate / Treasury Bonds
domestic currency with foreign currencies. are going at 2% whereas in
Greece’s bonds going at 4% Then
American investors will convert
EXCHANGE RATE Dollars to invest in Greece. Later,
REGIME when US fed increases their repo
rate from 2% to 4% American
investors might pull back from
Managed Greece. Because America
Floating or Fixed or
Float / Dirty commercial bank loans will
Flexible Pegged
Float become more expensive near about
5%, then there will be American
1. Floating or Flexible companies willing to borrow by
• In floating or flexible exchange rate is determined issuing Bond/debentures at 4.5%.
by the market forces of demand and supply.
• Under the floating exchange rate regime, the market
forces determine the value of domestic currency on
the basis of the forces of demand and supply of the
Mixed Exchange
domestic currency. Rate
• In this system, neither the government nor the Where thec entral
bank interferes
Floating whenever a crisis
central bank intervenes and the market functions Exchange rate- situation occurs.
freely to determine the real value of domestic Fixed exchange Otherwise the
rate system has exchange rate is
currency. inherent risk of market driven on
day to day basis
Payment crisis.
• The floating exchange rate regime establishes trust Fixed Exchange
rate- IMF would
Hence many
decide for each countries
among the foreign investors which can help in the country started shifting
increase in foreign investment in the domestic to Floating
Exchange Rate,
economy. first being UK in
1973
• This system ensures that a country can get easy
access to loans from the IMF and other international
2. Fixed or Pegged
financial Institutions.
• Under the fixed exchange rate regime, the
• So if there are more number of Indian people
government or the central bank has complete
wanting to import crude oil, gold, iPhone;
intervention in the determination of the
Compared to the number of Americans interested to
currency’s exchange rate. This is achieved by
buy Indian goods, services; / coming to vacation in
linking the domestic currency to the value of gold
or with other major currencies such as US dollar etc.

263
• For instance, when the central bank of a country
itself decides the exchange rate of local currency to
foreign currency e.g. People’s Bank of China
(PBC) $1 = 6 Yuan.
• If excess dollars are entering in their market, the
central bank will print more Yuan to buy and
absorb the excess dollars, to ensure Yuan doesn’t
strengthen against Dollar ($1 = 6 → 5 Yuan). As a
result their forex reserve will get large build-up
of dollars, due to central bank’s purchase.
• In future, if less dollars are entering in their market,
the central bank will sell the (previously
acquired) dollars from its forex reserve to ensure
Yuan doesn’t weaken (₹ 1= 6 → 7 Yuan)
• In this system, if Yuan is weakened by Central
Bank’s official notification, it is known as
‘devaluation’ (e.g. $1=6 → 7); usually done when
it doesn’t have enough dollars in reserve to play the
game and / or when it wants to deliberately weaken
Yuan to encourage exports.
It ensures stability in the exchange
rate of the domestic currency.
Benefit It ensures that the domestic currency
does not appreciate or depreciate
beyond the predetermined level.
This regime puts a massive burden on
the government for maintenance of
the exchange rate and the government
may have to infuse a large amount of
money for the maintenance of the
exchange rates.
The foreign investment can reduce
under the fixed exchange rate regime
as investors may lose their confidence
as they believe that the exchange rate of
the domestic currency does not
represent the real value of the economy.
Challenge If trade deficit widens or speculators
are hoarding dollars or FPIs are
pulling their money back to USA due
to higher interest rates. It will create
shortage of $ in local forex market.
Then PBC will have to sell $ from its
forex reserve to keep the exchange
rate stable.
But since PBC will not have infinite
amount of dollars in its reserve
ultimately it will be forced to be
devalue the local currency. This will
made imports more expensive.
Therefore, most of the countries have
abandoned this system after 70s.
China too abandoned it in eventually,
and shifted to Managed Floating
Exchange Rate.
Floating exchange rate
• Under the floating exchange rate regime, the
market forces determine the value of domestic
currency on the basis of the forces of demand and
supply of the domestic currency.
• In this system, neither the government nor the
central bank intervenes and the market functions
freely to determine the real value of domestic
currency.
• The floating exchange rate regime establishes
trust among the foreign investors which can help
in the increase in foreign investment in the
domestic economy.
• This system ensures that a country can get easy
access to loans from the IMF and other
international financial Institutions.
3. Managed floating exchange rate
• It is the middle path between the fixed exchange
rate regime and the floating exchange rate regime.
• In the system, the exchange rate of domestic
currency is allowed to move freely based on the
market forces of demand and supply.
• However, during difficult circumstances, the
central banks intervene to stabilize the exchange
rate of the domestic currency.
• RBI will not decide the exchange rate (unlike the
fixed system). In the ordinary days, RBI will let the
market forces of supply and demand decide the
exchange rate.
• But if there is too much volatility, then RBI will
intervene to buy / sell $ to keep the volatility
controlled.
• Similarly, People Bank of China will not intervene
in ordinary circumstances. They will intervene
during volatility i.e. if $ to Yuan value changes
more than “x%” up or down compared to previous
day’s exchange rate.
• It can further be categorised as following:
264

Managed floating
exchange rate
Crawling Clean Adjusted Dirty
peg system floating peg system floating
Under this, the central bank tries to
hold the exchange rate of domestic
currency until the foreign exchange
Adjusted reserves of that country gets
peg system exhausted. After this, the central
bank goes for the devaluation of the
domestic currency to move to
another equilibrium of the exchange
rate.
Under this, the central bank keeps on
adjusting exchange rate based on the
new demand and supply conditions
Crawling of the exchange rate market. It
peg system follows a system of regular checks
and balances and the central bank
undertakes small devaluations based
on the market conditions.
Clean Under this, the exchange rate of
floating domestic currency is based on the
system market forces of demand and supply
without the government
intervention. This system is identical
to the floating exchange rate.
Dirty Under this, the exchange rate is
floating mainly determined by the market
system forces of demand and supply but the
central banks occasionally
intervened to remove excessive
fluctuations from the foreign
exchange markets.
Currency speculation and interest
rates
Currency Manipulation: usually
occurs when a central bank keeps
buying dollars to create artificial
scarcity of $ in the forex markets.
This makes dollar more expensive.
This makes local currency weak
Challenges in and helps in boost to exports.
Managed US Department of the Treasury
Float System
publishes a semi-annual report to
track such nations. 2018: China,
Germany, Japan, Switzerland,
265
South Korea and India have been
kept in (‘Watch list’) citing the
(alleged) lack of transparency
and consistency in their respective
Central banks operations. USA has
not officially labelled anyone as
“Currency Manipulator”, since
1994.
Q. The price of any currency in international market
is decided by: (CSE-2012)
1. The World Bank.
2. Demand for goods/services provided by the country
concerned.
3. Stability of the government of the concerned
country.
4. Economic potential of the country in question.
Answer codes:
a) 1, 2, 3 and 4
b) 2 and 3
c) 3 and 4
d) 1 and 4
EXCHANGE RATE REGIMES
Pegged
regime(1971-
Gold Standard 1992):
(1870-1914)
Bretton Woods Towards
System (1946- Managed
1971) Floating
Exchange Rate:
1995 onwards
Fixed exchange rate system → Gold Standard (1870-
1914)
• USA would issue $1 note, if only it has 14 grams of
gold in reserve, whereas England would issue one
pound note if only it has 73 grams of gold in its
reserve. Accordingly, their exchange rate will be 1
Pound =73/14 = about 5 USD.
• And, each Central Bank Governor has promised
to convert their currency into gold at a fixed
amount. So, a person could walk with paper
currency and demand the gold coins or gold bars in
return.
• When the gold mining production declined, nations
gradually shifted to ‘bimetallism’ e.g. $1
promised with 14 gm gold or 210 gm of silver
whichever available with their Central Bank.
• This system collapsed during the First World
War (WW1) because the nation’s currency
printing capacity was limited by their gold
reserve, but their governments where more eager to
 print more money to finance the war (soldiers’
salaries, rifles, ammunition etc.)
Fixed exchange rate system → Bretton Woods
System (1946-1971)
• Here, USA agreed to fix price of its $1 = (1/35)
ounces of gold. [1 ounce = 28 grams]. USA allowed
free convertibility of Dollar to Gold. So if a
person walked into the US Federal Reserve with
$35, their chairman (Governor) will give him one
ounce of gold.
• Then IMF fixed the exchange rate of every
country's currency against USA. e.g.₹ 1= $0.30 =
about 0.24 grams of Gold. So, that implied India
can’t issue more currency if RBI does not have
proportionately sufficient gold reserve of its own.
Still if RBI issues more ₹ currency, International
Monetary Fund (IMF) will order India to
devalue its rupee exchange rate against dollar.
• Robert Triffin (American Economist) claimed
this system will collapse eventually because gold
is a finite commodity and its price will continue to
rise (from 1 ounce of gold = $35 to $40). So there
is always danger of people converting the local
currency into dollars and then converting dollars
into gold at $35, then selling it in open market at
profit, then US Feds Chairman can’t continue
honouring his promise. It was called “Triffin
Dilemma”. He therefore suggested an alternative
SDR (Paper gold) system for IMF.
• USA President Robert Nixon, in 1971 pulled out of
Bretton Woods gold convertibility system, mainly
because he wanted freedom to print more dollars
to finance the Cold War and arms race against
the USSR.
• Thus, USA shifted to “Floating Exchange
System”. Eventually most of the nations also
shifted in that either floating / managed-floating
system.
• Ecuador adopted Dollarization in 2000. i.e. it
abandoned the domestic currency and adopted the
US dollar as their official currency.
Currency Exchange system in India
Towards Fixed Exchange Rate
1860 onwards Fixed Fiduciary System → i.e.
British Indian Govt can issue
Rs.10 crore notes on fiduciary
(“trust”) backed by G-Sec.
Beyond that every note must be
backed by gold / silver.
1935 onwards Proportional Reserve → RBI
must keep about 40% gold to the
value of currency issued. British
govt fixed exchange rate.
1946 onwards Bretton Woods / IMF system of
fixed exchange rate → Wherein ₹
price was fixed (pegged) against
dollar, and dollar price was fixed
(pegged) against gold.
1956 onwards While RBI could issue any
amount of Indian currency but
that has to be balanced by the
Assets of the issue department
(Remember M0). If RBI printed
too much currency backed by
only Indian G-sec but (without
adequate Gold / Forex Reserve,
then IMF may force
devaluation of ₹ against Dollar).
So, we adopted “Minimum
Reserve System” i.e. RBI must
keep ₹ 400 crore of foreign
currency/security + ₹
‘specified’ crore worth gold.
Towards Managed Floating Exchange Rate: 1995
onwards
• Post 1995 onwards, “Minimum Reserve System;
is continued but RBI is required to only keep ₹
‘specified’ crores of gold. No compulsion for RBI
to keep additional 400 crore worth foreign currency
or foreign securities. RBI can print as much
currency it wants as long as its balanced by the
Assets of Issue Dept. (such as Indian G-sec,
Foreign Securities, Gold etc.)
Big Mac Index - The Economist magazine’s informal
index to measure PPP exchange rate using the price of
one McDonald burger in USA vs the respective country.
Attracting Dollars: VRR and FAR
To prevent weakening of ₹, we have to attract more $
(and other foreign currencies) in India. So, RBI taken
following notable measures:
Voluntary • Launched in 2019: If an FPI
Retention buys Indian Union/State
Route (VRR) Governments’ G-Sec and
Indian Corporates’ Bonds
through this route → FPI will
be given more freedom in
certain technical regulations of
RBI & SEBI.
266
 • But, with condition= FPI must
remain invested in India for
minimum 3 years. (Hot
Money)
• RBI decides quantitative
limits to how much money can
FPI invest through this route.
Fully • Budget-2020 had announced
Accessible allowing non-resident
Route (FAR) investors to invest in G-Sec,
without any restrictions.
• 2020-March: RBI announced
this window, non-resident
individual investors (who’re
not FPI) can buy G-Sec. No
limits on amount of
investment.
Benefit - Investors will convert $ & other foreign
currency into ₹ currency to buy G-Sec. so more $$
coming towards India which will help keeping BoP and
currency exchange rate stable during crisis.
Currency Exchange Rate in COVID-19 Crisis
Corona Virus Force Majeure
→SENSEX dips so FPIs Selling
shares from Indian companies= they
got ₹₹ → converting them into $ →
2020-Feb running back to USA to invest in
(AAA rated) US treasury bonds which
is safest investment. So there is a great
shortage of dollars in the Indian
market. If RBI does not supply dollars
→ further weakening of rupee
($1=₹75 → ₹80).
RBI starts Dollars Swap with Indian
banks. i.e. A bank shall buy US
2020- Dollars from the Reserve Bank and
March simultaneously agree to sell the same
amount of US Dollars at the end of the
swap period (6 months). It is done
through auctioning, so, RBI to earn
some % of profit.
COVID-19 Dollar up-down movements, RBI
signing more swap agreements, Indian
Government borrowing more $$ from
ADB, BRICS Bank etc.
Q. In the context of India, which of the following
factors is/are contributor/contributors to reducing
the risk of a currency crisis? (CSE-2019)
1. The foreign currency earnings of India’s IT sector.
267
2. Increasing the government expenditure.
3. Remittances from Indians abroad.
Answer Codes:
(a) 1 only
(b) 1 and 3 only
(c) 2 only
(d) 1,2 and 3 only
Q. Which one of the following is not the most likely
measure the Government/RBI takes to stop the slide
of Indian rupee? (CSE-2019)
a) Curbing imports of non-essential goods and
promoting exports
b) Encouraging Indian borrowers to issue rupee
denominated Masala bonds
c) Easing conditions relating to external commercial
borrowing
d) Following an expansionary monetary policy.
IMF Special Drawing Rights (SDR)
• After the collapse of Bretton
Woods Exchange Rate
System, IMF was converted
into a type of ‘deposit bank’,
where the members would
deposit currencies in the
proportion of quotas allotted
to them (depending on size of their economy,
openness etc).
• IMF will pay them a small interest rate for their
deposits. And IMF would lend this money to a
member facing balance of payment crisis. To
operationalize this mechanism, IMF would allot an
artificial currency / accounting unit called SDR
to the members based on their deposits.
• Initially the price of SDR was fixed against the
amount of gold but present mechanism:
Currency Basket Weightage
U.S. Dollar 41.73
Euro 30.93
Chinese Yuan 10.92
(Renminbi *added in
2015)
Japanese Yen 8.33
Pound Sterling 8.09
• By applying a formula involving (weight *
exchange rate), IMF will obtain value of 1 SDR =
how many dollars?
• Presently, 1 SDR = $1.40 = ₹ 98 (assuming $1 is
trading at ₹ 70).
• SDR is called ‘Paper Gold’ because it’s merely an • So, RBI puts certain restrictions on the
accounting entry or artificial currency, without convertibility of Indian rupee to foreign currency
any gold involved. using the powers conferred under:
• SDR can be traded among the members, it can be
converted into members’ currencies as per above FERA was later replaced by
method & be used to settle their Balance of Foreign Exchange Regulation Foreign Exchange
Act, 1973 (FERA) Management Act, 1999
Payment Transactions / Crisis. (FEMA)
• If the BoP crisis is so big, that a country’s entire
SDR quota exhausts, then member country may
borrow more SDR from IMF (and then convert it RBI Restriction On Convertibility Of Rupee:
into dollar etc. to pay off the import bill), but
eventually member will have to repay this loan
to IMF with interest. CONVERTIBILITY OF RUPEE

2016-Reforms: The total quantity of SDR was

increased, and India’s quota was increased from Convertibility on Capital Convertibility on Current
2.44% to about 2.75%, accordingly, we are allotted Account Transactions account transactions

around 13 billion SDR [25% of it is kept as reserve

tranche position (RTP)] Convertibility on Capital Account Transactions:

• India is 8th largest quota holder after USA RBI’s External Commercial
(~18%), Japan (~7%), China (~6%)... External Borrowing (BoP → Capital
• In IMF, a member’s voting power depends on his Commercial Account → Borrowing → ECB)
SDR quota contribution. Borrowing ceiling is up to $750 million (or
• For India, this voting power is exercised by (ECB) equivalent other currency) per
India’s Finance Minister as the ex-officio year for Indian Companies. That
Governor in IMF’s Board of Governors. means even if Bank of America
• If Finance Minister absent, then RBI Governor was willing to lend $1500 million
can vote as the Alternate Governor during the to Reliance, it can’t bring all those
IMF’s meetings. dollars (or its converted rupee
equivalent) in India. If he tries
Q. Recently, which one of the following currencies through illegal methods like
has been proposed to be added to the basket of IMF's Hawala, then Enforcement
SDR? (CSE-2016) Directorate (ED) will take action
Answer codes: for FEMA violation.
(a) Rouble Foreign An Foreign Portfolio Investors
(b) Rand Portfolio (BoP → Capital Account →
(c) Indian Rupee Investors Investment → FPI) can’t invest in
(d) Renminbi (FPI) more than 5% of available
government securities in the
Indian market and more than
Currency Convertibility 20% of the available corporate
• Presently, India has managed floating exchange bonds in the Indian market.
rate system wherein, currency exchange rate is So, even if Morgan Stanley or
determined by the market forces of supply and Franklin Templeton investment
demand, however, during high level of volatility fund has billions of dollars they
RBI will intervene to buy / sell ₹ or $ to stabilize can’t bring them all to India
the exchange rate. because of above restrictions.
• But if people are allowed to convert the local and Foreign Similar restrictions on Foreign
foreign currency in an unrestricted manner, this Direct Direct Investment (FDI) as well.
will led to so much volatility that RBI will not be Investment Govt decides FDI policy and RBI
able to manage. (FDI) mandates the forex dealers

268
 accordingly to convert or not
convert foreign currency into
Indian currency. E.g. Las Vegas’s
Flamingo Casino company can’t
convert $ into ₹ to invest in Goa’s
Casino (Because FDI prohibited
in Casino). If they manage to
‘smuggle’ rupees through Hawala /
Mafia boats then again ED will
take action for FEMA violation.
Thus, Indian rupee is not fully
Conclusion convertible on capital account
transactions.
Convertibility on Current account transactions
• During 2013 to 2014, RBI’s 80:20 norms
mandated min. 20% of the imported gold must
be exported back.
• Until then Jeweller/bullion dealers will not get
permission to (convert their rupees into
dollars/foreign currency) to import next
consignment of gold.
• However, if we disregard such few rare
examples/restriction, Indian rupee is considered
fully convertible on current account transactions
(i.e. Import and export, remittance, income transfer
gift and donations) since 1994.
FCRA 2010 violations:
• If NGO / Universities were allowed to accept
foreign donations in an unrestricted manner, they
may become puppets of ISI / Pakistan / China / CIA.
• So, Ministry of Home Affairs (MHA) requires
them to ‘register’ and furnish annual reports
under Foreign Contribution Regulation Act 2010
(FCRA). Those who fail to comply with it, are
prohibited from accepting foreign donations.
• But this angle takes us towards the ‘National
security and sovereignty of India’. We need not
confuse or mix it up with ‘Economics concept’ of
Rupee convertibility under FEMA ACT.
Full convertibility of Rupee
Meaning - India should permit unrestricted
conversion of Indian ₹ to foreign currency for both
current account and capital account transactions.
This will infuse more FDI investment in India which
will help in resolution of NPA problem, new factories,
jobs, GDP growth, rivers of honey and milk will flow.
Anti-Arguments:
• Before 1997, East Asian “Tiger” economies -
(South Korea, Indonesia, Malaysia, Thailand,
269
Vietnam Philippines etc.) allowed full capital
account convertibility to attract FDI.
• But 1997: Their automobile & steel companies
filed bankruptcy. The foreign investors panicked,
sold their shares and bonds and got local currency
to convert into $ and ran away. The flight of this
‘Hot Money’ resulted into extreme depreciation
of local currency $1 = 2000 Indonesian Rupiah →
$1= 18,000 Indonesian Rupiah. All developments
resulted into heavy inflation of petrol and diesel,
social unrest, riots and political instability. None of
their central banks had enough forex reserve to
combat this crisis.
• So, in 1998, their GDP growth rates fell in
negative territory e.g. Indonesia (-13.7%)
Because of their mistake of allowing full currency
convertibility.
• Whereas India and China grew at 6-8% because
we had not allowed it.
S.S. Tarapore Committee (1997) on Convertibility of
Rupee
• Committee suggested India to allow full Capital
Account Convertibility (CAC) only when the
fundamentals of our economy become strong
enough, such as:
a) RBI must have enough forex to sustain 6
months’ import
b) Fiscal deficit must not be more than 3.5% of
GDP
c) Inflation must not be more than 3-5%
d) Banks’ NPA must not be more than 5% of
their total assets, and among others.
• So, time is not yet ripe for allowing full CAC.
Rupee Convertibility and RBI reforms (2004-2019)
• While RBI has not permitted full convertibility
of Indian rupee (on Capital Account), but over the
years it has liberalised the norms, such as:
Liberalised Remittance Scheme
(LRS) for each financial year, An
Indian resident (incl. minor) is allowed
to take out upto $2,50,000 (or its
equivalents in other currencies) from
India. He may use it for either current
account or capital account
transaction as per his wish. (e.g. paying
2004 for college fees abroad, buying shares,
 bonds, properties, bank accounts Chinese product more cheaper in global trade.
abroad.) He even accused Russia and Japan of playing
Controversy → Panama papers allege similar ‘Currency War’ against him.
certain Bollywood celebrities used LRS
window to shift money from India in
their shell companies in tax havens. Currency War and Fall of Indian ₹ in 2018
Later used those shell companies for tax 2018: Turkey was suffering from high Inflation, current
avoidance. account deficit and political turmoil.
RBI began relaxing the norms for
External Commercial Borrowing
2016 (ECB), mainly to soften the NPA
onwards problem e.g. Software firms can bring
up to $200 million in ECB, Micro-
finance $500 mill, Infrastructure
companies $750 million etc.
2018-19 When ₹ started to depreciate heavily
against dollars ($1 → ₹ 63 → ₹ 74), RBI
had to encourage the flow of dollars into
Indian economy. So, aforementioned
sector- specific limits streamlined →
all eligible companies automatically
allowed to borrow upto $750 million
• US Feds was pursuing Hawkish (Dear)
via ECB route. (Although prohibited in
monetary policy, so dollar supply shrinking and
certain categories e.g. purchase of farm
resultantly dollar is becoming more expensive
house, tobacco, betting, gambling,
against other currencies. In this atmosphere,
lottery etc.)
foreign investors feared Turkish companies (who
2019 RBI allowed ECB even for working
had previously borrowed lot of money from
capital & repayment of rupee loans.
American financial market) will not be able to repay
their loans in dollar currency.
Twin Deficit - It’s the term used when both Current
• So foreign investors began selling their shares
Account Deficit and Fiscal Deficit are high.
and bonds from Turkey’s market. They got Lira
currency and exchanged it to dollars and ran away
CURRENCY WAR 2018
from Turkey.
• Because of this rush, demand of dollars
• 2015: Chinese authorities announced they don’t strengthened even further and resultantly, other
manipulate/control Yuan exchange rate. They only currencies became even weaker. (Including India:
intervene if Yuan’s exchange rate varies more $1=₹ 63 in January → $1= ₹ 74 in Oct’18).
than +/- 4% from previous day. • In 2019-20 also, India rupee continued to weaken
• During 2018, People’s Bank of China pursued towards $1=75₹ because Corona Force Majure
‘Cheap (Dovish) Money Policy’ to injected more which leads to dip in SENSEX. Foreign investors
Yuan (renminbi) in the system to makes loans pulling out money from India.
cheaper in domestic market and boost the • While such depreciation is good for our exporters
consumption, demand, growth. but bad for our importers.
• But, on the other side, US Feds pursued Dear
(Hawkish) Money Policy, so dollar supply is To combat this fall, Govt and RBI initiated following
shrinking, so dollar is becoming more expensive steps:
against other currencies. 1. FPI’s investment limits in Bond market was
• Results → Increased supply of Yuan vs. reduced relaxed. (So they feel encouraged to convert their
supply of $: resulted in $1=6.20 Yuan weakening Dollars into Rupees and invest in Indian bond
to almost $1= 7 Yuan. market)
• Trump alleges Yuan was deliberately weakened 2. External commercial borrowing (ECB) norms
(due to PCB increasing Yuan supply) to make were also relaxed.

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 3. RBI sold about 25 billion dollars from its forex
reserve to calm down the demand of dollars.
4. Further, to attract NRI’s dollar savings into India:
a) RBI could announce more interest rates on
Foreign Currency (Non-Resident) Account
(Banks) [FCNR (B) Account] & then pay
interest subsidy to Indian Banks, like they had
done in 2013.
b) Govt could also tell RBI to issue NRI bonds to
attract their $ savings to India.
5. But, Urjit Patel avoided doing 4A and 4B solutions
because eventually such borrowed dollars have to
be returned back to NRI with interest, which could
result in exchange rate crisis in future.
6. RBI could also pursue Hawkish Monetary Policy
to reduce rupee supply in market (so that ₹ can also
become expensive just like dollars). But, because
RBI act mandates inflation control within 2-6%
CPI, and by December 2018 the CPI has been
falling towards 2% so RBI’s MPC had to actually
reduce the policy rate (2019 Feb to August) to
combat deflation.
2018-Oct The central banks of India and
Japan signed Currency Swap
Agreement of $75 billions i.e.
either party can use that much
dollar currency from other party’s
forex reserve during the crisis.
Even in 2008 and 2013 too they had
signed similar agreement but lower
amount was involved.
2019- March RBI’s $5 bn Currency Swap with
Indian banks → RBI gains dollar
reserve to fight future volatility in
currency exchange rate, whereas
Indian banks got extra rupee
liquidity → (Hopefully) cheaper
interest rates to combat deflation.
2018-Dec India signed pact with Iran to pay
crude oil bill in rupee currency.
National Iranian Oil Co (NIOC)
will open a bank account in India’s
UCO Bank (a PSB). Indian oil
companies will make payments
there in ₹ currency. This will help
curbing the demand of dollars in
India.
Budget - 2019 Nirmala S. announced various
measures to attract more FPI and
FDI investment in India
2020-Feb Corona Virus Force Majeure =
dip in SENSEX so FPIs Selling
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shares from Indian companies=
they got ₹₹ → converting them into
$ → running back to USA to invest
in (AAA rated) US treasury bonds
which is safest investment. So there
is a great shortage of dollars in the
Indian market. If RBI does not
supply dollars → further
weakening of rupee ($1=₹75 →
₹80).
2020-March RBI starts Dollars Swap with
Indian banks. i.e. A bank shall buy
US Dollars from the Reserve Bank
and simultaneously agree to sell the
same amount of US Dollars at the
end of the swap period (6 months).
It is done through auctioning, so,
RBI to earn some % of profit.
Quantitative Easing and Federal Tapering
Subprime crisis in USA (2007-08:)
→ Borrowers unable to repay the
Quantitative home loans → American Banks and
Easing NBFCs’ bad loans / NPA / toxic
assets increased → to help them, US
Federal Reserve printed new dollars
& used it to buy those toxic assets →
increased dollar supply in the
system. Known as “Quantitative
Easing”.
Fed 2013: US Federal Reserve gradually
Tapering cut down its toxic asset purchasing
program → less new dollars issued
→ called “Fed Tapering”
Result
• shortage (perceived) of dollars in USA → Loans
% become more expensive in USA so American
investors began selling shares/bonds in other
countries, and took their dollars back to USA (to
lend to local businessmen).
• This phenomenon was called “Taper Tantrum”. It
resulted into weakening of other currencies against
USD.
Helicopter Money & Zero interest rate regimes
• Economist Milton Friedman (1969) introduced
concept of ‘Helicopter Money’ to combat
recession, a central bank should supply large
amounts of money to the public at near zero
 interest rate, as if the money was being showered 2. In terms of PPP dollars, India is the sixth largest
on them from a helicopter. It will encourage economy in the world.
consumption, demand which will result into more Codes:
factories, jobs and economic growth. (a) 1 only
• In the aftermath of sub-prime crisis and global (b) 2 only
financial crisis, there was fall in consumption, (c) Both 1 and 2
demand and so the deflation & recession scenario. (d) Neither 1 nor 2
• So, the Central Banks of Sweden, EU and Japan
cut their deposit interest rates into negative
figures (-0.1%) so if a commercial bank Yuan as global currency
parked/deposited its surplus money into the central • In 2015, Yuan added in an
bank (through a reverse repo like mechanism), its SDR basket of currency. It
money will be deducted in penalty instead of increases the acceptance of
earning deposit interest. Yuan in global economy.
• Result → Commercial banks will proactively try to • China is also loaning Yuan
give away more loans to customers to boost demand to other nations for infra.
in economy. development in One Belt One Road Initiative
(OBOR), via AIIB and BRICS bank, and even via
Panda Bonds.
Purchasing Power Parity (PPP)
• In future, China may have to be less dependent on
• Hypothetical concept that tries to compare two dollar while importing oil, missiles, metal and food
currencies’ exchange rate through their purchasing commodities- as other nations begin to happily
power in respective countries. accept Yuan.
• So, If 1 cup of coffee in India = ₹ 20 whereas 1 cup • Such Yuan dominance may pose strategic
of coffee costs $2 in USA then Dollar to Rupee challenges to USA and India.
exchange rate (PPP) should be $1 = ₹ 10.
(According to OECD, exact figure is $1=₹ 17 at
PPP). Effective Exchange Rates
• This (hypothetical) exchange rate can happen in
real life, if both the countries have Floating Effective Exchange Rates
Exchange Rate without any intervention of the
respective Central banks; and if the bilateral trade is
free of protectionism (i.e. without tariff or non-tariff Nominal effective Real effective
barriers). exchange rate exchange rate
(NEER) (REER)
• GDP is the total market value of all goods and
services produced in a country within a year.
When we convert these GDP values from local Weighted average of
Weighted average of 36(6) currencies
currencies into PPP $ exchange rates, the largest 36(6) currencies adjusted to respective
economies of the world (GDP, PPP wise) are: domestic inflations

1. USA 2. China 3. India NEER and REER

• Nominal Effective Exchange Rate (NEER) and
Real Effective Exchange Rate (REER) are the
indicators of external competitiveness.
• Five-country and thirty six-country indices are
5. Germany 4. Japan being constructed by the Reserve Bank of India to
help the researchers and analysts.

Q. Find correct statement(s) (CSE-2019) NEER is the weighted REER is the weighted
1. Purchasing Power Parity (PPP) exchange rates are average of bilateral average of nominal
calculated by the prices of the same basket of goods nominal exchange rates exchange rates adjusted
and services in different countries. of the home currency in for relative price

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 terms of foreign differential between the
currencies. domestic and foreign
countries, relates to the
purchasing power parity
(PPP) hypothesis.
• In real life we are not just trading with USA but
other countries, using foreign currencies other than
US dollars (such as Euro, Pound, Yen, Yuan etc).
• Therefore, only tracking $1=60 or $1=70 will not
give a full picture. So, RBI also calculates
geometric average of rupee’s exchange rate
against upto 36 types of foreign currencies.
• The formula will give weightage to each of those 36
foreign currencies depending on their trade-
volume with India. The result is called “ Nominal
effective exchange rate (NEER)”.
• When NEER is mathematically adjusted as per
the CPI-inflation levels in India and those
foreign countries, it’s called “Real effective
exchange rate (REER)”.
• REER interpreted as the quantity of domestic goods
required to purchase one unit of a given basket of
foreign goods.
• NEER vs REER values help analysing whether a
currency is really weakening (depreciating)
against the foreign currencies or not, thus helps
to know our international competitiveness in
exports.
Devaluation of a currency
• Under the fixed rate regime, the central bank or the
government decides the value of the currency with
respect to other foreign currencies. The central bank
or the government purchases or sells its
currencies to maintain the exchange rate. When
the government or the central bank reduces the
value of its currency, then it is known as the
devaluation of the currency.
• For instance, in 1966 when the India was following
the fixed exchange rate regime, the Indian Rupee
was devalued by 36 %.
Reasons and objectives of currency devaluation
• To increase Exports: countries go for currency
devaluation to boost their exports in the
international market. Devaluation of currency
makes its goods cheaper compared to its
International competitors.
• Competitive devaluation (race to the bottom): if
one country devalues its currency other countries
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are also incentivized to devalue their own currency
to maintain their competitiveness and the
international export market.
• To reduce trade deficits: currency devaluation
makes a countries exports cheaper, while imports
become more expensive. This leads to an increase
in exports and decrease in imports. This situation
favors the improved balance of payment and
reduces trade deficits.
• To reduce the sovereign debt burden: If the debt
payments are fixed, devaluation of currency will
make the domestic currency weaker and will
ultimately make the payments less expensive over
time.
Disadvantages of currency devaluation
• Inflation: it can lead to increase in the inflation rate
as essential imports such as oil etc will become
more expensive. It can also lead to demand-pull
inflation.
• It reduces the purchasing power of the country’s
citizens and foreign goods and foreign tours
become expensive for them.
• Large and quick devaluation of currency may
reduce the faith of international investors in the
domestic economy. Foreign investors would be less
interested in holding the government debt as
devaluation reduces the value of their holdings.
• Devaluation of currency negatively impacts the
corporates and individuals who hold debt in the
foreign currency.
Depreciation of a currency
• In the floating exchange rate regimes, the value of
a country's currency is determined by the market
forces of demand and supply. The exchange rate of
the currency changes on daily basis as per the
demand and supply of that currency with respect to
foreign currencies. A currency depreciates with
respect to foreign currency when the supply of
currency in the market increases while its
demand falls.
Reasons responsible for currency devaluation
• Decline in exports: The decline in a country's
overall exports leads to a decline in export
revenues. This reduces the demand for the country's
currency and leads to its depreciation.
• Large increase in imports: A large increase in the
demand for imported goods and services can lead
to a trade deficit. Increase in the current account
 deficit can lead to a net outflow of the currency
which can weaken the exchange rate leading to
currency depreciation.
• Monetary policy of Central Bank: If the central
bank reduces its policy interest rates it can lead to
the outflow of hot money such as foreign portfolio
investment etc. This can lead to the depreciation of
domestic currency.
• Open market operations of the central bank: If
the Central bank (in Indian case, RBI)
undertakes open market operations to buy foreign
currency and gold etc. it can lead to the depreciation
of domestic currency.
Devaluation vs depreciation
Both devaluation and depreciation lead to the decline in
the value of domestic currency. However, there are
certain differences between them.
• This can increase the flow of foreign investment
which can cancel out some of the effects of
depreciation.
• However, this is not possible in a fixed rate
economy as only the government or Central bank
change the exchange rates.
Revaluation
• Revaluation refers to an upward adjustment to
the country's official exchange rate the relative to
either price of gold or any other foreign currency.
• Revaluation increases the value of the domestic
currency with respect to the foreign currency.
• Revaluation is a feature of the fixed exchange rate
regime, where the exchange rate is determined by
the central bank or the government.
• Revaluation is opposite to devaluation, which is a
downward adjustment.

Devaluation Depreciation Reasons for currency Revaluation

Devaluation is the Depreciation refers to an • Current account surplus: the government can go
official reduction in the unofficial decline in the for currency revaluation for reducing the current
value of a currency. currency’s value. account surplus. This happens for economies
Devaluation is the Depreciation of a where exports are higher than imports.
phenomena associated currency is associated • To manage inflation: the government may go for
with fixed exchange rate with the floating or currency revaluation in order to manage that
regime. managed floating inflation rate. Revaluation can lead to either
exchange rate regime higher inflation or even lower inflation. Currency
Devaluation of the The market forces of revaluation can make the imports cheaper which
currency is done demand and supply are can reduce the inflation rate in the domestic
purposely by the central responsible for the economy.
bank or the government depreciation of a • Changes in the interest rates of other countries
currency. and changes in the global economic
The impact of currency The depreciation of environment can also lead to currency revaluation
devaluation is for short currency can affect the in order to manage its impact on the domestic
term, economy for a longer economy.
time.
Devaluation of currency Depreciation and
is done occasionally by appreciation of currency Currency Appreciation
the central bank. occur on a daily basis.
• Currency appreciation refers to the increase in the
Long term impacts of currency devaluation and value of one currency with respect to other
depreciation: foreign currencies.
• The long-term impacts of devaluation and • Currency appreciation is the unofficial increase in
depreciation differ. the value of any currency.
• The depreciation of the domestic currency in a • It is a feature associated with floating or managed
floating exchange rate regime, can increase its floating exchange rate regimes.
exports, boost spending and can make the • Appreciation of a currency takes place when the
economy look better for the foreign investors. supply of the currency is lesser than its demand
in the foreign exchange market.

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 Causes of currency appreciation
• Increase in the policy interest rate by the central
bank: it would make the investors attractive to
invest in the government bonds and domestic
securities which can lead to inflow of foreign
investment in the form of hot money.
• Current account surplus: current account surplus
can cause an inflow of foreign exchange in the
economy leading to appreciation in the exchange
rate of the domestic currency.
• Increase in exports: it increase the demand for the
domestic currency leading to its appreciation with
respect to foreign currencies.
• Intervention by the central bank through open
market operations: buying of domestic currency
from the foreign exchange market by the central
bank can lead to an appreciation of the domestic
currency.
• Higher economic growth can increase foreign
investment in the economy which can cause
appreciation in the exchange rate.
Appreciation of a currency associated with a floating or
managed floating exchange rate system. Whereas
revaluation of a currency is associated with the fixed
exchange rate regime.
GSM2-2014 Though 100 percent FDI is already
allowed in non-news media like a
trade publication and general
entertainment channel, the
Government is mulling over the
proposal for increased FDI in news
media for quite some time. What
difference would an increase in FDI
make? Critically evaluate the pros
and cons.
GSM3-2014 Foreign direct investment in the
defence sector is now said to be
liberalised. What influence this is
expected to have on Indian defence
and economy in the short and long
run?
GSM3-2013 Discuss the impact of FDI entry into
multi-trade retail sector on supply
chain management in commodity
trade pattern of the economy.
GSM3-2013 Though India allowed Foreign
Direct Investment (FDI) in what is
called Multi Brand Retail through
joint venture route in September
2012, the FDI even after a year, has
not picked up. Discuss the reasons.

Previous Year Questions

GSM3-2016 Justify the need for FDI for the
development of the Indian economy.
Why there is gap between MOUs
signed and actual FDIs? Suggest
remedial steps to be taken for
increasing actual FDIs in India.
GSM3-2015 Craze for gold in Indians have led to
a surge in import of gold in recent
years and put pressure on balance of
payments and external value of
rupee. In view of this, examine the
merits of Gold Monetization
Scheme.
GSM3-2015 There is a clear acknowledgement
that Special Economic Zones (SEZs)
are a tool of industrial development,
manufacturing and exports.
Recognizing this potential, the whole
instrumentality of SEZs requires
augmentation. Discuss the issues
plaguing the success of SEZs with
respect to taxation, governing laws
and administration.

275
 CH-10 INTERNATIONAL ORGANIZATIONS
▪ United Nations Monetary and Financial
Conference, commonly known as Bretton Woods
conference, was held in Bretton Woods, New
Hampshire, USA to regulate the international
monetary and financial order after the
conclusion of World War II (1939-45)
▪ Total 44 nations participated, including India.
▪ The conference resulted in the agreements to setup
the International Bank for Reconstruction and
Development (IBRD)- popularly known as World
Bank and the International Monetary Fund
(IMF).
▪ It proposed 3 international institutions:
development banks, think tanks, and other
international institutions on issues ranging from
climate change, conflict, and food security to
education, agriculture, finance, and trade.
▪
▪ World Bank is a vital source of financial and
technical assistance to developing countries
around the world. This is not only a bank in the
ordinary sense but a unique partnership to reduce
poverty and support development.
▪ IBRD and IDA are collectively known as World
Bank, that provides loans to countries for capital
programs.

Bretton woods conference

International
Bank for
Reconstruction International
and International Trade
Development Monetary Fund Organisation
(IBRD), (IMF) (ITO) - International Commonly known as the
commonly
known as World (Proposed) Bank for world bank. Gives
Bank. Reconstruction development loans with
and Development interest.
ITO could not materialize due to American (IBRD) Voting power – Depends on
opposition. Instead, the countries later setup GATT the share capital provided by a
which eventually become WTO. country. USA highest,
followed by various European
▪ While World bank and IMF are considered giants.
“Specialized Agencies of UN”, the WTO is International Assists the poorest countries
considered “Related organization of UN” Development via interest- free long-term
because it doesn’t fulfil all requirements of UN Association (IDA) loans (“Concessional Loans”
charter on specialized agencies. or “soft loans”).
Voting power - depends on
the share capital provided by a
BRETTON WOODS INSTITUTIONS:1)WORLD country. USA highest,
BANK, (WASHINGTON,1945) followed by various European
▪ World bank originally giants.
focused on reconstructing International Supports enterprise of
war-torn European Finance developing countries.
countries. After 1950s Corporation (IFC) Known for its Masala Bonds.
focusing on poor countries Voting power - depends on
of Asia and Africa. the share capital provided by a
▪ WB works with country country. USA highest,
governments, the private followed by various European
sector, civil society organizations, regional giants.

276
 Multilateral Offers (foreign) investors Membership of WB
Investment insurance against non- ▪ Membership in IDA, IFC, and MIGA are
Guarantee Agency commercial risk (such as conditional on membership in IBRD
(MIGA) political instability, regime ▪ Membership in ICSID is available to IBRD
change etc.). This helps 3rd members, and those which area party to the Statute
world nations attract foreign of the International Court of Justice (ICJ)
investment.
Voting power - depends on Together with the World Health Organisation, the
the share capital provided by a World Bank administers the International Health
country. USA highest, Partnership (IHP+). IHP+ is a group of partners
followed by various European committed to improving the health of citizens in
giants. developing countries.
International Helps in dispute resolution
Centre for the related to foreign investment /
Settlement of foreign companies in 3rd World Bank is known for Reports?
Investment world countries. India is not a ▪ World Development Report,
Disputes (ICSID) member of this organization. ▪ Ease of doing business Index,
Voting power – It is a ▪ Remittance & Migration Report,
“dispute settlement” body, so ▪ Global Economic Prospects report
the concept of ‘each country’s ▪ International Debt Statistics
voting power’ does not apply ▪ World Development Indicators
to it.
Controversy (2019) → Trump demanded World bank
Aim Of World Bank should stop loaning to China because China has ‘lots of
money’. World Bank clarified, “As countries grow
End extreme poverty - reducing share of global
richer, we reduce loaning to them, and the same is
population that lives in extreme poverty to 3 percent by being done with China.”
2030.

Q. Which one of the following issues the ‘Global

Promote shared prosperity - by increasing the
incomes of the poorest 40 percent of people in every
country.
Provide sustainable development.
Economic Prospects’ report periodically? CSE-2015
a) The Asian Development Bank
b) The European Bank for Reconstruction and
Development
c) The US Federal Reserve Bank
d) The World Bank

Clean Air Initiative (CAI) is a World Bank
initiative to advance innovative ways to improve air
quality in cities through partnerships in selected
regions of the world by sharing knowledge and
experiences.
President of World Bank
▪ Since USA and European powers collectively
command large shareholding in World Bank &
IMF, so their informal arrangement is - USA’s
favorite will be picked as World Bank chief, while
European countries’ favorite will be picked as IMF
Chief.
▪ 2019: SBI Managing Director Anshula Kant has
been appointed as the Managing Director and Chief
Financial Officer of the World bank.
WB Reforms:
▪ Caters to the agenda of World Capitalism in the
garb of its “Structural Adjustment Programme”
(SAP) and continues to be dominated by rich
countries.
▪ SAP is a set of "free market" economic policy
reforms imposed on developing countries by the
World Bank as a condition for receipt of loans.
▪ SAP policies have increased the gap between rich
and poor
▪ Changing world order not reflected
▪ Failure is evident from:
o Peace meal development in poorest countries
o Emergence of Alternatives like AIIB of China
o Neo-imperialism and Neo-Capitalism

277
Deep reforms of the World Bank are necessary as (2014) members signed
part of rethinking the current world order, and giving treaty
rising powers and developing countries a meaningful Members - Brazil, Members - China, India,
voice in this institution Russia, India, China UK, Switzerland etc.
South Africa more than 70 nations as
India and WB of 2019.
▪ India is a founding member of WB. Voting power - Each Voting power - Based
▪ India is not a member of ICSID member is given equal on share capital
o Claims that convention isn’t fair rules for 20% voting power. provided. China about
arbitration leaned towards the developed 27%, India about 7%.
countries. Asian countries control
▪ By the end of the 1960s, the United States, until about 75% voting.
then India's largest source of external resources, HQ- Shanghai, China HQ – Beijing, China
sharply cut its bilateral aid program. Since then, COVID-19 loan to COVID-19 loan to
the WB emerged as the most important source of India → $1 billion. India → $750 million
official long-term finance. (2020-Apr) (2020-June)
o IDA provides almost quarter of it.
▪ But with Chinese entry to WB in 1980, the share to BRICS Contingent Reserve Arrangement (CRA)
India has declined. ▪ BRICS member have also setup $100 billion
▪ The lending portfolio changed sharply after BRICS Contingent Reserve Arrangement to help
the1991macro-economic crisis. members during BoP crisis - Somewhat similar to
o Structural adjustment lending IMF.
▪ World Bank Group (WBG) has approved a $25-30 ▪ BRICS nations also planning to setup their
billion commitment plan for India for the period BRICS payment system parallel to SWIFT and
2019-22. BRICS rating agency.

Q. Find correct statement(s) about AIIB: (CSE-

NON-BRETTON WOODS: MULTILATERAL 2019)
DEVELOPMENT BANKS
1. AIIB has more than 80 member nations.
A multilateral development bank (MDB) is an 2. India is the largest shareholder in AIIB.
institution, created by a group of countries, that 3. AIIB does not have any members from outside Asia
provides financing and professional advising for the Codes:
purpose of development. Apart from World bank, the (a) 1 only
other notable examples are → (b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3 only
MULTILATERAL
DEVELOPMENT BANKS
Other Multilateral Development Banks

OTHER MULTILATERAL
DEVELOPMENT BANKS
BRICS Bank AIIB

European Bank
Bank for African Asian for
BRICS Bank and AIIB International Development Development Reconstruction &
Settlements Bank Bank (ADB) Development
(EBRD)
BRICS Bank AIIB: Asian
New Development Infrastructure
Bank (NDB) Investment Bank ▪ 1930: setup in BASEL,
Started in 6th BRICS Started in 2015-16 Switzerland.
Summit in Fortaleza ▪ Made up of 60 countries’
Central Banks.

278
 BIS: Bank for ▪ Its committee on banking on the IMF's executive board in proportion to its
International supervision set norms in financial importance, so that the most powerful
Settlements 1988 (I), 2004 (II), countries in the global economy have the most
2011(III) to ensure global voting power.
financial stability. ▪ International Monetary Fund (IMF) helps in global
African ▪ 1964: setup in Abidjan in currency exchange stability, helps against
Development Ivory Coast balance of payment crisis.
Bank ▪ India is a member, also ▪ Acts as a reservoir of the currencies of all the
gets loans. member countries, from which a borrower nation
Asian ▪ 1966: setup in Manila, can borrow the currency of other nations- using the
Development Philippines Special Drawing Rights (SDR) mechanism.
Bank (ADB) ▪ India is a member, also ▪ It thus strives to provide a systematic mechanism
gets loans. for foreign exchange transactions in order to
European Bank ▪ 1991: setup at London. foster investment and promote balanced global
for ▪ India became member economic trade.
Reconstruction (shareholder) in 2018. ▪ IMF important decisions need to be passed with
& Development India will not be eligible 85% majority. USA has 16.52% voting power so
(EBRD) for loans from EBRD but it can effectively block/veto it.
India can initiate joint loan ▪ 2020-May: IMF wanted to issue $500 billion fresh
proposals for Asian, Special Drawing Rights (SDR) to help member
African, European nations countries combat the corona crisis. But USA
for its soft-diplomacy. blocked it. India also supported the USA. India
(usually India does it for has 2.6% voting rights.
winning poor nations
friendship. so they vote in Q. Recently, which one of the following currencies
favour of India during has been proposed to be added to the basket of IMF's
Kashmir - Arunachal etc SDR? (CSE-2016)
resolutions in UN General a) Rouble
Assembly) b) Rand
c) Indian Rupee
Q. Find correct statement(s):(CSE-2016) d) Renminbi
1. New Development Bank has been set up by APEC.
2. The headquarters of New Development Bank is in It stabilizes the global economy in three ways.
Shanghai.
Answer Codes:
a) 1 only First - It monitors global conditions and identifies
risks
b) 2 only
c) Both 1 and 2 Second, it advises its members on how to improve
d) Neither 1 nor 2 their economies.

Third, it provides technical assistance and short-

BRETTON WOODS INSTITUTIONS: term loans to prevent financial crises.

▪ The IMF's goal is to prevent these disasters by

2) IMF,WASHINGTON (1945) guiding its members.
▪ IMF was conceived at a UN ▪ To achieve these goals, the IMF focuses and
conference in Bretton advises on the macroeconomic policies of a
Woods in July 1944. country, which affect its exchange rate and its
▪ The International Monetary government's budget, money and credit
Fund (IMF) is an management.
organization of 189
member countries, each of Objective
which has representation ▪ Foster global monetary cooperation

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▪ Secure financial stability Poverty As the name implies, it aims to
▪ Facilitate international trade reduction and reduce poverty in the poorest of
▪ Promote high employment and sustainable growth member countries while laying
economic growth facility the foundations for economic
▪ Reduce poverty around the world (PRGF) development. Loans are
administered with especially low
Global Economic Crisis (2008): IMF undertook interest rates.
major initiatives to strengthen surveillance to Emergency The IMF also offers emergency
respond to a more globalized and interconnected Fund funds to collapsed economies, as
world. These initiatives included revamping the it did for Korea during the 1997
legal framework for surveillance to cover spill- financial crisis in Asia. The funds
overs (when economic policies in one country can were injected into Korea's foreign
affect others), deepening analysis of risks and reserves in order to boost the local
financial systems, stepping up assessments of currency, thereby helping the
members’ external positions, and responding more country avoid a damaging
promptly to concerns of the members. devaluation. Emergency funds can
also be loaned to countries that
have faced economic crisis as a
Functions of IMF result of a natural disaster.
▪ Provides Financial Assistance: to member
countries with balance of payments problems, the
Governance of IMF
IMF lends money to replenish international
reserves, stabilize currencies and strengthen
conditions for economic growth. Countries must
embark on structural adjustment policies monitored
Board of Ministerial Executive
by the IMF. Governors Committees Board
▪ IMF Surveillance: It oversees the international • one governor and one • International • It conducts the
monetary system and monitors the economic and alternate governor for Monetary and
each member country daily business of
Financial Committee the IMF
financial policies of its 189 member countries. As • All major functions like
appointment of Gov,
(IMFC)
• 24 members
part of this process, which takes place both at the admission of new • Development
country etc Committee
elected by BoG
global level and in individual countries, the IMF • advised by two
ministerial committees
highlights possible risks to stability and advises on
needed policy adjustments.
▪ Capacity Development: provides technical
assistance and training to central banks, finance
ministries, tax authorities, and other economic Chief of IMF
institutions. This helps countries raise public ▪ 2019: Christine Lagarde (France) resigned to
revenues, modernize banking systems, develop become chief of European Central Bank (ECB, HQ
strong legal frameworks, improve governance, and Frankfurt, Germany). Then,
enhance the reporting of macroeconomic and ▪ Kristalina Georgieva (Bulgarian economist,
financial data. It also helps countries to make previously CEO of the World Bank) becomes the
progress towards the SDGs. second woman IMF Chief after Christine
Lagarde. Her five-year term starts on October 1,
Facilities of IMF to lend money 2019.
▪ IMF’ Chief Economist, Gita Gopinath, an Indian-
Stand-by Offers financing of a short - term American economist, she became the first woman
agreement balance of payments, usually to be the Chief Economist of IMF (2019-Jan).
between 12 to 18 months. (Previously Raghuram Rajan has also served in this
The extended It is a medium-term arrangement position.)
fund facility by which countries can borrow a
(EFF) certain amount of money, typically Notable reports by IMF
over a three- to four-year period. ▪ Global Financial Stability Report
▪ World Economic Outlook

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 United Nations (UN) has 195 members, whereas IMF
has 189 members.
IMF gives loan to Pakistan (2019)
▪ 2019-July: IMF approved $6 billion loan to
Pakistan. It will be released in tranches
(installments) over the next three-years depending
on the conditional reforms taken by Pakistan’s
Government, which includes:
▪ Pakistan will have to comply with FATF norms
against anti-money laundering and terror financing.
So, if Pak gets added in FATF-blacklist, then Pak’s
IMF loan release may get stopped.
▪ Fiscal Deficit and Primary deficit must be
controlled to specified% of GDP. Indirectly,
Pakistan will be forced to cut down on its Defence
Expenditure.
▪ Pak Government will have to reduce the subsidy
on gas & electricity which could results into more
hardship for common men.
▪ Loss making PSUs like Pakistan Steel Mills,
Pakistan International Airlines and Pakistan
Railways etc. have to:
o become profit making or
o be Privatized or
o be Shutdown.
Q. 'Global Financial Stability Report' is prepared by
________(CSE-2016)
a) European Central Bank
b) International Monetary Fund
c) International Bank for Reconstruction and
Development
d) Organization for Economic Cooperation and
Development
Q. Which of the following organizations brings out
the publication known as 'World Economic
Outlook'? (CSE-2014)
a) The International Monetary Fund
b) UN Development Programme
c) The World Economic Forum
d) The World Bank
BRETTON WOODS INSTITUTIONS:3) GATT → WTO
(GENEVA)
▪ Initially, Bretton Woods conference proposed set
up the International Trade Organisation (ITO)
But post USA opposed, the idea could not
materialise.
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▪ The World Trade
Organization (WTO) came
into being in 1995.
▪ One of the youngest of the
international organizations,
the WTO is the successor
to the General Agreement
on Tariffs and Trade
(GATT) established in the
wake of the Second World War.
▪ It has 164 Member States
▪ General Agreement for Tariffs and Trade (GATT)
was setup in 1948.
▪ The General Agreement on Tariffs and Trade was
the first worldwide multilateral free trade
agreement.
▪ Uruguay Round of GATT negotiations decided
to set up a permanent institution which can
encourage international trade not only in goods,
but also in services and Intellectual Property
Rights (IPR) → Marrakesh treaty (1994) → WTO
started functioning from 1st Jan 1995 at Geneva,
Switzerland.
▪ India is a founding member.
General Agreement on Tariffs and Trade (GATT)
▪ It all began with trade in goods.
▪ From 1947 to 1994, GATT was the forum for
negotiating lower customs duty rates and other
trade barriers; the text of the General Agreement
spelt out important rules, particularly non-
discrimination.
▪ Since 1995, the updated GATT has become the
WTO’s umbrella agreement for trade in goods.
General Agreement on Trade in Services (GATS)
▪ The General Agreement on Trade in Services
(GATS) requires most- favoured-nation Treatment,
market access commitments and national treatment.
▪ GATS was agreed upon at the end of the
Uruguay Round negotiations with the
participation of all Member nations including
developing countries.
▪ The GATS covers a wide range of service
industries such as financial services, transport and
shipping, communications, construction, and
distribution.
Definition of Services Trade and Modes of Supply
The definition of services trade under the GATS is four-
pronged, depending on the territorial presence of the
supplier and the consumer at the time of the transaction.
 Cross border trade - from the territory
of one Member into the territory of any
other Member.
Ex. A user in country A receives
Mode 1 services from abroad through its
telecommunications or postal
infrastructure. Such supplies may
include consultancy or market research
reports, tele-medical advice, distance
training, or architectural drawings.
Consumption abroad - in the territory
of one Member to the service consumer
Mode 2 of any other Member.
Ex. Nationals of A have moved abroad
as tourists, students, or patients to
consume the respective services.
Commercial presence - by a service
supplier of one Member, through
commercial presence, in the territory of
any other Member.
Mode 3 Ex. The service is provided within A by
a locally - established affiliate,
subsidiary, or representative office of a
foreign-owned and — controlled
company (bank, hotel group,
construction company, etc.).
Presence of natural persons - by a
service supplier of one Member,
through the presence of natural persons
of a Member in the territory of any other
Member.
Mode 4 Ex. A foreign national provides a
service within A as an independent
supplier (e.g., consultant, health worker)
or employee of a service supplier (e.g.
consultancy firm, hospital, construction
company).
WORLD TRADE ORGANIZATION
matters under any of the
multilateral trade agreement
▪ It brings together all members
of the WTO, all of which are
countries or customs unions.
▪ Appoints Director General:
to look after administrative
work. Presently: Roberto
Azevêdo (Brazil)
▪ Day to day decision making
body at Geneva.
▪ Implements the decision of
ministerial conferences
▪ Has representative from each
member country.
▪ General council has two
General bodies, with separate
Council chairpersons:
a) Dispute settlement body: →
Appellate Body
b) Trade policy review body: →
Below general council, there
are committees on individual
agreements and annexes e.g.
Anti-dumping, Subsidies &
countervailing measures
(SCM) etc.
GATT (1948)
Uruguay Round, Marrakesh
Treaty 1995 WTO

▪ Supreme Decision-Making
body. General Ministerial
Secretariat
Council Conference
▪ Usually meets once every two
years, deliberates on trade
Ministerial agreements.
Conference ▪ One country = one vote. Dispute
Trade Policy
(unlike IMF & World Bank, Resolution
Review Body
Body
where the money power →
shareholding → determines the
voting power)
▪ The Ministerial Conference
can take decisions on all

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 How WTO can help the world: ▪ A nation's wealth and power were best served by
increasing exports and receiving payments in gold,
silver and precious metals.
Stimulate economic growth and employment. ▪ Therefore, any import was seen as loss of nation’s
Cut the cost of doing business internationally. wealth in gold payment.
▪ So, colonial powers tried to flood their colonies
Encourage good governance with readymade goods but always prevented entry
of goods in their home country.
Help countries in development
Adam Smith’s Theory of Absolute Cost Advantage
Support the environment issues (1776)
Contribute to peace and stability
Output per India China
one labourer
Aim of WTO Wheat 30kg 10kg
▪ Reduce such tariff and non-tariff barriers to Rice 10kg 15kg
encourage international trade through its ▪ India has an absolute cost advantage over China in
agreements and dispute settlement body. wheat production.
▪ So, India should focus on producing more wheat,
Objectives of WTO and import rice from China. India should not try to
▪ The WTO’s global system lowers trade barriers be a ‘rice production specialist’.
through negotiation and operates under the ▪ Adam Smith’s theory assumes –
principle of non-discrimination o There are no production costs except labourers
▪ The result is reduced costs of production(because o No transport cost
imports used in production are cheaper), reduced o There is free trade (no taxes on import exports)
prices of finished goods and services, more choice
and ultimately a lower cost of living. David Ricardo’s Theory of Comparative/Relative
▪ The WTO’s system deals with these in two ways. Cost Advantage (1817)
▪ One is by talking countries negotiate rules that are
acceptable to all. How many 1-meter textile 1 bottle of
▪ The other is by settling disputes about whether workers wine
countries are playing by those agreed rules. required to
produce →
Principles of WTO: France 10 workers 12 workers
▪ Most Favoured Nation (MFN) England 9 workers 8 workers
▪ Treating other people equally
▪ National Treatment: Treating locals and foreigners ▪ Here, we can see England requires less workers
equally than France to produce wine and 8 workers
▪ Free trade: Gradually through negotiation textiles. So, as per Adam Smith’s absolute cost
▪ Predictability: through binding and transparency. advantage, England should not import anything
With stability and predictability, investment is from France!
encouraged ▪ But, if plotted on graphs, it will appear that for
▪ Promising fair competition England per unit labour cost to produce 1 meter
▪ Encouraging Development and Economic Reform textile is (relatively) cheaper than 1 bottle of wine.
▪ Special and differential treatment ▪ So, England should shift domestic English wine
workers towards textiles. England should export
textile to France and import wine from France.
THEORIES OF INTERNATIONAL TRADE England should not try to become a ‘Wine
Mercantilist Theory production specialist’.
▪ From the 16th to 18th century, economists
believed in mercantilism i.e. The amount of Heckscher and Ohlin’s Factor - Proportions Theory
wealth in the world is static. (1919)

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 Capital- Capital-abundant country will export
abundant the capital – intensive goods. E.g.
country USA’s Boeing company exporting
Jet planes.
Labour- Labour-Abundant Country will
Abundant export labour-intensive goods. E.g.
Country India exporting cotton (and imports
jet planes from USA).
WTO → FUNCTIONS
Today all countries try to protect domestic industries
against foreign imports by creating two types of barriers
against the international trade:
Tariff Barriers against international trade
Tariff Barriers: Increasing the taxes, duties, cess,
surcharge, on imported goods and services e.g. Trump
imposed 25% custom duty on imported steel.
Two scenarios when foreign goods
will appear cheaper to Indians than
domestic goods:
▪ If foreign country is giving
subsidies to their exporters and
/ or
▪ If Indian government imposes
higher amount of taxes, cess or
surcharge on the locally
CVD manufactured products then
Indian Govt tries to protect
local (domestic) industry by
imposing Countervailing Duty
(CVD), Special Countervailing
Duty, Additional Customs Duty
on imported items on imported
items.
▪ These duties have been removed
in India. Now imported items
are subjected to [Basic Customs
Duty + Social Welfare
Surcharge on it] + IGST
▪ If China exports goods to India
at a price below their normal
price in domestic Chinese
market or at a price below their
cost of production- then it is
termed as “Dumping”
▪ Then, India's commerce
ministry → Directorate General
of Trade Remedies : (DGTR)
investigates → recommends
Anti- Finance ministry to impose
Dumping “Anti-Dumping Duty” on such
Duty imported items.
▪ E.g. $185 on every one tonne of
imported Chinese Steel, Then
its prices will become equivalent
to India Steel, thus Indian steel
industry will be protected.
▪ Not yet abolished in India.
They’re imposed subjected to
WTO norms.
Commerce Ministry → Director General of
Foreign Trade (DGFT) launched ‘ARTIS’ portal
(Application for Remedies in Trade for Indian
industry and other Stakeholders). Applicants can file
complaints against dumping.
Budget-2020: Purified Terephthalic Acid (PTA)
is used in manufacturing (synthetic) textile fibres
and yarns. Cheap PTA = boost to Indian textile
sector, so we’ll no longer charge Anti-dumping duty
on it.
Inverted duty structure is a situation where import
duty on finished goods is low compared to the
import duty on raw materials, then it becomes
difficult to produce the concerned good domestically
at a competitive price.
Non-Tariff Barriers against international trade:
If USA does not increase import taxes but plays other
tricks like:
▪ Subsidies to domestic industries: Giving free
electricity to Detroit car manufacturers. or USA
govt. giving tax benefits & free car-insurance to
American residents for buying American made
cars.
▪ Public Procurement: Making rule that only
American companies can fill up tender for
supplying stationery, school bags etc. in
government schemes.
▪ Technical Barriers to Trade: e.g. imported mango
must have 0% pesticides residue, imported cars
must have airbags for each passenger.
▪ Quota system: e.g. not more than 50 metric tonnes
of steel can be imported from a single foreign
country.
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 2020-June: WTO ministerial conference was to held Agreement on Subsidies and Countervailing
at Kazakhstan’s Astana (new name of this city: Measures (SCM).
Nur-Sultan) But, cancelled by Corona. ▪ India’s position is “We will phase out these
schemes after 8 years from 2017 (i.e. around
2025). Since we are a developing country, we
should be given such relaxed deadline under SCM
WTO DISPUTES INVOLVING INDIA VS USA agreement.”
India’s Solar procurement preference: ▪ 2019-Oct: WTO’s Dispute Settlement Body
▪ USA argued India’s Jawaharlal Nehru Solar (DSB) ordered in favour of USA and ordered
Mission gave public procurement preference & India to stop such schemes within the next 90-180
subsidy to India - made solar panels thus creating days.
a non-tariff barrier for American solar panels. ▪ 2019-Nov: India goes to WTO Appellate Body to
▪ India lost the case at WTO & forced to withdraw undo DSB’s order.
such barriers (2017). ▪ WTO Appellate Body members are appointed
▪ However, USA still alleges that India is playing by the WTO members by consensus, (i.e. no
mischief in solar schemes by giving preference to member-nation should formally object to
local manufacturers over American-made products candidate’s name). USA is presently opposing
(2018) appointment of new members in Appellate Body.
So, body is under-staffed/ dysfunctional.
Ban on American Poultry ▪ 2020-Mar: Indian Commerce Minister says, “we
▪ In 2007, India had imposed the ban on American will not implement WTO's dispute panel orders,
poultry under the Indian Livestock Importation because the appellate body is not functioning so
Act, 1898 stating avian influenza / bird flu danger our appeal is pending.”
in India.
▪ USA claimed there was no scientific basis - India
merely banning us to protect local poultry’ business WTO and NOTABLE AGREEMENTS
interest. Objective Agreement(s)
▪ WTO ruled in favour of USA (2016). But India 1. General Agreement on
has only allowed partial import of poultry from Tariffs and Trade
selected states of USA so, USA has demanded $450 Reduce the tariff (GATT) for goods
million compensation from Indian Govt. at WTO barriers 2. General Agreement on
(2018). Trade in Services
(GATS)
India’s export incentive schemes
For non-food: Agreement
▪ 2018: USA complained to the WTO's Dispute
on Technical Barriers to
Settlement Body (DSB) that India is running
Trade (TBT) e.g. talcum
various export incentive schemes such as: Reduce the non- powder should not have
Merchandise Export from India Scheme (MEIS)
tariff barriers more than x% of asbestos.
For food: Agreement on
Export Oriented Units (EOU)
Sanitary and Phytosanitary
Measures (SPS) e.g. ‘x’ food
item must not have more
Export Promotion Capital Goods (EPCG).
than y% pesticides residue
For non-food → Subsidies
Electronics Hardware Technology Parks (EHTP)
and Countervailing
Measures (SCM)
Special Economic Zone (SEZ) For food → Agreement on
Agriculture (AoA) - which
▪ Under such schemes India gives tax reliefs / aims to regulate the
subsidies to its exporters. So, it is creating tariffs subsidies on agriculture
and non-tariff barriers against American through its ‘box’
companies, & thus India is violating the WTO mechanism.

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 Reduce non-tariff 1. Subsidies that are
barriers → classified in Green &
Subsidies Blue box category - are
allowed (e.g. Research,
Cattle-Vaccination).
2. Amber box category
subsidies will be
subjected to quantitative
limits (e.g. Fertilizer,
Electricity, Diesel,
MSP.)
1. Trade-Related Aspects
of Intellectual Property
Rights (TRIPS)
2. Trade-Related
Investment Measures on
Misc. measures to Foreigners. (TRIMs)
encourage global 3. Plurilateral
trade agreements: They are
not signed by all the
members of WTO e.g.
Agreements on aircrafts,
dairy product, bovine
meat, Information
Technology Agreement
(ITA)
WTO’s Notable Report: World Trade Report
(Annual). World trade growth has slowed down from
2017 (4.6%) to 2018 (3%), mainly due to protectionism.
Q. In the context of which of the following do you
sometimes find the terms 'amber box, blue box and
green box' in the news? (CSE-2016)
a) WTO affairs
b) SAARC affairs
c) UNFCCC
d) India-EU negotiations
Q. The terms 'Agreement on Agriculture', 'SPS
Agreement and 'Peace Clause' are in the context of
affairs of the________ (CSE-2015)
a) Food and Agriculture Organization
b) UN Framework Conference on Climate Change
c) World Trade Organization
d) United Nations Environment Programme
TRIPS & TRIMS
▪ The WTO’s intellectual property agreement
amounts to rules for trade and investment in ideas
and creativity.
▪ The rules state how copyrights, patents, trademarks,
geographical names used to identify products,
industrial designs, integrated circuit layout-designs
and undisclosed information such as trade secrets
— “intellectual property” — should be protected
when trade is involved.
▪ The basic principles related to the Intellectual
Property agreements are mentioned in “The
Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS)”.
▪ The Agreement on Trade-Related
Aspects of Intellectual Property
Rights (TRIPS) is an international
legal agreement between all the
member nations of the World Trade
Organization (WTO).
▪ It sets down minimum standards for
the regulation by national
TRIPS governments of many forms of
intellectual property (IP) as applied to
nationals of other WTO member
nations.
▪ TRIPS was negotiated at the end of
the Uruguay Round of the General
Agreement on Tariffs and Trade
(GATT) in 1994 and is administered
by the WTO.
▪ Trade Related Investment
Measures (TRIMS)
▪ Under TRIMs, the WTO names the
list of investment measures that
discriminates foreign investment and
TRIMS hence violates the basic WTO
principle of National Treatment.
▪ These measures include – local
content requirement, domestic
employment, technology transfer
requirement etc
▪ The objective of TRIMs is to ensure
fair treatment of investment in all
member countries.
▪ As per the TRIMs Agreement,
members are required to notify the
WTO Council for Trade in Goods of
their existing TRIMs that are
inconsistent with the agreement.
Compulsory Licensing
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 ▪ Compulsory Licensing (CL) allows
governments to license third parties (that is,
parties other than the patent holders) to produce
and market a patented product or process
without the consent of patent owners.
▪ Any time after three years from date of sealing of
a patent, application for compulsory license can be
made, provided:
o Reasonable requirements of public have not
been satisfied;
o Patented invention is not available to public at
a reasonably affordable price;
o Patented inventions are not carried out in India.
o Compulsory Licencing is regulated under
the Indian Patent Act, 1970.
o The TRIPS does not specifically list the
reasons that might be used to justify
compulsory licensing.
However, the Doha Declaration on TRIPS and Public
Health confirms that countries are free to determine the
grounds for granting compulsory licences, and to
determine what constitutes a national emergency.
Recently, the CPI (Marxist) party has suggested that
the government shall issue Compulsory Licensing for
the manufacturing of a Generic version of
Remdesivir which is being used to treat Covid-19
patients.
Generic medicines and vaccinations are copies of
originally researched drugs, but at much lower prices.
“Evergreening” of patents
▪ “Evergreening,” is referred to the practice
whereby pharmaceutical firms extend the patent
life of a drug by obtaining additional 20-year
patents for minor reformulations or other
iterations of the drug, without necessarily
increasing the therapeutic efficacy.
▪ However it has become a practice in the
pharmaceutical industry where on one hand
innumerable patients struggling to afford the
high priced patented drugs, while on the other
hand innovators struggling to give immortal value
to their creation.”
Parallel Imports
▪ A parallel import is a non-counterfeit
products imported from another country
287
without the permission of the intellectual
property owner.
▪ Parallel imports are often referred to as gray
products and are implicated in issues
of international trade and intellectual property.
▪ Parallel importing is based on concept
of exhaustion of intellectual property rights.
According to this concept, when the product is first
launched on the market in a particular jurisdiction,
parallel importation is authorized to all residents in
the state in question. Some countries allow it but
others do not.
▪ Parallel importing of pharmaceuticals reduces
price of pharmaceuticals by introducing
competition.
▪ TRIPS agreement in Article 6 states that this
practice cannot be challenged under the WTO
dispute settlement system and so is effectively a
matter of national discretion.
▪ The practice of parallel importing is often
advocated in the case of software, music, printed
texts and electronic products.
WTO NEGOTIATIONS / SUMMITS / PACKAGES
Most Favoured Nation (MFN)-
▪ If a country grants someone a special favor (such
as a lower customs duty rate for one of their
products) then it must do the same for all other
WTO members. This principle is known as most-
favoured-nation (MFN) treatment.
▪ Suppose India levies 15% custom duty on
imported laptop from any country. But, later
India-Japan trade agreement is signed wherein
Japanese laptop are subjected to only 5% custom
duty in India. Then implies Japan has become the
 Most Favoured Nation for India (as far as the
laptop trade is concerned).
▪ WTO agreements require that whatever treatment is
being given to the MFN, must also be extended to
all other member countries. A member should
not discriminate between its trading partners.
(So even imported Pakistani laptop should be
subjected to 5% custom duty only, if India is
charging that % on Japanese). But in practice,
MFN is not implemented in letter and spirit by
the members.
▪ 1996: India granted MFN status to Pakistan but
Pakistan didn’t reciprocate (mainly) due to their
local textile industrialists’ lobby who feared
competition from Indian textile imports.
▪ 2019-Feb: India withdrew MFN status for
Pakistan, following Pulwama attack on CRPF
personnel. India also hiked the customs duty by
200% on goods originating from Pakistan.
▪ Since Pakistan is not giving India MFN treatment.
So, there is no ‘legal-compulsion’ on India to give
them MFN status. even if Pakistan complained to
WTO’s dispute redressal panel, it’ll lose the case.
Least Developed Countries (LDC)
▪ LDC are identified by the UN Economic and
Social Council: (ECOSOC).
▪ For example - Somalia, Ethiopia, Congo, Central
African Republic, Bhutan, Bangladesh etc.
▪ Least Developed Countries’ economic growth can
improve if they are able to export more. So,
WTO agreements permit other countries to give
duty free quota free access to exports from LDC.
and that is not considered as a violation of any
other agreement.
▪ For instance, if India levied 0% custom duty on
Somalian laptop, India will not be required to give
same treatment to Japanese laptop under “MFN
norm”, Because Japan is not an LDC.
First world Also known as Advanced
countries Economies (AE), Developed
Countries, such as USA
Canada, France and Germany
etc.
Second world USSR and its neighbouring
countries European countries which were
under the influence of
Communist Socialist ideologies.
However, the term has become
defunct with the collapse of
USSR.
Third world Developing countries, Emerging
countries market economies (EME) - India
China, Mexico, Brazil etc.
Domestic Subsidies are categorized into 3 boxes:
Subsidies which are no or least
market distorting includes measures
decoupled from output such as
income-support payments (decoupled
Green Box income support), safety – net
programs, payments under
environmental programs, and
agricultural research and development
subsidies.
Only ‘Production limiting
Subsidies’ under this are allowed.
Blue Box They cover payments based on
acreage, yield, or number of livestock
in a base year.
Those subsidies which are trade
distorting and need to be curbed.
The Amber Box contains category of
domestic support that is scheduled for
Amber reduction based on a formula called
Box the “Aggregate Measure of
Support” (AMS). The AMS is the
amount of money spent by
governments on agricultural
production, except for those contained
in the Blue Box, Green Box and ‘de
minimis’.
“De minimis” provision:
Under this provision developed countries are allowed
to maintain trade distorting subsidies or ‘Amber
box’ subsidies to level of 5% of total value of
agricultural output. For developing countries this
figure was 10%. So far India’s subsidies are below this
limit, but it is growing consistently and are likely to
cross 10% level allowed by de Minimis provision.
Some of the burning and contentious issues between 1st
world vs. 3rd world at WTO:
Doha Development Round (Qatar) - 2001
In WTO’s “Doha development agenda” (2001)
negotiations, the 3rd world countries wanted
following:
▪ 1st world should liberalize their trade regulation
further so that 3rd world’s goods and services can
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 enter more easily in the first world’s domestic
markets.
▪ 3rd world should be allowed to keep various
barriers to slow down the entry of 1st worlds
agriculture, manufactured goods and service
exports in their domestic market.
▪ 1st world should give financial and technical
assistance to 3rd world.
o Provisions requiring all WTO members to
safeguard the trade interests of developing
countries.
o Support to help developing countries build the
infrastructure to undertake WTO work, handle
disputes, and implement technical standard.
o Provisions related to least-developed country
(LDC) members

USA and European countries would not agreed to this. In the Doha Declaration, ministers agreed that all
So, Doha round of negotiation continues without special and differential treatment provisions should be
conclusion. And in future summits the USA/EU would reviewed, in order to strengthen them and make them
want WTO officials to begin negotiations on the new more precise, effective and operational.
matters lucrative to their MNCs (like ICT, E- Food subsidies & peace clause:
Commerce) whereas 3rd world nations will continue to ▪ Under WTO’s Agreement on Agriculture (AoA),
insist that Doha round negotiations must be concluded 1st world and 3rd world countries are required to
first. limit their food-subsidies to 5% and 10%
respectively to the value of their agriculture
National Treatment production in 1986.
▪ National treatment implies treating foreigners
and locals equally Imported and locally- Agreement on agriculture (AoA) has three
produced goods should be treated equally — at pillars
least after the foreign goods have entered the 1. Market Access
market. 2. Export Competition
▪ The same should apply to foreign and domestic 3. Domestic Support
services, and to foreign and local trademarks,
copyrights and patents.
▪ This principle of “national treatment” (giving
Prohibits
others the same treatment as one’s own nationals) is Trade Boxes
Definitions
also found in all the three main WTO Distortionary (Subsidies)
Support
agreements (Article 3 of GATT, Article 17
Decoupled from
of GATS and Article 3 of TRIPS), although once production and
prices
again the principle is handled slightly differently in Green
each of these. For research,
implementation of
▪ National treatment only applies once a product, structural prog,
disaster relief

service or item of intellectual property has entered Trade distortionary

but limits
the market. Therefore, charging customs duty on Agreement production.

an import is not a violation of national treatment on Blue

Agriculture
even if locally-produced products are not charged Encouraging
production for
limited time period
an equivalent tax.
Trade Distortionary
Amber
“Special And Differential Treatment Provisions” like MSP

▪ The WTO agreements contain special provisions

which give developing countries special rights
and allow other members to treat them more
favourably. These are “special and differential
treatment provisions” (abbreviated as S&D or
SDT).
▪ The special provisions include:
o Longer time periods for implementing
agreements and commitments.
o Measures to increase trading opportunities for
these countries.
▪ But in 1986, India's agricultural production was far
lower than USA so even in absolute quantitative
terms USA’s 5% will be much bigger than
India’s 10%. 1st world countries are able to give
larger amount of food subsidies to their farmers and
facilitate their export to 3rd world countries at
much cheap price, and ruining local farmers.
▪ Further, India has a large population of poor
farmers who require Govt support in the form of

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 subsidies & procurement at Minimum support
prices (MSP). India also has a large number of
malnourished poor families who need subsidized
food grains under National Food Security Act
(NFSA) 2013.
▪ 2013 - At WTO’s ministerial conference at Bali
(Indonesia), India refused to sign any new
agreements until this food subsidy issue was
resolved.
WTO Peace Clause → It gave temporary immunity
to India and other developing countries, “You may
continue to give as much subsidy for your food
programs. If USA/any other country challenges your
food subsidies at WTO’s dispute settlement platforms,
we will not entertain their petition.”
Bali Package & Trade Facilitation Agreement / TFA
(2013)
Bali Package is the trade agreement or outcome
resulting from the WTO ministerial conference 2013
at Bali, Indonesia. Its two significant components are :
▪ It requires the member
Trade countries to reduce their
Facilitation bureaucratic delays, red
Agreement tapes, inspector raj in
(TFA) import-export of goods.
▪ They’ve setup online portals
where traders can seek
permissions, pay fees, custom
duties, self-declaration forms
(like e-way bill) etc.
▪ India & others ratified in 2016
▪ TFA became effective from
2017. India set up a National
Committee on Trade
Facilitation (NCTF) under
Cabinet Secretary (IAS).
Peace Clause Discussed in previous section.
on subsidies
Q. Find correct among the following statements:
(CSE-2017)
1. India has ratified the Trade Facilitation Agreement
(TFA) of WTO.
2. TFA is a part of WTO’s Bali Ministerial Package of
2013.
3. TFA came into force in January 2016.
Answer Codes:
a) 1 & 2 only
b) 1 & 3 only
c) 2 & 3 only
d) 1, 2 and 3
Nairobi Package & SSM (2015)
Nairobi Package resulted from the WTO ministerial
conference 2015 at Nairobi (Kenya):
▪ We will extend the Peace Clause for another
“Specific” years.
▪ Members must stop the subsidy on Agriculture
Exports: 1st world countries must comply
immediately while 3rd world countries given a
relaxed deadline.
▪ If there is a surge of cheap agro exports from 1st
world to 3rd world, then 3rd world countries will
have the right to temporarily increase tariff /
taxes on them, to protect their local farmers,
popularly known as “Special Safeguard
Mechanism (SSM).”
▪ 1996 - Information Technology Agreement
(ITA) plurilateral agreement (i.e. not signed by
all member nations). Agreement aims to abolish
import export taxes on about 200 IT products.
We will try to get more members sign this, so global
IT-trade can increase.
▪ Technical reforms to help the exports from Least
Developed Countries (LDC).
Buenos Aires Summit (2017)
The 11th WTO Ministerial
conference 2017 at Buenos
Aires, Argentina failed to
deliver any notable and
substantial package because :
1. Food subsidy related
reforms remained
inconclusive because neither India - China nor
USA-EU were willing to compromise. So, in reality
‘Peace clause’ is extended for infinite period-
which is not a good thing because large amount of
food subsidies given on (chemical) fertilizers harm
the environment.
2. USA-EU were more keen for a new agreement
on e-commerce but India-China opposed that such
agreements will benefit 1st world countries more
(because they’ve Amazon, Walmart, Facebook etc)
than 3rd world. India insisted that first finish
negotiations of the original Doha agenda
subjects, before proposing such new topics like e-
commerce.
3. Members also failed to conclude negotiations
related to Special Safeguard Mechanism (SSM),
investment facilitation, MSME etc..
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 As a result, this conference ended without a joint
declaration by the members.
Buenos Aires Declaration on Women and Trade
Buenos Aires Declaration on Women and Trade is
non-binding declaration that sought women’s
economic empowerment by speedily removing
barriers to their participation in trade. India voted
against the declaration
Why has India opposed Buenos Aires Declaration?
▪ India held that it strongly supports gender equality
and is very much in favour of promoting gender
issues but it cannot concur with view that gender
is trade-related issue.
▪ WTO is purely trade-related body and not a
forum to discuss gender, so gender-related
discussions should take place at appropriate fora.
▪ It also held that developed countries have high
standard in gender- related policies as compared
to developing or least developed countries (LDC).
▪ Hence the proposition to link gender and trade
agreed then developed nations will curb exports
from developing world using ‘gender’ issues as
non-trade barrier.
G-33 (Group of 33)
▪ The Group of 33 developing countries,
including India and China, has proposed to
include procurement of food products from
farmers at minimum support price (MSP) and
their distribution at subsidised rates to poor in
the global rules of agriculture.
▪ Subsidies on account of these programmes should
not be included in the category of trade
distorting subsidies that disrupt markets and prices
of food items, the grouping has said in its proposal
on permanent solution on public stockholding
for food security.
▪ G33 includes 47 developing and least developed
countries. It has called for an amendment in the
Agreement on Agriculture (AoA) of the World
Trade Organisation (WTO) because current rules
291
suggest a fixed subsidy of 10% for food
procurement from farmers to feed the poor.
▪ The existing rule also uses an old methodology for
subsidy calculation that does not account
for inflation and is based on a price index of 1986-
88.
▪ Public stockholding for food security is critical
for developing countries where agriculture is
dependent on rains, agricultural markets are
imperfect and they provide subsidised food grains
to their poor.
Sanitary and Phytosanitary Measures (SPS)
▪ Agreement on the
Application of Sanitary and
Phytosanitary Measures
(SPS)
▪ The SPS agreement was
negotiated during the
Uruguay Round.
▪ Under the SPS agreement, the WTO sets constraints
on member-states’ policies relating to food safety
(bacterial contaminants, pesticides, inspection and
labelling) as well as animal and plant health
(phyto-sanitation) with respect to imported pests
and diseases.
▪ these measures may sometimes go beyond what is
needed to protect such objectives and be used to
shield domestic producers from foreign competition
▪ Ex. Indian Alphonso by EU
Geographical Indications (GI):
▪ Geographical indications are place names (in some
countries also words associated with a place)
used to identify products that come from these
places and have specific characteristics (for
example, “Champagne”, “Tequila” or
“Roquefort”).
▪ A geographical indication or GI is a sign used on
products that have a specific geographical origin
and possess qualities or a reputation that are due
to that origin.
▪ Under the TRIPS Agreement, all geographical b. Depending on number of participants it can be
indications have to be protected at least to avoid bilateral or multilateral or regional or global
misleading the public and to prevent unfair (e.g. WTO).
competition (Article 22). c. If countries go further beyond just lower tariffs
▪ This is the only intellectual property issue that is e.g. relaxed norms for entry of foreign
definitely part of the Doha negotiations. investment and foreign workers, then it becomes
▪ Geographical Indications are part of the intellectual Comprehensive Economic partnership
property rights that comes under the Paris Agreement (CEPA) or Comprehensive
Convention for the Protection of Industrial Economic Cooperation Agreement (CECA)
Property.
Customs Union FTA in which members apply a
In India, Geographical Indications registration is (CU): common external tariff (CET)
administered by the Geographical Indications of for non- members. E.g. East
Goods (Registration and Protection) Act of 1999. African Community (EAC).
Caribbean Community
Way Ahead Common Customs union where factors of
▪ Need of free trade is required more by Market (CM): production (capital, labour)
developing countries like India than developed can move freely amongst
countries. So Developing countries must work members e.g. MERCOSUR- S.
collaboratively to strengthen WTO America.
▪ There is a need to collaborate effectively and Economic Common market where
learn from the past experiences when India and Union (EU): member countries keep
China led the developing countries in common currency & tariff.
environmental forums, garnering funds in the form Allow entry of goods, services,
of GCF. capital and labour among
▪ There is need for the structural reforms in the themselves with minimum
WTO functioning as multilateral trading system restrictions. They decide their
▪ Despite WTO being a democratic organization, fiscal policies and diplomatic
there is a need to make it more effective in policies through a common
protecting the interests of small nations against parliament ‘European
stronger countries. The process of retaliation is Parliament’, and their monetary
ineffective and too impractical for smaller players. policies through a common
▪ WTO needs to strengthen the dispute settlement central bank – ‘European
mechanism as there are issues in appointment of Central Bank’.
judges in new appellate body
▪ Lastly, WTO needs to enhance discussion
mechanism by introducing wider consultations. FREE TRADE AGREEMENTS (FTAs)→ TPP, TPP11,
It has been a long standing complaint by the smaller TATIP, RCEP
participants that the consultations or decision Trans-Pacific Partnership (TPP)
making is limited to the green room of DG of WTO. ▪ USA proposed free trade
agreement among 12
countries: US, Japan,
TRADE AGREEMENTS TYPES:
Malaysia, Vietnam,
1. Partial Scope Agreement (PSA): Trade between Singapore, Brunei,
two countries for a small list of goods @reduced Australia, New Zealand, Canada, Mexico, Chile
tariffs. and Peru.
2. Preferential Trade Agreement (PTA) / Free ▪ Aimed to have lower tariffs for participant
Trade Agreement (FTA): Member → lower tariff; countries, easier norms for labour, environment
non-members: regular tariff. and investment.
a. All FTAs are not same. Tariff and list of ▪ 2016: President Trump withdrew from the
allowed goods/services could vary depending on negotiation claiming, “TPP will take away jobs
country to country. from USA because companies will setup factories
in Mexico where labour is cheaper, and then such

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 cheap products will be dumped in USA, yet we will
not be able to impose heavy taxes on them.” So
TPP has become defunct.
TPP-11 or CPTPP
▪ While USA-led TPP could not materialize, but
some of the nations in Pacific region separately
worked out a ‘Comprehensive and Progressive
Agreement for Trans- Pacific Partnership’
(CPTPP or commonly called TPP-11) in 2018-Dec.
Presently, it has 11 signatories: Australia, Brunei,
Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore, and Vietnam.
Transatlantic Trade and Investment Pact (TTIP):
▪ Proposed free trade agreement between USA &
EU with objectives similar to TPP- reduce tariff,
easier entry of foreign investment etc.
▪ Negotiations are ongoing but it is not yet signed
mainly due to opposition from the European Union
side. E.g.
1. In USA’s Farm, Dairy and Meat industry the
standards related to pesticide residue,
pathogens, antibiotics, growth hormones,
genetically modified (GM) crops etc. are
slightly lower than EU. So, EU’s animal rights
& environmental groups worried it will lead to
unrestricted flow of those “harmful” products
from USA to Europe.
2. EU has strict norms on private companies to
cut their emissions and compulsorily invest
in renewable energy. In USA such norms are
relaxed. EU’s environmental groups don’t want
such ‘polluting US companies’ to profit via
exporting to EU.
3. USA wants EU nations to cut down the
subsidies and preferences given to EU’s state
owned enterprises (SOE) / PSUs. The EU civil
rights / labour rights group fear it will lead to
privatization of health, education, and
insurance companies which will cause
unemployment of PSU-workers, and when pvt.
MNCs are providing such essential services it
will become unaffordable for many poor
citizens.
4. USA had been lobbying for TPP and TTIP
because USA is disillusioned with the WTO-
wherein India, China and other emerging
economies have equal voting rights and have
become more assertive, so USA and its MNCs
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are not gaining much benefit out of WTO led
agreements. But, If TPP/TTIP materialized, it’d
harm Asian economies exports towards US/EU
so to compensate that loss, Asian economies
came up with their own idea RCEP.
REGIONAL COMPREHENSIVE ECONOMIC
PARTNERSHIP (RCEP)
▪ RCEP is a proposed free-
trade agreement
between the 10 ASEAN
countries (Indonesia,
Malaysia, Philippines,
Singapore, Thailand,
Brunei, Vietnam, Laos, Myanmar, Cambodia) and
their six Free-Trade Agreements partners viz.
Australia, China, India, Japan, New Zealand and S.
Korea.
▪ Collectively, these countries command 25% of
global GDP, 30% of global trade.
▪ RCEP requires them to reduce the tariff and
non-tariff barriers against each other, encourage
investments, economic and technical cooperation,
protect Intellectual Property Rights (IPR) etc.
▪ This will boost trade, economic growth and
employment in each of these countries,
RCEP: Reasons for India not joining RCEP (2019)
▪ India already has over $100 billion trade deficit
with RCEP countries. Out of this, China alone
accounts for $54 billion trade deficit. So India had
following apprehensions about this agreement.
▪ China: RCEP will result in increased flow of
(Cheap) Chinese manufactured & electronic goods
→ Indian MSME, automobile, steel industries
harmed → So, India wanted separate levels of
customs duty against Chinese imports.
▪ Dairy: India is among the largest producers of
milk but our speciality is mostly in the liquid
products whereas New Zealand is renowned for
its solid products (milk powder, butter, cheese
etc.) These solid dairy products have a longer
shelf-life & easier to transport over long-
distance. So if trade-barriers removed, India will be
flooded with cheap dairy products which leads to
suffering of Indian farmers & dairy entrepreneurs.
▪ Agriculture: Southern India’s plantation farmers
afraid of cheaper tea, coffee, rubber, cardamom
and pepper from Malaysia, Indonesia & other
RCEP nations.
▪ India wanted an Automatic Trigger Safeguard
Mechanism (ATSM) to protect itself from surge in
 imports. (e.g. raise customs duty by “x%” on RCEP: Conclusion
imported products from “y” country if “z” situation ▪ While it is true that India could have gained in
occurs). certain export-sectors by signing RCEP
▪ Ratchet Obligation: It means a nation cannot go Agreement, but its present format did not fully
back/undo its commitments under the RCEP address India's issues and concerns regarding the
agreement. India wants certain exemptions here. protection of the domestic industry. So we’ve opted
▪ Base Year for tax cuts: India wants base year for not to sign it.
tax-cuts fixed at 2019 instead of 2014. Because ▪ The remaining member-nations have planned to
since 2014, India has raised customs duties on over sign the RCEP agreement in 2020 and they are
3,500 products. trying to convince India to get onboard.
▪ Data localisation: India wants all RCEP countries ▪ India has not permanently shut the doors for
to have the rights to protect data & prohibit negotiation. In future we may sign it, if our
cross-border data flow in the national interest. For concerns are addressed.
this reason, India even refused to sign G20 Osaka
declaration on cross-border data flow. ▪ India has signed 40+ trade
▪ 2019-Nov: RCEP summit at Bangkok, Thailand. agreements with various
Here, Indian demands were not agreeable to the countries, our global trade has
majority of other members. So, India announced not improved but more on import
to join the RCEP Agreement. side than export side.
▪ RCEP, TTIP, TPP are mega
regional agreements that will
RCEP: Counterview: India made a mistake by not
Economic undermine the WTO processes.
joining
Survey 2015- India must prepare for this
1. Competition brings excellence - Unless the Indian changing world. India should
industrialists are subjected to the competition from 16:
shed its “big but poor”
Asian giants, they will not invest further in the Observations
dilemma- i.e. We’ve to grow up
R&D, product upgradation, customer service & about from the mentality that “Our India
customer satisfaction. India’s is poor nation we must protect
2. If India doesn’t join RCEP, our products will not Trade farmers & MSME so we have
be able to compete in those nations because of the Agreements moral right to impose tariff and
higher taxes on Indian exports viz a viz other RCEP non-tariff barriers on US/EU
exports. goods/services & yet US/EU
3. Indian manufacturers could import must allow our goods/services
intermediate goods from RCEP countries at into their countries without any
cheaper price to process them further and re-export barriers”
towards Middle East, Africa and European. Thus, ▪ It’s for this reason, India-
RCEP could have provided the perfect European Broad-Based Trade
opportunity for India to become integrated with and Investment Agreement
(BTIA) is not reaching
the global value chain.
conclusion. International trade is
4. World Bank’s “A Glass Half Full - The Promise a give-and-take relationship
of Regional Trade in South Asia” report (2019) we’ve to reduce our trade barriers
estimates India’s potential trade in goods with only then we can expect them to
South Asia at more than 60 billion, but at present reduce their trade barriers.
the actual trade is less than $20 billion- due to tariff ▪ Critiques allege that most of
barriers and connectivity issues. Hence, RCEP is India’s FTAs have not worked
necessary for boosting India’s exports. ES20: in “India’s favour.” e.g.
5. RCEP was still ‘less strict’ in comparison of Observations India’s FTA with S. Korea,
India’s ongoing FTA negotiations with the USA or about Japan and Sri Lanka = %
EU. It was a low-hanging fruit, we should have India’s increase in imports >> are
signed it. Trade higher than % increase of
6. India will have to eventually shed-off its ‘big but Agreements exports.
poor’ mentality. International agreements always ▪ The ES20 concluded that
require some sort of bargaining / give and take. overall India has gained in

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 terms of increase in exports by Which of the above are among the 'free-trade partners'
signing FTAs. of ASEAN?
a) 1, 2, 4 and 5
▪ 1998: India - Sri Lanka FTA. b) 3, 4, 5 and 6
So ink manufactured in Sri c) 1, 3, 4 and 5
Lanka = 0% Indian customs d) 2, 3, 4 and 6
duty when imported in India.
▪ But sometimes Chinese
company manufacture ink NAFTA & SAFTA
bottles in China, transports to its ▪ North American Free Trade
Sri Lankan company → Sri Agreement; (1994) involves
Lanka’s company pastes a label Canada, USA and Mexico.
“this bottle manufactured in Sri- ▪ However, Trump felt NAFTA
Lanka” → sell them in India at NAFTA harms the American interests.
0% customs duty. 1994 ▪ 2018: He made a deal with Mexico
▪ So, FTA agreements contain and Canada to replace NAFTA with
'rules of origin'. Which a new agreement called United
Budget- requires that minimum x% States-Mexico-Canada-
2020: FTA manufacturing/processing/value Agreement (USMCA).
‘rules of addition must be done in ▪ South Asian Free Trade Area:
origin’ originating country (SriLanka in (SAFTA) is a trade agreement of
our example) before it’s eligible SAARC nation's - Afghanistan,
for 0% customs duty. Bangladesh, Bhutan, India,
▪ Originating country SAFTA Maldives, Nepal, Pakistan and Sri
(SriLanka) cannot dump 2004 Lanka.
goods from some third ▪ 2016: India refused to attend
country (China) in the Indian SAARC Annual summit at
market by just putting a label on Pakistan, after Uri- Attack.
it. ▪ In 2019 India raised duties on
Pakistani goods so SAFTA’s is
Rules of origin losing its shine.
▪ Determining where a product comes from is no ▪ 2019: African Union (AU)
longer easy when raw materials and parts criss- members have signed the African
cross the globe to be used as inputs in scattered AfCFTA Continental Free Trade Agreement
manufacturing plants. (AfCFTA).
▪ Rules of origin are therefore needed to attribute ▪ It’s world’s largest FTA covering
one country of origin to each product. 54 nations.
▪ They are the criteria used to define where a
product was made and are important for
implementing other trade policy measures, INDIA’S TRADE AGREEMENTS
including trade preferences (preferential rules of
origin), quotas, anti-dumping measures and Economic Survey 2019-20
countervailing duties (non-preferential rules of Free Trade ▪ India - Sri Lanka FTA
origin). Agreements ▪ Agreement on SAFTA
(FTAs) of India ▪ India Nepal Treaty of Trade
Q. Consider the following countries:(CSE-2018) ▪ India - ASEAN- CECA - Trade
in Goods, Services and
1. Australia
Investment Agreement
2. Canada
▪ India - Japan CEPA
3. China
Preferential ▪ Asia Pacific Trade Agreement
4. India Trade (APTA)
5. Japan Agreements ▪ Global System of Trade
6. USA (PTAs) Preferences (GSTP)
▪ India - Afghanistan

295
 ▪ SAARC Preferential Trading ▪ EU also making similar protectionist moves
Agreement (SAPTA) against China and India.
▪ India – MERCOSUR
On-going trade ▪ India - EU BTIA Protectionism: Medicine and Defence
negotiations ▪ India - Sri Lanka Economic
and Technical Cooperation Anti-malarial drug, could be
Agreements (ETCA) used in the COVID-19
▪ India - Thailand CECA
treatment. Earlier India had
▪ India - New Zealand
imposed a ban on its export
FTA/CECA
▪ India - Gulf Cooperation Hydroxychloroquine to ensure supply for the
Council (GCC) Framework Indian patients. But 2020-
Agreement june: India lifted the ban for
▪ India – Iran PTA 1)export earning
2)soft-diplomacy: winning
Key initiatives for trade facilitation support of its friendly
▪ Self e-sealing through RFID tag by trusted nations
exporters, Defense ministry has put
▪ Introduction of ‘E-Sanchit’ for lodging supporting 101 defense items in
documents online, negative import list i.e.
▪ Tracking of imported cargo clearance time through they will be purchased
Indian Customs Ease of Doing Business from local manufacturers.
Dashboard (ICEDASH), 2020-Aug They'll not be imported e.g.
▪ Launch of Atithi mobile App for international Multi barrel rocket
passengers. launchers, assault rifles,
▪ National level Time Release Study (TRS) across radars.
multiple locations covering seaports, Inland Benefit - Local industry
Container Depots (ICDs), air cargo complex etc. to will get contracts worth ₹4
achieve cargo release time targets. lakh cr. → Make in India,
Atma-Nirbhar, reducing
CAD
BURNING ISSUES IN INTERNATIONAL TRADE
Protectionism → Indian Govt procurement
Protectionism, Trade war: ▪ Atma-Nirbhar: PM asked the nation to be " vocal
▪ Protectionism connotes the use of tariff and non- for local " (to promote local goods) with an aim to
tariff barriers to protect the local industry against make India self-sufficient in every way.
foreign competition. ▪ So, in Government procurement tenders up to ₹200
▪ Trade war happens when two / more nations crore, foreign (global) companies will not be
attack each other's exports through tariff and non- allowed to apply.
tariff barriers. ▪ This will help Indian Micro, Small & Medium
▪ 2017: USA had $375 billion trade deficit with Enterprises (MSME) and large Indian companies to
China. Cheap import from China causes domestic revive business through increased purchase from
American manufacturers suffer. US companies the Government.
outsourcing to China which results into
unemployment of American workers. USA’s Special 301 report
▪ 2018: Trump announced 25% tariff on imported ▪ Annual report that lists the countries who are
steel, semiconductors, chemicals, plastics, harming the Intellectual Property Rights -
motorbikes and electric scooters etc. from China. copyrights, patents and trademarks of American
So, China retaliated by hiking tariff on imported companies.
American soybean & other food products, ▪ These countries are classified into categories such
chemicals, medical equipment & vehicles. as “Priority Foreign Country” (Most dangerous)>
▪ Both also filled complaints against each other at "Priority Watch List" > "Watch List" etc.
WTO. ▪ Depending on the classification, USA will
complaint to WTO and / or spend money on

296
 those countries to reduce the piracy (e.g. training
and capacity building of Russian police officers &
China’s cybercrime courts etc.).
▪ 2018: India, Russia, China etc. are in priority
watchlist. Mainly because of their hackers, movie
piracy, counterfeit products; India because of its
drug patent norms & NPPA which reduce the
profitability of US pharma companies’ patented
drugs.
USA’s Generalized System of Preferences (GSP) list
▪ If a developing country’s name is in this list, its
exports will be subjected to zero/lower import
duties in USA (for selected products only).
▪ 2019: Trump removed India from GSP list,
citing India has imposed heavy import duties on
Harley Davidson bikes and other American exports.
▪ As such most of the Indian exported goods to USA
are not in the GSP list in the first place, so this
blacklisting will not harm India much, albeit,
Indian textile companies are worried that GSP-
removal will make Indian garments more expensive
in USA.
Global System of Trade Preferences among
Developing Countries (GSTP) is a trade agreement
among developing countries and LDC signed under
the aegis of United Nations Conference on Trade
and Development (UNCTAD) in 1988. It aims to
reduces the trade barrier among themselves. India is
a member.
USA Reciprocal Trade Bill/Act 2019
▪ 2019: United States Reciprocal Trade Bill was
introduced in the American parliament (US
congress)
▪ If the partner nation has imposed a high level of
tariff/non-tariff barriers on American products,
then:
o US President can unilaterally increase the
taxes on imported products of that trading
country.
o US President can even 'undo' his
commitment from the free trade agreements
with that country.
▪ If the Intellectual Property Rights (IPR) of
American products are not respected/enforced in a
country → US President can raise taxes on
imported products from that country.
India-USA limited trade deal
297
▪ 2020-Jul: India and USA are negotiating for a
'limited trade deal' i.e. only for selected
commodities taxes may be decrease. Basically,
they're looking for following
▪ India should reduce taxes → on American farm &
dairy products, pharmaceuticals, electronics etc
▪ USA should reduce taxes → on Indian steel &
Aluminium etc, and USA should restore India's
name in the Generalized System of Preferences
(GSP).
Impact of US/EU/China trade war on India
Previous economic surveys observed:
▪ US’s protectionism is targeted more towards
Chinese goods than towards Indian services
(IT/BPO) because of their local political / vote bank
perception that Chinese manufacturing industries
are more responsible for the loss of American jobs
than Indian call-centres. So, India need not worry
excessively.
▪ Besides, Chinese tariffs on USA creates
opportunities for India to export its soyabean, cars,
medical equipment to China. Commerce Ministry
has recorded growth in over 300+ Indian exports
including vulcanized rubber, paper, copper wires,
electrodes, natural honey and pipes to China.
▪ Similarly, USA’s 25% import duty on Chinese
seafood has made American consumers shift to
Indian frozen shrimps which don’t attract such
large duties in USA. This has positively boosted
India’s seafood exports.
▪ However, with the rise of nationalistic political
groups in the 1st world nations, India will face
following challenges →
o 1st world nations’ local industrial groups keep
pressuring their governments to impose more
tariffs on Indian fisheries, textile and
pharma sectors.
o With the fall in (overall) exports of India,
there has been a glut the supply of
commodities in the domestic market, resulting
into inflation levels falling below 3%.
According to Phillips curve, there is an inverse
relationship between inflation and
unemployment. This could pose a challenge
to our economy in the days ahead.
o 1st world nations tighten their visa /
immigration policies - NRIs suffer.
Protectionism: Conclusion
▪ Protectionism has a mixed impact on Indian
macroeconomic stability because while helped
 boosting Indian exports in some sectors (seafood &
soybean), it has harmed the other sectors.
▪ Protectionism will only hurt the US economy &
Chinese economy in the long run.
BREXIT (BRITAIN EXIT)
TIMELINE DEVELOPMENT
1993 ▪ Maastricht Treaty formed
European Union, a political
and economic union to allow
easy movement of goods,
services, citizens among
themselves.
2002 ▪ EU introduced its common
currency, Euro. Although
Britain was an EU member, it
continued with its own
currency ‘Pound Sterling’
▪ Later, Britain’s political parties
campaigned that:
1) migrant workers from other EU
countries could results into job loss
for local Britishers.
2) EU framework is harming our
economic and foreign diplomacy
interests.
2016 ▪ Britain held a referendum &
asked its citizens “whether the
Britain should exit or remain
in the European Union?” 52%
voted yes, 48% voted no.
2017 ▪ Britain invokes Article 50 of
Lisbon Treaty, which gives
them 2 years’ timeframe to
work out a deal for exit /
divorce. e.g. What happens to
UK citizens living elsewhere in
the EU and EU citizens living
in the UK etc. How much
money Britain must pay to EU
for leaving?
Accordingly Britain is scheduled to leave at +2 years =
29th March 2019. But there is internal political
bickering among British parliamentarians on the terms
of exit deal.
How does BREXIT affect India?
BREXIT creates both opportunities and challenges
for India. We will have to rebuild / update our trade
agreements with both parties separately.
▪ With the rise of ‘nationalism’, ‘protectionism’ in
Britain/EU → India’s textile, pharma, automobile
exports may get hurt. Although Britain may ease its
travel & education visa norms to attract Indian
students for their college fees.
▪ EU is planning to create a ‘Digital Single Market
by 2020’ to cover digital marketing, E- commerce
and telecommunications related services. Indian
companies can provide backend services.
▪ British goods will no longer get easy entry in EU,
so they will try to export more towards India -
because of India’s rising middle class & their
growing purchasing power. We can demand
reciprocal treatment e.g. “we will cutdown tariff for
your ‘x’ list of goods, if you do the same for ‘y’ list
of Indian goods.”
▪ Britain becomes ‘free’ of EU’s foreign policies so
it may come up with new initiatives for Palestine,
Middle East, Afghanistan etc. and to keep India on
board, Britain may give some concessions e.g.
“Vote in favour of our “x” resolution at UNGA &
we’ll cut down tariff on Indian goods by y% & will
give a cheap infra. loan at z%”.
2020-May: EU announced 750 billion euro (826
billion $) economic stimulus package. Basically,
the EU will borrow money from the market → give
it to Member states in the form of loans and grants
for reviving their economy
Q. The term ‘Digital Single Market Strategy’ seen in
the news refers to (CSE-2017)
a) ASEAN
b) BRICS
c) EU
d) G20
Q. ‘Broad-based Trade and Investment Agreement
(BTIA)’ is sometimes seen in the news in the context
of negotiations between India and__________(CSE-
2017)
a) European Union
b) GCC
c) OECD
d) SCO
OTHER NOTABLE GROUPINGS RELATED TO
ECONOMY
GROUPINGS: INDIAN SUBCONTINENT
298
 ▪ Objective - cooperation in tourism, culture,
INDIAN SUBCONTINENT
education, transport, communications.
▪ Mekong river starts from China → flows through
Mekong- Shanghai Myanmar, Laos, Thailand, Vietnam, Cambodia →
SAARC Ganga ASEAN BIMSTEC Cooperation
Cooperation Organization drains in South China Sea.

▪ South Asian Association for

Regional Cooperation.
SAARC ▪ HQ: Kathmandu, Nepal
1985 (1985)
▪ 8 member states:
Afghanistan, Bangladesh,
Bhutan, India, Nepal,
Maldives, Pak & Sri Lanka.
▪ 2016: summit @Islamabad
cancelled after India and
others boycotted due to Uri
attack.
▪ Then no annual summits in
2017, 2018. Although 2019
summit is planned at
Colombo, Sri Lanka.
BIMSTEC ▪ Bay of Bengal Initiative for
1997 Multi-Sectoral Technical
and Economic Cooperation
(BIMSTEC)
▪ Dhaka, Bangladesh (1997) ASEAN
▪ 7 members: Bangladesh, ▪ Association of Southeast Asian Nations
India, Myanmar, Sri Lanka, ▪ Formed in 1969 by Bangkok declaration
Thailand , Nepal and Bhutan. ▪ HQ: Jakarta, Indonesia
▪ Summits every four years. ▪ 10 Members: Brunei, Cambodia, Indonesia, Laos,
▪ 2018 summit in Kathmandu, Malaysia, Myanmar, Philippines, Singapore,
Nepal Thailand and Vietnam.
▪ Next will be in Colombo, Sri ▪ 2018: marked the 25th Anniversary of ASEAN-
Lanka. India Dialogue Relation, their leaders were invited
to India. Delhi declaration with the theme
India has setup South Asian University (SAU-2010) at “Shared Values, Common Destiny”
Delhi (2010) for SAARC students. India also launched ▪ Their 10 leaders also graced our 26th January 2018
South Asia Communication Satellite (GSAT-9) in Republic Day parade as chief guests. 2019
2017 to provide tele- medicine, tele-education, banking celebrated as ASEAN- India Tourism Year
and television broadcasting facilities to SAARC ▪ 2019: Summit at Thailand‘s capital Bangkok.
nations. Theme: Advancing partnership for sustainability.
▪ Result - Bangkok declaration against Marine
South Asian Association for Regional Debris
Cooperation → SAARC leaders organized video
conference to fight Corona on 2020-March. India Shanghai Cooperation Organization (SCO)
proposed creation of a COVID-19 emergency fund ▪ 2001 → HQ: Beijing, China.
& contributed $10 million in it. ▪ Regional Anti-Terrorist Structure (RATS) at
Tashkent, Uzbekistan
Mekong- Ganga Cooperation (2000) ▪ 6 founding members: Russia, China, Kazakhstan,
▪ India + five of the ASEAN countries, namely, Kyrgyzstan, Tajikistan and Uzbekistan.
Cambodia, Laos, Myanmar, Thailand and Vietnam. ▪ 2 new members: India & Pak.

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▪ 2017: SCO summit at Astana, Kazakhstan → India,
Pak formally given membership.
▪ 2018: SCO summit at Qingdao, China resulted
Qingdao declaration- a 3-year plan to combat
terrorism. India refused to endorse China’s One
belt one road (OBOR) policy in this summit.
▪ 2019-June: SCO summit at Kyrgyzstan’s capital
Bishkek. Bishkek declaration major points:
1. Condemn terrorism,
2. Settle Syrian issue with political dialogue,
3. Roadmap to peace in Afghanistan through
dialogues,
4. Appreciated WTO
▪ 2020: SCO Summit at Russia’s Chelyabinsk.
GROUPINGS: OCEAN-RIM
GROUPINGS
Asia-Pacific
Indian Ocean Rim
Association (IORA)
Economic
Cooperation (APEC)
Indian Ocean Rim Association (IORA);
▪ 22 Indian Ocean rim nations. India is a member.
China-USA are dialogue partners.
▪ Setup in 1997, HQ: Ebene, Mauritius
▪ 2018 council of ministers’ meeting at S. Africa’s
Durban- established Mandela Scholarship, added
Maldives as a member but blocked membership of
Myanmar due to S. Africa’s opposition.
Asia-Pacific Economic Cooperation (APEC)
▪ 21 Pacific Rim ocean economies. India is not a
member, China-USA are members.
▪ 1989, HQ: Singapore
▪ 2018 summit at Port Moresby, Papua New Guinea.
India is keen to become member but not yet added.
▪ 2019 summit at Chile cancelled due to civilian
unrest in the country.
GROUPINGS:BRICS, OECD, OPEC, G20, JAI,
QUAD
BRICS, ▪ Brazil, Russia, India, China and
2009 South Africa. S. Africa joined
later in 2011.
▪ 2014: BRICS New Development
Bank
▪ 2018: summit at Johannesburg,
S. Africa with theme
“Collaboration for Inclusive
Growth and Shared Prosperity”
▪ 2019-Nov: summit at Brasilia,
Brazil. Theme: "BRICS:
economic growth for an
innovative future".
▪ 2020: 12th BRICS summit at
Saint Petersburg, Russia
▪ Role of secretariat is played by
its pro tempore presidency, so
accordingly, 2018: S. Africa.
2019: Brazil. 2020: Russia
OPEC, 1961 ▪ Organization of the Petroleum
Exporting Countries
▪ HQ at Vienna, Austria.
▪ A group of oil producing
countries Saudi, UAE,
Venezuela, Iran, Iraq etc with
total 14 members.
▪ Qatar withdrew from 1 Jan 19.
Russia is NOT a member
▪ Organisation for Economic Co-
operation and Development-
▪ HQ at Paris, France.
▪ Works for International
OECD, 1961 cooperation in the matters of
economy and taxation. Known
for Base erosion and profit
shifting (BEPS) Norms. India is
not a member.
G-20, 1999 ▪ International forum for the
governments and central bank
governors from 19 countries
and the European Union.
▪ Annual summits: 2018 at
Buenos Aires-Argentina, 2019 at
Osaka - Japan....2022 at Delhi.
2+2 ▪ e.g. India Japan 2+2 = meeting
meeting of the foreign minister &
defense minister from each
side.
JAI trilat ▪ Prime Minister Narendra Modi,
eral 2018 US President Donald Trump and
Japan Prime Minister Shinzo
Abe met in a trilateral format in
the sidelines of G-20 Summit in
Buenos Aires, Argentina. It
was called the first-ever ‘JAI’
meeting.
▪ Objective - Economic growth,
common prosperity.
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 QUAD ▪ Quadrilateral Security Dialogue
is an informal strategic dialogue
between the United States,
Japan, Australia and India.
G20: OSAKA DECLARATION
2019-June: G20 summit at Osaka, Japan. Its
declaration announced following points:
▪ We will work together to foster global economic
growth using technological innovation, esp.
Digitalization.
▪ Cross-border flow of data, information, ideas
and knowledge generates higher productivity,
greater innovation, and improved sustainable
development. So, we will encourage free flow of
data to harness the opportunities of the digital
economy. There should not be any restriction on
companies from storing personal information, in
foreign servers. Japanese PM Shinzo Abe called
this initiative ‘Data Free Flow with Trust’
(DFFT).
▪ We will cooperate to encourage the interoperability
of different frameworks, and we affirm the role of
data for development.
▪ We endorse the G20 Fukuoka Policy Priorities on
Aging society’s Financial Inclusion.
▪ We affirm our support to G20/OECD Base Erosion
and Profit Shifting (BEPS) Agreement; FATF’s
regulations against money laundering, terrorist
financing. No safe haven be given to any economic
offenders.
▪ Tourism, Agriculture, Global Health &
Environmental Issues.
▪ Next summits: Saudi Arabia in 2020, in Italy in
2021 and in India in 2022 (it is also India’s 75th
anniversary of independence)
▪ Data is a new form of wealth. US opposes data
localization policies so, this entire matter should be
discussed within WTO and not outside of it.
Conclusion: While India understands and
appreciates the role of ICT in economic development
and good governance. The issue of data flow requires
a wider global cooperation without undermining an
individual’s privacy or a State’s sovereign interests.
Considering these facets, India has refused to sign the
Osaka declaration on cross border data flow.
G7 - Group of Seven (1975)
▪ Consist of seven major developed countries:
Canada, France, Germany, Italy, Japan, USA, UK.
▪ 1997: Russia was added so it became G8 but then
Russia annexed Crimea region of Ukraine to
Russia was Expelled from this group so again it
became G7 in 2014.
▪ 2019: Summit at Biarritz, France. India was also
invited to attend.
▪ 2020: Summit was to be held at USA. But
postponed due to Corona.
▪ Trump proposed Australia, India, South Korea,
Russia etc should also be invited at G7. Although
the UK hates the idea of inviting Russia back.
D10: 5G club proposed by UK (2020)
▪ UK proposed “D10” club of democratic partners
including –
o G7 countries - UK, US, Italy, Germany,
France, Japan and Canada
o + 3 more plus Australia, South Korea and
India
▪ Objective - create supply chain for 5G
equipment and technologies. To avoid relying on
China/ Huawei- for data security and data privacy.

GROUPINGS: GCC VS OIC

Osaka declaration: why India refused to sign
India, South Africa and Indonesia remained absent
when G20 members formally signed Osaka declaration Gulf Cooperation Organisation of Islamic
because: Council (GCC); 1981 Cooperation (OIC);
▪ India believes that all of the countries must 1969
individually manage data. Otherwise MNCs will HQ - Riyadh, Saudi HQ - Jeddah, Saudi
use data for their commercial benefits, harming Arabia Arabia
privacy of citizens and sovereign interests of the 6 members: Bahrain, Around 50 Islamic
States. (e.g. Huawei mobiles’ send their data to Kuwait, Oman, Qatar, countries from across of
China, they may be hacked by Government- Saudi Arabia, and the the world.
sponsored hackers to spy on India.) UAE
▪ Such free flow of data may be misused for 2017: some of these 2019-March: While
influencing public opinion through targeted members have cut off India is not a member,
advertisements and articles on social media. (e.g. diplomatic and business but first time invited in
The alleged Russian hand in Trump's election.) ties with Qatar. OIC meeting as guest of

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 honour. Sushma Swaraj World ▪ Davos Theme 2019:
attended at Abu Dhabi, Economic Globalization 4.0 in 4th
UAE while Pakistan Forum, 1971 industrial revolution
(OIC member) skipped ▪ Annual reports of WEF
the event in protest. 1. Global Competitiveness
Report,
2. Global Information
MISC GROUPINGS / ORGANIZATIONS Technology Report,
▪ UNCTAD: United Nations 3. Global Gender Gap
Conference on Trade and Report,
4. Global Risks Report,
Development
5. Global Travel and
▪ UNDP: United Nations
Tourism Report,
Development Programme
UN specialized known for its Human 6. Financial Development
agencies development report. Report,
7. Global Enabling Trade
related to ▪ UNIDO: UN Industrial
Economy Development Organization Report.
▪ World Intellectual Property Andean Free Trade Area of the South
Organization (WIPO) Community American countries of Bolivia,
▪ International Labour Colombia, Ecuador, and Peru.
Organization (ILO). MERCOSUR Southern Common Market of
▪ Note - List not exhaustive Argentina, Brazil, Paraguay,
▪ Not-for-profit think-tank in Uruguay + ANDEAN + other
Cologny (a municipal area in countries. However Venezuela
Geneva), Switzerland. was suspended in 2016.
▪ Known for its annual
summit at Davos resort in Q. The Global Competitiveness Report is published
Switzerland where they by the _______________(CSE -2019)
invite selected world leaders, Codes:
thinkers, NGOs and a) IMF
industrialists. b) UNCTAD
▪ Davos Theme 2020: c) World Economic Forum
Stakeholders for a Cohesive d) World Bank
and Sustainable World.

EXPORT CONTROL / NON-PROLIFERATION REGIMES

NSG 1974 - Nuclear Suppliers Group (NSG) is a group of countries that control the export of nuke materials,
equipment and technology & aim to prevent its use in making nuclear bombs.
- China is a member, India not a member yet due to China’s objection.
Australia - Informal group that encourages members not to export chemical or biological weapons or technology.
Group China not a member, India became member (2018).
1984
MTCR 1987 ▪ Missile Technology Control Regime is an informal group that encourages members not to export
missiles equipment, software, technology.
▪ China not a member, India became member (2016)
Wassenaar ▪ Wassenaar is an area in Netherland. This arrangement (1996) requires members to be strict and
Arrangement transparent in the export of conventional arms and dual-use goods and technologies (e.g. Night
1996 Vision Googles). So they don’t fall in the hands of terrorists and rogue states like N. Korea.
▪ China not a member, India became member (2017)

PREVIOUS YEAR QUESTIONS

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 GSM2- What are the key areas of reform if the WTO has to survive in the present context of ‘Trade War’,
2018 especially keeping in mind the interest of India?
GSM2- The aim of Information Technology Agreements (ITAs) is to lower all taxes and tariffs on information
2014 technology products by signatories to zero. What impact should such agreements have on India’s
interests?
GSM2- India has recently signed to become founding a New Development Bank (NDB) and also the Asian
2014 Infrastructure Investment Bank (AIIB). How will the role of the two Banks be different? Discuss the
significance of these two Banks for India.
GSM2- WTO is an important international institution where decisions taken affect countries in profound manner.
2014 What is the mandate of WTO and how binding are their decisions? Critically analyse India’s stand on the
latest round of talks on Food security.
GSM2- The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-
2013 governmental pillars supporting the structure of the world’s economic and financial order. Superficially,
the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate
are distinctly different. Elucidate.
GSM3- How would the recent phenomenon of protectionism and currency manipulations in world trade affect
2018 macroeconomic stability of India?

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 CH-11 AGRICULTURE
Introduction
Agriculture is a primary economic activity that
includes growing crops, fruits, vegetables, flowers and
rearing of livestock among others.
• According to the World Bank data, the
number of people employed in agriculture is
steadily falling down: 55% (2011) to 42%
(2018)
• The share of agriculture in the total GDP is
falling down, but not steadily – about 15-17%
• Approx. 16 cr Indian workers are in agriculture
& allied sectors at present.
• The growth rate of agriculture has been zig zag
due to El-Nino led drought years.
Various boards / institutes for horticulture, plant
health management, Agro marketing etc.
2. Dept of Agro Research Extension
• Department of Agricultural Research & Education
• Autonomous body: Indian Council of Agricultural
Research (ICAR)
• Central Agro universities at Imphal (Manipur),
Pusa (Bihar), Jhansi (UP).
Ashok Dalwai committee on Doubling farmers’
income by 2022-23 compared to 2015-16.
Manmohan Singh govts. target was 4% annual
growth rate, Modi Govts. 2x income target would
require 10% annual growth rate in agriculture.

Ministry for Fisheries, Animal Husbandry and

Dairying
This ministry was newly setup in 2019, with two
departments.
1. Dept of Fisheries
2. Dept of Animal Husbandry And Dairying
UN-SDG 1 End poverty in all forms.
UN-SDG 2 Eliminate global hunger, protect Statutory → National Dairy Development Board
indigenous seed and crop varieties, (NDDB)
doubling agriculture productivity
and small farmer incomes by 2030
Sir Arthur Lewis’ Dual Economy Model
Economic development results in labourer moving
Ministry of Agriculture and farmers welfare away from agriculture to the more productive
industrial sector, & agriculture sector becomes less
Ministry of Agriculture and Farmers Welfare is made important part GDP.
up 2 departments and implements National Policy for
Farmers (2007)
Note - Previously above subjects were under the aegis
1. Dept of Agriculture of Agri ministry.
• Department of Agriculture, Cooperation and
Farmers Welfare
Agricultural Inputs
• Statutory Bodies/Boards - Coconut Development
Board, National Cooperative Development
Corporation, Protection of Plant Varieties and AGRICULTURAL
INPUT
Farmers’ Rights Authority, Registrar of Multi State
Cooperative Societies. Credit
/ Seed Insuranc farm
• Attached Office - National Rainfed Area Land
Financ s Water Fertilizer
e mechanizat
ion
Authority. e

• CPSE - National Seeds Corporation Ltd. (NSC)

• Autonomous / Cooperative bodies: NAFED, LAND INPUT
Small Farmers Agribusiness Consortium (SFAC).

304
 • While India accounts for more than 17% of world
population but we have barely 2.5 % of land of the
world.
• Agriculture is a purely land based activity. Size and
quality of land has direct bearing on agriculture
productivity and farmers’ income. Land ownership
also serves as a social value & security against
credit.
Challenges • Rising population
• Division of land among heirs leads
to fragmentation of landholdings.
• Small sized-farms are not
conducive for farm-machinery
results into poor productivity.
Solution • Small-marginal farmers should be
encouraged to join manufacturing /
service sector jobs
• Selling their land to big farmers
which could facilitate land
consolidation
• Cooperative and Corporate
farming
• Land Reforms is the government led division
of agricultural land and its reallocation to
landless people.
• Land Acquisition means Govt acquiring
private land for industrial or infrastructure
development.
Land reforms in India after independence
• Zamindari Abolition
• Vinoba’s Bhudaan movement and Gramdaan
movement
• Ceiling on Landholding i.e. fixing maximum size of
land holding that an individual can own.
• Laws to protection of tenant farmers
• National Land Records Modernization Programme
(NLRMP-2008) by Department of Land Resources
under Rural Development Ministry. Because digital
land records help reducing court case related to sale
or inheritance & help keeping track of land ceilings.
Land is a state subject, so Union circulated Model
Agriculture Land Leasing Act, 2016, which:
• Protects land owner from illegal occupation by
tenant farmer
• Helps tenant farmer get bank loans using leasing
agreement as proof.
305
• Forest Rights Act, 2006 - which gives ‘Patta’
(farm land ownership title) to the forest dwellers, if
the given family was cultivating that forest land for
the last 75 years.
SEEDS
• Since we can’t drastically increase the area under
cultivation, so, agriculture yield (amount of crop
produced in a given acre of land) depends greatly
on seed quality.
• For best yield, hybrid seeds must be replaced every
year, and non-hybrid must be replaced every three
years. But in India, seed replacement rate is less
than optimum because of:
o New seeds are not affordable and
o Not available to all farmers. So, government has
approved 100% automatic FDI in seed
development.
Seed village concept: Group of farmers in a village
given training to produce seeds of various crops so
they can fulfill seed demand of their own &
neighbouring villages.
Seed bank / Seed vault is a depository that stores
seeds to:
• Preserve genetic diversity
• Supply seeds during natural calamities and
unforeseen conditions.
• Agro Ministry gives funding for above two
initiatives.
Draft Seeds Bill 2019 aims to replace the Seeds Act,
1966, to regulate the quality of seeds for sale, import,
export. But since it’s in draft stage.
Q. Which one of the following best describes the
main objective of Seed Village Concept? (CSE-2015)
a) Encouraging the farmers to use their own farm
seeds and discouraging them to buy the seeds from
others.
b) Involving the farmers for training in quality seed
production and thereby to make available quality
seeds to others at appropriate time and affordable
cost.
c) Earmarking some villages exclusively for the
production of certified seeds.
d) Identifying the entrepreneurs in villages and
providing them technology and finance to set up
seed companies.

Biofortification: is the process by which the
nutritional quality of food crops is increased. E.g.
ICAR developed CR Dhan 310- a rice variety that
has higher protein & zinc content than traditional
rice. Germans developed Golden rice for Vitamin
A.
Green Revolution:
• Green revolution refers to the large increase in food
production with the help of High Yielding Variety
(HYV) of hybrid seeds.
Phase-1: Mid 1960s upto mid 1970s → focus
on wheat, rice and more affluent
states such as Punjab, Andhra
Pradesh and Tamil Nadu.
Phase-2: Mid-1970s to mid-1980s → HYV
seeds were spread to a larger number
of states. They also focused on crops
apart from wheat and rice.
Pepsi vs Potato Farmers
• 1970’s Indian Patents Act doesn’t give Patent to
seeds / plant varieties. But,
• 2001’s Protection of Plant Varieties and Farmers'
Rights Act grants Intellectual Property Rights (IPR)
to plant breeders, researchers and farmers who have
developed any new plant varieties
• Pepsi supplied FC5 potato hybrid variety to Indian
farmers. It has a lower moisture content so suitable
for making Pepsi-Lay’s potato chips. Later,
contract expired yet farmers continue to grow this
variety (& selling to other chips makers).
• 2019: Pepsi filed a complaint against Gujarat
Farmers. Later, Pepsi withdrew the complaint.
Genetically modified (GM) crops
• Hybrid seeds are developed by cross-breeding /
cross-pollination with other plants.
• Whereas, Transgenic / Genetically modified
seeds are developed by transferring selected genes
from one organism into another. E.g. Bacterium
Bacillus thuringiensis genes inserted in cotton →
Bt. cotton → if bollworm pests eat it, it’ll die by the
toxin crystals in Bt. cotton plant.
• GM-Regulation → Environment Protection Act
1986 (EPA) → Genetic Engineering Appraisal
Committee (GEAC) conducts studies, and
recommends approving a GM crop in India →
Environment ministry gives final permission.
• 2017: GEAC recommended environment ministry
to allow GM-Mustard in India.
• 2018: however, GEAC did ‘U-turn’ on its previous
recommendation saying further studies required
before allowing GM-Mustard in India.
• Thus, so far, Environment ministry has allowed
only Bt. Cotton (a non-food crop) cultivation in
India (2002).
Challenges to GM crops
• Biosafety concerns GM food crops may be unsafe
for human and animal consumption. They may
harm the soil bacteria & bees → harm to entire food
web and biodiversity. GM crop may eliminate the
wild/indigenous species by cross-pollination.
• American company Monsanto’s Bollgard
technology is used for developing Bt Cotton seeds.
So, Indian Bt-cotton seed production companies
have to pay a type of royalty to Monsanto, called
Trait fees. Govt of India decides the ceiling on Trait
fees.
• Monsanto also owns patent over Terminator gene
technology i.e. when such seeds are planted, they’ll
produce crops only once. Their resultant crop’s
seeds will be sterile → Farmer forced to buy new
seeds from company for every season. Terminator
gene seeds are not allowed in India.
Suggestions by Economic survey 2017 on GM crops
We’ve a robust regulatory framework with GEAC. So,
mischief is unlikely so we should allow GM crops with
following precautions:
• Allow GM seeds which don’t have Terminator
Gene or high cost.
• Allow GM seeds that have following properties:
o Disease, pest & drought resistant
o Longer shelf life
o Shorter crop duration
o Non-food / Tree format crops.
• To prevent MNC monopoly on GM seeds, we’ve to
encourage domestic companies.
GM-Crops: Conclusion
India needs self-sufficiency in
agriculture because of:
• SDG goal of zero hunger
Conclude • Economic goal of low food
in Favor: inflation. GM-crop can help in this
regard, so a positive consideration
should be given GM adoption in
India.
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 • India is a signatory to Cartagena • Various water dispute tribunals
protocol to protect biodiversity. under Inter-State Water
• SDG Goal (2.5) also requires all Statutory Disputes Act, 1956
Conclude nations to protect the genetic Bodies • Under Environment Protection
Against: diversity of plants and animals. Act, 1986
Given the aforementioned • National Ganga River Basin
concerns, GM crops should not be Authority (NGRBA) → 2006
introduced in India without due replaced by National Ganga
diligence. Council chaired by PM
• Central Ground Water
WATER (IRRIGATION) Authority.
• The supply of water to crops at different intervals is • Water and Power Consultancy
called irrigation. PSU Services Ltd (WAPCOS)
• Challenges → While India accounts for more than • National Projects construction
17% of world population but we have barely 4% of Corporation Ltd.
world's water resources. • National Institute of
• India is a water stressed country. More than 50% of Autonomous Hydrology
the agriculture depends on rainfall. Only four Bodies • Krishna River Management
months of monsoon & if El-Nino we receive even Board
less rainfall. → 2014 & 2015 drought → food • Godavari River Management
inflation. Board
• Irrigation water productivity is defined as ratio of
the crop output to the irrigation water applied. To Jal Shakti Ministry
produce 1 kg of rice, Indian farmers use 3,000- 2019-May: Government formed Jal Shakti Mantralaya
5,000 litres of water, whereas Chinese farmers by merging following ministries:
manage it within 350 litres of water. 1. Ministry of Water Resources, River Development
• MSP, heavily subsidized electricity, water and and Ganga Rejuvenation
fertilizers = 60% of water is consumed by water 2. Ministry of Drinking Water and Sanitation
intensive crops like paddy and sugarcane. Now Ministry#1 and Ministry#2 have been made
• By 2050, India will be in the global hot spot for ‘Departments under the Jal Shakti Ministry.
‘water insecurity’.
• To earn double income, a farmer must cultivate National Rural Drinking Water Programme (2009)
multiple crops annually. But majority of farmers • National Rural Drinking Water Mission
face water shortage so they can’t do so. • Nodal → Drinking Water Dept. Centrally
Sponsored Scheme → Core Scheme = NOT 100%
Water related Ministries and Departments funded by Union. (50:50)
Min. of Water Resources, River Development & Ganga • To provide every rural person with safe water for
Rejuvenation consists of : drinking, cooking & domestic needs.
• Additional focus on areas affected by Arsenic,
Dept Description Fluoride & chemical contamination; Encephalitis
• Central Water Commission disease etc.
• Ganga Flood Control • 2019: NRDWP subsumed under a new scheme
Attached / Commission namely Jal Jeevan Mission (JJM).
subordinate • Bansagar Control Board (Son
offices River) Pradhan Mantri Krishi Sinchai Yojana (2015)
• Central Water and Power • Nodal → Agro Ministry (2015).
Research Station • Core Scheme → Not 100% Funded by Union.
• Central Soil and Materials • Aim → To improve the irrigation coverage, reduce
Research Station wastage of water, using 4 pillar strategy:
• Betwa River Board, 1. Accelerated Irrigation Benefit Programme
Brahmaputra Board under (AIBP)→ Requires Jal Shakti Ministry to finish
respective Acts.

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 the ongoing national irrigation projects at a
faster pace.
2. Watershed Development → Setup water
harvesting structures like check dams, Nala
bund, farm ponds, tanks etc. Encourage
traditional water storage systems such as Jal
Mandir (Gujarat); Khatri & Kuhl (H.P.); Zabo
(Nagaland); Eri & Ooranis (T.N.); Dongs
(Assam); Katas & Bandhas (Odisha & M.P.).
3. Har Khet ko Pani → To distribute water to each
and every farm.
4. Per drop more crop → Improve the water usage
efficiency through Micro-irrigation devices
such as drips, sprinklers, pivots, rain-guns.
Mixing water-soluble fertilizers in
Fertigation: drip system → fertilizer delivered
into the root system → reduced
wastage of fertilizers.
It is a simple process of covering the
bare soil with straw, wood chips,
Mulching: shredded bark etc. to reduce the water
evaporation, soil erosion and weed
growth.
Challenges to Micro-irrigation
High cost of purchase. Trampling by elephant, boar,
nilgai etc. damages the equipment, but repairman not
available locally and repair costs not covered in crop
insurance. So less adoption.
Namami Gange Yojana (2015)
• To make Ganga pollution free in the next 5 years
through Sewage / Effluent Treatment Plants,
Information, Education & Communication (IEC)
etc.
• Nodal → Water Resources Dept.
• Central Sector Scheme = 100% funded by union
• 1986: Ganga Action Plan by PM Rajiv Gandhi.
• 2009: Ganga was declared the ‘National River’, &
National Ganga River Basin Authority (NGRBA)
setup under Environment Protection Act. Initially
the authority functioned under the Environment
Ministry but later transferred to the Water
Resources Ministry.
• 2015: Modi repacked previous schemes / initiatives
under ‘Namami Gange’.
Jal Kranti Abhiyan (2015)
• Nodal → Water Resources Dept.
• In every district, 2 villages facing acute water
shortage are designated as ‘Jal Gram’ and efforts
are made to turn them into ‘water surplus’ villages.
• This is not a separate scheme. ₹ ₹ is mobilized from
others schemes like Pradhan Mantri Krishi
Sinchayee Yojana, NRDWP, MNREGA etc. to
create dugwells, watershed, artificial recharge tanks
etc. water assets.
Jal Shakti Abhiyan (2019-July)
• Nodal → Jal Shakti Ministry’s 2 phase to conserve
water.
• Phase1: from 1st July, 2019 to 15th September,
2019.
• Phase2: from 1st October, 2019 to 30th November,
2019 for States receiving the North East retreating
monsoons.
• They will focus on following areas to conserve
water:
o Rainwater harvesting, Renovation of traditional
water bodies/tanks, bore well recharge
structures, watershed development
o Water reuse, intensive afforestation.
Water Schemes → Jal Jeevan Mission (2019-Aug)
• Nodal → Jal Shakti Ministry
• Objective → Har Ghar Jal (piped water supply)
o To all rural households by 2024.
o To Cities with million+ population will be
encouraged to achieve it in current year (2020)
itself.
• Focus on rainwater harvesting, groundwater
recharge and using household wastewater for reuse
in agriculture.
• Previous scheme NRDWP scheme subsumed into
this new scheme.
• Funding → Government aims to spend ₹ 3.60 lakh
crores in this by converging with other Central and
State Government Schemes and using their funds.
Further, if required, the Government will also use
additional funds available under the Compensatory
Afforestation Fund Management and Planning
Authority (CAMPA) for this purpose.
ATAL Bhujal Yojana (ATAL JAL) (2019-Dec)
• Nodal → Jal Shakti Ministry’s Jal Shakti Ministry.
• Funding: 50:50 by Union and World Bank.
• This scheme is not meant for entire India but only
in the selected areas of selected 7 states facing
extreme water shortages viz. Gujarat, Haryana,
Karnataka, Madhya Pradesh, Maharashtra,
Rajasthan and Uttar Pradesh.
• Panchayat led ground water management and
behavioral change. Better performing gram
panchayats, will be given more funding allocation.
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 • Villagers formed into ‘Water User Associations’ → • NITI Aayog’s index
try to minimize water wastage, build water assets, • Guidelines Version 1.0 in 2018, Version 2.0 in
IEC etc. 2019.
• 2019-25th Dec: Modi formally launched this • NITI divides India in:
scheme on the 95th birth anniversary of former 1. Non-Himalayan states
prime minister Atal Bihari Vajpayee. Further, 2. North-Eastern and Himalayan states,
Rohtang Tunnel connecting Manali, Himachal 3. Union Territories (UTs).
Pradesh with Leh, Ladakh and Jammu Kashmir, • NITI ranks them into nine themes and 28 indicators
will now be known as Atal Tunnel against the base year 2017-18.

In 2014-15, PM Modi also announced Bharat Ratna Conclusion

for Atal B. Vajpayee, and declared his birthday (25th Water is a scarce natural resource. Water is fundamental
Dec) to be celebrated as ‘Good Governance Day’. to life, livelihood, food security and sustainable
development. SDG Goal-6 requires India to provide
Universal access to safe and affordable drinking water
Other Schemes related to Water for all. Aforementioned policy / scheme / challenges are
• Nodal → Jal Shakti Ministry. significant in this regard / need to be addressed on
• Central Sector Schemes = 100% funded by union priority basis.
(In the sense that states are not required to give
money) + Additional loans from World Bank. FERTILIZER
• Manure or Compost is a natural substance from
• Dam Rehabilitation and decomposition of organic waste. Whereas,
Improvement Program. Fertilizer is an artificial chemical prepared in
• DHARMA web-portal: to factories to boost nutrients in the soil.
DRIP (2012) monitor safety of dams in
India, minimize loss of life and Fertilizers Notes
property damage in case of
• Haber process: natural gas
dam overflow / disaster.
(methane) converted into
National • Objective - Remote Sensing ammonia (NH3) → further
Hydrology for water resources, flood processing to create Urea.
Project (2016) forecast etc. Therefore, Urea production
• Budget 2017- NABARD has Nitrogen (N) requires natural gas import.
NABARD given funds for Long Term Urea • Ministry of Chemicals and
Irrigation Infrastructure (20k Fertilizers gives Indian
cr) and Micro Irrigation (5k cr) companies subsidy to
manufacture and sell it at cheap
Composite Water Management Index price to farmers.
Suggestions by Economic Surveys on Water • Urea subsidy is a Central Sector
(irrigation) Scheme = 100% paid by Union.
• River inter Linking project. (i.e. State Government not
• Encourage pulses cultivation in the drought prone required to contribute money).
areas. ~80-85% demand is met via import.
• Canal water usages: cost-based water pricing, stop Phosphorous ISRO using remote Sensing
theft of water. (P) technology to identify the potential
• Rainwater harvesting i.e. capture and store mines for rock phosphate.
rainwater. Potash 100% demand is met via import.
• Watershed management i.e. building percolation
tanks, recharge wells, etc. with community
participation. It helps in conservation of rain, surface Ideal Nitrogen: Phosphorus: Potassium (NPK) ratio
and groundwater resources. in soil: 4:2:1, for India it’s 8:3:1.
• A National level dedicated agency to push above
things.

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Because subsidized cheap Urea → illiterate farmers
use excessively. As a result →
• Soil & ground water pollution.
• Subsidized urea smuggled to non-agro purpose in
chemical industries related to dyeing, inks,
coatings, plastics, paints even synthetic milk.
• Subsidized urea also smuggled to Bangladesh and
Nepal.
• Increased use & smuggling → increased subsidy
burden → increased fiscal deficit.
So Govt. initiated one following reforms to control urea
Misuse/Overuse/Diversion:
Nutrient Based Subsidy (2010)
• To prevent misuse of urea
• Central Sector Scheme = 100% Paid by Union (i.e.
State Government not required to contribute
money).
• Nodal → Ministry of Chemicals and Fertilizers
gives subsidy to company based on weight of the
different nutrient in the fertilizer. E.g.
Nutrient N P K S
(Nitrogen) (Phosphorus) (Potash) (Sulphur)
• Above subsidy given to companies for producing
non-UREA type “customized/mixed” fertilizer
according to soil requirement in each region.
• Challenge → Urea not covered in this scheme,
Urea subsidy paid separately. Delay in NBS
subsidy payments.
• Therefore Fertilizer companies focus more on urea
more than other fertilizers → Urea overuse
continued.
Soil Health Card (2015)
• Nodal → Agro Ministry. Core Scheme - not 100%
funded by Union.
• SHC contains the status of soils with respect to 12
parameters →
• A farmer’s land is tested & he is given updated soil
card once in every 3 years.
• The card also advises on which type of crops, seeds,
fertilizer, irrigation method will be suitable for his
farm, according to his soil type.
Neem Coating of Urea (2015)
• Nodal → Ministry of Chemicals and Fertilizers.
From 2015, Government made it mandatory for
fertilizer companies to neem coat the urea before
selling it.
• Benefits →
1. Prevents diversion of subsidized urea towards
non-agricultural purposes.
2. Neem coating slows down the rate of
dissolution of urea in soil→ Improves the
plant’s absorption of Nitrogen from the urea →
Yield is improved.
3. Reduction in pest and disease attack →
Pesticide consumption is also reduced.
Q. Why does the Government of India promote the
use of Neem-coated Urea’ in agriculture? (CSE-
2016)
a) Release of Neem oil in the soil increases nitrogen
fixation by the soil microorganisms.
b) Neem coating slows down the rate of dissolution of
urea in the soil.
c) Nitrous oxide, a greenhouse gas, is not at all
released into atmosphere by crop fields.
d) It is a combination of a weedicide and a fertilizer
for particular crops.
DBT of fertilizer (2018)
• Nodal → Ministry of Chemicals and Fertilizers.
• Direct Benefit Transfer in fertilizer: Fertilizer
companies are paid subsidy only after the retailer
has sold the fertilizer to farmer through Point of
Sale (PoS) devices & noting down his Aadhaar
Card/ Kisan Credit Card/Voter Identity Card etc. to
verify his identity as farmer.
• Then Government transfers the subsidy ₹ ₹ directly
into the bank account of the respective fertilizer
company.
• Benefits - Prevents diversion of subsidized urea
towards non-agricultural purposes and towards
Bangladesh / Nepal.
PESTICIDES & WEEDICIDES
• Pesticides and weedicides are chemicals which are
used for killing / controlling pests and weeds
respectively.
• 25% crop loss on account of pests, weed, diseases
but India’s per hectare pesticide consumption is far
less than first world. We should encourage organic
pesticides and biocontrol agents.
• We should adopt Integrated Pest Management
(IPM) approach i.e. rather than eradicating pest
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 population to 100%, just try to keep crop damage to
economically tolerable level. Because even pests
are important for biodiversity protection and food
chain balance.
• Spread awareness about proper use of chemical
pesticides (esp. Endosulfan) so it doesn’t
contaminate in food / land / water / human bodies
excessively.
• 2019: Monsanto & its parent company Bayer fined
in USA for their weedicide / herbicide ‘
Glyphosate’ (brand name ‘Roundup’) which was
causing cancer. This weedicide is already banned in
Punjab, Kerala and selected states of India (2018).
• Agro Ministry’s Participatory Guarantee
Scheme (PGS) for certification of organic
products. It assures the buyers the given
fruit/vegetable/produce has organic origin.
Zero Budget Natural Farming (ZBNF)
• 'Zero Budget' means without using any loan, and
without spending any money on purchase of inputs
(seeds, fertilizers).
• 'Natural farming' means farming without chemicals.
By using biofertilizers, earthworms, cow dung etc.
Associated keywords:

Paramparagat Krishi Vikas Yojana (PKVY) (2015)

• Organic farming is a type of agriculture that avoids
the use of synthetic fertilizers, pesticides, and other
chemical inputs. It relies on crop rotation, crop
residues, manures, biofertilizers, biopesticides etc.
• Nodal → Agro Ministry. Core Scheme = Not 100%
paid by Union. (60:40,90:10)
• Mechanism → Form a group of 50 farmers in a
cluster to start organic farming. Every beneficiary
farmer is given ₹ 20,000 per acre for 3 years for
doing organic farming.

Less use of chemicals →

Ecological biodiversity protected, less soil
benefits pollution and water pollution. Less
air pollution (because farmers will
not burn the crop residue).
• Organic products command
higher prices among the health
conscious buyers from
developed countries → more
Economic exports → less CAD, more
benefits farmer’s income.
• Less use of chemical fertilizers
→ governments urea subsidy bill
will decline → fiscal deficit can
be controlled.
• In 2003, recognizing the aforementioned benefits,
Sikkim has stopped entry of chemical fertilizers,
and its Vidhan-Sabha declared the intention to
become a 100% organic state. The goal achieved in
2015.
• 2015: To encourage organic farming in India,
Union Govt. launched Paramparagat Krishi Vikas
Yojana (PKVY).
• Agro Ministry’s Jaivik Kheti webportal to help
organic buyers and sellers connect with each other.
• ZBNF saves farmers from debt-traps; and protects
the environment, soil and biodiversity.
• Practice first started in Karnataka by Subhash
Palekar. Himachal Pradesh and Andhra Pradesh
are also frontrunners.
Budget-2019 promised to expand ZBNF in other
parts of India. Govt thinking of launching it as a sub-
scheme under Paramparagat Krishi Vikas Yojana.
Limitations of Organic farming & ZBNF
• Organic farming yield (quantity produced per acre)
is lower than conventional chemical-based farming.
• Difficult to produce off-season crops using organic
farming. so if entire India became “100% organic
farming” → food shortage → inflation.
• Shelf life, colour and texture of organically grown
fruits/vegetables are less attractive than chemically
grown hybrid / GM varieties. So, unless ordinary
consumers are made aware of their health benefits
they may not buy.

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Conclusion:
• SDG along with New India Vision 2022 requires
doubling farmers’ income, while Sustainable
Development Goal No. 2 requires nations to adopt
agriculture practices that improve land and soil
quality & protect the genetic diversity of flora-
fauna.
• Given the aforementioned ecological and economic
benefits of organic farming /ZBNF, it can help us
achieve both the targets.
FARM MECHANIZATION
• It means the higher usage of combine harvesters,
land levelers, cultivators, tractors, reapers,
threshers, trolleys and mechanical pickers etc.
• Significance:
o ↑ productivity of land and labour by increasing
work output per unit time.
o ↑ employment opportunities to rural youth in
production, operation, and repair-maintenance
of machines.
• Labour augmenting technological progress:
Allows each laborer to be more productive e.g.
Industrial revolution → James Hargreaves'
Spinning Jenny that allowed each worker to spin
eight cotton threads at once (1770).
• Capital augmenting technological progress:
Allows capital assets / machinery to be more
productive. E.g. wooden plough replaced with steel
plough → more sturdy, requires less maintenance
& repairs, resistant to water-fungal attacks.
• After MNREGA scheme (wherein villagers are
guaranteed 100 days of unskilled manual work), the
Punjab-Haryana farmers are facing shortage of
farm-laborer in peak season, & forced them to offer
higher wages → many of those farmers opting for
machinery to reduce labour requirement.
Indian tractor industry is the largest
in the world, accounting for one-
third of the total global production.
Nearly 80,000 tractors exported
every year to African and Asian
nations. But within India, the
utilization is low. India farm
mechanization (40%) < China
Challenges (60%) < Brazil (75%) < USA
(95%).
Customized machinery required
for India’s soil and climatic
diversity so R&D, Make in India
required.
Small-marginal farmers lack
financial resources to own
machines so renting centres should
be setup.
• Government Scheme - 2017: Green Revolution -
Krishonnati Yojana → Sub-Mission on
Agricultural Mechanisation (SMAM): to address
above challenges.
Q. The substitution of steel for wooden ploughs in
agricultural production is an example of
_____________technological progress. (CSE-2015)
a) Labour-augmenting
b) Capital-augmenting
c) Capital-reducing
d) None of the above.
FINANCE / CREDIT:
• Small and marginal farmers produce little
marketable surplus, and often deprived of the
remunerative prices even during bumper crops, so
without borrowing they can never buy inputs for the
next cropping cycle.
Economic Survey 2016 found an inverse relation
between size of landholding vs. Indebtedness of
farmers i.e. small/marginal farmers are more
indebted than big farmers.
• ES20: The share of North Eastern States <1% in
total agricultural loans.
Budget-2020:
1. Agriculture credit target for the year 2020-21
has been set at ₹15 lakh crore. NABARD will
provide a refinance facility for this.
2. If a PM-KISAN beneficiaries doesn’t have
Kisan Credit Card, he will be given such a card.
Notable steps to enhance credit availability to
farmers:
1. RBI’s PSL norms: 10% to agriculture + 8% to
Marginal Farmer (upto 1ht) & Small farmer (>1
upto 2ht).
2. Nationalisation of banks after the Independence.
Setting up of differential banks (RRB, LAB,
SFB).
3. Kisan credit card scheme & interest subvention
scheme
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 Negotiable Warehouse Receipts (NWR)
• Nodal → Ministry of Consumer Affairs, Food &
Public Distribution → Statutory Body Warehousing
Development and Regulatory Authority (WDRA) -
law in 2007.
• Farmer deposits his produce into WDRA registered
warehouses and gets negotiable warehouse receipt
(NWR). He can use it in two ways:
o Pledge it in the banks to obtain loans for the next
cropping cycle. OR
o Trade it via the commodity exchange markets or
electronic National Agriculture Markets (e-
NAM).
• Benefit → NWR prevents the distress sale of
agriculture produce. Farmer can wait and watch for
the prices to improve before selling, while his crop
is safely stored in the warehouse.
• 2017: Govt launched Electronic Negotiable
Warehouse Receipt (e-NWR) to prevent tampering,
frauds & loss of the receipt. Unscrupulous farmers
will not be able to sell same receipt to multiple
buyers or get multiple loans from multiple banks.
• Budget-2020: Negotiable Warehousing Receipts
(e-NWR) will be integrated with e- NAM portal.
Loan waivers for the farmers
• Budget 2008: Agricultural Debt Waiver and Debt
Relief Scheme (ADWDRS). On their outstanding
crop-loans upto 29/Feb/2008→
• Small and marginal farmers given 100% debt
waiver;
• Other farmers were given 25% debt relief
• Department of Financial Services → paid the dues
to the banks in a phased manner on behalf of
farmers → 2009: 15th Lok Sabha Election won by
UPA/Congress.
• 2016-18: The state governments of Tamilnadu,
Maharashtra, Karnataka, Uttar Pradesh, Jammu
Kashmir, Punjab, Chhattisgarh Andhra Pradesh
Telangana et al. also launched in similar debt
waiver and debt relief.
• 2017: Budget gave 60 days interest waivers to
farmers on account of the problems farmers
suffered during demonetization in 2016.
Arguments in favour of Farm loan waivers:
• 2002 onwards: BT cotton was approved → boost
in agriculture production & income.
• 2008: Post-subprime crisis and global financial
crisis, the demand for textile declined in the
international market → cotton prices fell in India →
farmers suffered.
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• 2014: drought, 2015: again drought. Agri growth in
zero to negative territory.
• 2016-17: Demonetization → cash shortage → price
of agricultural commodities fell.
• Thus farmers are suffering for a decade (2008-18),
as evident from the violent agrarian agitations in
Madhya Pradesh, Uttar Pradesh and Maharashtra in
2017 and 2018. While corporate borrowers are
eligible for loan restructuring, farmers are not given
such benefits. So farmers should be given loan
waiver.
• “Debt overhang”: a situation where all current
income gets used up in repaying the accumulated
debt. Farmer feels no motivation to invest in his
‘business’. Debt waiver cleans up his liability. It’ll
spare his income /savings for investing in better
seeds/fertilizers and machines. (Counter: ES20
found no such evidence.)
Arguments against Farm loan waivers:
• Moral Hazard: Lack of incentive to be
"disciplined", when risky behavior is insured by
someone. If the government continue to give loan
waivers, farmers will have no discipline to be
efficient, cost-savvy and hard working.
• “Loan waivers undermine honest credit culture.
NPA problem will get aggravated.”, said RBI
Governor Urjit Patel.
• Whenever elections are near, agri-loan defaults are
increasing. It hints farmers are strategically
defaulting on loans, in anticipation of waiver.
• Consequently, neither agricultural investment nor
productivity is increasing.
• Thus, Government Intervention has hurt more than
it has helped, says ES20.
• Loan waivers → Higher fiscal deficit → households
and business firms will be hurt.
• Total farm loans: ~5.5 lakh cr (2013). Out of that
~60% by formal lenders (banks, Microfinance
etc.) Rest by informal money lenders. So even if
loan waivers are announced, all farmers will not
benefit from it.
• Govt’s expenditure on healthcare is ~1.2% of GDP.
WHO recommends 5%. If all the farm loans are
waived it will cost 1.5% of GDP. So, if government
has so much spare money to spend, it’ll be better to
spend in public healthcare which will benefit both
farming and non-farming families.
Anti-Argument: Loan waiver will not stop farmer
suicide Farmer suicide is a result of:
• Lack of marketable surplus produce because
they’ve small landholding, lack of irrigation, high
yielding seeds and fertilizers.
• Lack of remunerative prices because of challenges
in APMC, MSP and transport-storage
infrastructure.
• Lack of financial inclusion and financial planning.
Even after good monsoon and good harvest, they
waste money on social events and pilgrimage.
• So, loan waiver is a short-term remedy that can’t
prevent farmer suicide until above three issues are
addressed.
ES2017: cited similar reasons to prove, Loan waiver
will not increasing our crop production or GDP growth.
Conclusion
From the aforementioned analysis, it’s evident that farm
debt waiver will have negative macroeconomic
consequences for India. Debt waiver is neither feasible
nor sustainable solution against agrarian distress, we
should work on more efficient and targeted ways to help
farmers.
RISK REDUCTION AND INSURANCE
• Though agriculture sector is a minor contributor to
India’s GDP, but large proportion of our population
depends on agriculture. Agriculture itself depends
on monsoon, pests, disease and other vagaries of
nature. But insurance penetration & insurance
density is low in India.
• 2002: Agriculture Insurance Company of India Ltd.
(AIC) was setup.
• Agro Ministry launched Pradhan Mantri Fasal
Bima Yojana (Core scheme) and other crop
insurance schemes.
• Challenges → State Governments not paying their
share of money in PM Fasal Bima Yojana , private
insurance companies rejected / delaying claim
settlements.
ISSUE OF BURNING THE CROP RESIDUE
• Every year during Sept-October, farmers of Punjab,
Haryana, Uttar Pradesh burn the paddy stubble &
residue which are left over from previous cropping
season. Burning clears the farm land for sowing
wheat for next cropping season.
• Result → Thick smog, air pollution, particulate
matter (PM 2.5) in Delhi.
• Open burning of crop residues has ill effects on soil
organic carbon and soil fertility
• In-situ composting
• Machines like Rotary Slasher, Zero
Till Seed Drill, Rotavators, 'Happy
Seeder: They help in wheat sowing
without having to get rid of paddy
straw on the land.
Solutions • 2015: National Green Tribunal
order → Burning crop residue is a
crime under Section 188 of the IPC
and under the Air and Pollution
Control Act of 1981
• Budget-2018: Union to give 100%
funding to Punjab, Haryana and
Delhi to tackle this menace. Further,
individual farmers to be given
subsidy for such machinery
purchase.
• ES20: PM2.5 emission (g/Kg) from
burning crops: Sugarcane (12.0) >
Maize (11.2) > Cotton (9.8) > Rice
(9.3) > wheat (8.5). So, we should
promote low lignocellulosic crop
residues like rice, wheat, maize etc.
• Setup biomass depots for storage of
bailed crop residues. from there:
o Thermal power plants to use
crop residues with coal.
o Biochar briquettes as fuel for
local industries, brick kiln and
hotel/dhaba
APMC AND AGRI-SELLING
• In the Post-independent India, despite the abolition
of zamindari, the farmers were not ‘liberated’ from
exploitation. Because, the goons of local Baniyaa or
money lender would forcibly take away the
farmers’ harvest without paying sufficient money.
So, state governments enacted APMC laws that
“first sale of agriculture produce can occur only at
the market yards / Mandis of Agricultural Produce
Market Committees (APMC).”
Issues with APMC:
• APMC trustees (office bearers) are politically
influential persons. They enjoy a cozy relationship
with the licensed commission agents. These agents
then form cartel, manipulate prices and deprive
farmers of remunerative prices; they also engage in
hoarding & artificial shortage of food supply in the
retail market, thereby driving up the food inflation
for profiteering.
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 • APMC trustees lack the managerial skill / vision for
vertical integration with food processing industries.
• WhiletheseMandischargemultipleentry,exitandothe
rfees.Butmoneyissiphoned off → poor
infrastructure, lack of cold-storage and transport
facilities → substantial waste of fruits & vegetables
despite bumper harvests in good monsoon years.
Model APMC Act:
• Since agriculture is a state subject, ultimately state
governments have to reform their archaic laws.
Union Government already circulated a model
APMC Act, 2003
• It allows the private entrepreneurs and cooperatives
to set up their parallel markets, & sell directly to
consumers
• It allows the corporate companies to engage farmers
in ‘contract farming’ and directly purchase the
produce from farmgate. Further, Union
Government released
• Model Agricultural Produce and Livestock
Marketing Act 2017 (APLM) → it has better
features than above model act, covering both Agro
commodities as well as livestock, fisheries and
poultry.
• Model Contract Farming Act, 2018 →
(concurrent list) → aims to protect farmers engaged
in contract farming with better features than model
APMC act 2003.
• 2016: NITI Aayog launched Agricultural
Marketing and Farmer Friendly Reforms Index
(AMFFRI) to rank States and UTs. it has a score
from 0-100. No state has achieved 100 score yet.
Q. In India, markets in agricultural products are
regulated under the (CSE-2015)
• Essential Commodities Act, 1955
• Agricultural Produce Market Committee Act
enacted by States
• Agricultural Produce (Grading and Marking) Act,
1937
• Food Products Order, 1956 and Meat and Food
Products Order, 1973
E-NATIONAL AGRICULTURE MARKET (e-
NAM) AND ONLINE AGRI-SELLING
• Nodal → Agro Ministry (2016) → Small Farmers’
Agribusiness Consortium (SFAC)
• Central Sector Scheme = 100% paid by Union.
• e-NAM aims to connect the existing 580+ APMC
mandis across India through a web portal, thus
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enabling interstate and intrastate (within state) trade
of agricultural commodities.
• It will also remove the information asymmetry
between buyers and sellers, and help in real time
price discovery based on actual demand and supply.
• 2019-Nov: FM Nirmala. S says State Governments
should dismantle the APMC-mandis & replace
them with E-NAM Mandis so farmers can get a
better price for their produce.
• Budget-2020: Negotiable Warehousing Receipts
(e-NWR) will be integrated with e- NAM. This will
help merchants buy e-NWR from E-NAM portal.
Criticism of e-NAM →
• While the portal was launched for namesake in
2016, but, first inter- state trade started only in
2019.
• Only 16 states have so far connected their mandis
with the web portal.
• Many APMC mandis lack in quality-check labs for
grading of the commodities before online auction-
so buyers hesitant to purchase.
• Delays in the actual delivery.
Other initiatives for Online Agri-Selling
• Coffee Board (a statutory body under Commerce
Ministry) has launched blockchain based coffee e-
marketplace.
• e-Rashtriya Kisan Agri Mandi (e-RaKAM)
2017: portal is a joint initiative by state-run-
auctioneer Metal Scrap Trade Corporation Limited
(MSTC- a Government company under the Steel
Ministry) and Central Warehousing Corporation (a
statutory corporation under Consumer Affairs
Ministry). It helps farmers to sell agricultural
produce.
Q. What is/are the advantage/advantages of
implementing the 'National Agriculture Market'
scheme? (CSE-2017)
a) It is a pan-India electronic trading portal for
agricultural commodities.
b) It provides the farmers access to nationwide market,
with prices commensurate with the quality of their
produce.
c) Both a and b
d) Neither a nor b
Gramin Agricultural Markets (GrAMs)
• Nodal → Agro Ministry (2018) → NABARD fund
for Agri-Market Infrastructure Fund (AMIF).
• Gramin Haats are owned by Local Bodies
(Panchayats/councils), Agricultural/ Horticultural
 Departments of State Govts, Cooperatives, APMCs
and Private Sector. Total ~22,000 of them. Whereas
APMC mandis are barely 580 plus.
Budget-2018:
• We will upgrade Gramin haat into GrAMs.
• We’ll link them with e-NAM. So, farmers can
directly sell from nearby Gram Haat, instead of
transporting the produce to the APMC Mandis at
the district level.
Agri Export Policy, 2018
• Nodal → Commerce Ministry
• Since the economic reforms began in 1991, India
has remained consistently a net exporter of agri-
products i.e. we export more than we import, in
value terms.
• 2018-19: India’s Largest Agri-export (Value wise):
Rice > Oil meals> Sugar > Fresh Vegetables >
Cotton > Spices
• Oil meals are leftovers after oil extraction. It’s used
as fish food, animal food & fertilizer. E.g. de-oiled
soya extract, groundnut oil cake etc.
• Target → To double agricultural exports from
present ~US$ 30+ Billion to ~US$ 60+ Billion by
2022 and reach US$ 100 Billion in the next few
years thereafter.
• To diversify our export basket e.g. Wild Herbs,
Medicinal Plants, Aromatic Oils, Frozen
vegetables; Biscuits, Confectionery & Processed
Food etc.
• To diversify destinations e.g. Biscuits to Uganda,
Nigeria, Kenya. (because Americans are unlikely to
be attracted to our Parle-G biscuits.)
• To boost value added agricultural exports e.g
cashew apple jams , flavoured / roasted cashew, etc.
instead of exporting raw cashew.
• To help exporters with sanitary and phyto-sanitary
(SPS) issues via APEDA, FSSAI and other bodies.
So their products are not banned by US/EU on the
allegations of pesticide residue / pathogen / fruit fly
contamination.
• To focus on branding, packaging & marketing of
Indian ethnic products e.g. canned Indian cuisine
like Sarson Da Saag, Makhana from Bihar, Agra
petha, Hyderabadi biryani in overseas markets.
• To focus on R&D for gluten free, fibre rich products
to cater health conscious consumer overseas.
• Encourage private investments through Ease of
doing biz. in export oriented activities: cold storage,
packaging, air cargo; Creation of Agri-start-up
fund.
Conclusion → Thus, this policy will help integrating
Indian agricultural products with the global value
chains and help doubling farmers’ income by 2022.
INCOME SUPPORT FOR FARMERS 2018:
• NABARD released All India Rural Financial
Inclusion Survey.
• Total ~21 crore rural household. Out of them ~10
crore engaged in agriculture.
• These agricultural households’ average monthly
income is ₹ 8900/-
o Out of that agriculture cultivation brings
barely ₹ 3100.
o Rest of the income comes from livestock, wage
labour, MNREGA etc.
• Thus farming is not a very profitable enterprise in
India.
ES2018 noted: Climate change’s negative impact is
twice on unirrigated farms than irrigated. With
higher temperature and shorter rainfall: income fall
will be 15-18% (for irrigated farm), 20-25% (for
unirrigated farm).
• Present govt has target of doubling the farmers
income (from base year 2015-16) in 2022-23. But
for that agricultural sector must grow at 10%
annually whereas it’s struggling to grow even at
5%. Therefore, Govt. intervention is necessary in
the form of subsidies, procurement, MSP and
minimum income support (PM-KISAN at 6k/pa).
MINIMUM SUPPORT PRICES (MSP)
• Under the State APMC Acts, the first sale of
agriculture commodity can occur at Agricultural
Produce Market Committee (APMC) Mandis only.
• However, a farmer may not get remunerative prices
at the Mandi due to following reasons:
1. Bumper production /supply which brings down
the market prices AND / OR
2. Cartelization / price-fixing by the mandi-
merchants.
• So, to protect the farmers, Government of India
announces MSP before each crop sowing season.
MSP covers which crops?
For 22 crops (MSP) + 1 sugarcane (FRP) = 23 viz.
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Q. Consider the following: (CSE-2018)
1. Areca nut
2. Barley
3. Coffee
4. Finger millet
5. Groundnut
6. Sesamum
7. Turmeric
The Cabinet Committee on Economic Affairs
announces MSP for which of the above?
a) 1, 2, 3 and 7 only
b) 2, 4, 5 and 6 only
c) 1, 3, 4, 5 and 6 only
d) 1, 2, 3, 4, 5, 6 and 7
MSP computation, Swaminathan Committee?
• Agro Ministry’s Commission for Agricultural Costs
and Prices (CACP) recommends MSP (& FRP for
sugar) → Cabinet Committee on Economic Affairs
(CCEA) chaired by PM approves & announces
MSP.
• CACP’s computation method is →
• The National commission on farmers (2006)
headed by Scientist MS Swaminathan had
suggested 50% profit but using a different ‘C2
formula’, but,
• C2 formula computed lot of costs, including
imputed rent on his own land and imputed interest
on his own capital etc. (i.e. what if farmer had
leased the farmland or gave his savings as loan to
someone else, instead of farming by himself, then
how much rent / interest would he have earned?)
• If govt. used C2 formula, MSP will become very
high due to aforementioned (hypothetical) imputed
costs → higher budgetary allocation, fiscal deficit
will increase. So, Govt is using A2+FL formula
only.
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Q. The Fair and Remunerative Price (FRP) of
sugarcane is approved by the (CSE-2015)
a) Cabinet Committee on Economic Affairs.
b) Commission for Agricultural Costs and Prices.
c) Directorate of Marketing and Inspection, Ministry
of Agriculture.
d) Agricultural Produce Marketing Committee.
MSP and Procurement ?
• Central agencies namely, Food Corporation of India
(FCI), Cotton Corporation of India (CCI), Jute
Corporation of India (JCI), Central Warehousing
Corporation (CWC), National Agricultural
Cooperative Marketing Federation of India Ltd.
(NAFED), National Consumer Cooperative
Federation of India Ltd. (NCCF), and Small
Farmers Agro Consortium (SFAC) will purchase
the entire quantity offered by the farmers at MSP.
• So, it’s also called ‘Open Ended Procurement’
i.e. whether farmer brings specific kilo, Govt
agencies will buy it, without any ‘quota’ for every
farmer.
• Collectively, this entire mechanism is called
Market Intervention Scheme and Price Support
Scheme (MIS-PSS).
• Nodal → Agro Ministry. Central Sector Scheme =
100% paid by Union. From Food Corporation of
India’s point of view, the economic cost of food
grains is:
a) MSP paid to farmers (technically called
‘Pooled cost of grains bought at MSP’)
b) + Bonus paid to farmers (if any. This is usually
announced during election season for Vote
bank appeasement)
c) Procurement Incidentals: paid to truck drivers,
loaders, diesel, cost of operating godowns etc.
d) Cost of Distribution: When delivering grains to
States for their Public Distribution System
(PDS) shops, National Food Security Act
(NFSA), Mid-day-meal schools etc.
Q. The economic cost of food grains to the Food
Corporation Of India is Minimum Support Price
and bonus (if any) paid to the farmers plus______
(CSE-2019)
a) Transportation cost only
b) Interest cost only
c) Procurement incidentals and distribution costs
d) Procurement incidentals and charges for godowns
Benefits of MSP
• Farmer always has the option to sell produce to
government, if he can’t get remunerative prices
 from private merchants. It prevents distress-sale of
produce at throwaway prices to private merchants.
• Government announces MSP before the sowing
season for 23 crops including cereals, pulses,
oilseeds & certain cash crops. This advance
information helps the farmer to make an informed
decision about which crop to sow for maximum
economic benefit within the limitations of his farm
size, climate and irrigation facilities.
• MSP sends a price-signal to market that if
merchants don’t offer higher than MSP prices the
farmer may not sell them his produce. Thus MSP
serves as an anchor or benchmark for agro-
commodity market. While MSP doesn’t guarantee
that market prices will always be higher than MSP,
but at least it ensures the market prices will not be
drastically lower than MSP.
Limitations of MSP
• FCI/NAFED procurement is usually confined to big
towns and district centres. Farmers in remote &
tribal area unable to bring their produce to the
procurement agencies due to high cost of
transportation.
• 1997: Government launched Decentralized
Procurement (DCP) wherein State Government
themselves procure wheat and rice from farmers, &
Union will bear the costs. But not much success in
increasing the penetration yet.
• Procurement is usually confined to rice and wheat
(cereal grains). Not done for pulses, oilseeds and
other crops. So, aforementioned benefits of MSP
remain ‘only on paper’, they are not implemented
in reality.
• MSP not even announced for vegetables and fruits.
PM-AASHA TO FIX MSP
• Pradhan Mantri Annadata Aay Sanrakshan
Abhiyan.
• Nodal → Agro Ministry (2018-Sept). Central
Sector Scheme = 100% funded by Union. The
scheme has three components:
o Price Support Scheme (PSS): Central
Agencies will henceforth also do physical
procurement of pulses, oilseeds and Copra.
o Price Deficiency Payment Scheme (PDPS):
If Farmers sells oilseed crops to private
merchants in APMC-mandis who are paying
them less than MSP price, then govt will
directly transfer the difference money in
farmer’s bank account.
o Private Procurement Stockist Scheme
(PPSS): Private agencies will be hired for
procuring the commodities at MSP on behalf
of Govt.
FCI’S BUFFER STOCK PROBLEM
• 1964-65: Food Corporation of India (FCI, HQ-
Delhi), a statutory corporation, setup under
Consumer Affairs Ministry
• Procurement of foodgrains from farmers at
Minimum Support Prices
• Distribution of foodgrains to consumers through
Public Distribution System (PDS)
• Maintenance of buffer stock for food related
schemes and to meet emergency situations like
unexpected crop failure, natural disasters, festivals,
etc.
Problems of FCI
• Due to electoral populism, successive Governments
kept increasing MSPs → MSP is no longer
‘minimum support price’ but rather maximum
offered prices as rarely any private trader is
matching that amount. Consequently, 80-90% of
rice and wheat in Punjab- Haryana is procured by
FCI only.
• This discourages the private sector to undertake
long-term investments in procurement, storage and
processing of these commodities.
• 2019: Food Corporation of India’s (FCI) godowns
are overflowing with three times the buffer stock
requirement. So:
o Started Open market sale.
o Exploring to donate it to the poorest nations of
the world.
o FCI forced to spend a large amount of ₹₹ for
acquiring, storing and distributing foodgrains.
But the Government is not releasing subsidy /
funds to FCI in a timely fashion. FCI is forced
to borrow money.
• Thus, Government Intervention has hurt more than
it has helped.
Solutions by ES2020
• It aims to provide rice (₹3/kg),
wheat (₹2/kg) and coarse grains
National (₹1/kg) at heavily subsidized
Food price to 67% of Indian
Security Act population.
(NFSA): • We should reduce the number of
beneficiaries to bottom-20%
poorest Indians.
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 • For ‘relatively less poor’
people, Govt should charge
slightly higher prices.
• Brazil (Bolsa Familia), Mexico
(Oportuni dades), Philippines
(Pantawid Pamilyang Pilipino).
Conditional • Here poor families are given
Cash money to buy (non-subsidized)
Transfer foodgrains from the market.
Schemes: • We should explore similar ways
of giving cash/food
coupon/smart cards to reduce the
FCI’s procurement and stock
keeping burden.
AGRI-SELLING - STORAGE AND TRANSPORT
Budget-2020 announced:
• Indian Railways with refrigerated
coaches in trains.
Kisan Rail • This will improve national cold
supply chain for perishables, milk,
meat and fish.
• Ministry of Civil Aviation will
permit new flights on international
and national routes to transport
Krishi agricultural cargo.
Udaan • This will help farmers of North-
East and tribal districts to sell their
exotic fruits/flowers at premium
prices.
• We’ll encourage the Warehousing Development
and Regulatory Authority (WDRA), Food
Corporation of India (FCI) and Central
Warehousing Corporation (CWC) to build more
warehouses. [All these are bodies under Consumer
Affairs Ministry]
• We’ll launch a Village (grain) Storage scheme
using Self-Help Groups (SHG). (Details yet to be
finalized)
PM-KISAN
• Pradhan Mantri Kisan Samman Nidhi → Income
Support Scheme
• Nodal → Agro Ministry. Central Sector Scheme =
100% paid by Union.
• Beneficiary → Originally, A small / marginal
farmer family comprising of husband, wife and
minor children -who collectively own cultivable
land upto 2 hectare as per the land records of the
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concerned State/UT. (2 hectare = ~5 acres).
However, 2019-May: After General Election, Modi
2.0 Government remove the land holding ceilings.
Now scheme available for all farmers, irrespective
of farm size.
• Entitlement → Direct Benefit Transfer (DBT) of ₹
6000 per year in three equal installments (₹ 2000 x
3) in the beneficiary’s bank account. Thus,
eliminating middlemen and corruption.
PM-KISAN timeline and criteria
• 1/2/2019: PM-KISAN scheme announced for the
first time in interim budget 2019 & allotted annual
₹ 75,000 crores for Financial Year 2019-20.
• 24/2/2019: Modi formally launched from
Gorakhpur, UP.
• The benefits are given with retrospective effect
from 1/12/2018 (so, addl. ₹ 20k crores are allotted
for this previous-instalment in revised estimates of
2018-19).
• Farmer may show Aadhar card, driving License,
Voters’ ID Card, MNREGA Job Card etc. State
authorities will cross check it against their land
ownership database.
• Aadhar card is kept optional for the 1st and 2nd
instalment. But, in subsequent instalments, Aadhar
to be compulsory for farmers for verifying their
identity.
• Mobile number is optional but State Govt are
encouraged to capture it.
• Compulsory to give Bank account number and its
IFSC code (This code is written on bank’s
passbook, helps identify the name of the bank and
address of the branch.)
• Mechanism → Union ₹ → State govt’s bank
account → beneficiary’s account. States send data
to http://pmkisan.nic.in portal.
• Complaint → District Level Grievance Redressal
Committees.
PM-KISAN: Criticism And Challenges
• If a farmer’s name is not in the land records of
State/UT then he’s not eligible. This excludes:
o Landless / tenant farmers - who cultivate
someone else’s land on contract.
o Tribal farmers who may not have land
ownership documents.
• It excludes farmers with land above 2 ht. But in
drought prone / rain-fed areas, even they require
income support because their income is low.
• ₹ 6000 rupees per year is too little amount to cover
the cost of seeds, fertilizers, wages of farm
 labourers. For a 2 ht land, minimum input cost is ~₹
50k in reality.
• Some state governments are running better schemes
on their own e.g. Telangana’s Rythu Bandhu,
Odisha’s KALIA scheme etc. Either they give more
₹₹ per farmer and/or even landless farmers given
some ₹₹.
• Counter-argument → Union government has
launched a scheme within the constraints of fiscal
deficit target. 15th finance commission has provided
41% tax devolution to the states so they may run
parallel schemes with their own ₹₹ for the farmers’
welfare. PM- Kisan is a better alternative than one-
time loan-waivers.
Pension: PM Kisan Maan Dhan Yojana
• 2019-August launched on the similar lines as
Shram-Yogi Maan Dhan Yojana.
• Voluntary and co-contributory for small / marginal
farmers in 18 to 40 years age group.
• They’ve to contribute ₹ 55-200 (depending on
which age they joined). Agri Ministry will co-
contribute money. LIC is the fund manager, and
responsible for Pension pay out.
• They get a monthly pension of ₹ 3000/pm on
attaining 60 years. Husband dies → wife gets ₹
1500/pm as ‘family pension’. Wife dies → children
get nothing.
Who is not eligible?
• Small / marginal farmer who joined Pradhan Mantri
Shram Yogi Maan Dhan Yojana, NPS, EPFO or any
other Government run pension scheme.
• Farmer who owns more than 2 ht cultivable land.
• Any income tax assessee; Any registered as
Doctors, Engineers, Lawyers, Chartered
Accountants etc; Any Government employee; Any
person who is a member in local bodies, State /
Union legislature.... Even if they own 2 ht or less
farmland, they’ll not be eligible for this scheme.
Conclusion:
Successive economic surveys have noted that farming
is not a profitable enterprise in India. However, an
Indian farmer is often at the mercy of the monsoon &
the APMC-merchants. PM KISAN income support
scheme / PM Kisan Maan-dhan Yojana is a notable
initiative to empower him.
FOOD INFLATION FOR CONSUMERS
• With green revolution, we became self-reliant in
cereal production. But perishable fruits and
vegetables have remained our Achilles’ heel.
Seasonal spikes in onion, tomatoes & pulses is a
recurring nightmare for middle class families of
India. The underlying causes as following:
Growth of middle class & their
Demand Side: disposable incomes → increase in
demand of fruits/veggies than
before.
Supply Side: Shortage of commodities on
account of:
• Poor monsoon & pests
• Post-harvest losses due to
unavailability of cold-storage
& warehousing
• Hoarding
Consumer Food Price Index (CFPI) by NSO, Base year-2012
Food Inflation due to shortage of Vegetable supply
• Global Warming: April-May heat waves destroy
nascent flowers / buds of vegetable plants.
• Pests & Diseases: Maharashtra and Southern
Indian farmers have been growing tomatoes &
onions since last 3 decades. But, overuse of general
pesticides → whiteflies, red mites, gram pod borers
and other pests have gained immunity. → crop- loss
has increased. Farmers had started using Swiss-
MNC developed seeds but later they were found to
be vulnerable to certain viral diseases.
• UPA-Congress Govt (2004-14) had rapidly hiked
MSP for wheat & rice so many farmers shifted from
veggies / pulses to cereal production.
• After demonetization (2016), cash based retail
vegetable industry suffered → lower prices to
farmers in the last season. So they shifted away
from vegetables towards sugarcane, maize, soya
etc. cash & cereal crops → veggies production
decreases.
• Price wedge = large difference between the
wholesale and retail prices. It’s due to high
transaction costs, poor marketing infra, huge
margins by middleman etc
• Heavy rains, floods and cyclones disrupt the
supply chains. Farmer strike in Maharashtra, UP &
MP, wherein they destroyed truckload of tomatoes,
milk, potatoes etc. to vent their grievances.
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 • Shortage of cold storage infrastructure. Big
traders utilize them for hoarding onions and
potatoes, → less space for other vegetables’ storage
even during bumper crops.
• 2019 (Sept-Dec): Onion Shortage caused by:
o Late-arrival of monsoon: sowing period
delayed.
o Prolonged rains damaged the standing crop in
the Major producers viz. Karnataka, Telangana,
Madhya Pradesh and Maharashtra (largest
producer: Its Lasalgaon town in Nasik district
is India’s largest onion market).
o 2019-Sept-Oct: Heavy rains affected cutting
and transportation of the crop.
o So, [Supply < Demand] = Onion prices
increased to ₹140/kg in late-2019.
Food Inflation due to shortage of Pulses supply
• Finest irrigated land used for cereal and cash crops
like sugarcane because of better MSP. So pulses’
area under cultivation is declining. Govt should
tweak the MSP for pulses cultivation, especially in
rain-fed areas because pulses require less water than
sugarcane.
• Pulses make the soil nitrogen rich, it encourages
weed growth- which harms the pulses yield. Pulses
are themselves protein rich, so they’re more
susceptible to:
o Pests attack
o When stored in open godowns, humid
conditions = fungal growth. 25% of the
produce is lost by this.
• Solution → New seed varieties required but Indian
scientists are always focused on ‘cereals’ rather
than ‘pulses’.
Cobweb Cycle
• If a farmer observes a high price for a specific crop
for a year, he would opt to produce more of it the
next year.
• But if all farmers think with this mindset →
excessive production & supply → prices decreases
→ then they stop cultivating it in the next cycle →
shortage in supply→ price increases.
• Faulty producer expectations → cyclical fluctuation
in supply & prices.
• This is called ‘Cobweb’ Cycle. Term given by
economist Nicholas Kaldor (1934)
ES2020 blamed this phenomenon for price fluctuations
in pulses.
FOOD-INFLATION AND GOVT INITIATIVES?
321
• Minimum Export Price (MEP) It is the price
below which of commodity cannot be exported
from India. During inflation in a particular
agricultural commodity, commerce ministry will
raise MEP to discourage its export from India and
increase its availability in the local market.
• Limitation → Frequent revisions in MEP creates
uncertainty for exporter-oriented farmers for the
next cropping season.
• Hoarding by big traders to create artificial shortage
& food inflation. Essential Commodities Act
(1955) if the Union finds that a certain commodity
is in short supply and its price is spiking (agro,
fertilizer, edible oil etc.) then it can notify stock-
holding limits for a specified period.
• Limitation → The state govts. have to enforce it.
But not done in letter and spirit due to nexus
between politicians & big traders who provide them
election funding.
Minimum Import Price (MIP): it’s the price below
which a commodity can’t be imported. This is
usually done for protecting domestic industries
against cheap imports. E.g. Government imposed
MIP on pepper and arecanut in 2018-19
Govt initiatives and Open Market Sale Scheme.
• 1964-65: A statutory corporation Food Corporation
of India (FCI) was set up under Ministry of
Consumer Affairs, Food and Public Distribution -
• By default, FCI procures cereals/foodgrains at MSP
& sells them to poor-families via the Public
Distribution System (PDS) outlets.
• However, during food inflation, FCI would also sell
the grains in open market to increase supply and
curb price rise. This is called Open Market Sale
Scheme.
• Limitation → While OMSS can help during
shortage / inflation of cereal grains (rice, wheat).
But, not much useful in veggies because they’re out
of FCI-MSP ambit.
Price Stabilization Fund (2014)
• PSF is a Central Sector Scheme = 100% funded by
Union.
• Nodal → Govt gives Interest free loans given to
FCI, NAFED & other central/state agencies to
procure pulses and perishable vegetables from local
and foreign farmers and sell it to common man at
reasonable prices.
• 2014: set up in the agriculture ministry but 2016:
shifted to Consumer Affairs Ministry.
Operation Greens for T-O-P (2018)
• Nodal → Food Processing Ministry → NAFED
given ₹ 500 crore.
• NAFED pays money / subsidy to the farmer self -
help groups, food processing companies etc. for
processing, transportation & cold storage of
Tomato, Onion and Potato (TOP), to ensure their
round the year availability in market at a reasonable
price.
Onion Inflation (2019-Sept to Dec)
• Commerce Ministry → DG Foreign Trade →
temporarily banned the export of Onions since
2019-Sept. (Although Andhra’s Krishnapuram
onions were allowed for exports. They are
extremely pungent in taste, liked by Srilankan and
ASEAN families. But, Indian families don’t like its
taste much.)
• Income Tax officers raided onion traders for
verifying stocks and finding tax evasion.
• Commerce Ministry’s MMTC Ltd. company will
import onions from Turkey & Egypt using the ₹₹
from Price Stabilisation Fund (It’s a fund under
Consumer Affairs Ministry) → These onions will
be supplied to State Government’s Food and Civil
Supply Departments → sold at reasonable prices.
• Government also directed the States to build buffer
stocks, impose stock limits on traders and take
action against hoarding.
• Long term solutions → Help the farmers
cooperatives to directly sell to customers, strict
action on hoarding, develop more cold storage
warehouses etc.
ECA Act harms, says ES-2020
• Essential Commodities Act 1955 (ECA) aims to
control the production, supply and distribution of
certain goods considered as essential commodities
e.g. foodgrain, pulses, edible oil, sugar, jute,
fertilizers & seed, cattle-fodder, medicines, petrol,
diesel, kerosene, etc.
• Ministry of Consumer Affairs itself does not lay
out Rules and Regulations but allows the State
Govts to issue Control Orders related to dealer
licensing, stock limits, restrict movement of goods
and compulsory purchases during emergency.
ES2020 conducted case study of Onion inflation of
2019 & found
• 76,000+ raids were conducted, yet, less than 3000
traders penalized. It hints that raids are misused for
bribery and harassment.
• Assuming every raid needs a minimum of 5 govt
officials, this is a waste of manpower as well.
• Under ECA, State Governments randomly impose
stock limits on all wholesalers, distributors, and
retailers. But, these raids and stock limits had no
impact on decreasing onion inflation (2019) or
pulses (2006) or Sugar (2009).
• In fact, ECA discourages traders from investing in
warehousing and storage facilities. It discourages
entry of large private sector players into agricultural
warehousing and marketing.
• The ECA Act does not distinguish between genuine
large firms that need to hold large amount of stock
vs a greedy trader hoarding speculative profits.
• ECA Act was passed in 1955 when India was
worried about famines, shortages, speculative
hoarding and black marketing; it is irrelevant in
today's India and must be discarded.
• Because here, Government Intervention has hurt
more than it has helped.
Conclusion →
• Vegetables and pulses are rich source of vitamins
and nutrients. They’re part of large varieties of
Indian and international cuisines. Therefore, food
Inflation is a matter of concern for:
o Nutritional security in India and
o India’s export competitiveness. Hence
aforementioned factors need to be addressed on
priority basis.
Q. India has experienced persistent and high food
inflation in the recent past. What could be the
reasons? (CSE-2011)
1. Due to a gradual switchover to the cultivation of
commercial crops, the area under the cultivation of
food grains has steadily decreased in the last five
years by about 30%.
2. As a consequence of increasing incomes, the
consumption patterns of the people have undergone
a significant change.
3. The food supply chain has structural constraints.
Answer Codes:
1) 1 and 2 only
2) 2 and 3 only
3) 1 and 3 only
4) 1, 2, and 3
DEFLATION (2017 ONWARDS)
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 • While agri. Inflation was a recurring nightmare
during UPA-Congress raj (2004-14), the Modi-raj
has resulted in food-deflation (fall in the prices) for
3 reasons:
1) Demonetization, limits on cash transactions and
fear of being tracked by IT/GST authorities →
Traders are less inclined to hoarding → more
supply available at market.
2) Protectionism by US/EU & fall of International
commodity prices → India's agro exports are
down → More supply available in domestic
market.
3) Urjit Patel's hawkish policy helped curbing
inflation.
Problems of Sugar mills
• Bumper production of sugarcane in India and Brazil
→ fall in global sugar prices but to keep Indian
farmers happy Govt did not reduce FRP → Mill-
owners’ arrears to farmers (i.e. previous payment
not cleared yet.) → Ministry of Consumer Affairs,
Food & Public Distribution gave mill-owners soft
loans. It also raised the Minimum Selling Price
(MSP) of sugar from factory gate to wholesalers
from ₹ 29 → ₹ 31/kg.
• Finance Ministry imposed 100% custom duty on
import of sugar & 0% custom duty on export of
sugar to help Indian sugar mills.
• 2019-March: Brazil and Australia filed official
complaint in WTO that Indian Govt’s
subsidies/soft-loans/tariff to sugar sector led to
excess supply & "depressed" global prices so their
local industry is hurt.
OTHER SCHEMES
Farmer Producer Company (FPC)
• Western economists had predicted that small farms
will eventually cease to exist as big farmers will buy
their land, but that hasn’t happened in India. So,
Government decided better to enable small farmers
to setup company & combine their landholdings.
• 2003: Companies Act, 1956 was amended to allow
new type of company- FPC.
• FPC is a hybrid between a private limited company
(=professional management) and a cooperative
society (mutual benefits without excessive
weightage to who contributed how much land /
share capital.)
• FPC can be setup by minimum 10 farmers (no upper
limit). However, FPC is not allowed to become a
Public Ltd. company i.e. they can’t invite public at
large to invest in their shares/bonds.
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• Agro ministry gives them upto ₹ 10 lakh equity
support, & additional credit guarantee for bank
loans.
RKVY & RAFTAAR (2017)
• Nodal → Agro Ministry. Core Scheme = not 100%
funded by Union.
• Rashtriya Krishi Vikas Yojana (RKVY) started
during UPA/Congress (2007).
• 2017: Modi renamed and rebranded it to RKVY-
RAFTAAR i.e. Remunerative Approaches for
Agriculture and Allied sector Rejuvenation.
• It’s a SUNSET scheme - will expire in 3 years
(2017-2020).
• It provides funding for Infrastructure creation
(warehouse, cold storage, market facility etc.);
training & skill development (Mushroom
cultivation, beekeeping, aromatic plant cultivation,
floriculture) and financial support to farmers to start
agri- enterprise after getting the training.
Agro Prod. & Processing → Green Revolution -
Krishonnati Yojana
• Boss → Agro Ministry. Core scheme= not 100%
paid by Union.
• It’s a SUNSET scheme 2017 to 2020. (Unless
renewed and continued further)
• 2017: Modi made this umbrella scheme by
combining previous 11 Schemes viz.
• Mission for Integrated Development of
Horticulture (MIDH): Bee keeping also promoted
in it. One of MIDH sub-mission is ‘Coordinated
Programme on Horticulture Assessment and
Management using ‘geo-informatics’ (Project
CHAMAN) to use space technology / remote
sensing data to assess the horticulture production &
diseases in India. 2018: Phase-II of Chaman
launched.
• National Food Security Mission (NFSM) to
increase production of rice, wheat, pulses, millets
(coarse cereals) and commercial crops & restore
soil fertility.
• 2018 declared as “National Year of Millets”.
Further, UN & FAO accepted India’s proposal to
celebrate 2023 as International Year of Millets.
Because, millets are tolerant to drought, climate
change, photo insensitive; need less water, provide
nutritious elements in poor families’ diet. So, Govt
create two sub-missions.
o NFSM on Makka and Jau.
 o NFSM on Nutri-Cereals - Jowar, Bajra, Ragi • Integrated Scheme on Agricultural Marketing
and little millets like Kutki, Kodo, Sawa, (ISAM): To develop online and offline agricultural
Kangni and Cheena. marketing infrastructure.
• NFSM has another sub-mission: National Mission
on Oilseeds and Oil Palm (NMOOP) to augment the PM Kisan Sampada Yojana
availability of vegetable oils and to reduce the • Boss → Food Processing Ministry. Core Scheme =
import of edible oils. Associated term: Yellow not 100% funded by Union.
Revolution. • Modi’s PMKSY is an umbrella scheme
• National Mission for Sustainable Agriculture incorporating previous schemes like Mega Food
(NMSA) to encourage organic manures, bio Parks, Integrated Cold Chain, modernization of
fertilizers, cropping practices for soil and moisture reefer vans etc. Basically, funding is given to setup
conservation measures; Rainfed Area Development food processing infrastructure / parks / collection
(RAD) programme. centres. E.g. Patanjali Food and Herbal Park at
o Sub-scheme: National Bamboo Mission Haridwar, Uttarakhand.
(NBM) to augment the income of farmers. • Budget-2018 launched a new sub-scheme under
Further, Indian Forest Act, 1927 was amended PM Kisan Sampada Yojana called Operation
to exclude bamboo from the definition of Greens for T-O-P: Tomato, Onion and Potato.
‘trees’. This will encourage bamboo grown
outside forest area without interference from ANIMAL HUSBANDRY
Forest Department. • DPSP-Article 48: requires the State to organise
• Sub-mission on Agriculture Extension (SMAE): animal husbandry on modern and scientific lines,
farmers training & skill development with more use preserving and improving breeds, and prohibiting
of electronic / print media, mobile apps and ICT the slaughter of cows and other cattle.
tools, etc. • ES2020: India is the largest producer of milk in the
• National e-Governance Plan on Agriculture world. Per capita availability of milk and eggs has
(NeGP-A): to enhance reach of extension services- steadily increasing in recent years.
about cropping methods, market prices etc. to the Livestock Census
farmers. • Department of Animal Husbandry conducts
• Sub-Mission on Seeds and Planting Material livestock Census every 5 year since 1919-20.
(SMSP): to promote new technologies in seed • The 20th Livestock Census: data collection
production, processing, storage, certification and started in 2018-Oct. Provisional data released in
quality etc. 2019-Oct.
• Sub-Mission on Agricultural Mechanisation • India has the world's largest livestock population
(SMAM): To increase the availability of farm
machines to small and marginal farmers. e.g.
‘Custom Hiring Centres’ where they can rent the
machines without spending money on individual
ownership. encourage R&D for small-sized
machineries for small landholdings, hill-areas etc.
• Sub Mission on Plant Protection and Plan
Quarantine (SMPPQ): To minimize the damage by
insect pests, diseases, weeds, rodents, etc. and to
shield our agricultural biosecurity from alien
species.
• Integrated Scheme on Agriculture Census,
Economics and Statistics (ISACES): For data
collection which can be used for R&D and policy
making.
• Integrated Scheme on Agricultural Cooperation
(ISAC): Give financial assistance for farmers'
cooperatives for agricultural marketing, processing,
storage etc.

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 Agro Allied: Animal husbandry → White
Revolution
• White Revolution Scheme Nodal → Department of
Animal Husbandry & Dairying.
• Core Scheme = Not 100% Funded by Union.
• India ranks first in milk production, accounting for
20 percent of world production.
• 1970-1996: Operation Flood in 3 phases, to setup
dairy farmers’ cooperatives → increase milk
production in India.
• Afterwards, milk production in India has been
increasing steadily.
• All India per capita availability of milk is 375 grams
per day, it varies between 71 grams per day in
Assam to 1120 grams per day in Punjab.
• It is an Umbrella scheme covering many schemes
like Dairy Entrepreneurship Development,
Livestock Census, National Livestock Mission,
Schemes for fodder & vaccination etc.
Notable parts of White revolution are:
• Animal Wellness
Programme with
emergency helpline
Pashudhan • Farmers given Nakul
Sanjivani Swasthya Patra: An Animal
Health card with UID
identification number of
each animal registered in a
National Database.
• Online portal for for
connecting farmers with
e-Pashudhan breeders of indigenous
Haat portal bovine breeds so they can
connect with each other for
bulls, artificial
insemination etc.
• Indigenous bovine breeds -
conserve them & increase
their population. E.g. Gir,
Sahiwal, Rathi, Deoni,
Rashtriya Gokul Tharparkar, Red Sindhi.
mission • State govts are given money
for establishing Gokul
Gram breeding & disease
treatment centres.
National • For development and
Kamdhenu conservation of indigenous
breeding centre breeds in a scientific
manner.
Int-Budget-2019 setup this
executive body in Department
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of Animal Husbandry &
Dairying.
Goals:
• Genetic up-gradation of
cow resources.
• Enhance cow productivity
through research in organic
manure, biogas etc; Cow
Rashtriya welfare, cow protection
Kamdhenu laws.
Aayog 2019
Structure:
• Chairman with tenure of 2
years.
• Members from govt,
research institutions, social
workers etc their tenure
depends on govt’s
discretion.
• HQ: New Delhi.
• Minimum 1 meeting every
quarter (3-3 months)
Budget-2020
• We’ll eliminate following disease by 2025:
o Cattle: Foot and Mouth disease, Brucellosis
o Sheep and goat: Peste Des Petits Ruminants
(PPR)
• We’ll use MNREGA workers to develop fodder
farms.
Challenge in dairy sector:
• Post-2017: Excess supply of milk in global market
→ crash in milk prices. So, Indian private dairy
owners also cut down their procurement prices,
resulting in dairy farmers’ distress & agitations. So,
farmers spilling milk on highways in protest.
• As animal gets old & stops giving milk → farmers
sell it to slaughter house to get money to buy new
animals. But, this trade becoming difficult with
rising incidents of Cow-vigilantism → even
leather-industry also suffering.
• RCEP Angle.
ES2019: Focus on Small Ruminants
• Sheep and goat are collectively known as small
ruminants
• These small ruminants have higher survival rates
under drought conditions compared to bovines:
Cattle, Buffalo, Mithun and Yak).
• They can even live on shrubs and trees. Their
reproduction rates are higher than large ruminants.
Farmers/producers can sell them more frequently &
no fear of ‘cow- vigilantism’.
• Thus, small ruminants can help improving income
of the small-marginal and women farmers.
Blue Revolution:
• India is the second largest fish producer in the
world. Majority of our production comes from
inland fisheries sector. It provides employment,
income, export earning, nutrition and food security
to a large population of the country.
• Nodal → Dept of Fisheries. This is also a core
scheme.
• Government gives money for modernization of
boats, marketing & cold storage infrastructure.
National scheme for welfare of fishermen which
gives money for construction of houses, tube wells
for drinking water etc. Promote Inland fisheries,
aquaculture & pisciculture i.e. raising fish in
artificial tanks/ ponds.
Budget-2019:
Dept of Fisheries to launch Pradhan Mantri Matsya
Sampada Yojana (PMMSY) for infrastructure, post-
harvest management, quality control etc.
Budget-2020:
• “Sagar mitras”: these extension workers to advise
fishermen with processing and marketing.
• Target to raise fishery export to ₹1 lakh crore by
2024-25.
• We’ll promote growing algae, sea-weed and Cage
Culture (growing of fishes in existing water
resources in a net cage which allows free flow of
water.)
“Pink Revolution” for meat and
“Pink poultry industry, under Ministry of
Revolution” food processing however not much
in Limelight under the Modi-
government.
Yellow Yellow revolution in oilseed also not
revolution much limelight.
'Honey Mission' was launched in
'Honey 2017 by Khadi and Village
Mission' Industries Commission (KVIC), a
statutory body under MSME
Ministry. PM Modi termed it ‘Sweet
revolution’.
Mariculture → Cultivation of marine organisms in
their natural environment in sea upto 12 nautical
miles from coast. Just like Agriculture, this is also a
State-list subject.
2018: Agro Ministry announced Draft National
Policy on Mariculture which encourages State Govts
to lease the sea area to private entities & even
farming of genetically modified species in enclosed
/ caged marine spaces.
AGRICULTURAL RESEARCH DEVELOPMENT
& EDUCATION
• Indian Council of Agricultural Research (1929) is
the apex body of agricultural research, education
and extension under the ministry of agriculture.
ICAR operates through 690 + Krishi Vigyan
Kendra which provide last Mile connectivity to
farmers and help them adopt the latest cropping
technologies.
Challenges in Agro R&D
• ICAR scientists’ salary structures and promotion
rules are time-bound and seniority based. So highly
intelligent scientists opt for private companies /
foreign countries.
• Presently agriculture research funding is <1% of
GDP. We need to increase it.
• Government scientists mainly focus on improving
quantitative yields. If they also focused on aroma,
taste, appearance, calorie, nutrient, antioxidants etc.
from wealthy health-conscious urban/foreign
consumers’ point of view, then premium varieties
can be created to help farmer earn more money.
Because our goal is doubling farmer income, which
doesn’t necessitate doubling production.
• Indian agriculture research has become ‘cereal
centric’. We need to focus on pulses, oilseeds,
horticulture and animal husbandry as well.
• Even if research doesn’t drastically improve the
quantitative yield, but improves the shelf life of
onions, potatoes, tomatoes etc. then also food
inflation can be controlled by reducing seasonal
variation in the supply.
Past Economic Survey & NITI reports observed:
• There is proliferation of self-financed private agri
colleges without sufficient faculties, proper labs or
infrastructure.
• Instead of creating more institutions, we should
focus on quality of research and infrastructure in
existing bodies.
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 • ICAR should have UGC like powers to regulate • Validity → Phase1: 1st June, 2018 till 15th Aug,
these private agro. Colleges. 2018. Phase2: 2nd October, 2018 to 25th
• At least two agricultural universities should be December, 2018.
given large grants so they can achieve global status. • Aim → Aid, assist and advice farmers on how to
improve their farming techniques. Training on Bee
Extension Service Keeping, Mushroom cultivation and Kitchen
• Definition: Extension service is an informal garden. Distribution of soil health card. Animal
education process to offer advice, information and Husbandry ministry will also advice on vaccination,
training, usually meant for farmers, villagers and Artificial insemination etc.
women to change their outlook towards their • Where → Earlier NITI Ayog had identified certain
agricultural / economic / health problems. backward districts & labelled them as ‘Aspirational
• Challenge → According to NSSO survey, ~60% of Districts’. Within these ‘Aspirational Districts’
Indian farmers do not get much agricultural some villages are covered. So, NOT ALL villages
technical assistance from government-institutes. So across India are covered.
they rely on progressive farmers, media, and private
sellers of seeds, fertilizers, and pesticides- who may Extension Services: Conclusion
not give them unbiased advisory because of their Agricultural extension plays a key role in boosting
own vested commercial interests. agricultural productivity, enhancing food security,
improving rural livelihoods and changing farming
Usually 5 delivery channels for agri-extension practices positively. However, hardly 40% of
services: Agricultural Households are getting access to it. So, we
need to enhance the access to extension services on war-
Channel Challenges footing.
Individual counselling Geographical each,
via personal meeting, manpower availability. Global Cooperation: Food and Agriculture
toll-free Helpline & Barely 1 extension Organisation (FAO) → FAO is a specialized agency of
Letters worker available per UN, setup in 1945 with HQ @ Rome, Italy.
800-1000 farmers.
Group counselling via Farmers fear loss of International Years by UN
seminar, workshop, workday, lack of 2024 Camelids (group of Camel species)
group discussion, field motivation to spend time 2023 Millets
visit. / travel. 2022 Artisanal Fisheries and Aquaculture
Kurukshetra and other Illiteracy and poverty. 2020 Plant Health
govt magazines / then we’ve to use audio- 2019 1. Indigenous Languages;
periodicals. visual methods such as.... 2. Moderation;
Mass Media via Kisan Marginal farmers may 3. Periodic Table of Chemical
TV (2014) and Public not have instruments to Elements
Radio broadcast. watch them. Customized 2017 Sustainable Tourism for Development
/ tailor made advisory / 2016 Pulses
information difficult to
deliver. International Decades by UN
E-Technology via E- Mass reach possible 2018- 2028 International Decade "Water for
Krishi (Webportal); because more mobiles Sustainable Development"
mKisan (SMS/USSD), and jio 4G effect. Tailor- 2019-2028 1) Nelson Mandela Decade of Peace
Kisan Suvidha App etc made advisory can be 2) United Nations Decade of Family
given. Farming
2021-2030 United Nations Decade on Ecosystem
Krishi Kalyan Abhiyaan (2018) Restoration
• Nodal → Ministry of Agriculture and farmers’ 2021-2030 International Decade of Ocean
welfare. Science for Sustainable Development

327
Global Cooperation: Misc. → SAARC Food Bank
(2007)
• 2007: South Asian Association for Regional
Cooperation (SAARC) countries signed the
agreement to establish the SAARC Food Bank.
• The Food Bank will help member nations’ people
in case of emergencies.
• Each member country is required to contribute
either wheat/rice.
• Stock is kept with respective Govt agencies like
FCI. So, Bank doesn’t have a HQ as such.
Global Cooperation: Misc. → International Grains
Council (London)
• HQ: London, for cooperation in wheat and coarse
grain matters.
• IGC has two types of members - importing and
exporting members. India has been included in the
category of exporting member since 2003.
Agriculture-Conclusion
• Agriculture is the largest sector of Indian economy
in terms of number of people employed. For their
income security, as well as entire India’s food &
nutritional security, we’ve to focus on improving
soil, irrigation, seed, fertilizers, market reforms etc.
<insert name of x y z> scheme is important in that
regard.
• And / or to double the farmers income, we’ve to
focus on horticulture / floriculture / fisheries /
animal husbandry / poultry / food processing /
extension services and therefore addressing
aforementioned <insert name of > challenges is
need of the hour.
PREVIOUS YEARS MAINS QUESTIONS
Syllabus Topic: Major crops cropping patterns in
various parts of the country, different types of irrigation
and Land reforms in India.
How far is the Integrated Farming System 2019
(IFS) helpful in sustaining agricultural
production?
Elaborate on the impact of the National 2019
Watershed Project in increasing agricultural
production from water-stressed areas
Sikkim is the first ‘Organic State’ in India. 2018
What are the ecological and economic
benefits of Organic State?
Assess the role of National Horticulture 2018
Mission (NHM) in boosting the production,
productivity and income of 2018 horticulture
farms. How far has it succeeded in increasing
the income of farmers?
How has the emphasis on certain crops 2018
brought about changes in cropping patterns in
recent past? Elaborate the emphasis on millets
production and consumption.
What are the major reasons for declining rice 2017
and wheat yield in the cropping system? How
crop diversification is helpful to stabilize the
yield of the crop in the system?
What is water-use efficiency? Describe the 2016
role of micro-irrigation in increasing the
water-use efficiency.
What is allelopathy? Discuss its role in major 2016
cropping systems of irrigated agriculture.
Given the vulnerability of Indian agriculture 2016
to vagaries of nature, discuss the need for
crop insurance and bring out the salient
features of the Pradhan Mantri Fasal Bima
Yojana (PMFBY)
Discuss the role of land reforms in 2016
agricultural development. Identify the factors
that were responsible for the success of land
reforms in India.
Establish the relationship between land 2013
reform, agriculture productivity and
elimination of poverty in Indian Economy.
Discussion the difficulty in designing and
implementation of the agriculture friendly
land reforms in India.
Syllabus Topic: e-technology to aid farmers,
Technology missions;
Explain various types of revolutions, took 2017
place in Agriculture after Independence in
India. How these revolutions have helped in
poverty alleviation and food security in India?
How can the ‘Digital India’ programme help 2015
farmers to improve farm productivity and
income? What steps has the Government
taken in this regards?
Syllabus Topic: Food processing and related industries
in India (scope & significance, location, upstream-
downstream requirements, supply chain management);
storage, transport & marketing of agro-produce and
related issues & constraints; Economics of animal-
rearing.
Elaborate on the policy taken by the 2019
government of India to meet the challenges
of the food processing sector.
328
 Examine the role of supermarkets in supply
chain management of fruits, vegetables and
food items. How do they eliminate number
of intermediaries?
What are the reasons for poor acceptance of
cost effective small processing unit? How
the food processing unit will be helpful to
uplift the socio-economic status of poor
farmers?
Livestock rearing has a big potential for
providing non-farm employment and
income in rural areas. Discuss suggesting
suitable measures to promote this sectors in
India
In view of the declining average size of land
holdings in India which has made agriculture
non-viable for a majority of farmers, should
contract farming and land leasing be
promoted in agriculture? Critically evaluate
the pros and cons.
What are the impediments in marketing and
supply chain management in industry in
India? Can e-commerce help in overcoming
these bottlenecks?
There is also a point of view that agriculture
produce market committees (APMCs) set up
under the state acts have not only impeded
the development of agriculture but also have
been the cause of food inflation in India.
Critically examine.
India needs to strengthen measures to
promote the pink revolution in food industry
for better nutrition and health. Critically
elucidate the statement.
2018 cooperative society.” – All Indian rural
credit survey. Discuss this statement in the
background of agriculture finance in India.
What
2017 constraints and challenges do financial
institutions supplying agricultural finances?
How can technology be used to better reach
and serve rural clients?
Food security bill is expected to eliminate 2013
2015 hunger and malnutrition in India. Critically
discuss various apprehensions in its
effective implementation along with the
concerns it has generated in WTO.
What are the different types of agriculture 2013
2015 subsidies given to farmers at the national and
state levels? Critically analyze the
agriculture subsidy regime with the
reference to the distortions created by it.
2015
2014
2013

Syllabus Topic: Farm subsidies and MSP and issues

therein (direct and indirect); PDS (objectives,
functioning, limitations, revamping, issues of buffer
stocks & food security)

What are the reformative steps taken by the 2019

government to make food grain distribution
system more effective?
What do you mean by Minimum Support 2018
Price (MSP)? How will MSP rescue the
farmers from the low income trap?
How do subsidies affect the cropping 2017
pattern, crop diversity and economy of
farmers? What is the significance of crop
insurance, minimum support price and food
processing for small and marginal farmers?
“In the villages itself no form of credit 2014
organisation will be suitable except the

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 CH-12 MANUFACTURING AND INDUSTRIES
Introduction
• People employed in the secondary activities
manufacture the primary materials into finished
goods.
• The workers employed in steel factories, car,
breweries, textile industries, bakeries etc. fall into
this category. Some people are employed in
providing services.
• In this chapter, we are mainly concerned with
manufacturing industries which fall in the
secondary sector.
• The economic strength of a country is measured
by the development of manufacturing industries.
Importance Of Manufacturing:
Manufacturing sector is considered the backbone of
development in general and economic development
in particular mainly because:
• Manufacturing industries not only help in
modernising agriculture, which forms the
backbone of our economy, they also reduce the
heavy dependence of people on agricultural income
by providing them jobs in secondary and tertiary
sectors.
• Industrial development is a precondition for
eradication of unemployment and poverty from
our country. This was the main philosophy behind
public sector industries and joint sector ventures in
India. It was also aimed at bringing down regional
disparities by establishing industries in tribal and
backward areas.
• Export of manufactured goods expands trade
and commerce, and brings in much needed foreign
exchange.
• Countries that transform their raw materials into a
wide variety of furnished goods of higher value are
prosperous. India’s prosperity lies in increasing
and diversifying its manufacturing industries as
quickly as possible.
Agriculture and industry are not exclusive of each
other. They move hand in hand. For instance, the
agro-industries in India have given a major boost to
agriculture by raising its productivity. They depend on
the latter for raw materials and sell their products such
as irrigation pumps, fertilisers, insecticides, pesticides,
plastic and PVC pipes, machines and tools, etc. to the
farmers. Thus, development and competitiveness of
manufacturing industry has not only assisted
agriculturists in increasing their production but also
made the production processes very efficient.
In the present day world of globalisation, our industry
needs to be more efficient and competitive. Self-
sufficiency alone is not enough. Our manufactured
goods must be at par in quality with those in the
international market. Only then, will we be able to
compete in the international market.
Contribution of Industry to National Economy:
• Over the last two decades,
the share of manufacturing
sector has stagnated at 28 per
cent of GDP – out of a total
of 28 per cent for the industry
which includes 10 per cent
for mining, quarrying,
electricity and gas.
• This is much lower in comparison to some East
Asian economies, where it is 30 to 35 per cent.
• The trend of growth rate in manufacturing over the
last decade has been around 7-9 per cent per
annum. The desired growth rate over the next
decade is 12 per cent.
• With appropriate policy interventions by the
government and renewed efforts by the industry to
improve productivity, economists predict that
manufacturing can achieve its target over the next
decade. The National Manufacturing
Competitiveness Council (NMCC) has been set
up with this objective.
Classification of Industries
If we classify the various industries based on a
particular criterion then we would be able to understand
their manufacturing better. Industries may be classified
as follows:
1. On the basis of source of raw materials used:
Agro based: Cotton, woollen, jute, silk textile,
rubber and sugar, tea, coffee,
edible oil.
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 Mineral based: Iron and steel, cement, goods such as electrical
aluminium, machine tools, industries.
petrochemicals.
Cost of
Cost of obtaining raw
2. According to their main role: production at materials at
site site
Basic or key which supply their products or
industries raw materials to manufacture
other goods e.g. iron and steel and Decision to Cost of
copper smelting, aluminium locate factory distribution of
at site Ideal production
smelting. location of
Consumer that produce goods for direct use an
industries by consumers – sugar, toothpaste, industry
paper, sewing machines, fans etc.

3. On the basis of capital investment: Industrial Location

• A small scale industry is defined with reference to • Industrial locations are complex in nature. These
the maximum investment allowed on the assets of a are influenced by availability of raw material,
unit. This limit has changed over a period of time. labour, capital, power and market, etc.
• It is rarely possible to find all these factors available
4. On the basis of ownership: at one place. Consequently, manufacturing activity
tends to locate at the most appropriate place where
Public sector Public sector, owned and all the factors of industrial location are either
Industries: operated by government agencies available or can be arranged at lower cost.
– BHEL, SAIL etc. • After an industrial activity starts, urbanisation
Private sector Private sector industries owned follows. Sometimes, industries are located in or
Industries: and operated by individuals or a near the cities.
group of individuals –TISCO,
Bajaj Auto Ltd., Dabur
Industries.
Joint sector Joint sector industries which are
Industries jointly run by the state and
individuals or a group of
individuals. Oil India Ltd. (OIL)
is jointly owned by public and
private sector.
Cooperative Cooperative sector industries are
sector owned and operated by the
Industries producers or suppliers of raw
materials, workers or both. They
pool in the resources and share
the profits or losses
proportionately such as the sugar
industry in Maharashtra, the coir • Thus, industrialisation and urbanisation go hand
industry in Kerala. in hand. Cities provide markets and also provide
services such as banking, insurance, transport,
5. Based on the bulk and weight of raw material labour, consultants and financial advice, etc. to the
and finished goods: industry.
• Many industries tend to come together to make use
Heavy Heavy industries such as iron of the advantages offered by the urban centres
industries: and steel known as agglomeration economies. Gradually, a
Light industries: Light industries that use light large industrial agglomeration takes place.
raw materials and produce light • In the pre-Independence period, most
manufacturing units were located in places from the

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 point of view of overseas trade such as Mumbai,
Kolkata, Chennai, etc. Consequently, there
emerged certain pockets of industrially developed
urban centres surrounded by a huge agricultural
rural hinterland.
• The key to decision of the factory location is the
least cost. Government policies and specialised
labour also influence the location of industry.
Before LPG Reforms
1948 First industrial policy by India’s Minister
for industries Shyama Prasad
Mukherjee.
1956 Industrial Policy Resolution. It focused
on public sector led heavy industries (Oil,
mining, shipbuilding, steel, chemicals,
machinery manufacturing etc). PM
Nehru presumed this will help in:
1. Employment generation
2. Self-reliance
3. Provide Raw material, intermediate
goods and machinery to help other
industries to produce consumer
goods.
1991 BoP crisis forces PM Narsimha Rao to
launch New Industrial Policy with LPG
reforms.
Post The contribution of secondary and tertiary
LPG in India’s GDP & employment increased.
LIBERALIZATION, PRIVATIZATION AND
GLOBALIZATION (LPG)
1. Liberalization
• Liberalization implies the withdrawal of controls
and regulations by the government on the
industries.
Till 1991:
• Ministerial interference in the functioning of
CPSEs led to fall in professionalism and
inefficiency.
• License was mandatory for any private individual
to start any industrial activity.
• Even on licensed industries, govt. would impose
‘production quota’. Government would appoint
inspectors to ensure the compliance.
• Outcomes - Delays, corruption, No ease of doing
business.
• The big corporates were not allowed to enter in the
sectors reserved for the Small Scale Industries
(SSI) / MSME. For e.g. wax candles, glass bangles,
steel almirah etc.
After LPG Reforms:
• Govt. signed Memorandum of Understanding
(MoUs) with CPSEs granting them operational
freedom through ‘Ratna’ status.
• Production quota & Inspector was abolished.
Licenses required only for a selected number of
industries. Namely,
1. Alcoholic drinks
2. Tobacco products
3. Electronic aerospace and Defence equipment
4. Industrial explosives, gun powder,
nitrocellulose and matches;
5. Hazardous chemicals: Hydrocyanic acid,
Phosgene, Isocyanates & their derivatives.
• For remaining sectors, a private entrepreneur can
start the business by simplifying an Industrial
Entrepreneur Memorandum (IEM) with
Commerce Ministry (except for the industries
reserved for public sector). The purpose of IEM is
merely to collect data about investment,
employment and industrial activities.
• Govt gradually shrunk this list. By the end of 2015,
no item was reserved for SSI/MSME industries.
2. Privatization
• Privatization implies allowing private sector to
enter into the sectors which were previously
reserved for public sector companies only;
• Converting public sector companies to private
sector companies by reducing Government
shareholding to below 50% (alternatively called as
Strategic Disinvestment)
Till 1991
• Most of the industrial sectors were reserved for the
public sector Industries only. This resulted into no
competition, lack of innovation.
• Government would nationalise private sector
industries in the national interest such as banking,
insurance, aviation.
After LPG-reforms
• Only following industries are reserved for public
sector undertakings:
o Atomic Energy
o Railway Transport
• Stopped the practice of nationalisation.
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 • Private sector companies were allowed in Banking, 2018 Defense ministry set up a taskforce on AI for
Insurance, aviation, telecom and other sectors. national security under N.
Chandrasekharan of Tata Sons.
3. Globalization 2018 Budget gave ₹100 crore to Department of
Globalization is a process in which nations allow free Science & Technology for a mission on
flow of goods, services, labour, capital investment, cyber physical systems.
technology, ideas and innovations. NITI Aayog working on National Artificial
Intelligence Mission.
Till 1991 2019 Interim-Budget announced a National
• Inward looking economy, Import substitution Programme & Centre & web portal on
policy, variety of tariff and non-tariff barriers on the 'Artificial Intelligence'.
imported goods and services → problem of
smuggling. New Industrial Policy
• Very strict controls on currency convertibility, • 1991: Our last industrial policy was made.
foreign companies, and foreign investment. • 2017: Commerce ministry began formulating a
New industrial policy for India focusing on the
After LPG-reforms Fourth Industrial Revolution with six thematic
• India joined the WTO-regime, we gradually areas viz.
relaxed the tariff and non-tariff barriers on the 1. Technology & Innovation: Govt to provide
imported goods and services. incentives for artificial intelligence, internet of
• Norms where relaxed things, and robotics.
2. Manufacturing & MSME,
3. Ease of Doing Business
TOWARDS 4TH INDUSTRIAL REVOLUTION 4. Infrastructure & Investment
Timelines Industrial Revolutions 5. Trade & Fiscal Policy
6. Skills & Employability for Future
1.0 (1800 Powered by coal, iron machines
onwards) and factories, railways, • 2019: This policy is awaiting cabinet approval.
steamships and telegraph.
Samarth Udyog Bharat 4.0
2.0 (1900 Powered by electricity, oil,
onwards) motor-vehicles, planes, • It aims to propagate
telephone, TV, cinema and radio. technological solutions to
3.0 (1980 Electric and hydrogen powered Indian manufacturing units to
onwards) vehicles, drones, flexible robots, make them ready for Industry
3D printers and nanotechnology. 4.0 by 2025.
4.0 (2016’s It further optimizes the • Strategy: Awareness
WEF - Davos computerization of Industrial generation, demo centres,
summit revolution 3.0 using cloud training, networking between
onwards) computing, Artificial Intelligence industry and academia, international corporation.
and Internet of Things (IoT: e.g. • Nodal Agency: Ministry of Heavy Industries &
using smartphone app to turn on Public Enterprises (Department of Heavy
AC before you arrive at home.) Industries)

• The Fourth Industrial Revolution will result in
automation of manufacturing processes through
"smart factories" where Cyber-Physical Systems
(CPS) will make decisions, minimizing wastages,
optimizing the use of energy and raw material.
• Germany, France, China, USA etc. have already
launched government funded programs for this.
2017 Commerce ministry set up a task force on AI
for India's economic transformation under
Dr. V. Kamakoti of IIT Madras.
Department of Heavy Industries also responsible for
the National Capital Goods Policy 2016, that aims
to increase domestic production of textile
machinery, Earth moving and mining machinery,
printing machinery etc.
Textile Ministry’ SAMARTH scheme: skill
development in textile sector.
CIRCULAR ECONOMY

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• A circular economy is
an alternative to a
traditional linear
economic model
(make, use, dispose).
In circular economy,
resources are kept in
use for as long as
possible, the
maximum value is extracted from them, and
ultimately waste is recovered and regenerated in
the end.
• NITI Aayog, in 2019 proposed the concept of
‘Circular Economy and Resources Efficiency in
India’.
Circular Economy in EU is expected to create
savings of €600 billion for EU businesses, creation
of additional 580,000 jobs and reduction of carbon
emissions by 450 million tonnes by 2030. In India it
can generate 1.4 crore jobs in next 5-7 years.
Business Models of Circular Economy:
A Circular Economy functions on following business
models:
1. Circular Supply Chain: recyclable input
materials. E.g. र Used newspapers → pulp → paper
rims for printing new newspapers.
2. Recovery & Recycling:
a) Nike uses scraps of used shoes for filling sports
surfaces like basketball courts, tennis courts,
etc.
b) Japan decided to manufacture gold, silver and
bronze medals for the 2020 Olympics by
extracting precious metals from electronic
waste only.
c) India can extract $1 billion worth gold from e-
waste, 8 million tonnes of steel from scrapped
vehicles. In India, only 60% plastic is recycled,
if we achieve 100% → about 14 lakhs jobs.
3. Product Life Extension: through R&D, we can
extend working lifecycle of products, encourage
their repair, refurbishment, upgrading and reselling
of second-hand goods esp. in mobile, laptop, TV,
other consumer electronics and vehicle through olx,
quikr etc.
4. Sharing Platform / ownership: Airbnb app allows
homeowners to rent their property for short term to
tourists. Uber uses taxis to deliver food. Thus, asset
owners can gain a new revenue stream, while
construction for separate hotel, separate food-
delivery trucks decline = resource conservation.
5. Product as a Service:
a) Microsoft Office disk costs $150, however,
they also offer Office365 as a ‘software
subscription service’ with deep discount for
students so they can afford it at $1 per month.
This discourages piracy, increases more
revenue to company and led to more R&D for
future upgrades.
a) Some companies allow short term renting of
computers, cameras and other gadgets. This
results into less generation of e-waste by
consumers who don’t want the gadget on 24/7
basis.
b) In some countries, Philips offers lighting as a
service, wherein users are required to pay for
the consumed intensity, rather than how many
bulbs purchased.
Roadmap to achieve Circular Economy:
• Enact a dedicated policy and law for waste to
resource management.
• Create synergy between ongoing initiatives like
Swachh Bharat Abhiyan, Smart Cities, Make in
India, Start-up India, Digital India, Corporate
Social Responsibility (CSR) etc. for efficient
resources management.
• Setting up a national coordinating body- Bureau of
Resource Efficiency, and state level bodies to
monitor this initiative.
• More taxes on using virgin raw materials, less
taxes on using secondary / recycled raw materials.
• More funds for R&D in recycling, supply chain
management using AI & blockchain technology.
Circular Economy aims at minimising waste and
making the most out of the available resources. SDG
Goal-12 requires nations to ensure sustainable
consumption and production patterns. Therefore, we
must focus on Circular Economy on war-footing.
NATIONAL MANUFACTURING POLICY 2011:
• The Government of India has announced a National
Manufacturing Policy with the objective of
enhancing the share of manufacturing in GDP to
25% (by 2022) within a decade and creating 100
million jobs.
• Commerce ministry’s DIPP / DPIIT is nodal for
national manufacturing policy.
• For this target, Govt will pursue ease of doing
business, skill upgradation for young workforce,
funding for innovation & green Technologies.
• Creating National Investment and Manufacturing
Zone (NIMZ).
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National Investment & Manufacturing Zones
(NIMZ):
• National Investment & Manufacturing Zones
(NIMZs) are an important instrumentality of the
manufacturing policy.
• The NIMZs are envisaged as integrated industrial
townships with state of the art infrastructure; land
use on the basis of zoning; clean and energy
efficient technology; necessary social
infrastructure; skill development facilities etc. to
provide a productive environment for persons
transitioning from the primary to the secondary and
tertiary sectors.
• The policy is based on the principle of industrial
growth in partnership with the States.
• The Central Government will create the enabling
policy frame work, provide incentives for
infrastructure development on a Public Private
Partnership (PPP) basis through appropriate
financing instruments, and State Governments will
be encouraged to adopt the instrumentalities
provided in the policy.
• NIMZ are given additional support by
government e.g.
o Tax incentives, Relaxed norms for FDI
approval.
o Providing Rail, Road, energy, communication
connectivity, schools-hospitals & other social
infrastructure for the workers, etc. in a time
bound manner.
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o Relaxations in the labour laws e.g. women
allowed to work in night shift, easier hiring-
firing norms.
• NIMZ will be treated as self-governing bodies
under Article 243(QC) of the Constitution. So the
traditional norms related to Municipality, its
functions, election of ward members etc. will not
apply for this township area.
• We have more than 15 NIMZ such as Ahmedabad-
Dholera Investment Region in Gujarat, Dadri-
Noida-Ghaziabad investment Region in Uttar
Pradesh, Manesar-Bawal Investment Region in
Haryana etc.
• Previously, Delhi Mumbai Industrial Corridor
(DMIC) had setup Special Investment Regions
(SIR) in its region. They’re converted into NIMZ.
• In 2017, Commerce ministry launched Industrial
Information System (IIS), a GIS-enabled database
of industrial areas and clusters across the country.
This helps the entrepreneurs to find out availability
of raw material, distance from key transport hubs,
layers of terrain and urban infrastructure.
Industrial Corridors
• Industrial corridors offer effective integration
between industry and infrastructure, leading to
overall economic and social development.
• Industrial corridors constitute:
o High-speed transportation network – rail and
road
o Ports with state-of-the-art cargo handling
equipment
o Modern airports
o Special economic regions/industrial areas
 o Logistic parks/transhipment hubs
o Knowledge parks focused on catering to
industrial needs
o Complementary infrastructure such as
townships/real estate
o Other urban infrastructure along with enabling
policy framework
• Commerce Ministry’s National Industrial Corridor
Development and Implementation Trust (NICDIT)
is Nodal Agency.
• They provide funding for industrial and
commercial areas, townships, Warehousing and
container depots, Rental Factories, Social
infrastructure like- schools, technical institutions,
hospitals etc, Housing and Residential Complexes;
Connectivity for roads, railways, airports, Oil and
gas pipeline etc.
Notable (ongoing and proposed) industrial corridors
of India:
• Delhi Mumbai Industrial Corridor: (DMIC-2006
onwards) passing through Uttar Pradesh, Haryana,
Rajasthan, Madhya Pradesh, Gujarat and
Maharashtra. IT’s implemented by a Special
Purpose Vehicle (SPV) with ownership: 49%
NICDIT, 26% Japanese Bank for International
Cooperation (JICA) and remainder with India’s
Public Sector Financial Intermediaries.
• Other notable corridors: Amritsar Kolkata
Industrial Corridor, Chennai Bengaluru Industrial
Corridor, Bengaluru Mumbai Economic Corridor,
Vizag - Chennai Industrial Corridor, East Coast
Economic Corridor from Kolkata to Chennai.
• 2017: Commerce Ministry approved Defence Park
at Pallakad, Kerala.
• 2018: Budget announced two Defence Industrial
Production Corridors:
o Tamil Nadu
o Uttar Pradesh.
MAKE IN INDIA (2014)
Previous Economic Surveys observed that nations
improve their GDP using three ways:
Geology: • Energy & Minerals resources
e.g. W. Asia, Australia, Canada.
• India’s challenges - Not enough
crude oil resources, we still lack
cost-effective technologies for
large-scale exploration of Shale
gas and nuclear minerals.
Geography • Tourism e.g. Barbados,
Mauritius, Caribbean.
• India’s challenges - While India
has great tourism potential due to
its geographical, climatic and
cultural diversity. But, tourism
income alone cannot sustain a
large nation like India.
Jeans to • As agrarian economy evolves, it
Jets: will begin producing low-skill
items like jeans → further
growth & technological
advancements to produce jets,
software & other high-skilled
goods and services → then
country will outsource the jean
mfg. to other third world nations.
USA grew like this. China,
Thailand, Indonesia, Malaysia
and other East Asian economies
pursuing this model.
• India's case is unique because post LPG-reforms we
directly jumped from Agriculture to IT/service
sector. Our growth in (low skill) manufacturing
sector has been sub-optimal due to:
1) Electricity, road and other infrastructural
bottlenecks
2) Outdated factory and labour laws that prevent
ease of doing business.
Demographic Dividend and the need to shift
agricultural labour :
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 • In the advanced economies, not more than 25% of • Economic Survey 2020 suggested we move one
the population is engaged in agriculture. For E.g. step ahead from ‘Make in India’ towards Assemble
USA 4%, UK 5%, France 14%, Australia 16%. in India.
• Whereas in India more than 49%, because the non-
agricultural sector has not been adequately Make in India Assemble in India
developed to absorb the labourers from the growing What textiles, clothing, Products of Apple,
population. footwear, toys Samsung, Sony,
• Demographic dividend has direct correlation with Nike, Adidas etc.
economic growth potential when share of the
working-age population becomes larger than the How Traditional Semi-skilled labour
non-working-age population. In India 65% Unskilled Labour
population is below the age of 35 age.
• Industries use raw materials from agriculture and
agriculture sector needs industrial equipment and Assemble in India and “Network Products”
machinery such as pump set, tractor, electricity etc. • Network Products are those products whose
So both are complementary to each other. But, production occurs across Global Value Chains
industrial activities provide higher wages / (GVCs) operated by Multinational Companies
remuneration than agricultural labour. (MNCs) such as Apple, Samsung, Sony, Nike,
• So, industrialization is the only answer to reap Adidas etc.
India’s demographic dividend. Further, to double • Product is designed by their Headquarter (HQ)
farmers’ income, some of the small-marginal located in a rich country for instance in US, EU,
farmers should opt for industrial / service sector Japan. But Product assembly or manufacturing in
jobs so that land consolidation-mechanization can done low wage countries.
help doubling the incomes for rest of the farmers. • Further, these products are not produced from start
• Keeping these angles in mind, govt. launched to finish within a single country.
‘Make in India’ for facilitating investment, • Instead, countries specialize in particular stages of
fostering innovation, building manufacturing production sequence. E.g. Iphone:
infrastructure, making it easy to do business and o LCD screen In South Korea
enhancing skill development. o Processor in Taiwan
o WiFi chip in Malaysia and above parts are
Strategy for Make in India: finally assembled in Foxconn Factory in China.
• Nodal agency: Commerce ministry.
• Objective is to promote India as global hub for Advantages of Assemble in India
manufacturing goods & services, design and IF India joins the assembly chain of Network Products
innovation in 25 sectors. Later it was expanded to esp. computers, TV, mobile, electronics, road-vehicles,
total 27 sectors. then:
• Strategy:
o Updating the Policies, relaxing the FDI norms Assemble in India 2025 2030
o Fiscal incentives (Tax breaks, subsidies, New Jobs in India 4 cr 8 cr
procurement) India’s share in World Export 3.5% 6%
o Infrastructure Creation
o Ease of Doing Business by relaxing the factory- ES20 observed:
labour-tax laws & administrative procedures • India is presently at a stage where it can become
o foster Innovation and R&D part of Geese flying model.
o Skill Development. • India has experience of Network products in the
• Challenge and obstacles: Most of the jobs in above Automobile sector: Suzuki, Honda, Ford, Fiat, and
27 sectors are skill intensive while India is burdened Renault etc. import some of the components and
with vast pool of unskilled labour. So, government finally ‘assemble’ Car in India. But such cars are
has to pay more attention to education and skill made for domestic consumers (and not ‘exported’
development schemes including Skill India (2015). to rich countries, unlike the China-assembled
iPhone & Sony TV).
Assemble In India:
Policy recommendations for Assemble In India:

337
• US and EU Protectionism: higher duties on China- Technical Support for filing the patent, lower / zero
made products led to companies are shifting fees for patent applications etc.
production away from China. • Foreign venture capital investors (FVCI) given
• So, India should attract these MNCs by reforming certain technical relaxations by Income Tax Dept
its taxation, FDI and labour laws. (for TDS/ tax withholding) and Reserve Bank of
• Skill training of Indian youth as workers and India (for currency convertibility).
middle-level supervisors.
• Improve infrastructure for transportation, Budgets on Start-Ups:
broadband communication etc.
• Shipping Delays, Electricity Failure, Political Budget-2019 • Govt. will stop pursuing the
Disturbances, Labour Disputes etc could disrupt the Start-Ups: Angel Tax cases, if the
entire production chain & thereby discourage the entrepreneurs and investors
MNCs. So, Govt should try to monitor them provide the required data.
closely. • Govt. will launch special
• 2018: top 3 mobile handset manufacturers Doordarshan TV channel
1. China for helping startup
2. India entrepreneurs- how to
3. Vietnam. register and manage
business, how to mobilize
capital, tax planning,
STARTUP INDIA (2016) marketing strategies etc.
• Govt. will extend the Stand-
Up India Scheme till 31
march 2025.
Budget-2020 on • Startup can claim 100%
Start-ups deduction on its profits, for
3 years out of the first 10
years of incorporation. (as
such they get tax benefits
under Startup India scheme,
• Nodal Agency - Commerce Ministry. but new budget fine-tuned
• Startup company was defined originally as a those technical definitions
company which is: further.)
o Not older than 7 years. (10 years if Biotech • Start-ups generally use
Company). Employee Stock Option
o Doesn’t have annual turnover above ₹ 25 crore. Plan (ESOP) to attract
o Works towards innovation & development of talented employees. But
goods / services. ESOP was subjected to
• These norms were changed to 10 years for any various direct taxes → New
company & upto 100 cr. Turnover in 2019-Feb. budget gave some technical
• Under Startup India initiative such start-up reliefs to them.
companies are given 3 years exemption from
Income Tax / Corporation Tax. Startup: Misc Terms and trends:
• Self-certification permitted with respect to • Unicorn club - A startup company whose valuation
(WRT) EPFO act, ESIC Act etc. is $1 billion or above. Swiggy, Paytm, Byjus etc.
• Relaxed norms in public procurement. Indian startups are in this list.
• Relaxed norms for exit i.e. winding up the • As of Jan-2020 - Total 27,084 startups registered
companies. in India. 43% of them have at least 1 woman
• Govt established "Fund of Funds for Startups" director.
(FFS) in Commerce Ministry. This fund will
provide money to other startup related schemes.
• Industry-academia partnership, incubation and
hand holding, Mobile app and Portal, Legal and

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 Economic Survey 2020 observed:
• World Bank’s Data on Entrepreneurship: Top 3
nations with largest number of new firms
registered:
1. USA
2. Brazil
3. India.
• As per Ministry of Corporate Affairs (MCA)-21
database of new firms created in India rised from
70,000 (2014) to 1,24,000 (2018).
• Largest number of new firms are created in the
Services sector than in (manufacturing,
infrastructure or agriculture).
• 10% increase in registration of new firms in a
district = 1.8% increase in that district’s Gross
Domestic District Product (GDDP)
• Thus, entrepreneurship at district – has a
significant impact on wealth creation at the
grassroot level.
ES2020: Factors affecting new Startup firms
creation
• Eastern India: lowest literacy rate (59.6%, census
of 2011). This region has the lowest registration of
news firms. In the past, the privatization of
engineering colleges helped improve India’s
software exports. So, governments could also
explore the privatization of education further (allow
more private colleges) → education → Rise in No.
of new firms at district level.
• West Bengal, Assam, Jharkhand, Kerala and Bihar
have inflexible labour laws so entrepreneurial
activity is lowest here.
• Physical infrastructure such as road, electricity,
water/ sanitation facilities, and telecom services.
NATIONAL POLICY ON ELECTRONICS 2019:
• 2019 replaces the previous policy of 2012.
• Nodal Agency: Ministry of Electronics and
Information Technology (MeitY).
• To make India a global hub for Electronics System
Design and Manufacturing (ESDM), Government
will do following:
o Tax benefit, subsidies and other incentive for
R&D, innovation, Training and skill
development for 5G, Internet of Things (IoT),
Artificial Intelligence (Al), Machine Learning,
Virtual Reality (VR), Drones, Robotics, Nano-
based devices, Medical Electronic Devices,
Automotive Electronics Industry, Strategic
electronics for the defence sector etc.
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o Sovereign Patent Fund (SPF): Govt will buy
Patents / Intellectual Property Rights (IPR)
from the innovators / Corporate Companies →
allow MSME industries to use those IPR for
electronics manufacturing, without having to
pay hefty royalties to original patent holder..
Targets for 2025: Turnover of $400 billion. Produce
100 crore units of mobile handsets & export 60 crores
units out of that. Create 1 crore jobs.
Electronics Development Fund (EDF)
• Nodal Agency: MeiTY gave money to Canara
bank’s CANBANK Venture Capital Funds Ltd.
• EDF was set up in 2015 as a “Fund of Funds” →
money is given to “Daughter Funds” e.g. SEBI
registered venture capital funds who are investing
in electronics related startup companies.
National Digital Communications Policy (2018)
• 2018 Policy replaces National Telecom Policy of
2012.
• Nodal Agency: Ministry of Communications, Dept
of Telecom
• Target-2022: 50mbps broadband to every citizen,
10 Gbps to all Gram Panchayats, jobs to 40 lakh
people covering 8% GDP.
• Bodies:
o DoT’s Telecom Commission transformed into
‘Digital Communications Communication’.
o National Fibre Authority (proposed)
o : for creating broadband National Digital Grid
• Focus on data privacy, digital security, 5G, Internet
of Things (IOT), Machine to Machine
Communication (M2M), etc.
• International Telecommunication Union (ITU)
(Specialized agency – UN) releases ICT
Development Index → improve India’s ranking.
(presently below 100, have to get into top-50.)
National Policy on Software Products - 2019
• Nodal Agency: MeiTY
• Target-2025: 10000 start-ups, 35 lakh jobs, 10%
of India’s GDP.
• For this we will help the start-up companies, setup
Software Technology Parks, Research, Innovation,
Training, Skill Upgradation, Linkages Between
Industry- Academia, IPR Protection.
• Software Product Development Fund (SPDF) of
₹ 1000 cr as ‘Fund of Funds’ which will give ₹ ₹
to Venture Capital Funds to software developers.
Quantum Technology 2020
• Conventional computers process information in
‘bits’ or 1s and 0s.
• Quantum computers compute in ‘qubits’ (or
quantum bits). They work on quantum mechanics
principles related to how matter behaves on the
atomic scale.
• Google’s quantum computer ‘Sycamore’ claimed
‘quantum supremacy’ because it finished a task in
200 seconds that would have taken a conventional
supercomputer 10,000 years to complete.
• Applications - computing, communications, cyber
security etc.
• Budget-2020: National Mission on Quantum
Technologies for a period of 5 years.
Conclusion:
Electronics and IT Technology permeates all sectors
of economy. It plays vital role in economic growth,
employment generation and strategic security of nation.
R&D, IPR and Training are the critical components for
the success of an Electronics and IT Technology
company. Aforementioned policy, initiative, scheme
will play a significant role in this regard.
Challenges To The Startup:
• “Valuation game”: Startup try to increase
subscribers with cashback and discounts, show
the data to investors about company’s projected
sales/growth/valuation to get more funding.
Eventually convert the private limited company
into public limited company & launch IPO to get
even more capital. People subscribe in IPO hoping
large amount of dividend while the promoter leaves
with money & company sees fall in revenue once
the cashbacks and discounts are stopped.
• Past Economic Surveys: Most of the startups are
focused on e-commerce aggregation i.e.
Connecting the buyers with sellers (Uber, Zomato,
Flipkart, Pepperfry etc.) due to ‘valuation game’,
whereas India needs more startups in Agriculture,
Manufacturing, Healthcare and Education.
• Raghuram Rajan (2019): There is no ‘free lunch’
in economy so when ‘superstar’ companies are
giving free products / cashback to consumer - who
is paying for it? is it company itself or the
government (through tax-holidays & subsidies
given to that company!)
• While Start-up entrepreneurs must be encouraged
but at the same time, (fake) Angel investors’ tax
evasion and avoidance has to be discouraged.
Startup: “Exit” Of Sick Industries
• Sick industries is an entity that has accumulated
more losses than its entire capital. Industrial
sickness can be a result of:
o Internal factors like mismanagement,
workers low morale & strikes etc.
o External factors like rising cost of energy &
raw material, fall in product demand etc.
In 1985, PM Rajiv Gandhi in enacted Sick Industrial
Companies Act. Board for Industrial and Financial
Reconstruction (BIFR) is Statutory body in Finance
Ministry.
• BIFR would:
o Help the Sick industry with new funds or
o Shut down the Sick industry on case to case
basis.
o Authority for Industrial and Financial
Reconstruction (AIFR) will be higher
appellate authority.
• Ideally, a sick industry should be liquidated so
its labour and capital can be shifted to healthy
companies.
• But, above bodies’ decision making was very slow
so sick companies will not quickly shut down, and
continue to receive Government funding/support,
as if Abhimanyu entered the ‘‘Chakravyuh’ but
never exits. So previous economic surveys used the
term ‘Chakravyuh challenge’.
• In 2016, Govt. repealed this Act & its statutory
bodies. Their pending cases referred to National
Company Law Tribunal (NCLT). So now if a firm
becomes sick then:
o If wilful defaulter or incapable defaulter then,
liquidation under the SARFAESI Act
o Otherwise I&B Code: IP will make a
resolution plan within “specified” number of
days. If IP’s resolution plan is not agreeable to
the lenders, liquidation will be initiated.
• If a startup company wants to (voluntarily) shut
down, it can make application under I&B Code, IP
will liquidate it within 90 days. This helps the
entrepreneur to pull out his portion of capital.
Conclusion:
Startups have always been the engine of progress. The
mega corporations of today were startups of
yesterday. Startups can be effective instruments for
reaping India’s demographic dividend, catalyze
employment generation and augment its economic
growth. The aforementioned policies and schemes are
significant in this regard.
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 INTELLECTUAL PROPERTY RIGHTS
• WTO’s Trade-Related Aspects of Intellectual
Property Rights (TRIPS-1995) protects following
types of IPR: Copyright, Trademarks, Geographical
Indications, Industrial Designs, Patents, Integrated
Circuits & Trade Secret.
• Nodal agency: World Intellectual Property
Organization (WIPO: HQ Geneva, Switzerland) -
UN specialized agency
WIPO is known for:
1. Global Innovation Index
2. Marrakesh Treaty 2013 which requires nations to
increasing accessibility of copyrighted books to
Visually Challenged. India was first to ratify.
IPR and Indian Laws
IPR and Patents:
Following inventions cannot be patented:
• Frivolous inventions. E.g. schoolbag, laptop bag
• Anything seriously harmful to public order,
morality, humans, animals, plants or environment.
E.g. Stone-pelting machine
• Atomic energy related inventions.
• Mere discovery of a scientific principle or the
formulation of an abstract theory or discovery of
any living thing or non-living substance occurring
in nature;
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• Plants-seeds varieties, biological process to create
them;
• Animals breeding; Medical treatment of humans
and animals
• Mere discovery of a new form of a known substance
which does not result in the increased efficiency.
• Mere re-arrangement or duplication of known
devices.
• Mere aggregation of properties of the components
e.g. lemon + sugar + water = juice
• Traditional knowledge. E.g. Ayurvedic
information.
• Mathematical formula, business method, method of
playing game e.g. Dhoni’s helicopter shot.
• Computer program, presentation of information,
integrated circuit
• Literary, dramatic, musical or artistic work;
cinema-TV shows
Q Find correct statement(s): (CSE-2019)
1. According to the Indian Patents Act, a biological
process to create a seed can be patented in India.
2. In India, there is no Intellectual Property Appellate
Board.
3. Plant Varieties are not eligible to the patented in
India.
Answer Codes:
a) 1 and 3 only
b) 2 and 3 only
c) 3 only
d) 1,2, and 3
Patents And Compulsory Licensing:
• If public interest is involved: Government can use,
manufacture, import or sell a patented invention
without the patent-owner’s consent. Permitted
under WTO’s TRIPS agreement.
• 2012: Shortage of an anticancer drug Nexavar in
Indian market. Bayer Pharma (Germany) held the
patent and production rights & sold it price of ₹ 2.50
lakhs per 120 tables.
• So, Indian Govt used powers of Indian Patent Act
to ‘Compulsory License’ to an Indian company
NATCO to produce this drug, sell it at ₹ 8880 per
120 tablets & pay 6% royalty to Bayer.
• US & EU are apprehensive of Indian Govt issuing
CL, because their MNCs will suffer, if such low
prices and royalty % are forced.
IPR And Evergreening Of Patents:
• Patent is a statutory right given for an invention
for a limited period of time.
• Patent protection is a territorial right and therefore
it is effective only within a country. SIPP • Commerce Ministry’s Startups
• Suppose a pharma company is given 20 years patent Intellectual Property
for “x” drug in India, others cannot manufacture it Protection (SIPP) scheme valid
during that period. from 2016 to 2020.
• But when the patent is about to expire, the company • Startup entrepreneurs are given
just slightly modifies the original drug formula free training on how to file the
to create a new drug and seeks patent for that new patents. No patent fees for
drug. This unethical practice is called them.
“Evergreening”. AIM & SETU • Atal Innovation Mission in
• Indian Patent Act prohibits Evergreening. In NITI in NITI Aayog to help the
(under Section 3(d)). 2015 innovators. E.g. launch
• In 2013, a Swiss pharma company Norvatis’s blood challenges / competitions and
cancer drug Glivec’s patent was about to expire, award prize money.
they had sought patent for similar new anti-cancer • Self-Employment and Talent
drug but lost the case in Supreme Court India. SC Utilisation (SETU) in NITI
allowed Indian companies can produce generic Aayog to setup incubators for
version of this anti-cancer drug. As a result, patient innovation. Incubators are
will get it at cheaper price. centers that help aspiring
entrepreneurs to develop
IPR And Utility Patents: /experiment with products
• Utility patents or ‘petty patents’ recognize the without investing in all the
minor (mechanical) improvements of existing machineries beforehand.
products e.g. adding speaker in a microwave oven Smart India • Organized by the HRD
to announce when food is prepared. Hackath on Ministry in 2017, 18, 19.
• Commerce ministry is not in favour of amending • 2019: College students asked
the Patent Act to allow Utility Patent because to give innovative ideas to
otherwise it could aggravate the problem of solve the challenges faced by
‘Evergreening of Patents’. public sector organisations,
industries and even NGOs. 36
National IPR Policy 2016: hrs software development
• Nodal agency: Commerce ministry. competition, 5 days hardware
• Aim: Creative India; Innovative India. development competition etc.
• This policy shifted the Copyright Office and its Misc Dept of Science Technology
statutory body Intellectual Property Appellate launched:
Board (IPAB) from HRD ministry to commerce • INSPIRE (Innovation in
ministry. Science Pursuit for Inspired
• Conduct IPR awareness programs for industry, Research) – scholarship and
police, customs and judiciary so they can combat awards given to students and
counterfeiting and piracy in a more efficient faculty.
manner. • MANAK (Million Minds
Augmenting National
Q. With reference to the ‘National Intellectual Aspiration and Knowledge)
Property Rights Policy’, consider the following • NIDHI (National Initiative for
statements: (CSE-2017) Developing and Harnessing
a) It reiterates India’s commitment to Doha Innovation)
Development Agenda & TRIPS Agreement. • NIDHI-PRAYAS (Promoting
b) Department of Industrial Policy and Promotion is and Accelerating Young and
the nodal agency for regulating intellectual property ASpiring technology
rights in India. entrepreneurs)
c) Both a and b • HRD Ministry launched
d) Neither a nor b Uchhattar Avishkar Yojana
(UAY) for IITs
Notable Schemes related to IPR:

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 All these schemes provide
some type of grant, funding,
scholarship, award the
innovator. By default they’re
100% Union fund.
Conclusion:
Innovations and Startup can turn Indian youths from job
seekers into job creators. They encourage
entrepreneurship, innovation and creation of
revolutionary new products that can be used by people
around the world. Hence startups are important and
protecting their IPR is important. Aforementioned
initiatives and schemes are important in that regard.
Q. Atal Innovation Mission is set up under
the____(CSE-2019)
a) Department of science of technology
b) Ministry of labour and employment
c) NITI Aayog
d) Ministry of skill development and entrepreneurship
• By INSEAD business school (Paris) in partnership
with Tata Communications and Adecco Group.
• Ranking 2019: 1. Switzerland, 2. Singapore, 3.
USA,…. 80. India
3. Global Competitiveness Index (GCI)
• By World Economic Forum ranks nations on GCI
4.0 framework with 12 drivers of productivity:
Institutions, Infrastructure; Technological
readiness; Macroeconomic context; Health;
Education and skills; Product market; Labour
market; Financial system; Market size; Business
dynamism; and Innovation.
• Ranking 2019: 1) Singapore 2) USA 3) Hong
Kong....68) India. India has fallen by 10 places.
IMD World Digital Competitiveness Ranking 2019
• By Switzerland-based International Institute for
Management and Development (IMD).
• Ranking 2019: 1. Singapore 2. Hong Kong 3.
USA..... 43. India

India Innovation Index (NITI)

IPR: Indices & Rankings
• Ranking 2019: NITI Aayog
1. Global Innovation Index (GII): released it. Institute for
• By WIPO, Cornell University (USA), Insead Competitiveness (a private
Business School (Paris). \ organization) acted as
• In 2019, for the first time WIPO held event in a knowledge partner. It monitors
developing country (New Delhi) to release this the States and UT on two
report to the Press. dimensions viz:
• GII ranks a country based on performance across 7
pillars viz. Enablers Includes five pillars:
1) knowledge and technology outputs, 1. Human Capital,
2) market sophistication, 2. Investment,
3) human capital and research, 3. Knowledge Workers,
4) institutions, 4. Business Environment, and
5) business sophistication, 5. Safety and Legal Environment
6) infrastructure, Performance Includes two pillars:
7) creative outputs. 1. Knowledge Output and
• Among these individual 7 pillars, India's 2. Knowledge Diffusion.
performance improved in 1 to 4; but it degraded in
5-6-7 compared to last year. The Innovation ranking has three categories:
• Theme 2019: Creating Healthy Lives - The Future
of Medical Innovation
• Ranking 2019: 1. Swiz (since 2011) 2. Sweden 3.
USA 4. Netherlands 52. India (improved by 5
positions than last year). Total 129 nations ranked. Q. Global Competitiveness Report is published by
• India is identified as the ‘regional leader’ in the_________(CSE-2019)
reforms in Central And Southern Asia, a) International Monetary Fund
continuously since 2011. India’s overall rank b) UNCTAD
continuously improving since 2015. c) World Economic Forum
d) World Bank
2. Global Talent Competitiveness Index (GTCI)

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Ease Of Doing Business (EoDB) Report
Pro-Business Vs Pro-Crony: ES2020
• EoDB Report is an index by the World Bank to
Crony capitalism is an economic system in which
measure how easy or difficult it is to run a business
businessmen thrive not by their hard work or risk taking
organisation in a given country, based on simple
capacity, but through a nexus between a business class
average (equally weighted) of 10 parameters -
and the political class.
such as no. of documents, time & cost involved in
registering a property, getting an electricity
ES2020 found that:
connection, paying taxes etc.
Across the world, crony capitalist firms pay lower taxes
• As such no specific themes are given in these than their actual profits.
reports.
India: After election results, road contractors
• New Zealand > Singapore > associated with the ruling party were
Hongkong > India (63) given large numbers of contracts to
>……. Somalia (190) build Pradhan Mantri Gram Sadak
• Report acknowledges India Yojana. But 25% of such roads exist
Rank 2020 as one of the top 10 only on paper.
(Released in improvers, third time in a Brazil Brazil’s public sector banks are more
2019): row. India’s rank in 2017 likely to approve loan applications of
(130) to 2020 (63), shows a a company if the company owner gave
jump of 67 steps- this is election donation to the ruling party.
highest by any large country Eastern When politically connected firms fail
since 2011. Europe: in business then Government will
usually bail them out using taxpayers'
Ease of Doing Biz Parameters : money.
1. Starting a Business China Politically Connected Underwriters
2. Construction Permits increase the likelihood of clients’ IPO
3. Getting Electricity applications being approved by the
4. Registering Property Chinese share market regulator.
5. Getting Credit (loan)
6. Protecting Minority Cronyism: Related Party Transaction (RPT)
Investors • RPT transactions involve company’s directors,
7. Paying Taxes their relatives and their related companies. RPTs
8. Trading across Borders may harm the interests of the company’s
9. Enforcing Contracts shareholders.
10. Resolving Insolvency • E.g. Minister gives 2G spectrum / coal auction /
highway construction rights to a company. THEN
Q. Which one of the following company appoints that minister's wife/son as a
is not a sub-index of the World Bank's ‘Ease of consultant/director & pays a hefty salary.
Doing Business Index?_______(CSE-2019) • Companies Act has norms to regulate RPT. But,
a) Maintenance of law and order often Crony capitalists, wilful defaulters and tax-
b) Paying taxes avoiders misuse RPT using loopholes.
c) Registering property
d) Dealing with construction permits Cronyism: Economist David Ricardo & Rent
Seeking
ES2020 on Ease of Doing Biz in India: • A Mobile company pays political bribes to get
• To open a restaurant, China and Singapore require spectrum/license from the Government.
only 4 four licenses, but India requires more than • Then the Company will charge very high prices on
20. the prepaid plans and data packs to recover:
• 45 documents required to get Delhi Police’s 1. Operational Costs
permission for opening a restaurant. Far less 2. Profit
number of documents required for a gun license! 3. Bribes.
• Hong Kong construction permits available within 2 • Similar examples could be cited in the coal-power
months, India takes 4 months. based thermal electricity prices, Toll fees charged

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 by highways developers, heavy fees in private
hospitals/ schools/colleges. Pro-business vs Pro-Crony Policies:
• Ricardo called it “rent seeking behaviour” It
doesn’t help in (new) wealth creation because Pro-business policies Pro-crony Policy
abnormal profits extracted at common citizens’ Make it easy to start a When existing
expense. Further, such crony capitalists do not business, Register companies pay political
invest their high profit for research and innovation, property, enforce bribes to restrict entry of
they use it for building more relationship with contracts, increased new companies / import
politicians. competition restrictions of rival
brands. This decreased
ES20 observed: competition and increase
• This type of rent-seeking behaviour was more in heavy profits, but at
prevalent till 2011. the expense of the
• After CAG / Media reported the scam, the profits, customer.
share prices, SENSEX performance of such crony Make it easy to obtain When political masters
firms greatly declined, since they couldn't compete loans, resolve pressurize public sector
with the innovative firms. insolvency. This helps in banks to lend money to
• CEA Subramanian K. used ‘Herfindahl Index’ to biz expansion and wealth unviable biz projects.
prove this. Economist Herfindahl’s Index (1950) is creation When wilful defaulters
used for monitoring the level of competition among are not given strict
the companies. treatment.
They’ve destroyed a total
Crony Capitalism and SENSEX’s 30 companies: ₹1.4 lakh cr of loan
assets. Majority of wilful
Before liberalization After liberalization defaulters belong to mfg.
If a company entered this Decreased to only 12 sector
list, it could stay there for years. Within that time, Transparency in bidding Government gives
60 years. So, CEA some new firm will for natural resources preferential treatment to
Subramanian K. isreplace old firm in the crony companies.
hinting that: BSE-30 list. E.g. Result: Competition, Reverse will happen →
• Pre-LPG firms paid Bombay dyeing replaced innovation, lower prices Wealth is destroyed
political bribes to by Arvind Mills etc. and better service quality
prevent any new • It shows a for citizens → Rise in
entrepreneurs from continuous influx of demand → Rise in
getting a license to new firms, products production → GDP →
even start the and technologies (new) wealth created.
business or getting a into the economy.
quota to expand • Thus, crony Cronyism doesn’t foster competitive markets. It
business production. capitalism is finding fosters inefficiencies & results in erosion of wealth.
• So, rival’s company less domination in As Dr. Raghuram Rajan said, “There is a need for
will never grow large post-LPG India. saving capitalism from the crony capitalists”.
enough to get • Austrian economist
noticed by BSE- Joseph Schumpeter
officials so they’ll coined the term Ease Of Doing Biz and Judicial Reforms:
not add its name in “Creative
BSE-SENSEX-30 Destruction ” i.e. Economic Survey 2018-19 observed:
Older firms/products • Theory of Matsyanyaya: If no ruler or
are destroyed by Government → big fish will eat little fish.
newer
• 3.5 crore cases pending in the judicial system.
firms/products,
• More than 80% of them are concentrated in the
which is necessary.
district and subordinate courts. Out of these
BSE-SENSEX-30 list Service sector firms
pending cases, about 70% are criminal cases, about
Majority had
30% are civil cases. Some economists say poor
manufacturing firms

345
 performance of the criminal justice system is of no
direct consequence to the economy. But, a
behavioural economics: general lawlessness leads
to thriving of Mafias. So investors are discouraged
(e.g. UP and Bihar).
• World Bank’s Ease of Doing Business: in
“Enforcing Contracts” Indicator, India’s ranking is
in the range of 160+. And it is not improving at a
faster rate.
• Compared to many European countries we are 4-6
times slower.
• Punjab and Delhi are performing much better than
the national average.
• But, Odisha, Bihar, West Bengal, Uttar Pradesh
very slow rate. And these states are also lagging
behind in SDG India Index, Health Index.
Reforms need in judicial system:
• Recruit more judges: At the district and
subordinate level courts: sanctioned strength is
around 23,000 judges but at present we have about
18,000 judges. So we have to fill up the vacant posts
through faster recruitment.
• High Court: Each HC Judges disposes about 2300
cases per year. So to clear all the backlog cases In
the next five years, about 360 additional HC judges
required.
• Similarly a few more judges also required at the
supreme court.
• Create a new Judicial Administrative Service:
For faster clearance of cases, judicial staff’s
efficiency also matters - Whether it is the Court
Manager, Bailiff, Judicial clerks, Legal assistants,
Translators, Typists/Stenographers. But there
recruitment, syllabus, eligibility conditions and
training mechanism is not uniform across India.
Many tribunals recruit staff on adhoc- contractual
basis, and do not impart adequate training.
• Canada, USA and UK have separate cadre of
Government employees for this. Therefore, ES19
proposed to create a specialized service called
Indian Courts & Tribunal Services (ICTS) with
following functions:
o Provide administrative support to judges
o Improving administrative aspects of the legal
system - Document storage, data processing
etc. back-office functions through Information
and Communications Technology (ICT) and
re-engineering.
o Identify process inefficiencies and advise the
judiciary on legal reforms.
Budget-2020:
1. We’ll reform the recruitment system for tribunal to
attract best talents and professional experts.
2. Reform the Contracts Act.
• Increase courts’ working days: Presently Central
Government offices are open for 244 days per
year. Whereas High Courts are open for only 232
days and Supreme Court open for only 190 days
in a year- Because they take longer vacations in
summer, winter, Holi, Diwali and Dussehra.
• E-governance, ICT-Technology:
o Lower courts consume a lot of time in sending
Notice or summons, recording witness
statements. Higher court cannot proceed until
it receives case’s records from the lower court.
o Computers are used as mere ‘modern
typewriters’. Their scanning, email,
computation facilities are not fully used.
o So we have to focus on E-governance, ICT-
Technology to increase the efficiency of the
court administration. Even Artificial
Intelligence may be deployed for ordinary
disputes e.g. Traffic challan, or Cheque
dishonour.
o Ministry of Law and Justice started eCourts
Mission Mode Project - creation of the
National Judicial Data Grid (NJDG),
digitalization of cases. It allows stake-holders
to keep track of individual cases and their
evolving status. We must ensure its speedy
implementation and connectivity with all the
courts.
Conclusion on Judicial reforms:
• Thus, case pendency can be reduced through
recruitment of additional judges, creating separate
cadre of Judicial Administrative Services, increase
in working days of court, and deploying ICT
technology.
• Preamble to the Constitution of India defines that
the first role of the State is to secure social,
economic, and political justice for all citizens.
• Therefore, need of the hour is to pursue judicial
reforms on a war footing.
• Judicial delays discourage the victims from
approaching the court. Victims silently continue
to suffer injustice or approach Mafia elements. It
also fuels the atmosphere of insecurity, vigilantism
and mob lynching.
• SDG Goal 16: provide access to justice for all.
Corruption Perceptions Index 2019
346
 • Released by: Transparency • Employees’ • Pending in Lok
International. Compensation Act, Sabha
• Transparency International is a 1923
global civil society organisation • Maternity Benefit
fighting against corruption. Setup Act, 1961
in 1993, HQ - Berlin, Germany. • Payment of Gratuity
• Ranking for 2019: 1. Denmark and New Zealand, Act, 1972
then directly given 3. Finland, 4. (Tie) Switzerland, • Unorganized
Singapore, Sweden. Workers’ Social
• India in 2019: 81 (in 2018 it was 78, meaning rank Security Act, 2008
fallen and corruption increased) etc.
• To control corruption, the report recommends: 13 Labour Acts like: • Labour Code on
o Focus on conflicts of interest, preferential • Factories Act, 1948 Occupational Safety,
treatment given to wealthy. • Plantation Labour Health & Working
o Regulate electoral financing, election Act, 1951 Conditions, 2019
integrity. • Mines Act, 1952 • Pending in Lok
o Regulate lobbying activities. • Building and Other Sabha
Constructions
Workers’ Act, 1996
Labour Reforms : etc.
• There are multiple Central laws related to labour
e.g. Minimum Wages Act, 1948; the Payment of But, until above labour code bills are passed, Labour
Wages Act, 1936; the Payment of Bonus Act, 1965; Ministry keeps amending the existing laws for ease of
and the Equal Remuneration Act, 1976. doing business and for workers welfare such as:
• Entrepreneur has to fill up multiple forms to prove
his compliance, and he’s subjected to multiple Maternity Benefit (Amendment) Act, 2017:
annual inspections by the govt officials, results • Applies to factory, mines, plantations, shops and
into poor ease of doing biz. other establishments.
• Therefore, Second National Labour Commission • Increased paid maternity leave from 12 weeks to 26
(2002) recommended govt to simplify & weeks (for the first two children only.)
consolidate these laws. 2017-18: Govt announced • If woman worker adopts a baby less than 3 years (or
to replace existing central laws with just four laws gets a baby through surrogacy) then 12 weeks paid
namely: leave for her as well.
• If factory has 50 workers and above, then boss
Old Laws Merged in must install creche facility; allow mother to visit
• Payment of Wages • Labour Code on child min. 4 times a day.
Act, 1936 Wages, 2019 • After maternity leave is over, boss may even allow
• Minimum Wages • Both houses have the woman worker to work from home.
Act, 1948 passed and the • Boss must inform every woman worker of her rights
• Payment of Bonus President has signed in writing.
Act, 1965 it in 2019.
• Equal Remuneration Payment of Wages (Amendment) Act, 2017
Act, 1976 • Previously the employer was legally required to pay
• Trade Union Act, • Labour Code on salary in ‘physical cash only’- in certain industries.
1926 Industrial Relations, Act reformed to allow salary payment in
• Industrial 2019 cheque/NEFT to encourage less cash economy.
Employment Act, • Pending in Lok
1946 Sabha Child Labour (Prohibition) Amendment Act, 2016:
• Industrial Disputes • It amends the 1986’s act to provide that,
Act, 1947 Children below 14 years can’t be employed
Nine Labour Acts like: • Labour Code on anywhere, Except:
Social Security & o TV/ Cinema /Sports (but not circus)
Welfare, 2019

347
 o Non-hazardous family enterprise work after
the school hours. Adolescents between 14 to
18 age can be employed but only in non-
hazardous work.
• Any violations will attract Jail or penalty or both.
District Magistrate given additional powers.
• Issues with policy - Chemical mixing, battery acid
recycling etc. occupations removed from the
‘hazardous list’ so Ease of doing business for their
owners, but exploitation of adolescent workers.
Apprentices (Amendment) Act, 2014
• The original 1961 Act regulated the training of
apprentices in the industry. But rules were
draconian e.g. Govt shall decide the apprentice
youth’s stipend, holiday, overtime. If factory owner
is violating any norm will result into imprisonment.
• So, the 2014’s amendment relaxed the norms,
Factory owner will decide stipend, holiday etc. and
if any violations then only penalty, no jail for him.
Q. Which of the following statements is/are correct
regarding the Maternity Benefit (Amendment) Act,
2017? _______(CSE-2019)
1. Pregnant women are entitled for three months pre-
delivery and three months post- delivery paid leave
2. Enterprises with creches must allow the mother
minimum six creche visits daily
3. Women with two children get reduced entitlements.
Codes:
a) 1 and 2 only
b) 2 only
c) 3 only
d) 1,2 and 3
Fixed Term Employment 2018:
• Fixed-term employee is a contractual worker
hired for a fixed period. If his contract is not
renewed on expiry then he’s deemed automatically
terminated. No notice for termination is required.
• Just like a permanent worker, a fixed-term worker
is entitled to all benefits such as wages, hours of
work, allowances, EPFO-ESIC and other
statutory benefits (But only for the duration of
contract).
• 2016: Labour Ministry allowed Fixed term
employment only to the textile sector using the
powers under Industrial Employment (Standing
Orders) Act.
• Budget-2018: Finance Minister Jaitley permitted in
all manufacturing sectors.
Positive: When factory owner has large
production order to fulfill, he can hire
more people for short duration without
the compulsion of giving them
‘permanent jobs’. Ease of doing
business will further improved.
Negative: Trade Unions fear the industrialist will
convert all the permanent jobs into
‘fixed term contract jobs’. So employer
may simply refuse to renew contract
without giving reasons & replace them
with cheaper younger labourers, job
security is diminished. Although Govt
clarified that industrialist can’t convert
existing permanent jobs into fixed-term
contract jobs.
Q. Find correct statement(s) about the Industrial
Employment (Standing Orders) Central
(Amendment) Rules, 2018:_______CSE-2019
1. If rules for fixed-term employment are
implemented, it becomes easier for the
firms/companies to lay off workers.
2. No notice of termination of employment shall be
necessary in the case of temporary workman.
Codes:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Minimum Wages
• According International Labour Organization
(ILO), minimum wage is the minimum amount of
remuneration that an employer is legally required to
pay to the worker. It’s usually expressed in amount
per day or per hour.
• The concept of minimum wages is not a modern
day innovation. Even Arthashastra written in the
2nd Century BCE ordained the lowest wages for
workers based on their skills and occupation.
• While the Britishers in enacted Payment of Wages
Act, 1936 in India to ensure workers are paid
salaries in a timely fashion it did not provide for
minimum wages computation or enforcement or
equal remuneration for males and females.
• After independence, the Directive Principles of
State Policy mandated the State:
➢ to secure a living wage, a decent standard of
life for all workers (Article 43),
➢ to provide adequate means of livelihood for all
citizens & equal pay for equal work for men
and women (Article 39)
348
 Minimum Wages Act (1948): 2. Consumption basket (food items, clothing etc.)
The act protects both regular and casual workers should be reviewed every five years.
Minimum Wages are fixed for different categories of
workers according to skill levels, location and Code On Wages 2019:
occupations. But suffers from following serious This new act aims to merge the existing Minimum
problems. Wages Act, 1948, the Payment of Wages Act, 1936, the
Payment of Bonus Act, 1965 and the Equal
1. Gender Injustice: Remuneration Act, 1976 into a single Code on Wages,
• Minimum wages are the same for both male and with following features:
female. But, minimum wages of security guards
are higher than domestic workers (This work is Union • Sectors: Air transport
mostly done by women). Government service, Railways, Major
• So, minimum wages need to be accommodative Ports, mines, oil field,
of the gender justice angle as well. telecommunication, banking
and insurance company,
2. New-age workers not covered: Central Government Jobs,
• Minimum wage rates are set both by the Central CPSEs, autonomous bodies,
and the State governments for employees their subsidiary bodies
working in selected ‘scheduled’ employment. • To fix minimum wages here,
But, with the advent of ICT and startups, there Government will setup a
has been a massive expansion in job categories Central Advisory Body of
but the schedules are not updated. Employers, Employees,
• Every 1 in 3 workers is not in the ambit of Independent Experts and 5
minimum wages. State representatives
• Based on Central Advisory
3. Unorganized workers not represented: Body’s recommendations,
• Act did not prescribe norms / formula for fixing the Union will fix Floor
minimum wage. However, it provided for Wages, for different
tripartite advisory boards consisting of geographical areas Taking
employers, employees of scheduled into account minimum living
employments, and independent experts. stds. (Meaning Anoop’s idea
• As a result, the unionized workers are able to is accepted)
get better wages compared to unorganized State • Sectors: They’ll look after all
workers, because unorganized workers have no Governments the other sectors of
representation in such advisory boards. employment which are not in
Union’s domain.
Minimum Wage Reform: Anoop Satpathy • They’ll have individual State
Committee (2019) Advisory Board.
This committee was setup by the Labour Ministry for • They must keep Minimum
Determining the Methodology for Fixation of the wages more or Floor Wages.
National Minimum Wage. It recommended: Update Frequency - minimum wages norms will be
revised every 5 yrs or less. − Here Minimum Wages
Minimum wages should be decided based on the → salary, allowance and other monetary
following factors: components. But doesn’t include: bonus, travelling
1. Cost of food basket: consisting of x units of allowance.
calories, fats and proteins.
2. Essential non-food items: such as clothing, fuel Salient Features of Code on Wages 2019:
and light, house rent, education, medical expenses, 1. Overtime Pay
footwear and transport. ➢ Depending on sector: Union / State will fix
max. hours in a normal working day.
Anoop: Frequently revise Minimum Wages: ➢ If worker doing more: “Overtime Wage” =
1. Minimum wages be updated every 6 months with Min. 2x normal wages
changes in consumer price index (CPI) 2. Payment Frequency

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 ➢ Employer may pay wages (i) daily, (ii) weekly,
(iii) fortnightly, or (iv) monthly.
➢ In coin, currency, cheque, bank money, e-
transfer.
3. Deduction
➢ Employer may deduct worker’s wages for 1)
penalty 2) absence 3) rental home 4) advance /
loan etc.
➢ But, deductions should not > 50% of the
workers’ total wage.
4. Right to Bonus
➢ If worker’s salary less than “X” ₹ , then he is
given Right to bonus
➢ 8.33% of wages or ₹ 100 Whichever higher
➢ But not more than 20% of his annual wages.
5. Gender discrimination
➢ It is forbidden. Employer must give equal pay
for equal work
6. Penalty for violation
➢ Upto 3 months jail, ₹ 1 lakh fine
Above Code on Wages is already passed by Parliament
and signed by the President. But to implement it in
reality, the Government of India need to notify the rules
& announce the minimum wages.
But, as of 2019-Dec, Government has not yet released
it. Because, if minimum wages are raised then
industrialists (who’re already suffering from economic
slowdown) will suffer even more. So implementation is
put on a backburner.
ES19 on Minimum Wages reforms (2019)
CEA Subramanian K. appreciated Code on Wages
and suggested further reforms in this direction:
• Simplification and Rationalisation
o Present system is extremely complex with
nearly 2000 minimum wages defined for
various scheduled job categories. They should
be clubbed together into six minimum wages
based on skill category i.e. Unskilled, Semi-
Skilled, Skilled And Highly Skilled.
o Such Wage Code should be applicable on all
jobs, all workers, and all sectors of economy -
Whether it is organised or unorganised.
• Use ICT to enforce Minimum Wage:
o Bounded Rationality Humans can’t make the
most rational and optimal decision because they
do not have all the necessary information
o So, spread MW related information through
computer, mobile phones, rural haats, TV-
Radio-Massmedia. Then both worker and boss
can do effective bargaining.
o Setup Digital dashboard to show updated
minimum wages.
o Easy to remember helpline / complaint
number for the workers.
o Labour ministry should announced we
punished “X” number of violators, so it puts
fear into other employers, and discourages
them from violating minimum wages.
• Adopt Best Practices from abroad
o UAE: All companies are legally mandated to
pay all types of salary through banks only.
o South Africa: ‘Impimpi Alive’ system
wherein workers can send anonymous SMS
messages to Labour Department, and within 48
hrs, an inspector will come to the factory.
o U.S.: They’ve apps to notify the minimum
wages related updates to all the workers &
companies.
Way Forward:
• Indeed minimum wage enforcement is important.
• Minimum wages is a subset of labour welfare
policies. So we can always connect it with keyword
such as inclusive growth, sustainable development,
poverty removal, Social justice and accordingly we
can make a conclusion linking them all:
• India is witnessing a period of demographic
dividend. But, even if the youth is equipped with
vocational skills but unable to find well-paying
jobs, then such circumstances will breed social
unrest and perpetuate social injustice.
• SDG Goal 8 requires India to promote full and
productive employment and decent work for all.
Minimum wages protect the vulnerable workers,
reduce inequality and poverty.
• Therefore, establishing an effective minimum wage
system is important for sustainable development
and inclusive growth.
• Although for complying with the DPSP we have
enacted multiple laws but successive Committees
and economic surveys observed these laws have
failed to bring about the change in letter and spirit
so aforementioned reforms are necessary.
Factories Act Reforms:
• Factories Act 1948 regulates safety, health &
welfare of factory workers.
• If an establishment is classified as ‘factory’, then
the entrepreneur is required to install washroom,
drinking water facility, spittoons, creche and other
amenities depending on how many workers are
employed.
• He cannot engage women workers in night shift or
near dangerous machineries.
• His premises will be subjected to government
inspection, If any violation he can be arrested and
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 jailed. (entails more opportunity for the factory
inspector to demand bribes)
• The original act defines a factory as a premise
where manufacturing is done using power and
minimum 10 and above workers are employed
during last 12 months. (20 workers, if no power
used).
Factories (Amendment) Bill, 2014
• Bill aims to relax definition of factory (20 or above
workers) This will create ease of doing business for
the small entrepreneurs because they will not have
to comply with the factory act.
• Allows the entrepreneur to engage women worker
in night shift & near dangerous machineries
subjected to various safety conditions - women
equality & empowerment.
• For smaller violations, the entrepreneur can pay
specified penalty. No arrest or jail.
The bill is still pending in the parliament, but
Rajasthan and other state governments have
amended their state laws to implement these
reforms, because Labour is in concurrent list.
ES19 observed that
• After initiating these reforms, Rajasthan has
progressed much faster in terms of employment
generation, attracting domestic and foreign
companies.
• Whereas inflexible states like W. Bengal, Bihar,
Kerala are unable to create enough employment,
cannot attract adequate capital into their states and
their wages are lower as their productivity is lower.
Shram Suvidha Portal (2014)
Labour Ministry’s web-portal to facilitates ease of
doing business in following manner:
• Labour inspector has to upload reports within 48 hrs
of inspecting the factory. This
• reduces the scope of bribery, corruption &
tempering of records.
• Entrepreneur can do online registration & payment
of ESIC and EPFO for his workers.
• Entrepreneur can upload compliance documents
under various factory / labour acts.
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Separately, Labour Ministry also launched Samadhan
portal (Software Application for Monitoring and
Disposal, Handling of Industrial Disputes) for handling
industrial disputes between workers’ trade union vs
industrialist.
Real Estate Regulation & Development Act
(RERA):
• Ministry of Housing
and Urban Poverty
Alleviation.
• While “land” is in the
State List of the
Constitution, but
purchase of home,
property and real estate ‘Contract’ comes under
ambit of in the Concurrent List.
• So, Parliament enacted, 2016 to regulate
transactions between home or commercial property
buyers and builders of the real estate projects, by
setting up state level regulatory authorities called
Real Estate Regulatory Authorities (RERAs).
Higher appeal to Real Estate Appellate Tribunals.
• The builder must get his project registered on
RERA’s website, including the facilities like
firefighting systems, sewage treatment plants,
functional lifts etc. He can’t make advertisements
or accept money from the buyers otherwise.
• Real estate agents dealing in these projects also
need to register with RERAs.
• After RERA registration, project details will be
published on RERA website where buyer can cross
check / file complaints if any.
• Then builder can accept money from buyers, but in
a separate bank account (Escrow Account). If the
project is not completed in time, builder will have
to pay the home, shop, office - buyer’s monthly
interest on bank loans (if any). RERA can order
further relief, refund, arrange another builder to
finish the project.
• If defects found in building upto 5 years then,
builder must repair free of cost.
• Punishment - Penalty and jail upto 3 years.
Advantages: • RERA registration system is
online & time bound. So this will
improve ease of doing business
for the Builder as he will not
have to make repeated trips or
bribes to govt. officials.
• Consumer protection.
• Since building has to be
registered at RERA, money has
 to be deposited in separate bank
account which will reduces the
opportunities for tax evasion and
avoidance; malpractice like
selling same home to two buyers
etc.
Challenges: • Since cost of compliance
increases, builders may raise
home prices prices (e.g.
considering the additional
business cost of doing ‘free
repairs’ upto 5 years).
• The building projects which
were started before RERA act
but still building construction is
pending → difficult to get justice
due to legal loopholes.
• Some state governments have
not yet appointed RERA
chairman or setup RERA
websites.
Conclusion:
World bank research indicates that countries that
improve 10 points on the Ease of Doing business score
create an additional 60 new businesses per 1 lakh
population. Those new businesses create further job
opportunities, which help reduce poverty & inequality
in a country. Thus, ease of doing business for
‘corporates’ results into the ease of living for poor
people. The aforementioned policies, act and challenges
will play pivotal role in that regard and must be
addressed on priority basis.
TEXTILE And MSME Sector
Textiles Ministry:
Notable schemes and initiatives of Textile Ministry:
• Indian textile industry, the second largest
manufacturer and exporter in the world. Textile
sector is the biggest employer after agriculture
employing 4.5 crore people directly and another
6 crore people in allied sectors.
• Jute Packaging Material (JPM) Act, 1987:
requires the foodgrains and sugar companies to
pack “specified%” of their produce in jute bags
only. This ensures that jute bag industry can survive
against the competition of cheap plastic bags.
• Technical textiles: Fishing nets, bullet proof
jackets, shoe laces, surgical gowns, parachute etc.
items. They are lightest and toughest. They have a
variety of applications in automobile, aerospace,
architecture and building, occupational therapy,
sport and apparel industries etc.
Budget-2020
India imports a technical textiles worth US$ 16 billion
every year. So, to reverse this trend, we’ll launch a
National Technical Textiles Mission from 2020-21 to
2023-24.
• Project India Size: Presently the makers of shoe /
shirt / pants etc. refer to size charts developed by
UK / US standards e.g. Size 44 shirt, XL t-shirt etc.
Textile ministry’s project aims to develop size
charts specific to Indian consumers' measurements.
• India Handloom Brand logo (2015): It certifies
that given handloom product -
sari, dress material, bedsheet
etc. is:
1. Indeed handmade
2. has zero defect
3. has zero negative impact on
the environment has
authentic Indian traditional design. Such brand
logo increases the appeal of Indian handcrafts
to (mainly foreign) buyers. To obtain this logo,
the weaver applies online to Textile Ministry
and pays fees after his product is registered.
• Previously, UPA had Mahatma Gandhi Bunkar
Bima Yojana (MGBBY) - although gradually
Modi switched those beneficiaries to Pradhan
Mantri Suraksha Bima Yojana. So we need not
worry about this obscure scheme.
• In 2016, ‘Pehchan’cards given to handicraft
artisans-linked with their Aadhaar numbers and
bank accounts to help them avail various scheme
benefits.
• e-Cocoon App a mobile application for quality
certification in silkworm seed sector.
• E-Dhaga App, Bunkar Mitra helpline to advising
the weavers on business.
Textile Ministry’s Central Sector Schemes:
• National Handloom Development Programme:
Weavers Mudra scheme - Textile ministry gives
interest subvention and credit guarantee for the
weavers’ bank loans upto prescribed limits.
• Amended Technology Upgradation Funds
Scheme (ATUFS): Provides funding to the textile
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 industries to upgrade their machineries. Similarly
Power Textiles scheme for power looms.
• Ambedkar Hasthshilp Vikas Yojana, Handloom
Weaver Comprehensive Welfare Scheme
(HWCWS) etc. schemes to provide training / skill
development / marketing support etc. to the
artisans.
• Samarth Scheme (2017) for Capacity Building in
Textile Sector. Ministry of Skill Development &
Entrepreneurship (MSDE) hires public & private
sector institutes for giving training to youth for
textile sector → Textile ministry pays ‘coaching
fees’ to those institutes.
• Pradhan Mantri Paridhan Rojgar Protsahan
Yojana: Textile ministry pays ‘EPFO contribution
of employer’s side’ for the first three years to
encourage formal job creation in the textile sector.
(Ref: Pillar1D Handout)
Textile & Leather Industry: Past Economic Surveys’
suggestions:
• India is well positioned to get ahead of China in
textile sector because wage costs in most Indian
states are significantly lower than in China’s wages.
• Textile leather industries should be encouraged to
move to smaller towns so they can absorb the
Indian women workers available there.
• To increase export earning, we should go beyond
textile i.e. readymade garments. But that requires
R&D in foreigners’ fashion, style & size
preferences.
• Similarly, in leather industry, India primarily
exports leather-based shoes, but nowadays
foreigners prefer non-leather shoes for they are
o Cheaper
o More comfortable
o More fashionable.
• So, we've to do R&D for non-leather shoes targeted
for them.
Challenges:
• Getting quality cattle hides becoming difficult due
to present socio- political atmosphere so leather
industry facing problems
• Bangladesh & Ethiopia emerging as textile/leather
hubs and they get duty free access to USA/EU for
being L.D.C. so India textile industry facing steep
competition.
Conclusion:
Textile and Leather industry has great potential to
generate new jobs especially for Indian women, &
augment our income from exports. These industries can
greatly help achieving SDG Goal 1 (End poverty), Goal
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5: Gender Empowerment, Goal 8 (Promote sustained,
inclusive and sustainable economic growth) Goal 10
(Reduce inequality within India). Aforementioned
policy, scheme, initiative, challenges are crucial in that
regard and must be addressed on priority basis.
Ministry of MSME:
PSU National Small Industries Corporation
Limited (NSIC)
Attached Development Commissioner (MSME)
offices
Statutory Khadi & Village Industries Commission
Bodies (KVIC), Coir Board
MSME Amendment Bill 2018: Pending
Amendment Bill, 2018 aims to update old definitions:
• Further, the bill empowers Union Govt to change
these annual turnover limits through a notification
up to three times the limits given above. (This saves
the time in not having to introduce another bill in
future to get permission of Parliament)
MSME Problems: RBI’s UK Sinha report (2019)
• MSMEs contribute 45% to the manufacturing
sector’s output and 40% to the nation’s exports.
We should do following to help them:
1. Easier registration:
• MSMEs should be classified based on turnover, and
not investment. (As given in above table)
• Presently, MSMEs must do multiple registrations
with various Departments and get different
registration numbers. Better to use PAN number as
their Unique Enterprise Identifier (UEI)
number.
2. Easier loans:
• Non-availability of loan at reasonable rates is the
most severe problem faced by MSME. So,
• Mudra scheme offers three types of collateral free
loans – Shishu (upto ₹50,000), Kishor (above
₹50k-upto ₹5 lakh), and Tarun (above ₹5 lakh- ₹10
lakh). UK Sinha suggested to double these loan
amounts.
• Loan application know-your-customer (KYC)
processes require the MSME owner to come
physically to the bank branch for verification. We
should adopt video KYC.
• Integrate data from GSTN, Income Tax, Credit
Bureaus, Land ownership records, Fraud Reports,
etc. & give it to banks so they can easily know the
credit- worthiness of an MSME owner and process
his loan applications.
• PSB Loans In 59 Minutes: technical reforms to
make it more easy for new MSME entrepreneur to
get loans.
• SIDBI should help venture capital funds to invest
in MSME.
3. Easier NPA resolution
• Insolvency & Bankruptcy Code (IBC) technical
norms should be fine-tuned for MSMEs’ NPA.
• When Government bans plastic bags or SC puts
limits on firecrackers, it affects MSME producing
those goods, and turns their loans into NPA. So to
help MSME during such ‘external shocks’, we
need to create a Distressed Asset Fund to help
them.
4. Pending payments
• MSME Act, 2006 need to be replaced with a better,
more stronger law. So, MSME can get quick justice
for delayed payments.
• Setup an Information Utility portal. All MSME
upload their invoices. If any client not paying on
time, Government should punish him.
5. Give them training & social security
• Focus on technology adoption, capacity building,
backward and forward linkages. Teach rural
entrepreneurs how to register for GST, how to file
IT return/PAN application, loan document
preparation, etc.
• Government should actively enroll MSME
employees in pension & insurance schemes.
PM's Employment Generation Programme
(PMEGP) 2008 (continued it till 31 March 2020).
• Nodal Agency - MSME Ministry, KVIC.
• Central Sector Scheme - 100% funded by the
union.
• Beneficiary - Min. std. 8 pass person / Self-help-
group wanting to setup a new micro- enterprises in
the non-farm sector.
• Suppose the cost to start a business is 100% then
entrepreneurs himself has to contribute 5-10%
from his pocket, KVIC gives him 15-35%, rest is
given as bank loans. Thus it’s a ‘Credit linked
Subsidy’ program.
• These percentages depend on whether the business
is to be started in rural area or urban area, and
whether the Entrepreneur is General /SC/ ST/
Women/ PH/ Minorities/ Ex-Servicemen/ North
East.
ASPIRE (2015)
• A Scheme for Promoting Innovation, Rural
Industry and Entrepreneurship.
• Nodal Agency - MSME Ministry. Central Sector
Scheme i.e. 100% funded by the union.
• To encourage Innovation & Rural
Entrepreneurship, this scheme will set up Business
Incubators and Startup fund for agro-based
industry.
Solar Charkha Mission(2018)
• Nodal Agency - MSME Ministry - KVIC.
• Central Sector Scheme i.e. 100% funded by the
union. - KVIC to setup solar charkha clusters in
rural areas.
• KVIC will provide training, subsidy for
purchasing Solar Charkha, and interest
subvention on the loans taken by the weavers /
entrepreneurs.
• Target - Generating 1 new lakh jobs.
Other initiatives in MSME Sector:
UAM 2015 To register an enterprise as MSME, its
onwards entrepreneur has to fill up an Udyog
Aadhaar Memorandum(UAM)-free
online form to MSME ministry.
(Previously it was cumbersome form
called ‘Entrepreneurs’
Memorandum’) He’ll be allotted a
unique Udyog Aadhar id linked with his
personal Aadhar number.
Udyog Aadhar id helps applying for
various Govt. schemes for MSME
Udyami Toll-free helpline mainly to help the first
Mitra Yojana generation entrepreneurs.
India For promoting grassroot innovations
Inclusive
Innovation
Fund
SFURTI Scheme of Fund for Regeneration of
Traditional Industries → to setup
clusters of Khadi, Coir, Handicraft; &
help the entrepreneurs inside them.
CGTMSE Credit Guarantee Fund Trust for Micro
and Small Enterprises (CGTMSE)
funded by MSME Ministry and SIDBI
to help the MSE Entrepreneurs get loans
without collateral from the banks.
MSME MSME Act, 2006 requires State
Samadhaan Governments to establish Micro and
Small Enterprise Facilitation Council
(MSEFC). If a buyer (Govt org at
Union/State) is not paying money to
MSME supplier within specified time
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 limit, then MSEFC can order him to pay
money with interest rate. MSME
Ministry’s ‘MSME SAMADHAAN’
web portal helps filing online complaint
for delayed payments.
MSME- MSME Ministry’s webportal to connect
Sampark jobseekers (passed out trainees /
students of MSME Technology Centres)
to recruiters (various companies).
Udyam MSME ministry organizes such
Sangam, Workshops, Conventions, Mela usually
Udyam at Delhi.
Samvad
Public Procurement Order (PPO):
MSME Ministry’s Public Procurement Order 2012
requires every Central Ministry/Department/PSU to
procure annually:
• At least 25% of their goods & services requirement
from Micro and Small Enterprises (MSE). Further:
➢ 3% of that 25% must be procured from MSE
owned by Women Entrepreneurs: MSE
➢ 4% of that 25% from SC/ST entrepreneurs.
• Give first purchase preference to local suppliers.
Try to ensure that procured goods/services have
minimum 50% local content (to encourage Make in
India).
• ‘MSME- Sambandh’ webportal (by MSME
Ministry) monitors the progress.
MSME Ministry gets power to issue such order /
quota under MSME development Act 2006.
Public Procurement: GeM Portal
• Government e-Marketplace (GeM) is an online
portal that helps Govt organizations at union, state,
PRI/ULB and PSUs to buy common use goods &
services in transparent and efficient manner e.g.
pen, pencil, stationery.
• Nodal Ministry: Commerce Ministry’s not-for-
profit company named ‘GeM Special purpose
vehicle (SPV)’.
• Verified sellers list products in this portal, Govt
organizations buy it online from here.
• Ensures transparency, efficiency, cost saving
(compared to individual organization giving
newspaper ads inviting tenders).
• SWAYATT is Commerce Ministry’s initiative to
promote Start-ups, Women and Youth
entrepreneurs through GeM portal.
PM's Initiatives for MSMEs (2018):
• Loans upto 1 crore within 59 minutes through an
online portal.
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• Interest subvention of 2% for all GST registered
MSMEs on fresh or incremental (additional) loans.
(Same again announced in Interim-Budget-2019)
• MSME / Corporates can borrow money from
banks/NBFCs under Bill of exchange / Factoring /
Trade Receivables Discounting System (TReDS).
Technical norms are further tweaked to help them.
• All govt organizations to compulsorily procure 25
percent from MSMEs, out of that 25%, 3% from
women owned MSME. (previously women did not
have internal quota)
• All CPSUs to compulsorily procure through
GeM portal.
• Simplified forms under labour laws. Factory /
labour Inspector will inspect MSME unit via
computerised random allotment- to prevent any
nepotism / collusion.
• Self-declaration for air and water pollution laws.
Only 10% MSME units to be inspected to checked.
• For minor violations under the Companies Act,
entrepreneurs no longer have to approach NCLT,
but file penalties online using simple forms.
• 100 Technology Centres will be established. Govt.
will bear 70% cost for establishing Pharma clusters.
ES2019: MSME dwarfism:
CEA Subramanian K. observed: Following benefits are
available to Small firms:
Similarly, small firms get benefit of :
• Priority Sector Lending, Credit Guarantee Fund
Scheme, Public Procurement Quota.
• Benefits in Government tendering such as no need
to pay fees / security deposits. Some
tender/contracts are exclusively reserved for
MSME.
• GST Composition scheme: where they have to
submit the collected GST to Government on a
quarterly basis instead of monthly basis, if turnover
less than “X” crores.
MSME ‘Dwarfism’ is caused by Govt schemes:
ES2019 observed above policies create a “perverse”
incentive for firms to remain small.
• If the firms grow beyond these worker or turnover
thresholds they will be unable to obtain the said
benefits.
• So, entrepreneurs find it optimal to start a new firm
to continue availing these benefits.
• But then firm doesn’t benefit from economies of
scale, as a result they can’t create large number of
jobs.
• Thus infant firms → giant companies…No; but
infant firms → ‘dwarfs’. Such dwarf firm contribute
neither to productivity or jobs.
• As a result, a 40-year old firm in Mexico generates
40 per cent more employment than the average 40-
year old Indian firm.
• Productivity level for 40-year old enterprises in the
U.S. was more than 4 times of a newly setup firm.
Whereas in India, productivity level for 40-year old
firms in India was only 60% greater than a newly
setup firm.
MSME ‘Dwarfism’: Suggested Reforms by ES2019
• Under Priority Sector Lending (PSL), banks are
required to lend 7.5% of their annual loans to Micro
enterprises. These norms should be tweaked to give
first preference to loan applications by ‘start ups’
and ‘infants’ firms.
• Sunset Clause for Incentives: MSME benefits
should have a ‘sunset’ clause, say, after 5-7 years,
the firm will no longer be able to claim it. If owner
starts a new firm, then based on his Aadhar card
number, the system should alert authorities, so he
can’t claim the MSME benefits in the new firm.
• Focus on High Employment Sectors such as
rubber and plastic products, electronic and optical
products, transport equipment, machinery, textiles
and leather & leather products,
• Focus on Service Sectors with high spillover
effects such as Tourism. Because it can open up
new jobs in tour and safari guides, hotels, catering
and housekeeping staff, shops at tourist spots etc. It
would also reduce the migration of the rural labour
force to other States.
Way forward:
• MSMEs contribute 45 per cent to the
manufacturing sector’s output and 40 per cent to
the nation’s exports.
• India’s total exports and provide employment &
entrepreneurship opportunities to weaker sections
of the society.
• Thus they play a pivotal role for both industrial
development and human development of India.
Q. Find correct statement(s): (CSE-2018)
1. The Food Safety and Standards Act, 2006 replaced
the Prevention of Food Adulteration Act, 1954.
2. The Food Safety and Standards Authority of India
(FSSAI) is under the charge of Director General of
Health Services in the Union Ministry of Health and
Family Welfare.
3. Both 1 and 2
4. Neither 1 nor 2
MAINS QUESTIONS GSM2 and GSM3
Account for the failure of manufacturing 2017
sector in achieving the goal of labour-
intensive exports rather than capital-intensive
exports. Suggest measures for more labour-
intensive rather than capital-intensive
exports.
Has the Indian governmental system 2016
responded adequately to the demands of
Liberalization, Privatization and
Globalization started in 1991? What can the
government do to be responsive to this
important change?
Capitalism has guided the world economy to 2014
unprecedented prosperity. However, it often
encourages short-sightedness and contributes
to wide disparities between the rich and the
poor. In this light, would it be correct to
believe and adopt capitalism driving inclusive
growth in India? Discuss.
"Success of 'Make in India' programme 2015
depends on the success of 'Skill India'
programme and radical labour reforms."
Discuss with logical arguments.
While we found India's demographic 2014
dividend, we ignore the dropping rates of
employability. What are we missing while
doing so? Where will the jobs that India
desperately needs come from? Explain.
Normally countries shift from agriculture to 2014
industry and then later to services, but India
shifted directly from agriculture to services.
What are the reasons for the huge growth of
services vis-a-vis industry in the country?
Can India become a developed country
without a strong industrial base?
Examine the impact of liberalization on 2013
companies owned by Indian. Are the
competing with the MNCs satisfactorily?
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 CH-13 ECONOMIC PLANNING
Planning is the process through which Govt. prepares a Q. How are the principles followed by the NITI Aayog
list of socio-economic problems e.g. mass poverty, different from those followed by the erstwhile Planning
inequality, low productivity in agriculture, lack of Commission in India? (GSM3-2018)
industrial and infrastructural development etc.; and then
Govt. sets goals / targets / plans to fix these problems. Functions: Planning Commission Vs NITI Aayog
• While Finance commission (a constitutional body
Note: We have dealt with Economic planning under Art. 280) is responsible for the tax-
elaborately in Indian Economy – Before and After devolution from Union to states, these two non-
Independence chapter. Here we will discuss planning constitutional bodies look/looked after →
viz-a-viz NITI Aayog briefly.
Planning Commission NITI Aayog
Limitations Planning Commission: Prepared the Five-Year NITI has given
• Achieved about 9% GDP growth-rate during Plans of India responsibility to draft:
2005-07, thanks to American boom prior to • Three Year Action
Subprime crisis. But almost all nations including Agenda (2017-20).
Pakistan had experienced high growth in that era. • Seven Year Strategy
Document.
So 9% GDP did not come from PC’s magic wand.
• Fifteen Year Vision
• Post-Subprime crisis: GDP-fell while food- Document (2017-32).
inflation &NPA rose during 2008-13. PC couldn’t 2018: drafted Strategy
fix it. for New India @ 75
• PC was a toothless body, couldn’t punish any covering the period
government organizations if targets failed. 2017 to 2022-23.
• Failed to implement land reforms, labour laws. How much money should NITI doesn’t decide how
• PC designed Government schemes with ‘One Size union give to each state for much money should be
implementation of centrally given to each state. That
Fits’ all approach and a few extra crores to NE,
sponsored schemes (CSS)? component is decided by
J&K, Hill-states and LWE-affected states. But for the Finance Commission
long, PC did not use pilot projects / sample testing How much money should (tax devolution and grants)
/ interaction with states. So, Indira Awas Yojana union give to the five year and Finance Ministry
(IAY), ICDS- child development scheme etc. plans of the state (Allocations for schemes).
programs failed to show tangible result despite governments?
pumping crores of rupees over the decades. NITI primarily serves as the
• PC tried to bypass State Governments by PC would answer these think tank, helps in policy
designing schemes that directly funded to NGO & questions using Gadgil design.
private agencies. So, non-Congress states became Mukherjee formula
(designed in 8TH FYP)- Helps in monitoring
unenthusiastic about implementing Central
based on population, per schemes’ implementation
Schemes. capita income, special through its dashboard e.g.
• Only in 2013, PC attempted to undo its mistakes by problems etc. of a state. ‘School Education Quality
reducing number of Centrally sponsored schemes Index’, ‘SDG India Index’,
(CSS), Performance based funding to States etc. ‘Digital Transformation
But it was too little, too late. Index’ etc.
• PC’s shortcomings resulted in creation of new
bodies like PM’s Project Monitoring Group, NITI: Initiatives
PM’s Economic Advisory Council (PM-EAC),
Group of Ministers (GoM) committees etc. This Darpan Portal • 2017 onwards: NGO
all resulted into more lack of coordination. So, register here, get unique ID –
Govt. felt PC is a beyond repairs & replaced it with apply for grants under
NITI Ayog. various govt schemes.
Aspirational District • 2018 onwards: to rapidly
Programme transform 115 backward
districts on 49 key
performance indicators

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 (KPIs) related to Health,
Nutrition, Education,
Agriculture, Water
Resources, Financial
Inclusion, Skill
Development, Infrastructure
etc.
• Their progress is monitored
using NITI online dashboard
called ‘Champions of
Change’.
Strategic NITI Aayog suggested strategic
disinvestment disinvestment of more than 30
sick and loss making CPSEs such
as Air India, Pawan Hans
Helicopter, Scooters India etc.
POSHAN Abhiyaan • Ministry of Women and
Child Development
(MWCD) is implementing
POSHAN Abhiyaan to make
India malnutrition free India
by 2022 with focus on
pregnant women, mothers
and children.
• NITI Vice-Chairman is the
head of POSHAN
Abhiyaan’s National
Council.
Bills and policies Since its inception NITI Aayog
has:
• Helped framing various
policies on Energy, Mineral
etc.
• Helped framing various
bills, Model Acts on
Agricultural Land Leasing,
Livestock Selling etc.
Agriculture NITI helped revamping the MSP
by suggesting price deficiency
payments (under PM-AASHA),
& revamping fertilizer subsidies
through DBT mechanism to
fertilizer companies.
SDG For Sustainable Development
Goals:
• NITI developed SDG India
Index to monitor our
progress in 17 SDG goals.
• NITI suggested Govt. to
focus on methanol / biofuel
based economy for reducing
the fuel bill by around 30%
by 2030.
CSS NITI helped developing Output
Outcome Monitoring Framework
to monitor the implementation of
Govt schemes.
Seminars NITI regularly organizes
seminars, workshops,
conferences for idea exchange
with industries and academicians.
PC was ‘closed / introvert body’
in terms of interaction with
others.
Startups NITI runs Atal Innovation
Mission (AIM): grant of upto
INR 10 crores to setup Atal
Incubation Centres incubators. →
AIM also started “Mentor
India” program, wherein experts
from industry provide
mentorship to students in Atal
incubator labs. SETU to help start
ups.
Digital Age NITI developing National
Program on Artificial
Intelligence.
It is evident that NITI’s approach is more
modernised, forward-looking, less bureaucratic and
less status-quo oriented than the erstwhile Planning
Commission. With such initiatives, NITI Ayog is
playing a pivotal role for economic growth, human
development and good governance in India.
Prime Minister's Economic Advisory Council:
• PM-EAC is just like PC and NITI, this is also
neither constitutional nor statutory body.
• Started in the 2000s to give advice on economic
issues to the Prime Minister.
• After PM Manmohan Singh’s term finished (2014),
PM Modi did not reconstitute it for a while. But in
2017, our growth rate decreased in the aftermath of
demonetisation and GST, so opposition parties &
critics were making lot of hue and cry about PM’s
faulty economic policies. In that atmosphere, PM
Modi again reconstituted this Economic Advisory
Council (2017-Sept).
• Composition: Economist Bibek Debroy (as
Chairman) & other notable full time and part time
members, Total 7 persons.
• NITI provides administrative and secretarial
support to PM- EAC. PMEAC has suggested to
government to:
1. Set up a GST Council like body on public
expenditure
2. Reduce the number of GST slabs.
3. Reduce the Direct Taxes to boost the demand &
economy.
PRAGATI:
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 • 2015: Pro-Active Governance and Timely
Implementation (PRAGATI) is a web platform
under Prime Minister's Office (PMO) for
Monitoring scheme implementations.
• Addressing common man’s grievances related to
tax refunds, EPFO claims etc.
• PM uses this digital platform for monthly video
conferencing with ministries & departments in
Union, and Chief Secretaries in States.
eSamikSha • 2014: PM Modi launched web portal
under Cabinet Secretariat.
• After the Ministers and officials meet
PM → decisions or follow up actions
are monitored through this portal.
• If an IAS is sitting on a file, this
webportal allows PM / Cabinet
Secretary to digitally ask that IAS to
explain the delay or expedite the
decision- making.
Project • 2013: PM Manmohan formed it under
Monitoring Cabinet Secretariat for fast tracking
Group the approval / implementation of
(PMG) various public sector, private sector
and PPP Projects.
• They also operate a webportal ‘e-
Nivesh Monitor’ for investment /
business proposals.
Investment • 2004-09: Under Ratan Tata to make
Commissio recommendations to the government
n on policies and procedures to
facilitate investment.
• 2016 Government thought to revive it
but faded topic.
CPGRAMS • 2007: Personnel Ministry →
Department of Administrative
Reforms & Public Grievances
(DARPG) launched the portal
Centralized Public Grievance
Redress And Monitoring System
(CPGRAMS)
• Any citizens can file complaint
against any Central
Ministries/Departments/Organisation
s for Corruption, Nepotism,
harassment, mismanagement,
absenteeism, Delay in providing
services etc. They also launched a
mobile app ‘My Grievance’.
MoSPI:
Ministry of Statistics and Programme Implementation
(MOSPI)’s administrative head is called ‘Secretary &
Controversy with NSC:
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Chief Statistician of India’ usually, Indian Statistical
Service officer recruited by UPSC. MoSPI consists of:
1. National Statistical Office (NSO):
a) Central Statistics Office (CSO): computation of
GDP, GSDP, IIP, ASI, CPI (Rural, Urban, All
India) and Economic Census (6th was done in
2013);
b) National Sample Survey Office (NSSO): data
collection for various socio-economic indicators,
Annual Survey of Industries (ASI), Rural-urban
prices and other data required for CSO’s
calculations.
c) 2019-June, MoSPI merged CSO+NSSO
henceforth it will be called National Statistical
Office (NSO) only. it will be headed by Chief
statistician of India-cum-Secretary of MoSPI.
(Earlier, C Rangarajan’s National Statistical
Commission in 2005 had recommended this
CSO+NSSO Merger). Further, MoSPI also
planning to setup a National-Level Data
Warehouse: It’ll act as a central repository of all the
statistical data collected various ministries, and
provide big data analytics.
2. Programme Implementation wing:
a) Member of Parliament Local Area Development
Scheme (MPLADS-1993): In this each MP can
suggest development works worth ₹ 5 crore per year
in his constituency.
b) Twenty Point Programme (2006) to measure
performance of various schemes related to poverty
alleviation, employment generation, housing,
education, health, etc.
c) Infrastructure Monitoring and Project Monitoring.
National Statistical Commission:
• Setup in 2005 in MOSPI by Cabinet resolution
based on recommendations of C. Rangarajan
Committee. So, neither constitutional nor
statutory.
• Structure: 1 part time chairman, 4 part time
members + NITI Secretary is ex-officio member, 6
people in total. Chief Statistician of India serves as
‘Secretary’ to this commission.
• Functions: It replaced the erstwhile Governing
council of the NSSO. So, basically the nodal body
designing the standards of data collection- data
publication, coordination among the different
agencies involved.
In 2019, two members resigned citing “Over the months, we have been feeling that we were not been taken seriously
and being side-lined by the government. NSC had approved the Employment Survey 2017-18 but it’s not yet released.”
Critics allege this Employment survey shows jobs fell after demonetization / GST so Modi did not want data released.

If this type of data manipulation & window-dressing is continued then eventually:

• International organisations will lose confidence in India's data collection methodologies. They will not believe
fully, even if the Indian economy is growing really.
• Large sized economy has to contribute more money to IMF & in return gets more voting rights in IMF board (e.g.
USA). But, if IMF loses confidence in our data collection methodologies, they may not increase our quota, even if
we become an economic superpower.
• International credit rating agencies such as Standard & Poor's (S&P), Moody's, and Fitch Group will give poor
ratings to Indian G-Sec and corporate bonds - Foreign investors will feel shy about investing in India or they will
demand higher interest rates.

To install faith in official statistical data, Government is doing following:

1. Draft National Statistical Commission (NSC) Bill 2019 to give statutory status to National Statistical
Commission, so it may work more independently.
2. Draft new National Policy on Official Statistics.
3. In 2019, MOSPI setup a new SCES Committee.

Standing Committee on Economic Statistics (SCES):

• Setup in 2019, To improve the quality of data, MoSPI setup a Standing Committee on Economic Statistics (SCES)
with 27 members + 1 Chairman (Ex- Chief Statistician Pranab Sen) → total 28 persons.
• This new SCES Committee subsumes previous 4 Standing Committees on:
a) Labour force statistics,
b) Industrial statistics,
c) Services sector and
d) Unincorporated sector enterprises.
• SCES will review the existing framework/methodology/data collection for IIP, periodic labour force survey,
economic census etc.
• Chairman Pronab Sen suggested that:
o Government should announce a specific calendar that on ‘x’ date of each month or quarter, ‘y’ Macroeconomic
indicator data will be released.
o This way critiques will have more confidence in the data released by the Government.

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 CH-14 ECONOMIC INDICATORS
NATIONAL INCOME
• National Income is the total value of all final
goods and services produced by the country in
certain year. The growth of National Income helps
to know the progress of the country.
• In other words, the total amount of income accruing
to a country from economic activities in a year’s
time is known as national income.
• National Income includes payments made to all
resources in the form of wages, interest, rent and
profits.
NATIONAL INCOME ACCOUNTING (NIA)
• National Income Accounting is a method or
technique used to measure the economic activity
in the national economy as a whole.
• It is the bookkeeping system which measures the
level of economic activity in a given time period
• NIA sets rules and definition to measure
aggregate economic activity and tries to
summarise the performance of the economy
NIA is mainly done for:
Policy Formulation: It helps in comparing the
estimates of the past from the future and also forecast
the growth rates in future. For example, if a country has
a GDP of Rs. 103 Lakh which is 3 Lakh rupees higher
than the last year, it has a growth rate of 3 per cent.
Effective Decision Making: To estimate the
contribution of each of the sectors of the
economy. It helps the business to plan for
production.
International Economic Comparison: It helps in
comparing the level of development of countries and
provides useful insight into how well an economy is
functioning, and where money is being generated and
spent. One can compare the standard of living of
different nations and its growth rate.
Uses of NIA
• Indicates the performance of the economy
signifying the economy’s strength and failures
• It helps to find out structural changes in the
economy. E.g. – Proportional share of primary
sector is declining and tertiary sector is
proportionately increasing since late 1990.
• It helps in assessing the current standard of living
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• Helps in comparison among nations with respect
to national income, per capita income.
• Data help in making suitable changes in policy and
approaches to achieve rapid economic development
PROBLEMS FACED IN THE ESTIMATION OF
NATIONAL INCOME
1. Conceptual problems: what should be included or
excluded in NI?
• E.g. which activities of foreign firms or the govt
should be considered productive?
• Services of household – not included as there is
no income, no price and no market for service
rendered for the household work done
• Domestic servants are to be included- but
quantifying becomes difficult
• Farm products kept for self-consumption are to
be estimated by guess.
• Output from veggies grown from home
garden or terrace garden –not included as there
is no accurate estimate for the produce.
2. Practical or Statistical problems:
• Small shopkeepers, casual workers etc don’t
keep a proper record of their
income/expenditure;
• Non-market activities (self- consumption) are
tough to estimate
• Reliable information is not available due to
illiteracy
• Statistical staff is untrained and inefficient
• Large regional diversity – language , customs –
create a problem in computing the estimates
• Issue with multiple counting
PROBLEMS IN CALCULATING
• Black money outside the estimates.
• Non monetisation such as barter system in rural
areas are kept out of transaction
• Household services like care economy not included
• Social service ,voluntary and charitable work
ignored.
• Environmental cost
PHYSICAL QUALITY OF LIFE INDEX
Introduced by M D Morris in 1979, it is the average of
three statistics:
1. Basic literacy rate (at the age of 15 years),
2. Infant mortality (death of children under the age of
one year), and
3. Life expectancy at age one,
• All equally weighted on a 0 to 100 scale.
• It was widely used till 1990, when HDI was
introduced.
INDICATORS
• Impact on environment may be harmful despite
increase in GDP.
• Only give average figure and hide stratification
• Conditions of poor not indicated
• Gender disparities not revealed.
• Does not matter how wealth increase... by war or
demand
• Does not measure sustainability of growth.
METHODS OF GDP CALCULATION

GDP Unemployment Inflation 1. EXPENDITURE METHOD

If anything is produced in India then someone must
have paid money for that. So, accordingly we can derive
GDP = C + I + G + X -M
INDICATORS: GDP
GDP
• Gross Domestic Product is the market value of all Expenditure Examples
the goods and services produced within the Method
domestic territory of a country during a specified Purchasing new car, mobiles,
time period, usually one year. computer etc. Both India made &
• Accounting Year = Fiscal Year; for India it is 1st (Imported) foreign made are
of April to 31st of March (next year) counted.
• Will include the income generated by MNCs in
India (C) If existing house, its ‘notional rent’
Consumption is counted (i.e. even if you didnot
Domestic Territory = Political frontiers of the country of final goods rent the property.)
including its territorial waters+ Embassies/Consulates + and services
Military Establishments of the country abroad + DOESN’T INCLUDE:
Ships/Aircrafts/Fishing Vessels/Oil Rigs belonging to Purchase of second hand goods,
the residents of the country because we are only measuring
‘new’ things “MADE in India” in
GDP does not include : present year. IGNORE of new
• Capital goods (e.g. machinery) are included in house is not counted here, it’s
GDP, but intermediate goods (e.g. raw materials) counted in (I)
are not. Purchase of tangible capital assets
• Intermediate goods and services are not included to like New House, Land, Building,
avoid double counting. Factory, Truck, Machinery.
• Same good can be final (you consuming milk ) or
intermediate (milk in the restaurant) depending on Purchase of intangible capital
the usage. assets like IPR / Patents, Computer
(I) Software etc.
Investments
Purchase of raw material &
intermediate goods, wages to
workers for production.

Unsold inventory.

DOESN’T INCLUDE:
Savings in bank, shares and bonds
etc.
Limitation to usefulness of GDP Because it’d have been given to

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 entrepreneur as ‘Capital’ to buy • Therefore, from 2018-April, RBI decided to use
above things. GDP instead of GVA to measure the economic
Salaries to employees, activities for its policy making & big data analytics.
Procurement of computer,
stationery, fans, tube lights,
vehicles etc.
(G)
Government DOESN’T INCLUDE:
Purchases Government’s scholarship,
Subsidy, ‘Transfer Payments’-
pension, maternity benefit,
employment allowance. They’re
counted in “C” (Private)
consumption by the respective
beneficiaries.
- Export is added because it means
a foreigner must have bought
goods/services “MADE in India” MISMATCH IN CALCULATION
so it’s part of India’s GDP. • Theoretically, the GDP calculated by production
(X-M) Export - Whereas, Import is subtracted method should equal to GDP by expenditure
MINUS because some Indians must have method.
Imports Consumed (C) foreign products • However, in real life, GDP (production ) does not
that were not “MADE in India”, So equal to the GDP (expenditure);attributed to
if you do not subtract the factory production data is systematically captured
‘Import(M)’, it will give wrong by Government machinery such as Corporate
estimation of India’s GDP. Affairs ministry’s MCA-21portal, NSO’s Annual
The GDP thus arrived is called Survey of Industries (ASI) etc. But, all of the final
GDP at Current Market private consumption may not be captured in the
Total = GDP Price.When we adjust it with official statistics due to unreported transactions
inflation against base year 2011 → (e.g. due to black money etc.)
GDP at Constant Market Price • As a result, mismatch /discrepancy will be observed
in GDP (expenditure) figures, and mentioned in the
PRODUCTION/GVA METHOD official NSO report.
• Estimated by adding the value added by all the firms • Therefore, GDP (Production Method GVA) is
• Value added = Value of Output – Intermediate good = considered more accurate method among the
GVA at FC three methods (Production, Expenditure, Income).
• If manage it with taxes and subsidies then It gives GDP • So, while NSO computes data using all 3 methods,
at Market Price (MP) – because it includes depreciation but official GDP & growth figures are presented
(therefore ‘gross’) and taxes (therefore ‘market price’) based on the ‘Production GVA’ method.
• To reach National Income (that is, NNP at FC)
GDP CALCULATION METHOD → VIA
1. Add Net Factor GNP at MP = GDP at MP + INCOME (WIPR)
Income from NFIA • This method follows the simple idea that whatever
Abroad: is “MADE in India”, its revenues must have been
2. Subtract NNP at MP = GNP at MP – distributed among the factors of production.
Depreciation: Depreciation
3. Subtract Net NNP at FC = NNP at MP – GDP = Wages to labourers (W) + Interest on Capital to
Indirect Taxes: NIT Lenders (I) + Profits to Entrepreneur / Owners of the
firm (P) + Rent on land (R).
• While GVA gives a picture of economy from the
producers' side or supply side, the GDP model • Estimated by adding all the factors of production
gives the picture from the consumers' / demand side (rent, wages, interest, profit) and the mixed income
perspective. (Because it considers Indirect taxes of self-employed.
and subsidies). • In India, one-third people are self-employed

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• Will get GDP at factor cost.
• The GDP thus arrived is called GDP at Current
Factor Cost.
GDP CALCULATION METHOD → VIA
INCOME (CSO REAL LIFE)
Theoretical CSO’ real life income formula
Wages Compensation (i.e. Employees
salary + Employer’s contribution
to his Social Security Account
e.g. EPFO / ESIC).
(+) Interest (+) Operating Surplus, Mixed
(+) Profit Income. (Because in a family run
farm / enterprise it is difficult to
separate income and profit, unlike
a corporate balance sheet)
(+) Rent (+) Consumption of fixed assets
during production
Total= “GDP Here total is called “GVA at
at Factor Cost” Factor Cost”
GROWTH RATE &GDP DEFLATOR
• Growth Rate (%) = [GDP (Present year - Last
Year) / Last Year] x 100
• But, quantitatively the production may not have
improved (From 1 kg garlics to 2 kg garlics), and
only because of inflation in the prices (₹ 10/kg
garlic to ₹ 100/kg) the growth rate may be appear
high.
• Therefore (to remove the inflation impact on
growth rate), we must select a base year, and
convert the current prices to constant prices.
• The ratio of these GDPs is called ‘GDP deflator’,
it presents a picture of inflation like CPI and WPI
but, unlike CPI & WPI it’s not based on a fixed
basket of commodities.
• These figures are revised as the new data arrives /
previous data is cross verified & corrected.
• E.g. 2019-Jan - NSO says 7.2% growth forecasted
for 2018-19 (ending at 31 march 2019), then in
2019-Feb revises it downwards to 7.0%, then 2020-
Jan = it says 6.8% (this figure given in Economic
Survey 2020), then 2020-Feb NSO says 6.1% was
the growth rate in 2018-19
• NSO will also prepare quarterly growth rates
(compared to previous quarters) and then engage in
upwards / downwards revision.
• Similarly, RBI, IMF, Rating Agencies will forecast
& then revise it upwards and downwards.
GDP replaced GVA (2018)
• While GVA gives a picture of economyfrom the
producers' side or supply side, the GDP model
gives the picture from the consumers' / demand
side perspective. (Because it considers Indirect
taxes and subsidies).
• Therefore, from 2018-April, RBI decided to use
GDP instead of GVA to measure the economic
activities for its policy making & big data analytics.
GDP AND BACKSERIES CONTROVERSY
• During Manmohan Singh govt (PM), GDP base
year was 2004-05.
• In 2015, PM Modi changed GDP base year to 2011-
12. Then, ManmohanSingh govt.updated / re-
adjusted GDP figures as per the new base year.
• The (new) GDP-data thus re-produced for 2005-
2011 is called “Back series” data.
• In August 2018: National Statistical Commission
(MoSPI) → Committee on Real Sector Statistics
under the Chairmanship of Dr. SudiptoMundle
discussed various approaches to prepare such
Backseries.
• In November 2018, NITI released backseries data,
showing UPA/Congress times GDP growth was
pathetic.
Critiques alleging “Methodology is misleading, and
MoSPI/CSO should have released the report. NITI
Aayog should not have released it on their behalf. So,
it’s all Modi govt’s manipulated data just to show his
growth figures are higher.”
Average Growth Base year Base year 2011
rate 2004
UPA-1 era 8.1% ~ 6.7%
(2004-09) (using Backseries)
UPA-2 era 7.0% ~ 6.7%
(2009-14) (using Backseries)
Modi-era N/A ~ 7.4%
(2014-2018*)
Economic Survey 2020: India GDP is not overstated.
2015→ India changed its GDP Base year from 2004 to
2011. It was done to comply with the System of
National Accounts (SNA-2008) of the United Nations.
Using 2011 as base year prices, India’s-
Average annual GDP growth rate was approximately
7% (2011 to 2016).
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 Average annual GDP growth rate was approximately
7.5% (for the last five years that is 2015-2019).
2019-March: Former RBI Governor Raghuram
Rajan expressed doubt over India’s 7% growth rate.
He felt it was overstated.
2019-June: Former CEA Arvind Subramanian
published a research paper:
• He compared the growth rate figures against
India’s exports, imports, loans to industry,
petroleum consumption, railway freight traffic,
electricity consumption, etc.
• He did not find strong evidence of 7% GDP
growth. He estimated it’s only 4.5%.
• That means, India’s growth rate has been
overestimated by 7.0-4.5 = 2.5%.
• So, if Raghuram Rajan & Arvind Subramanian
are right then either:
a) The Government's data collection
methodology is wrong and/or
b) Collected data is manipulated / doctored.
ES2020: CEA Subramanian K. has dedicated a entire
chapter to prove how above criticism (By Raghuram
Rajan and Arvind Subramanian) is invalid.
• First rough estimate of National Income was
done by Dadabhai Naoroji for 1867- 68; published
in his book Poverty and Un-british rule in India
(famous for its Drain of Wealth theory)
• First scientific estimate made by Prof V K R V Rao
(1931-32)
• GoI estimated the National Incomefor the first
time in 1948-49 through the Ministry of Commerce
• National Income Committee was set up in 1949
(Chairman – Dr P C Mahalanobis)
Shifting base years to 2017 & 18
2018-Feb: MoSPI declared that it’ll ‘initiate’ steps to
change base years:
Indicator Present Base Proposed
year New Base
Year from
2019
GDP & IIP 2011 2017-18
CPI 2012 2018-19
This is proposed to ‘accommodate’ the changes take
place in the economic scenario of the country (e.g. GST,
Demonetization, RERA).
CRITERIA FOR SELECTION OF BASE YEAR
• Normal year – neither too high nor too low
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• Latest possible year
• Relevant data for that year should be readily
available
CITY-LEVEL GDP (PROPOSED)
• In 2018, the Ministry of Housing and Urban
Affairs (MoHUA) asked the Economist
Magazine’s EconomistIntelligence Unit (EIU) to
prepare feasibility of calculating City level GDP for
Indian cities.
• This can help the municipal administrators to
know the economic potential of their area, and
decide municipal property tax rates & user fees;
development projects for water / sanitation /
transport / infrastructure accordingly.
ECONOMIC (BUSINESS) CYCLE
• Business cycles are fluctuations in economic
activity that an economy experiences over a period
of time.
• Business cycles are generally measured using the
rise and fall in the real gross domestic product
(GDP) or the GDP adjusted for inflation.
• It is also known as the economic cycle or trade
cycle.
• The stages in the business cycle
include→expansion, peak, recession or
contraction, depression, trough, and recovery.
• Business cycles are measured by the National
Bureau of Economic Research in the United
States.
Expansion • This is the first stage.
• When the expansion occurs, there
is an increase in employment,
incomes, production and sales.
• The economy has a steady flow in
the money supply and investment
is booming.
Peak • Peak is when the economy hits a
snag,having reached the
maximum level of growth.
 • Prices hit their highest level, and
economic indicators stop
growing.
Recession • From peak prosperity to moving
Phase downwards.
• Usually evident from continuous
negative growth rate for two
successive quarters (6
months).E.g.USA 2007-09 in the
aftermath of Subprime crisis
Depression • Severe and long lasting Recession
Phase e.g. USA 1929-39 in the
aftermath of stock market
crash.
• It resulted in great fall in GDP,
income, employment, industrial
production, and wholesale-retail
sales.
• Consumer confidence and
investment levels also drop.
Trough This period marks the end of the
depression, leading an economy
into recovery.
Recovery • The economy starts to turn around.
• Low prices spur an increase in
demand, employment and
production start to rise, and
lenders start to open up their credit
coffers.
• This stage marks the end of one
business cycle.
Notable recessions in the past:
• The Post-War Recession: (November 1948 –
October 1949) – As returning veterans returned to
the workforce in large numbers to compete for jobs
with existing civilian workers who had entered the
workforce during the war, unemployment began to
rise.
• The Oil Crisis Recession: (November 1973 –
March 1975) – This long, deep recession was
brought on by the quadrupling of oil prices and
high government spending on the Vietnam War,
which further led to stagflation and high
unemployment.
• The Iran/Energy Crisis Recession: (July 1981 –
November 1982) – This long and deep recession
was caused by the regime change in Iran, which
exported oil at inconsistent intervals and at lower
volumes, forcing prices higher.
• The Gulf War Recession: (July 1990 – March
1991) – Iraq invaded Kuwait. This resulted in a
spike in the price of oil in 1990, which caused
manufacturing trade sales to decline.
• The 9/11 Recession: (March 2001 – November
2001) – The collapse of the dotcom bubble, the 9/11
attacks contributed to this relatively mild
contraction of the U.S. economy.
• The Subprime mortgage crisis/ Great Recession:
(2007) – It was a period of marked general
recession observed in national economies globally.
It was concluded as the most severe economic and
financial meltdown since the Great Depression by
the IMF. The emergence of sub-prime loan losses
in the US in 2007 began the crisis and exposed other
risky loans and over-inflated asset prices.
COVID 19 and recession:
• According to the latest United Nations
Conference on Trade and Development
(UNCTAD) analysis, the world economy will go
into recession due to the coronavirus pandemic.
• The commodity-rich exporting countries will face a
$2-$3 trillion drop in investments from
overseas in the next two years.
• This would spell serious trouble for developing
countries, with the exception of China and India.
• However, an explanation as to why and how India
and China will be the exceptions is not given in the
report.
• Fiscal and forex constraints are bound to
tighten further over the course of the year.
• UNCTAD has hence called for a $2.5 trillion
rescue package for these nations.
POST-COVID19:V-SHAPED RECOVERY FOR
INDIA
• If GDP growth suffers a sharp economic decline→
then quickly recovers. So graph will appear "V-
shaped".
• 1918- 1920: Spanish Flu: USA growth falls to
(3.5%)→after wards quickly recovers to(7.5%)=V-
shaped recovery.
• 2020:CEASubramanian K. predicts, "History will
repeatit self for India-If Coronavaccine is found
sooner."
GDP GROWTH OF INDIA AND ECONOMIC
SURVEY 2020
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 According to ES2020, GDP Growth rate of India &
World is reducing.
FACTORS RESPONSIBLE FOR FALL /
DECLINE IN GROWTH RATE
• Protectionism in Chinaand the USA, US-Iran
geopolitical tensions which have affected global
trade.
• Consequently the investment and manufacturing
production has decreaseeven in the G7 and OECD
group of countries. India’s not the only country
suffering from exports.
• Sharp decreasein the automobile purchase. This
problem will further worsen with Bharat-6
emission norms. Such vehicles are more expensive
compared to the previous models.
VIRTUOUS CYCLE OF GROWTH
• In India, investment slowed down in the
aftermath of mounting Non-performing assets -
Twin balance sheet syndrome (TBS) & IL&FS-
NBFC Crisis
• Although now things are improving, but, it takes
two to four years for the cycle to restart again
• IMF research found that if there is a sudden uptake
in loans, it will increaseproduction, employment
and demand. But this positive effect remains only
for a short term.
o In the long term, it will cause a decrease in
growth rate.
o Same has happened in India→ during the
mid-2000s (before the subprime crisis), the
lending quantity was very high resulted into
later decreasein growth.
• According to critiques, the demonetization and
GST too have harmed the growth rate but ES20
chose to remain silent on that part.
CHALLENGES OF DECLINING GROWTH
RATE: ECONOMIC SURVEY 2020
• US-Iran geo-political will increase crude oil price
→ weaker rupee → higher inflation → reduced
consumption → GDP declines.
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• Even after the Insolvency Bankruptcy Code, the
badloan resolution process has been very slow.
Banks reluctant to give loans to the corporate sector
→ GDP unable to expand.
• Government's National Infrastructure Pipeline
(NIP) aims to spend 102 lakh crore on
infrastructure in the next five years. But then
government will have to borrow more money →
rise in fiscal deficit → crowding out of the private
investors → GDP unable to expand.
• Unless real estate developers reduce home prices, It
is difficult to sell the unsold homes → Builders will
not build new homes → decrease in demand of
Steel and cement → GDP unable to expand.
• 2019: India is among the top 5 economies of the
world in terms of GDP at current US$ trillion i.e.
USA (21 Tn$), China ($14), Japan ($5), Germany
($3.9), India ($2.9)
• 2024-25: We plan to increase the size of our
economy to 5 trillion. But to achieve this, we need
9% GDP Growth rate annually, which is rather
difficult because presently we are struggling
around 5% & Corona lockdown will make the
matters worst.
Global Risk Report
World Economic Forum’s (WEF’s) Global Risks
Report 2020 shows that the global risks over the coming
decade. Notable risks are:
2020: weather, climate, natural disasters, biodiversity
loss, water crisis, weapons of mass destruction (WMD)
2019:similar to above and cyber security , data theft,
data fraud.
Declining Growth rate and India
• Among the BRICS Nations, India's growth rate
is still relatively better and stable than Brazil,
China, Russia.
• Even though the GDP growth rate is falling,
Bombay Stock Exchange (BSE) SENXSEX is
improving. Which means both domestic and
 foreign investors are still investing enthusiastically
in the shares of companies → Which means they are
confident that the Indian economy will improve in
the upcoming days.
• By doing the quarterly growth analysis since
1996, CEA Subramanian K. found India’s business
cycle is about 13 quarters.
• Meaning, after every 13 quarters, we will achieve
the highest level and then it will start to fall.
• Presently we are at the “Fall phase”, But definitely
improve after that as per the historic trend of our
business cycles.
World Bank-ICP's GDP series based on PPP
• UN Economicand Social Council→United
Nation's Statistical Commission→ International
Comparison Program (ICP)
• ICP's goal is to convert data on Purchasing Power
Parities (PPPs) so GDP and price levels can
compared. More on PPP.
• 2020-
June→WorldBankreleasednewdatasetsfor2017,usi
ngICP.
• Investment - It's the domestic Savings + NET
foreign money which is put in Real (physical)
Assets like machines, tools, buildings, office
spaces, storehouses, roads, bridges, airports
• GFCF→ Gross Fixed Capital Formation Rate
(GFCF) = INVESTMENT – DISPOSAL of assets
(liquidation, condemnation). Thus, GFCF shows
the net increase in physical assets. It does not
considers depreciation, and land purchases.
• Capital Output Ratio→It is the amount of capital
needed to produce one unit of output. It depends on
factors such as technological progress, prices of
capital goods / machinery. In India, High Capital
Ratio is among the reasons for subdued growth
rates.
ES2018 had observed:
• Pre-Subprime crisis, above indicators had peaked
over 30% of GDP. But then falling down, then
struggling zig-zag.
• Pre-subprime crisis our growth rate was in peak 9%,
presently struggling in ~7% range.
• Some countries take as much as 17 years to come
out of such crisis.
• If we want to quickly recover, & bring our growth
rate back to 9% then we mustincrease investment
→ GFCF will increase → then growth rate will
automatically increase → savings will
automatically increase.

Budget-2019 and $5 Trillion Economy • Resolve TBS,

Increasing • Encourage Make in
Year India’s GDP in trillion $ (Current Investment / India & Startup India,
Prices) GCFC: should be • Reforms in Tax Laws,
2014-15 1.85 trillion our urgent priority: • Labour Laws,
2018-19 2.70 trillion • Environment Clearance,
2019-20 2.90 trillion • Faster FDI approval etc.
2024-25 5 trillion targeted Increasing / • PMJDY,
mobilizing savings • Pension-Insurance
• 2019-Aug: GDP growth sharply fell, FPIs exiting is important but schemes,
on large scale from India. So, Finance Minister should not be our • Sovereign Gold Bonds,
Nirmala. S announced Fiscal Stimulus. urgent priority: • Unearthing black
C. Rangarajan(Former RBI Governor) opinion money,
→India cannot achieve 5 trillion dollar economy by • Demonetization etc.
2025, because to achieve it, we will have togrow at 9-
10% annually but at present we are struggling with 5- Economic Survey 2019 also reiterated the similar
6% growth rate. theme, that private investment is necessary for boosting
growth.
ES2020 strategy to Achieve $5 Trillion Economy
• Savings - It’s the Income excess of Consumption. Q. Economic growth in country X will occur
Subdivided into Private Savings [by households & if______(CSE-2013)
business firm] and Public Savings by Govt a) There is technical progress in the world economy.
organizations. b) There is population growth in X.

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 c) There is capital formation in X. • Therefore, we must leave no stone unturned to
d) The volume of trade grows in the world economy. accomplish above targets / address above
challenges on priority basis.
Q. Despite being a high saving economy, capital
formation may not result in significant increase in Wealth Creation and ES2020
output due to____________(CSE-2018) • Until the entry of Europeans, India has been the
a) Weak administrative machinery dominant global economic power.
b) Illiteracy • Then our GDP growth started to decline during
c) High population density British Raj and Nehruvian Socialism.
d) High capital-output ratio • But since 1991’s LPG reforms, again we are back
on track.
$5 Trillion Economy and strategy of NITI to Achieve
1. Increase the Gross Fixed Capital Formation Benefits of wealth creation by private
(GFCF) from present 29% → 36% of GDP by entrepreneurs: ES2020
2022-23. To increase Public Sector and/or
Government led-investment:
➢ Must improve Tax:GDP by combating tax Employees, •Increase income, jobs and
evasion and tax avoidance. suppliers, employment opportunities.
➢ Must decrease Revenue deficit by combating retailers →
Subsidy leakage through JAM-trinity.
➢ Government has to exit from loss making •Enhancing and broadening
public sector enterprises. Government → of tax collection
➢ To mobilize private households’ investment-
PPP for Infrastructure.
➢ To mobilize domestic & foreign companies’ Common citizen •Increased quality of roads,
schools, hospitals created
investment - Addressing the NPA crisis, → through the tax revenue
reforms in the FDI policy, Ease of Doing Biz
etc.
➢ Greater coverage in Sovereign Gold Bond,
Ancient and modern thinkers/economists to suggest
Jan Dhan Account, Pension-Insurance schemes
how to broaden our wealth: CEA Subramanian K
etc; Preventing Ponzy& Chit Fund scams.
Thinker How CEA Subramanian K. links
2. Increase India’s growth rate to 9- 10%. Increase their ideas with wealth creation
size of Indian economy (GDP) to $5 trillion
USD.For this we must increase our ‘Net Exports’: • Kautilya’sArthshastra book
➢ Address various bottlenecks in our agriculture is centred around
and manufacturing sector. Varta(economic policy),
➢ Ease the complex labour and land laws. Dandaneeti(law and
➢ Industrial Revolution 4.0, artificial intelligence, enforcement),
IoT etc. Anvikshiki(philosophical and
Kautilya ethical framework) and
➢ Skilling Youth, increasing female participation
in labour force. Trayi(cultural context)
➢ Renewable energy to decrease import bill. • Kautilya asked the King to
➢ Trade agreements with like-minded countries remove all obstructions to
& regional blocks economic activity and provide
economic freedom to the
5 Trillion economy: Conclusion citizens.
• Higher economic growth can help increasing • So, incumbent govt should also
employment avenues for citizens & tax revenues for focus on Ease of Doing Biz
the Governments. • Thiruvalluvar’sThirukural
• Collectively, this results in improved living book advocates wealth creation
Thiruvalluvar through ethical means.
standards through higher expenditure on health & Tamil poet and
education by both the citizens and the State. philosopher
• Govt should provide equal
opportunity for new

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 entrepreneurs, incumbent
govtshould avoid Pro-Crony
policies of Manmohan Singh
Govt.→ improve EoD.
• There should be no shame in
privatization (Strategic
disinvestment) of the
government companies,
Because after privatization
their profitability has
increased.
• Adam Smith's book ‘An
Inquiry into the Nature and
Causes of Wealth of Nations’
described “Invisible hand of
the free market is instrumental
AdamSmith
(Father of in economic growth”.
Economics) • But Government intervention
in free market often harms
more than it helps.
• “We should assume every man
is a dishonest person, his
actions are always driven by
private interest. So, effective
supervision required”.
• So, we’ve to regulate the
Shadow banking sector more
vigorously.
• We must deal with the wilful
defaulters responsible for the
high level of NPA. Use
Artificial intelligence,
David Hume,
Machine Learning etc. also
Scottish
envisaged and create PSBN
Philosopher
network.
• American Sharemarket
regulators has 15x times the
number of employees than
SEBI. So, we also need to
increase manpower in
regulatory bodies.
Maslow’s Motivational
Pyramid→“Individuals are not
driven just by physical / material,
Motivation but they also have needs of self-
esteem and self-actualization”.
Confucius: “if Government guides
the peoplewith penalties → they’ll
shamelessly evade the law. But if
the Government guides them
withvirtue → people will become
upright.”
Therefore we should use the ideas
of behavioral economics to
increase their morale to: Give up
subsidies andHonestlypaytaxes
• Adam Smith’s book ‘The
Theory of Moral Sentiments’
described, “while people are
sometimes selfish, they also
derive pleasure from seeing the
happiness of others.
• Absence of such mutual
sympathy / trust can result in
financial disasters, as seen in
Subprime Crisis, Global
Financial Crisis, India’s NPA
& Wilful defaulters.
Trust • So, trust is a ‘public good’
similar to ‘public park’-
everyone benefits from it.
Government &entrepreneurs
should try to build trust with
citizens and with each other.
Economic Policy Uncertainty and ES2019
• Economic Policy Uncertainty Index (EPU) index
Started in 2016, by three US-based economists—
Scott Ross Baker, Nick Bloom and Steven J. Davis.
• They capture countries’ newspapers’ headlines
related to economic
policy uncertainty,
and then rank the
nation accordingly.
• 2011-12: economic
policy uncertainty
was the highest in
India.
• 2G Scam, Coal
allocation scam,
Subprime Crisis, Global Financial Crisis.
• During this time, the government did not take the
corporate friendly reform decisions or reverted
its original decisions fearing the media scrutiny,
judicial scrutiny, protest by the labour unions.
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 Union Budget (2016) proposed
to impose income tax on the
money withdrawn by subscriber
from his EPFO fund. Later, due
to labour unions backlash it was
reverted.

Union Budget (2019) proposed

to hike surcharge on the income
tax of super-rich, then due to a
backlash by foreign investors, it
was reverted.
• 2016-17: increased due to Demonetisation, GST. Judiciary, legislature and
But during this stage it was not as bad as the executiveshouldrespect each
uncertainty during 2011-12. other's boundaries. Executive
• From 2014 onwards India’s EPU has declined Respect and legislature should not create
although in a zigzag manner with occasional boundaries a vacuum which could
spikes during Demonetization - GST etc. Whereas encourage Judicial Overreach
Global EPU has increased in zigzag manner- due to such as firecracker ban, or no
the Policies pursued by Donald Trump, BREXIT, selling of liquor on highway
Iran, N.Korea, OPEC, Trade war between USA and hotels, which may create new
China etc. challenges in economy.
• During high EPU: domestic investors hold up Government / Regulators should
their decision to invest into financial market. They maintain broad consistency in
prefer to invest in gold (large BOP), land / real actual policy with the forward
estate (Black money). FPI inflows decline during guidance. They should reduce
are volatility of exchange rate. ambiguity/arbitrariness in policy
• However, the relationship between FDI growth implementation. E.g.
and volatility of exchange rate is weak. Because 1. 2018-Dec: Monetary policy
Foreign Direct Investors are entering a market for Committee keeping
long term. They look at multiple factors beyond just “Calibrated Tightening”.
the exchange rate. They look at taxation, monetary Means in the next meeting
policy, consumer sentiment etc. all which are they would either ‘hold', or
reflected by EPU. 'increase' repo rate. No
• Low growth of FPI, FDI = Corporates are Keep chance of cutting the repo
deprived of the new capital from the domestic and consistency in rate. Yet in 2019-Feb, they
foreign investors → it affect the factory expansion, promises cut the repo rate.
job creation and GDP growth. 2. Similarly, Government
should avoid changing the
Addressing Economic Policy Uncertainty (EPU): goalposts and deadlines of
ES2019 Fiscal Responsibility and
Reducing economic policy uncertainty is critical for Budget Management Act.
both domestic investment and foreign investment. Then consistency becomes
Therefore, ES2019 suggested following reforms: hard to find and harder to
follow.
Top-level policymakers must • “What gets measured gets
ensure that their policy actions acted upon”. Therefore,
are predictable. E.g. Government must monitor
1. From which date Bharat its performance in the
Stage emission norms will Economic Policy
become effective? Uncertainty Index on a
Makingpolicies 2. From which date GAARor quarterly basis. We should
more E-Way Bill will become construct India-specific sub-
predictable effective? indices of economic

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 uncertainty To monitor our
performance.
• The actual implementation
of policy occurs at the lower
Monitoring levels, where ambiguity gets
Policy created and it compounds
implementations the economic policy
uncertainty. Therefore, staff
should be trained and
implementation processes
should be certified (by NITI
etc) before implementing
policy.
• Poorly drafted laws full of
ambiguities, amendments,
clarifications and
exemptions = endless
litigation. E.g. Provisions
related to Capital Gains Tax
in the Income Tax Act 1961:
Vodafone-Hutch case.
Policy Uncertainty: Conclusion
• Indian faces economic uncertainty from many
fronts which are beyond our control e.g. Poor
monsoon, BREXIT, OPEC Oil cuts, Geopolitical
disturbance in the Korean Peninsula and Western
Asia (Iran), protectionism and tariff wars.
• While policymakers cannot control above
‘economic and diplomatic uncertainties’, they can
definitely control economic policy uncertainty.
• Successive economic surveys have found that
greater private investment is necessary for
economic growth in India. EPU can spook investors
and spoil the investment climate in the economy,
therefore Government must strive for 100% policy
certainty on the economic fronts.
$5 TRILLION ECONOMY AND ATMA-NIRBHAR
BHARAT
• 2020-March: Government of India initiated nation-
wide lockdown to prevent the spread of
Corona/COVID-19 pandemic.
• This lockdown affected the in come and livelihood
of everyone from corporate companies to common
citizens of India.
• Therefore,to revive the economy ,PrimeMinister of
India launched AtmaNirbharBharat stimulus
package in 2020-May to revive the Indian economy.
• It’scentred on five pillars of– Economy,
Infrastructure, System, Demand and Vibrant
Demography
If govt. tried to give bigger fiscal stimulus then-
• Rise in Fiscal Deficit will result into low rating by
Credit Rating Agencies. This has impact on Flight
of Foreign Investors
• Currency exchange rate volatility.
• If the deficit is monetized by RBI printing more
currency → demand side inflation like Post-WW1.
Conclusion
• Thus, Atmanirbharbharat focuses on the well-being
of the poors, credit to MSME, ease of doing biz for
the corporate sector, reforms in agriculture and
catalysing the development of infrastructure.
GNP TO NNP TO PER CAPITA INCOME
• Primary income (or factor income) = wages,
interest, profit, rent
• Secondary income (or transfer payments) = gifts,
donations, charities, fines
• GNP is the total value of final goods and services
by normal residents of India within an accounting
year.
• GDP includes the contribution made by non-
resident producers - who work in the domestic
territory of other countries - by way of wages, rent,
interest and profits. For example, the income of all
people working in Indian banks abroad is the factor
income earned abroad.
• Net factor income from abroad is the difference
between the income received from abroad for
rendering factor services and the income paid for
the factor services rendered by non-residents in the
domestic territory of a country.
GNP= India’s GDP + Primary income earned by
residents from overseas- Primary income earned by
non-residents from India.
In brief, GNP (Market Prices) = GDP + NFIA (net
factor income from abroad).
• GNP ignores secondary income, the incomes from
sale of second hand (used) goods.
• Whenever something is produced, capital assets get
consumed due to wear and tear. This wear and tear
is called Depreciation. Since, depreciation does not
become part of anybody’s income, so it has to be
subtracted.
Net National Product (NNP at Market Price) = GNP -
Depreciation.
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 • It does not take into account the welfare dimension
Net Domestic Product (NDP) = GDP – Depreciation (poverty, literacy, political liberty, environment
etc).
• However, here we are getting the NNP at ‘Market
Prices’. We’ve to convert it to Factor cost. • FC includes rent, wages, interest
and profit. FC is used for
NNP (Factor Cost) = NNP (Market Price) (-) Indirect estimating growth (e.g. our
Taxes (+) Subsidies. annual GDP numbers)
➢ NNP (Factor Cost) is the
• Theoretically ‘net’ is a better measure of the National Income of India
health of an economy than ‘gross’ but it is difficult • MP = FC + Net Indirect Taxes
to estimate net values. So GDP & GNP are (taxes on goods and services )
commonly used measures . • Net Indirect Taxes = Indirect
FACTOR Taxes – Subsidies
COST (FC) • Therefore, GDP at MP = GDP
Vs at FC + Net Indirect Taxes
MARKET • GDP at MP can increase
PRICE merely by increasing the taxes,
(MP) even without increase in
NET ECONOMIC WELFARE
production
• The major problem of GNP as a measure of welfare
Current→Values estimated at
is that it measures the commercial transactions
prevailing (current) prices
taking place in the economy while the welfare of the
individuals depends on many other non- • GDP at current prices is called
transactional aspects. Nominal GDP
• This concept of NEW was popularized by Paul • Govt always gets its data in
Samuelson. terms of Nominal GDP and
then converts it to Real GDP
• NEW ECONOMIC WELFARE = GNP +
Housewives’ Services + Value of Leisure – • GDP at current price can
Expenditure on defence – Cost of Environmental increase because of inflation –
degradation. not a true indicator of increase
in production. So it is not used.
• Practically, it is tough to estimate this. Therefore, it
was not widely adopted.
Constant→ Values estimated at the
CURRENT prices of a base year
PER CAPITA INCOME (PCI) PRICES • For India, the base year is 2011-
• Per capita income (PCI) measures the average Vs 12 (earlier it was 2004-05)
income earned per person in a given area, in a CONSTANT • GDP at constant prices is called
specified year. PRICES Real GDP
• It is calculated by dividing the area's total income • Growth is always estimated at
by its total population. constant price
• It is not a satisfactory indicator of economic • So, when we say that the GDP
development because it increases if the overall growth rate of India in 2016-17
national income increases, without regard to the was 6.5 %, it is estimated at
composition of the national income. factor cost and constant prices.
• For example, even if the govt produces a lot of • GDP at Constant Prices is called
weapons during war, PCI will go up. Real GDP – it cannot increase
without a real increase in
production.

GDP AND NATIONAL INCOME

Gross National Income (GNI)

• According to OECD→ GNI as GDP + NET
receipts from abroad (wages, interest, profit, rent)

373
 plus net taxes & subsidies receivable from abroad.
Here, ‘Wages and salaries’ from abroad = ‘Guest’
workers who reside abroad for less than 12 months
and whose centre of economic interest remains in
their home country
National Disposable Income
• National Disposable Income= NNP + Other
Current Transfers from rest of the world
(remittances, gift, donations etc.)National
Disposable Income gives an idea of what is the
maximum amount of goods and services the
domestic economy has at its disposal.
Personal Disposable Income
• Personal Income - Personal Tax Payments (e.g.
income tax) - Non-tax Payments (e.g. fines)
World Development Report by World Bank
• World Bank has published it annuallysince 1978.
• 2020- theme: Trading for Development in the Age
of Global Value Chains.
• Earlier, World Bank used above income
classifications for analytical purposes only. But
since 2018, high income countries required to pay
“extra surcharge” on loan interest by International
Bank for Reconstruction and Development
(IBRD).
LIMITATIONS OF GDP
• Impact on environment may be harmful despite
increase in GDP.
• Only give average figure and hide stratification
• Conditions of poor not indicated
• Gender disparities not revealed.
• Does not matter how wealth increase... by war or
demand
• Does not measure sustainability of growth
CRITICISM OF GDP & PER CAPITA INCOME
1. GDP doesn’t give us true picture of Indian
economy because:
➢ Presence of unorganised sector of economy
implies that, not all the production data is
captured.
➢ To avoid any scrutiny by income tax and GST
tax officials, the businessmen deliberately show
low level of production during the surveys
conducted by CSO/NSSO/NSO/MOSPI.
➢ Large size of parallel economy which functions
on black money and cash.
2. Provides only quantitative picture and does not
consider the qualitative aspects / negative
externalities e.g. More coal based thermal power
production= more GDP, disregarding how much
pollution it created.
➢ So, Economist Peter Wood (1980s) came up
with the Green accounting & Green GDP
concept to consider environmental costs as
well.
3. Ignores non-marketed activities e.g. domestic
work done by mother.
4. Ignores the Opportunity Cost e.g. A child labour
produced ₹ 25000 rupees worth firecracker
annually which will be added in GDP. But, child
labourer could not pursue education else he could
have become a doctor/engineer and produced ₹
5,00,000 worth of annual goods and services - such
angles are not considered in computing GDP.
5. Ignores inequality of income among people.
➢ So, later on Gross Happiness Index, Physical
Quality Of Life Index, Human Development
Index etc were invented.
Two data collection agencies in India
• Estimates National Income
Central • CSO with new series of national
Statistical accounts with 2011-12 base year
Organisation for computing size of economy
(CSO) growth.
• It includes data on unorganised
manufacturing and services.
• Collects data on employment,
National poverty, consumption,
Sample expenditure, etc
Survey • Sample Surveys conducted
Organisation annually, but Large Sample
(NSSO) Surveys conducted every 5
years .
Economic Growth Vs Economic Development
Growth If the production of goods and
services increases, we call it
Economic Growth
It means that process of Economic
Growth which leads to improvement
in the general welfare of people is
Development called Economic Development. It
means progressive changes in the
socio-economic structure of the
country.
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Sustainable Development is development that meets
the needs of the present generation without
compromising the ability of future generations to meet
their own needs.
Q. Increase in absolute and per capita real GNP do
not connote a higher level of economic development,
if_______________(CSE-2018)
a) Industrial output fails to keep pace with agricultural
output.
b) Agricultural output fails to keep pace with
industrial output.
c) Poverty and unemployment increase.
d) Imports grow faster than exports.
PREVIOUS YEAR QUESTIONS
2019 Do you agree with the view that steady
GDP growth and low inflation have left
the Indian economy in 2019 good shape?
Give reasons in support of your
arguments.
2019 ‘In the context of neo-liberal paradigm of
development planning, multi-level
planning is expected to make operations
cost effective and remove many
implementation blockages.’-Discuss.
2018 How are the principles followed by the
NITI Aayog different from those
followed by the erstwhile Planning
Commission in India?
2017 Among several factors for India’s
potential growth, savings rate is the most
effective one. Do you agree? What are the
other factors available for growth
potential?
2015 The nature of economic growth in India in
described as jobless growth. Do you agree
with this view? Give arguments in favour
of your answer.
2014 Capitalism has guided the world economy
to unprecedented prosperity. However, it
often encourages short-sightedness and
contributes to wide disparities between
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the rich and the poor. In this light, would
it be correct to believe and adopt
capitalism driving inclusive growth in
India? Discuss.
INDICATORS – INFLATION
• Inflation is defined as a situation where there is
sustained, uncheckedincrease in the general
price level and a fall in the purchasing power of
money. Thus, inflation is a condition of price rise.
The reason for price rise can be classified under two
main heads:
a. Increase in demand
b. Reduced supply.
• Deflation is inverse of above definition. Deflation
occurs when the inflation rate falls below 0%
E.g.Suppose for Rs.100, last week you bought 10 pen.
This means that the cost of 1 pen was Rs. 10. This week
when you approached the same shop- keeper and paid
Rs.100 to get 10 pen, he gave only 5 pen. He also
explained that the price of pen has increased, and now
the price of one pen is 20.
INFLATIONARY AND DEFLATIONARY GAPS
In his book “General Theory on employment,
interest, money”, British Economist J.M.Keynes
(1883) said, “when economy is functioning at full
employment, aggregate supply will match aggregate
demand.” At this equilibrium, we will have ‘General
Price’ level → any increase → inflation, any decrease
→ deflation.
Aggregate Demand = Consumption(C) +
Investments(I) + Govt Purchases (G) + {Exports (X) –
– Imports (M)}
Inflationary Gap
It could have occurred because of:
• ↑ Money supply
• ↑ Propensity to consume
• ↑ Investment expenditure
• ↑ Fiscal deficit
• ↑ NET exports
• High growth → higher Aggregate demand → could
lead to inflation.
Deflationary Gap
It could have occurred because of
• ↓ Money supply
• ↑ Propensity to save / Consumer delaying purchase
with hopes of further fall in prices
• ↓ Investment expenditure
• ↑ Fiscal consolidation
• ↓ NET exports
• Depression / Recession that results into falling
‘Aggregate demand’.
Deflationary gap→ Aggregate supply > Aggregate
demand (at full employment level)
When inflation increases,
workers demand higher wages to
Inflationary keep up with the cost of living →
Spiral firms pass these higher labor
costs on to their customers →
higher prices → more inflation →
......
Fall in prices → lower profit to
firm → lower production, lower
Deflationary wages / workers laid off → lower
Spiral demand → lower prices → and
same cycle goes on.
Q. A rise in general level of prices may be caused
by___________________________(CSE - 2013)
1. An increase in the money supply.
2. A decrease in the aggregate level of output.
3. An increase in the effective demand.
Answer Codes:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Q.Economic growth is usually coupled
with__________________________(CSE - 2011)
a) Deflation
b) Inflation
c) Stagflation
d) Hyperinflation
INFLATION: TYPES BASED ON CAUSATION
It is “too much money chasing too
much goods”. Prices are rising
Demand because people have excess money
Pull → demands for goods and services
Inflation exceeds the available supply.
MGNREGA, pay commission, PM
KISAN scheme, Universal Basic
Income (UBI) could result into this.
Monetary When RBI printing of more money
inflation results in inflation
Price rise due to increased cost of
inputs e.g.
- Expensive crude oil → higher
Cost-Push costs for Transport Companies.
Inflation - Trade / labour unions’ protests /
strikes → wage hike.
- Natural disasters → Lower potato
/ chilly production → Chips makers
have to pay more for inputs.
When Cartels / Monopolists /
Profit – Oligopolists deliberately cut down
Push the supply / production or hike the
Inflation prices because of greed / profit
motive. E.g. OPEC group oil
production cut.
Linked to the “price/wage
inflationary spiral” i.e. when
inflation rises, workers demand
Built-in- higher wages to keep up with the cost
Inflation of living → firms passing these
higher labor costs on to their
customers as higher prices → more
inflation.
During war, Govt imposes price
controls and rationing to keep prices
under check. But the moment such
Repressed controls are withdrawn, prices will
Inflation go up (because traders will want to
cover up their previous losses by
raising prices). This is called
Repressed Inflation.
Persistent high inflation, high
Stagflation unemployment and low growth
resulting into a stagnant economy.
Term to denote episodic price rise in
one / small group of commodities
Skewflation while Inflation in the remaining
goods and services remain usual.
E.g. pulse / tomato / onion inflation
in india.
It is the measure of the total inflation
Headline within an economy, usually
Inflation presented in the form of CPI or WPI.
Core Headline inflation minus inflation in
inflation food & energy articles. Accordingly,
it can be CPI (Headline) or WPI
(Headline).
Philip curve we learned that
deflation → unemployment, so, RBI
tries to stimulate economy by
increasing the money supply, Govt
Reflation tries to give ‘fiscal stimulus’ by
reducing taxes / increasing public
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 procurement.... Such actions take
economy from deflationary path
towards inflation path, this is process
is ‘Reflation’.
Inflation that is part of a particular
economic system. A complete
change in economic policy would be
needed to get rid of it. e.g.
- To keep farmers happy, Govt
keeps raising MSP for wheat / rice
but not so much for pulses →
Structural inflation in pulses.
Inflation - APMC reforms not taken →
cartelization & hoarding → inflation
in vegetables.
- When global crude prices are
falling, Govt raises Excise / VAT to
get more money for their schemes,
so, petrol-diesel not getting cheaper
& so on…
Hoarding Accumulation of huge quantities of
inflation goods and releasing them into the
market in condition of scarcity at
higher prices.
Imported Country depends on imports has its
inflation: prices rising due to exchange rate.
Implications of Stagflation for policy making
Stagflation is considered to be a problematic
condition for governments to handle. This is because;
• It presents a situation when despite of low demand
the prices keep going up.
• When an economy is in recession, the governments
try to revive the economy by cutting interest rates
or increasing government spending to put boost
the demand, which leads to inflation.
• However, these inflationary measures cannot be
applied in stagflation because inflation is already
very high and such measures would further result in
prices spiralling out of control.
INFLATION TYPES BASED ON SPEED OF
INCREASE
Creeping ~4% per annum. It's regarded
Inflation: safe and essential for job
creation and economic growth.
Walking / Over 4% onwards → Running
Trotting Inflation is when it shifts to
Inflation: double digit.
Very high level. 20%-100%
and sometimes even 10,000% or
more, as observed in Germany
after Treaty of Versailles due
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Galloping / to monetized deficit. Modern
Hyperinflation: day Venezuela and Zimbabwe
due to mis-governance of
ruling parties resulting into
broken economy & shortage of
essential commodities. Here,
money becomes quite
worthless and new currency
may have to be introduced.
Q. Which one of the following is likely to be the most
inflationary in its effect? (CSE - 2013)
a) Repayment of public debt
b) Borrowing from the public to finance a budget
deficit
c) Borrowing from banks to finance a budget deficit
d) Creating new money to finance a budget deficit
Base Effect of Inflation
• Suppose price of 1 kg tomatoes = 100 (2010), 110
(2011), 120 (2012). So, as such their price is
increasing at the rate of ₹ 10 per year.
• However, the percentage rise in inflation over
previous year is 10% for 2011 (110 vs 100), and
9.09% for 2012 (120 vs 110).
• Thus, the choice of base (denominator) could make
the inflation look too high or too low even if the
price rise has been same as the same.
Q. A rapid increase in the rate of inflation is
sometimes attributed to the "base effect". What is
"base effect"?(CSE-2011)
a) It is the impact of drastic deficiency in supply due
to failure of crops
b) It is the impact of the surge in demand due to rapid
economic growth
c) It is the impact of the price levels of previous year
on the calculation of inflation rate
d) None of the statements
EFFECTS OF INFLATION ON INDIVIDUALS • Moderate inflation stimulates growth.
• Moderate inflation allows adjustment of prices.
Effect During During • Moderate inflation allows adjustment of real wages.
Inflation Deflation • Inflation may reduce the severity of economic
They make They make recession.
huge profits losses because • Tobin effect- can increase the investment.
because the prices of final
On price of final products fall Negative Impact
Businessman, product is rising faster than the • Real income of people would decrease.
Borrowers at a much faster cost of • Inflation is regressive in nature.
speed than the production→ • Would increase income inequalities.
price of raw lay-off workers
• Capital formation is adversely affected.
materials. to cut salary
• Interest rates were increased by RBI.
bill.
Salaried While they will • Promote hoarding and speculation. Thus Promotes
individual, benefit because generation of Black Money.
pensions suffer. the value • Standard of living would reduce.
(purchasing
Lenders suffer power) of COMBATING INFLATION OR DEFLATION
because even if money will
On borrowed increase, but Agency Fighting inflation Fighting
Fixed Income money is some workers / deflation
Groups, returned their employees will Tight / dear / Cheap / Easy /
Lenders ‘real lose their jobs RBI Hawkish Monetary Dovish - to make
Purchasing during deflation Policy to make the loans cheaper
Power’ would as per the Philip loans expensive
have declined Curve. Tax deduction / Tax deduction /
due to the fall in exemption / subsidy exemption /
Real Interest benefits towards subsidy type
Rate. producers to benefits to
Since rupee’s Reverse will decrease the cost of consumers to
purchasing happen. production. encourage
power will Curtailing Fiscal purchase /
decline, its Deficit. consumption.
exchange rate Curtailing schemes (e.g. cut GST on
value will and subsidies that are Television,
Currency weaken against Govt increasing money in Computers, Cars)
itself foreign the hands of Increasing the
currencies, as beneficiary without expenditure on
foreigners get increasing public projects
less keen to buy production. e.g. highway,
from India. Ordering RBI to dam etc. to boost
issue inflation demand in steel /
Q. Find correct statement(s): (CSE-2013) Indexed Bonds, cement industry
a) Inflation benefits the debtors. Sovereign Gold → workers get
b) Inflation benefits the bondholders. Bonds money →
c) Both A and B Essential demand →
d) Neither A nor B commodities act, towards inflation
Stock limits, .
IMPACT OF INFLATION minimum export
price, FCI’s Open
Positive Impact: Market Sale Scheme,
• Inflation is good for the economy upto reasonable Operation Greens for
limits. This according to RBI is 5%. TOP, Price

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 stabilisation fund, b) The Department of Economic Affairs
Offering higher MSP c) The Labour Bureau
to farmers to increase d) The Department of Personnel and Training
cultivation of a
particular crop etc. CPI (All India), NSO and Base Year: 2012

CPI, WPI, IIP & OTHERS Monthly CPI Components in (All Wt.
India) Index → (decreasing order)
German economist Etienne Food & Beverages 45.86
Laspeyres formula is used in Services: (Transport & communication 20.62
calculation of WPI, CPI and IIP > Health > Education > Recreation)
Laspeyre index. It is a weighted arithmetic Housing 10.07
mean (average) of a basket of Fuel & Light 6.84
commodities that tracks price / Clothing / footwear 6.53
production level against the base Misc. Personal care (soap etc) 3.89
year. Household goods & Services 3.80
German economist Hermann Pan Masala, Tobacco, Intoxicants 2.38
Paasche Paasche’s index tells us what today’s Total Weight 100
Index “Basket” of commodities, would
have cost at the base year’s price. For Individual CPI for Urban and Rural areas, these
American Economist Irving weights are assigned differently. E.g. CPI rural has
Fisher Index Fisher’s index is the Geometric zero weight to housing & 54.18 weight to food and
mean of (Laspeyrese and Passche), beverages.
to give a more accurate picture.
Headline CPI The inflation figure arrived based
INFLATIONINDICES on all of the above components of
CPI (All India).
Inflation Index Agency Base Core CPI Headline CPI Minus Inflation in
year food & energy)
Consumer Price Index: 2012
1) Rural Inflation rate %: how is it calculated?
2) Urban Index value of Headline CPI (All India) was 148.6
3) All India. NSO, MoSPI (2019-Nov) and 140.8 (2018-Nov). Therefore,

Consumer Food Price 2012

Index (CFPI)

CPI Industrial Workers Labour 2001

(IW) Ministry’s
Labour Bureau
CPI Rural labourers 1986 Trend
(RL),Agri. labourers • CPI was towards Inflationary path in
(AL) UPA/Manmohan era.
• CPI was towards Deflationary path during Modi 1.0
Wholesale Price Index Economic 2011 era (2014-19)- mainly due to falling food prices.
(WPI) Advisor to Food commands ~46% weight in CPI calculation.
DPIIT,
• Modi 2.0 era (2019-May onwards): back to
Commerce
inflationary path due to oil, onion etc.
Ministry
Wholesale Price Index, EA-DPIIT, Base: 2011
Q. Which of the following brings out the 'Consumer
Price Index Number for Industrial Workers?(CSE-
2015)
a) The Reserve Bank of India

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WPI→ Monthly growth is zigzag although towards
deflationary path nowadays. During initial Modi raj it
even went into negative zone for some months due to
fall in global crude price (although since Union/State
Govts kept raising Excise/VAT so it was not felt in real
life).
Other Inflation Indices
Index Features
WPI covers only goods
Producer’s Price but not services.
Index (PPI)
Whereas, PPI covers both
goods and services. It
measures price change
from sellers’ perspective.
OECD nations use PPI to
measure inflation at
wholesale level. Their PPI
only measures price (and
not PRICE + Taxes).
2014: DPIIT setup Dr.
B.N.Goldar Committee to
explore this for India.
EA to DPIIT preparing
these experimental indices
separately for Railway
Experimental Service Services, Port Services,
Price Index Air Services, Postal
Services, Telecom
Services, Banking
Services, Insurance,
It measures the inflation in
the fees charged by Banks
for NEFT- RTGS, Mobile
Banking Business Banking, Card
Service Price by RBI. Transactions, Issuing
Demand Drafts / Bank
Guarantee, annual fees for
opening DEMAT account
etc. [Base Year 2011]
RBI quarterly survey of
~5k households across 18
cities, asking them what is
Inflation Expectation their ‘expected level’ of
Survey for inflation for the next 3
households months and 1 year.
Measures inflation in the
residential house prices in
selected Indian cities. 2018
Reforms →
RESIDEX by NHB changed base year
National Housing from 2012 to 2017.
BankNHB) NHB introduced new
indices to measure
inflation in Land Price,
Building Materials &
Housing Rental.
INFLATION OBSERVATIONS BY ES-2020
• The World bank observed that Inflation has
decreasing across developing nations between
(119%) 1993 to 4.8%(2018) because of:
1. Monetary and fiscal policy
2. Structural reforms to raise production.
• However, inflation is on rising trendin 2019 for
India.
CPI (Urban) << CPI (Rural). But
since 2018: CPI (Urban) >> Rural
Before 2018 due to higher level of food inflation
Some areas have witness higher
level of inflation than all India
2018-19 average. E.g. Lakshadweep
Andaman (geographical isolation),
Manipur (frequent highway
Bandh/blockades), Kerala (floods)
etc.
Thalinomics byES-2020
• Thalinomics is a concept to estimate how much ₹₹
a common person pays for a Thali (platter of
food) across India.
• Between 2015 to 2018, the Thali price has reduced:
1. Across all regions of India
2. For both veg and non-veg thalis.
• While Thali prices reduced between 2015-18, they
have increased in 2019.
• But allover, thali’s affordability has increased for
poor families.
• Consequently, a family of five people is able to save
>₹10,000/per year because of reduced prices.
• ES-2020 appreciated various schemes of current
govt. for:
1. Increasing food production and
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 2. Making food more affordable. • Prepared by EA-DPIIT, Base Year 2011, It’s
similar to IIP index focusing 8 core industries
Index of Industrial Production (IIP) • Descending order of weight →Refinery Products >
IIP is a monthly index prepared by CSO, Base Year Electricity> Steel> Coal> Crude Oil> Natural Gas>
2011 and Laspeyres Index Formula. Cement>Fertilizers.
IIP measures production of 407 item groups related to: • Collectively, these 8 industries command 40.27%
1. Primary goods→directly obtained from natural weight in the overall IIP.
sources e.g. Ores, Minerals, Crude Oil; And energy
goods such as Petrol, Diesel, Electricity (Both Q. In the 'Index of Eight Core Industries', which one
Renewable and Non-Renewable). of the following is given the highest weight?(CSE-
2. Capital goods→Plants & machinery used for 2015)
further production e.g. Boilers, Air & Gas a) Coal production
Compressors, Engines, Transformers, Commercial b) Electricity generation
Vehicles etc. c) Fertilizer production
3. Infrastructure/constructiongoods→e.g.paints,ce d) Steel production
ment, cables, bricks and tiles, rail materials, etc.
4. Intermediate goods→ which goes as input in Q. Which of the following are among the 8 Core
production e.g. Cotton yarn, Plywood, Steel Tubes/ Industries of IIP?______________(CSE-2012)
Pipes, Fasteners, etc. 1.Cement
5. Consumer durables→ Products directly used by 2.Fertilizers
consumers and having a longer durability (2 years 3.Natural Gas
or more). E.g. Pressure Cooker, TV, AC, Tyres, 4.Refinery products
Telephone , Mobile, Cars, Motorcycles, Scooters, 5.Textiles
Jewellery etc. Answer Codes:
6. Consumer non-durables→Products that are (a) 1 and 5 only
directly used by consumers and can’t be preserved (b) 2, 3 and 4 only
for long periods. e.g. Soyabean Oil, Milk Powder, (c) 1, 2, 3 and 4 only
Maida, Rice, Biscuits, Sugar, Tea, Cigarettes etc. (d) 1, 2, 3, 4 and 5

OTHER INDICES

Indexes Features
• By CSO, covering all
registered units under
Observations of ES2020 on IIP factories act, and
Compared to 2017, there has been a fall in IIP for 2018 electricity companies.
and 2019 because: Annual Survey • Not Surveyed: Defense
of Industries (ASI) Factories, Oil-gas
• NPA problem, ILFS-NBFC crisis - conracted
amount of Loans moving toward the MSME Storage, Restaurants,
• Protectionism in US/EU levying higher import Hotels, Café, Computer
taxes on Indian products → decreased demand of Services, Departmental
Indian goods in foreign market → decreased Indian Units such as Railway
production. Workshops, Govt. Mints,
• Persistent decreasing demand in automobile, real Sanitary, Water Supply,
estate sector → steel, cement production decreasing etc.
• Coal productiondecreases because of Excessive
Index of Service • Because IIP & ASI only
Production (ISP) cover manufactured
rainfall during monsoon, labour strike in mining
States in 2019. items &electricity, so,
CSO working on
• Trade war – Between china and USA impacted IIP
(Experimental) Index of
in India.
Service Production
covering Banking,
Index of Eight Core Industries
Insurance, Education,
Telecom and transport.

381
 • Order Books, Inventories o They have actively searched for a job in the past
and Capacity Utilization four weeks.
Survey. • According to BLS (Bureau of Labor Statistics),
RBI’s OBICUS • Quarterly survey to assess people who have stopped looking for work are not
consumption & regarded as unemployed.
investment demand. • They are not even counted as part of the labor
• HSBC’s Purchasing force.
Manager Index • If, for example, an unemployed person wins some
(PMI)→by surveying money through the lottery and stops looking for
400+ companies senior work as they enjoy their new found wealth, that
executives. person is not considered as unemployed.
Economic Health • SBI’s Composite Index
Indices by based on its loan portfolio, Sustainable Development Goal - 8
Commercial inflation, consumer
Banks spending etc.
• Suchindices have scale
of 0-100 points.
• Above 50 means
economic growth,
• Below 50 means
contraction compared to
previous period.
London’s Baltic Exchange
measures the cost to transport
raw material by sea. If
increasing → world economy A person is out of job on his
Baltic Dry Index is growing, and vice versa. own choice. Either he wants
Post-Subprime crisis fell, then higher wages or doesn’t want to
rose from 2016-18, then again work at all. Voluntary
falling in 2018 due to Voluntary unemployment is likely to
protectionism. Unemployment: occur when the equilibrium
wage rate is below the wage
necessary to encourage
Q. Find correct statement(s):______(CSE-2013)
individuals to supply their
a) Inflation benefits the debtors.
labour.
b) Inflation benefits the bondholders.
Choose the correct option: Involuntary Prevailing wage rates, but
a) Aonly unemployment: unable to find work due to
b) B only factors beyond his control.
c) Both A and B
d) NeitherAnorB TYPES OF INVOLUNTARY UNEMPLOYMENT
Types Features
• Economy goes through
INDICATORS – UNEMPLOYMENT boom-bust cycles.
• During bust / recession /
• Unemployment refers to a situation where a depression when
person of working age who is looking for work is workers are laid off on
unable to find employment. mass scale.
• According to the Bureau of Labour Statistics, for • Cyclical unemp-loyment
someone to be termed as unemployed, they have to exists when individuals
meet these three conditions: lose their jobs as a result
o They do not have any job, not even a temporary of a downturn in
or part-time job. aggregate demand (Total
o They are currently available for work. Cyclical demand).If the decline in
aggregate demand is

382
 persistent, and the • Labourers in
unemployment long- Agriculture, Salt-pans,
term, it is called either Seasonal Sugar Mills, Ice- factory,
Demand Deficient Tourist spots, Marriage
Unemployment in Catering-Orchestra etc.
general, or Keynesian Underemploymento • Person is employed but
unemployment. r not in a befitting position
• E.g. Maruti removed Educated or salary corresponding
3000 workers in 2019- unemployment to his qualification.
Aug because car sales • e.g. M.Com working as
are dip. peon in MNCs, M. Tech
• Frictional working as Bank clerk
unemployment, also etc.
called search • Technological
unemployment, occurs unemployment occurs
when workers lose their when men are replaced
current job and are in the Technological with machines e.g.
process of finding unemployment Textile / Automobile.
another one. • 2018-Sept: World
• There may be little that Economic Forum
can be done to reduce released “Future of
Frictional this type of Jobs Report”. It says,
unemployment, other by 2025, machines will
than provide better do more work hours than
information to reduce humans in 12 industrial
the search time. sectors. As a result, 75
• This suggests that zero million worker jobs may
unemployment is be lost, but 133 million
impossible at any one new jobs may emerge in
time because some robot repair/robot
workers will always be software design etc.
in the process of Hence urgently workers
changing jobs. need to be reskilled.
• It is a form of • Structural unempl-
unemployment where it oymentoccurs
may seem that some whencertain industries
people are employed, decline because of long
when in fact they are term changes in market
not. Also referred as conditions creates a
hidden unempl-oyment mismatch between the
• Common in developing skills needed by
countries where Open / Structural employers and the skills
increasing populations unemployment that workers possess.
result in a surplus in the • Lack of jobs when
Disguised labor force, where person’sskill/qualificati
Unemployment employees are working on is insufficient for the
in a redundant manner. jobs available in the
• E.g. Farming family of 6 market
persons produces • e.g. An IT Graduate
400kgs of wheat, but knows machine design
even if you remove 3 but demand is for Catia
persons still production pro experts.
remains at 400kgs of
wheat.

383
Disguised unemployment generally means_____ STRUCTURAL UNEMPLOYMENT AND
(CSE-2013) LABOUR MOBILITY
a) large number of people remain unemployed • Labour immobility is
b) alternative employment is not available likely to increase
c) marginal productivity of labour is zero structural un-
d) productivity of workers is low employment. This is
because those industries
OTHER TYPES OF UNEMPLOYMENT that are growing and need
labour, often called
Classical Unemployment sunrise industries, are not
• Also referred to as induced unemployment or real necessarily able to employ
wage unemployment. Caused when wages are the same workers who have been displaced in the
‘too’ high. declining, sunset industries.
• Occurs in situations where wages are higher than
the laws of supply and demand, forcing • There are three types of labour immobility:
companies to lay off the other employees. ➢ Geographical immobility
• It is caused by one of the following situations: ➢ Industrial immobility
o Powerful trade unions negotiate for salaries ➢ Occupational immobility
and benefits that are above the market
equilibrium. • Information failure also contributes to labour
o legal minimum wages are higher than the immobility because workers may be immobile
market equilibrium. because they do not know where all the suitable
o Wages set by long term contracts exceed the jobs for them are.
equilibrium due to recession, forcing a
company to lay off some workers.
• This explanation of unemployment dominated
economic theory before the 1930s, when workers
themselves were blamed for not accepting lower
wages, or for asking for too high a wage.

Regional Unemployment
• When structural unemployment affects local
areas of an economy, it is called ‘regional’
unemployment.
• Labour market immobility is that it can create
regional unemployment, which is a type of
structural unemployment.
Natural Unemployment
• Natural unemployment is defined as the lowest rate
of unemployment that an economy can support.
It can be considered as a baseline below which the
levels of unemployment cannot decline. So, an
economy that has reached this point is said to be at
full employment.
• It is termed as ‘natural’ because it is caused by
other factors that are independent of the state of
the economy. Natural unemployment may be due
to frictional, structural or classical unemployment.
• No economic or market fix can be made to
eliminate natural unemployment. Economists
consider a natural unemployment rate of around
4% to be an indicator of a healthy economy.
REASONS FOR UNEMPLOYMENT
• Economic slowdown: Currently, sectors like auto,
real estate, banking, construction, agriculture and
MSMEs - which contribute a considerable amount
towards India's GDP - are facing a sharp demand
slowdown.
• Preference of voluntary unemployment:
Voluntary unemployment is preferred over low-
paying jobs (i.e. adopting the ‘wait-and-watch’
policy for the right job profile and remuneration.
• Downgrading of employment: i.e. hiring of
candidates, with higher but superfluous
qualifications, for elementary positions (e.g. news
reports of PhD holders applying for peon vacancies)
• Lack of Industry: Academia cohesion: Disparity
between colleges’/universities’ curriculums and
industry requirements/ expectations.

384
 • Lack of vocational training: which renders many
unemployable Worker type Employed for this much
duration in a year
Government Steps for employment generation Main worker 6 months or more. (183 days to
• MUDRA Bank Micro Units Development be precise)
Refinance Agency (MUDRA) Bank Marginal worker Less than 6 months.
• Start Up India and Stand Up India Schemes
• Make in India Program profile and remuneration. Unemployment And Unorganized Sector
• The apparel and garments sector received a special • An unorganized sector firm is not registered under
package any law such as Shop Establishment Act, Factory
• Mahatma Gandhi National Rural Employment Act, Companies Act, Statutory Corporation,
Guarantee Act (MGNREGA) Govt org etc.
• Unorganized sector consists of individuals / self-
WORKERS CLASSIFICATION BY NSO employed workers engaged in non- trade-unionized
casual / seasonal work with irregular payments &
• Those who work for lack of social security coverage like EPFO/ESIC.
Self-employed themselves & charge 'fees'. • Government has enacted Unorganized Sector
They do not sell their labour Workers' Social Security Act, 2008 to provide
power to anyone else for a them with life and disability cover, health and
"wage", so they are their own maternity benefits, old age protection etc.
'boss'.
• Subcategories: Indicative Examples of Unorganized worker
1) Own Account
2) Partners / Owners / Small and marginal farmers,
Employers Of Business Firm landless agricultural labourers,
3) Unpaid Family Labourers share croppers, fishermen, those
Regular They sell their labour to employer, engaged in animal husbandry,
wage/salaried for predetermined wages/salary. Occupation beedi rolling, labelling and
employees Their job continuous round the wise packing, building and
year. construction workers, leather
Casual They sell labour for 'wage' but workers, weavers, artisans, salt
workers employerhires them for very short workers, brick kilns and stone
time period on daily or monthly quarries
basis. Nature of Attached agricultural labourers,
employment bonded labourers, migrant
Table 2: Number of workers in each category in PLFS: 2017-18 workers, contract and casual
labourers.
High to 1 2 3 4 5 Specially Toddy tappers, Scavengers,
low distressed Carriers of head loads, Drivers of
(Male, Own Casual salaried Unpaid 2% categories animal driven vehicles, Loaders
account worke employe family Employ and unloaders.
Female workers rs es laboure er (those
Combine r. who Service Midwives, Domestic workers,
d) give categories Fishermen and women, Barbers,
jobs to Vegetable and fruit vendors,
others)
Male only Same descendingorder as above. Newspaper vendors etc.
Miscellaneous Cobblers, Hamals, Handicraft
Unpaid Casual salaried Own 0.5% artisans, Handloom weavers,
Female
family worke employe accou Employe Lady tailors, Physically
only laboure r e r within
rs
nt female handicapped self-employed
worke labourer persons, Rickshaw pullers, Auto
rs s
drivers, Carpenters, Tannery
/Power loom workers and Urban
poor.
Census-2011 classification of workers

385
 Unorganised worker is a Person
Unorganised working in above sectors. There are
worker more number of workers
inunorganized sector, than in the
organized sector.
Informal worker is a Person who is
not in the formal records / contract
of a firm. So he could be in
Informal unorganized sector and he could be
worker even in ‘organized sector’ e.g.
driver / Security Guard/ gardener,
delivery boy of Zomato etc.

Table: Number of workers in each category in PLFS: 2017-18

Current If not employed even 1 hr work in

NSO SURVEYS Weekly a week
Status
Quinquennial Periodic Labour Force Current If not employed even 1 hr work in
NSO Employment Survey (PLFS) Daily Status a day in a given week.
surveys and
• It’s further subdivided into:
Unemployme
1. Principal Activity Status
nt Surveys
(PS)
Every 5 Annual,
2. Subsidiary Economic
years. Startedsince2017
Activity Status (SS)
Frequenc Starting from
• If person’s usual status (PP+SS)
y 1972 Last 2017’sresultannounce Usual Status was “Unemployed” for majority
ofSurvey survey done din 2019. (US) of the year →he is deemed
in 2011-12.
unemployed.
Then
discontinued • In official reports, this figure is
given more prominence.
Non- 75% of the surveyed
agricultural house should have a • 2019-Jun: NSSO’s periodic
workers in minimum one class10 labour force survey (PLFS) says
Househol rural and pass person. unemployment rate is 6.1% as
ds which urban areas per (US PS+SS: 2017) which is
are Both urban & rural, highest in last 45 years. **
surveyed agro & non-agro
by NSO covered. WORKER POPULATION RATIO (WPR)
It is the percentage of employed persons in the
population.
UNEMPLOYMENT RATE (UR)
• Labour force→Those who are 'working' (or
employed) and those 'seeking or available for work'
(may called as involuntarily unemployed).
• Unemployment rate finds involuntarily
unemployed persons via following formula:

386
 LABOUR FORCE PARTICIPATION RATE E.g.Employment-Unemployment
(LFPR) Household Survey (NSSO), Annual Labour
• LFPRis the percentage of a persons in labour force Surveys: Force Survey (Labour Bureau)
(i.e. working or seeking or available for work) in the E.g. - Economic Census (by
population. MOSPI), Annual Survey of
Industries (MoSPI), Unorganized
Enterprise Sector Surveys of Industries and
Surveys: Services (NSSO), Quarterly
Employment Survey (QES)
(Labour Bureau)
E.g. - Employees’ Provident Fund
2017→37% (male + female in rural + urban combined). Social Security Organization (EPFO),
It can’t be 100% because there will be children, elderly Schemes: Employees’ State Insurance
outside the ‘15-59’ age group meant for workers. Corporation (ESIC)
Administrative It includes tax returns and filings,
data: pension and medical insurance
programs
It includes estimates via
Data from MGNREGA, MUDRA, job
government creations under programs such as
schemes: ICDS, PMKVY, DDUGKY etc.
Emerging GSTN, Big Data analytics
sources:

URBAN EMPLOYMENT
ES20 observed between 2004 to 2017, LFPR • India is in the midst of a
(Female: rural+urban) steadily decreasing because: massive job’s crisis.
• More and more proportion of women pursuing The unemployment rate
higher studies → their entry in the job market is has reached a 45-
delayed. yearhigh (6.1%) in
• Rising in income of (some) rural men → their wives 2017-18 as per data
have stopped working as labourer and just playing from the Periodic
domestic housewives role. Labour Force Survey (PLFS) report of the National
• Increase dmechanization of agriculture & animal Sample Survey Office (NSSO).
husbandry → Drop in demand for female • According to the PLFS report, the unemployment
agricultural workers. problem is especially aggravated in India’s cities
• Drop in textile/leather exports due to US/EU and towns.
protectionism → decrease in demand for female • Aside from unemployment, low wages and
workers precarity continue to be widespread.
• Drop in real estate sales → decreased construction • Centre for Sustainable Employment, Azim Premji
of new buildings →drop in female laborers University, recently published policy brief
• Cultural factors, social constraints and patriarchal “Strengthening Towns through Sustainable
norms restricting mobility and freedom of women. Employment”, which propose the creation of a
• Many rural / small-town girls don’t have require National Urban Employment Guarantee
knowledge of computer and English to get jobs in Programme.
emergent Startup sector.
Idea of an urban employment programme
Prudential solution will be government schemes for • The idea of an urban employment programme is
skill development and entrepreneurship among women. gaining traction in political and policy debates.
• In Madhya Pradesh, the State government has
UNEMPLOYMENT DATA launched the “YuvaSwabhiman Yojana” which
provides employment for both skilled and unskilled
workers among urban youth.

387
• Green New Deal: In the United States of
America, ‘Green New Deal’ proposals provide for
a ‘Green Job Guarantee’ which enshrines ‘a legal
right that obligates the federal government to
provide a job for anyone who asks for one and to
pay them a liveable wage’.
• Given the State’s relative neglect of small and
medium towns and to avoid migration to big cities,
such a programme can cover all ULBs with a
population less than 1 million.
• In the context of the present employment crises, it
is worthwhile considering to introduce an
employment guarantee programme in urban
areas.
• Incentivizing industry - Reducing corporate tax,
easing lending norms and relaxing GST rules on a
short-term basis are some of the reforms that could
give companies more room for hiring and boosting
productivity.
• The public investments in health, education,
police and judiciary to create many government
jobs.
• The government should introduce reforms to
quell the wage gap and get more women to
become a part of the country's workforce.
• India will have to shed its service-led structure and
transform into an innovation-driven economy and
focus on becoming a creator rather than an adopter.

Conclusion Skilling and Apprenticeship is the need of the hour

• An urban employment guarantee programme
not only improves incomes of workers but also has
multiplier effects on the economy.
• It will boost local demand in small towns,
improve public infrastructure and services, spur
entrepreneurship, build skills of workers and
create a shared sense of public goods.
• Hence, the time is ripe for an employment
guarantee programme in urban India. Hence we
need new ways to promote the sustainable
development of India’s small and medium towns.
• Another novel aspect is the creation of a skilling
and apprenticeship programme for unemployed
youth with higher education who can sign up for a
contiguous period of 150 days (five months), at
Rs.13,000 a month for five months.
• These employed workers can assist with
administrative functions in municipal offices,
government schools, or public health centres, and
for the monitoring, measurement, or evaluation of
environmental parameters.

WAYS TO CREATE JOBS

• Shift development focus towards labour intensive
sectors to create more jobs, such as food
processing, leather and footwear, wood
manufacturers and furniture, textiles and apparel
and garments.
• Cluster development to support job creation in
micro, small and medium enterprises (MSMEs),
with a specific focus on incentivizing these
MSMEs to grow bigger to generate more jobs.
• Formalisation of workforce - where growth in
jobs must be inclusive and new jobs need to be
decent and secure with better work conditions
including social security benefits and the right to
organise.
• Expansion of the organized sector to create well-
paid high productivity jobs.
• Greater focus is required on better and relevant
skilling opportunities so as to compete with
neighbours and global competitors.
• Expansion in export market by developing Coastal
Employment Zones (CEZ), using better
technology, and improving on quality to remain
competitive.

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 CH-15 INFRASTRUCTURE
• Infrastructure is the
set of basic facilities
that help an
economy to function
& grow such as
energy, irrigation,
roads, railway &
telecommunication.
• Infrastructure is the ‘lifeline’ of an economy as
protein is the lifeline of the human body. Whichever
sector be the prime moving force of an economy,
i.e., primary, secondary or tertiary, suitable level of
infrastructure presence is a pre- requisite for growth
and development.
• This is why the Government in India has always
given priority to the developmental aspects of
the sector. But the level of preparedness and
performance had been always less than required by
the economy.
• Infrastructure provides supporting services in the
main areas of industrial and agricultural production,
domestic and foreign trade and commerce. These
services include roads, railways, ports, airports,
dams, power stations, oil and gas pipelines,
telecommunication facilities, the country’s
educational system including schools and
colleges, health system including hospitals, sanitary
system including clean drinking water facilities and
the monetary system including banks, insurance
and other financial institutions. Some of these
facilities have a direct impact on production of
goods and services while others give indirect
support by building the social sector of the
economy.
• Basically, the goods and services usually requiring
higher investment, considered essential for the
proper functioning of an economy is called the
infrastructure of an economy. Such sector might be
as many as required by a particular economy such
as power, transportation, communication, water
supply, sewerage, housing, urban amenities, etc.
• Since, infrastructure benefits the whole economy, it
has been often argued by the economists that the
sector should be funded by the government by
means of taxation, partly not wholly.
• Indian infrastructure sector is clearly overstrained
and has suffered from underinvestment in the
post-reforms period.
• Infrastructure bottlenecks are always constraint
in achieving a higher growth for the economy. India
389
needs massive investment, both from the public and
private sectors, to overcome infrastructure
bottlenecks.
• Investments by the public and private sectors are
not alternatives, but complimentary to each other
as the required investment is very high.
• Public investment in the sector depends upon the
ability to raise resources (capital) in the public
sector and this in turn depends upon the ability to
collect the user charges from the consumers.
• Some divide infrastructure into two categories —
economic and social. Infrastructure associated
with energy, transportation and communication are
included in the former category whereas those
related to education, health and housing are
included in the latter.
Infrastructure
Economic Social
BASIC WATER & INVESTME
TRANSPO RURAL & COMMUNI
INDUSTRI ENERGY SANITATI NT
ES ON
RT URBAN CATION
MODELS
Road Railways Waterways Inland Waterways
Infrastructure sector received a push of Rs 5.97 trillions
in the budget 2018-19 up from Rs 1.91 trillion allocated
to infrastructure in 2014-15.
Infrastructure sector has following characteristics:
• Sometimes a natural monopoly e.g. Railways (and
once upon a time even aviation and telecom sector
in India).
• Sunk costs are high. It's the investment that cannot
be recovered even when the firm go out of business.
e.g. If airport closed down, airstrip's asphalt will
have little or no resale value because very bulky to
dig-off and transport.
• ‘Output’ is often Non-Tradable. e.g. A road /
bridge / airport constructed at one place cannot be
‘transferred’ to another place unlike a box of
carrots.
• Sometimes in tangible in nature e.g.we can’t
touch spect rumor electricity.
• Consumption is often ‘Non-Rival’ in nature e.g.
One person using a road or street light it doesn’t
make that product ‘unavailable’ for others.
• Price Exclusion is often difficult. A rural road or
street light can’t be ‘denied’ to a person who is not
 paying taxes or user-fees. (whereas if a person
cannot afford iPhone then he is excluded from
buying it.)
• Usually creates positive externality: e.g. new
railway station / airport → that much more business
for taxis & hotel owners in the surrounding area.
Sectors granted
Category ‘infrastructure’ status by
Finance Ministry; Dept. of
Economic Affairs.
Transport & Roads and bridges, Ports,
Logistics: Shipyard, Inland Waterways,
Airport, Railway, tunnels,
bridges, Transport, Logistics
Infrastructure.
2019-Feb: Commerce
Ministry released ‘Draft
National Logistics Policy’
Energy Electricity, Oil, Gas
Water & Water supply & treatment,
Sanitation Sewage/Solid Waste
Management, Irrigation
Communication Telecommunication
Social & Hospitals, Education
Commercial Institutions, Sports
Infrastructure Infrastructure, Tourism
infrastructure -hotels,
ropeways and cable cars etc.
Industrial Parks, food parks,
textile parks, SEZ etc.
Cold storage, Soil-testing
laboratories
Affordable Housing
Benefits of getting “Infrastructure Status” to any
sector:
• Govt could give them tax benefits, lease public
land at a token price, faster environment
clearance, automatic FDI approval etc.
• RBI could help them by relaxing the External
Commercial Borrowing (ECB) norms, Debt
restructuring (e.g. RBI’s 5/25 rule), Changing PSL
norms etc.
• SEBI could relax norms for REITS/InvITs etc.
funds to help them mobilize capital easily for the
infrastructure sector.
• IRDAI & PFRDA could oblige insurance and
pension companies to invest minimum % in
infrastructure companies etc.
• They could get easier funding from World bank
& other multilateral banks.
Relation Between Infrastructure & Economic
Development:
• Increase in investment: The development of
agriculture to a considerable extent depends on
development of irrigation, power credit,
transportation, marketing, education and training,
research and development and other facilities.
• Industrial development: It also depends on a
sound infrastructure base to a large extent.
• Employment generation: Infrastructure improves
mobility, productivity and efficiency of labour.
• Trade & commerce: Infrastructure facilities play a
vital role in the development of trade and
commerce. In fact they act as a platform for the
expansion of trade and other commercial activities
at a rapid speed.
• Thus, infrastructure development can have a
significant impact on economic growth. For low
income countries, basic infrastructure such as
water, irrigation and to lesser extent transport are
important. As the economies mature into middle-
income category, the share of power and transport
and telecommunications in infrastructure and
investment increases.
• Also, infrastructure not only contributes towards
the development of backward regions and removal
of regional imbalance but also acts as an
instrument of social change. Extensive studies
undertaken by the World Bank show that 1%
increase in investment in the stock of
infrastructure leads to a corresponding 1%
increase in the GDP of a nation.
INFRASTRUCTURE: MINING AND BASIC
INDUSTRIES
Basic industries are industries which supply their
products to manufacture other goods. Examples: Iron
and steel, copper, aluminium, chemical etc.
Capital goods Goods that are used in
industries producing other goods e.g.
textile machinery, conveyor
belts, mining equipment etc.
Heavy industries Producing large and heavy
products e.g. Ship building,
bulldozers, industrial
machinery, electric
transformers etc.
Ministry of Heavy Industries & Public Enterprises:
Dept • Department of Heavy Industry
390
 • Department of Public transport infrastructure to create an integrated
Enterprises: is responsible for: steel hub in the Eastern India.
1) Allotting Ratna Status • Nodal Ministry: Steel Ministry will coordinate
2) Conduct Public with other Central Ministries, State Governments
Enterprises Survey and Private Players.
Autonomous • National Automotive Testing
and Research and Ministry of Chemicals & Fertilizers:
Development Infrastructure
Project (NATRiP) - • Department of Chemicals and
implements FAME-India Dept Petrochemicals
project for faster adoption of • Department of Fertilizers
electric vehicles. • Department of Pharmaceuticals
PSU • Bharat Heavy Electricals Ltd. • Fertilizers Industry Coordination
(BHEL) etc. Attached Committee (FICC).
• Cement Corporation of India • National Pharmaceutical Pricing
Ltd. Authority (NPPA)
• Hindustan Newsprint Ltd • These bodies are set up under
• Scooters India Ltd. either Societies Registration Act
• Bridge & Roof Co, or Multistate Cooperative
Engineering Projects (India), Societies Act.
Bharat Pumps and • Multi State Cooperative
Compressors Ltd. Societies: IFFCO, KRIBHCO
Autonomous • Bureau of Pharma PSUs of
Ministry of Steel India(BPPI) for supplying
medicines to PM Jan Aushadhi
PSU • Steel Authority of India Ltd (SAIL) Kendras.
• Rashtriya Ispat Nigam Ltd (RINL) • National Institute of
• National Mineral Development Pharmaceutical Education
Corporation (NMDC) iron ore. Research (NIPER)
• Salem Steel Plant (Tamilnadu), • Central Institute of Plastics
Bhadrwati Steel Plant (Karnataka), Engineering & Technology
Ferro Scrap Nigam Ltd, & a few misc. (CIPET), Ranchi
• Hindustan Insecticide Limited
Data: (HIL) - Responsible for mfg. of
Di- chloro-di-phenyl-tri-chloro-
Largest 1 2 3 ethane (DDT) for mosquito
Steel control in Nation vector borne
Producer China India (6%) Japan PSU disease control program
(54%) • Hindustan Antibiotics
Consumer China USA India (6%) • Karnataka Antibiotics &
(49%) Pharmaceuticals Limited
(KAPL)
Purvodaya Initiative (2020) • Bengal Chemicals and
• The eastern states of India Pharmaceuticals Ltd. (BCPL)
(Odisha, Jharkhand, West • Hindustan Fluorocarbon Ltd
Bengal, Chhattisgarh, and
Northern Andhra Pradesh) are Ministry of Petroleum & Natural Gas
home to 80% of Indian iron
reserves. • Directorate General of
• Purvodaya Initiative aims to Hydrocarbons: regulator for
setup new steel plants, Attached the upstream activities i.e. oil
offices:

391
 and gas exploration and
production activities.
• 2018: proposal to give it
statutory status was rejected.
• 2006’s Act: Petroleum and
Statutory Natural Gas Regulatory Board:
regulator for the downstream
activities i.e. laying of
pipelines and fuel marketing
• Bharat Petroleum Corporation
PSU Limited
• Hindustan Petroleum
Corporation Limited
• Engineers India Limited -
consultancy services for
petroleum refineries and other
industrial projects.
• Gas Authority of India, Indian
Oil Corporation, Oil India,
• Oil & Natural Gas Corporation
(ONGC),
• ONGC-Videsh Ltd (OVL) -
associated with foreign
exploration projects like
Sakhalin (Russia), Al-Furat
(Syria), Greater Nile (Sudan),
San Cristobal ( Venezuela).
ES:2016-17 on Petroleum And Gas Reserves
• Dutch Disease: Discovery of Natural Gas in
Netherlands resulted into Higher inflow of Foreign
Currency ($) for import, investment, bribes to win
oil exploration rights which made Local currency
strong → Non-Energy Exports decline (Agri, textile
etc.) → farmer shift to work in oil/gas wells &
refineries. This resulted into food shortage and
resultant hyperinflation and so the food riots.
• Resource Curse or Paradox of Plenty: Venezuela
ranks 1in oil reserves in OPEC group yet food riots.
Because of 'Dutch Disease'.
• Resource Curse in context of India: Chhattisgarh,
Jharkhand have large mineral wealth which resulted
into mining mafia, Naxalite, politician nexus,
bribery, corruption, ransom, rent- seeking. This led
to prevalence of high level of poverty, malnutrition.
Q. Find correct statements: (CSE-19)
1. Petroleum and Natural Gas Regulatory Board
(PNGRB) is the first regulatory body set up by the
Government of India.
2. One of the tasks of PNGRB is to ensure competitive
markets for gas.
3. Appeals against the decisions of PNGRB go before
the Appellate Tribunals of Electricity.
Codes:
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1,2 and 3
Ministry of Mines
Mining sector in India contributes about 2.1% to our
GDP. India has huge mineral potential, especially in
relation to iron ore, bauxite, coal, diamonds, and heavy
minerals sand. But only 10 percent of the potential area
has been explored and 1.5 percent is being mined.
Attached • National Mineral Exploration
offices Trust
• Geological Survey of India
• Indian Bureau of Mines
PSU • National Aluminum Company
Limited (NALCO),
Bhubaneswar;
• Hindustan Copper Limited
(HCL), Kolkata;
• Mineral Exploration
Corporation Limited (MECL),
Nagpur.
• National Institute of Rock
Mechanics
• Kolar Gold Fields (KGF,
Karnataka),
• Districts Mineral Foundations
(DMF) in mining districts.
Autonomous • National Institute of Miners’
bodies / Health (NIMH in Karnataka).
Trusts • Although in 2020, Government
announced to merge it with
Health Ministry’s ICMR-
National Institute of
Occupational Health (NIOH,
Ahmedabad, Guj)
Note - By default, the ‘regulation of mines and
mineral development’, falls under Union List. But:
1. Minor minerals: Their legislation, royalty,
administrative work is delegated to the States’
domain e.g. Sand, Mica, Marble, Granite, Agate,
Chalk, Gypsum, Shale etc.
2. Major minerals: Any mineral that is not in
Minor mineral list is called ‘Major Mineral’
comes under Union’s domain e.g. atomic
minerals, bauxite, iron, coal, petroleum, natural
gas etc.
392

Q. Find correct statement(s) about minor minerals
in India:__________(CSE-2019)
1. Sand is a ‘minor mineral’ according to the
prevailing law in the country.
2. State Governments have the power to grant mining
leases of minor minerals, but the powers regarding
the formation of rules related to the grant of minor
minerals lie with the Centre Government.
3. State Governments have the power to frame rules to
prevent illegal mining of minor minerals.
Codes:
(a) 1 and 3 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3 only
Constraints in mineral exploration:
• Shortcomings in the licensing regime such as the
separation of auction of prospecting licences and
provision of mining licences, and the different
auction methodologies across different sectors like
coal, oil and minerals.
• Heavy cost of acquiring land.
• High incidence of taxes, royalties and levies in
comparison to global standards.
• Monopoly of state owned companies in few
sectors like coal is leading to inefficiencies.
• Old and obsolete technology, low skilled
manpower, low output etc.
• Inadequate infrastructure resulting in evacuation
problems. Ex: Rathole mine accident in Mizoram.
• Poor connectivity through inland waterways
means over reliance on railways for transportation
and thus increased transportation costs as well as
delays.
• Environmental concerns like open cast mining
which is highly polluting has become a norm for
almost all mining activities.
• Rehabilitation issues of tribals and other
communities.
• Non-uniform distribution of minerals as well as
unmapped reserves.
• Political nexus encouraging corruption through
non-transparent auctioning is another challenge.
• Social issues like child labour, exploitation of
workers, lack of safety measures, etc.
National Mineral Policy (NMP) 2019:
• Nodal agency: Mining Ministry
• NMP 2019 aims to replace 2008’s policy.
• Target: For non-fuel and non-coal minerals
393
• Govt. will allow transfer of mining leases from one
company to another, help in their merger and
acquisition.
• Govt. will grant ‘industry’ status to mining. (so
they become eligible for certain tax benefits /
schemes meant for industry sector, if any.)
• Increase the production of major minerals by
200 percent in seven years by granting industry
status to mining.
• Attract private investment through various
incentives like financial package, right of first
refusal at the time of auction etc.
• Introduces the concept of Exclusive Mining
Zones, which will come with in-principle statutory
clearances for grant of mining lease so as to curtail
delay in commencement of mining operations.
• Simplifies the clearance process and make it time
bound for mineral development and
commencement of mining operations.
• Encourages merger and acquisition of mining
entities, and transfer of mining leases to ensure
seamless supply of ores and scaling up of business.
• Identify critically fragile ecosystems and declare
such areas as “no-go areas”/ “inviolate areas”.
• Incentivising use of renewable sources of energy
at mining sites to reduce pollution, carbon footprint
and operational costs.
• Appropriate sensitization training about
environmental issues to all workers involved in
mining operations.
• Scientific mine closure to ensure restoration of
ecology and regeneration of biodiversity.
Mines and Minerals Development and Regulation
Act, 2015:
• MMDR Act 2015 replaced the 1957’s act for
EoDB.
• Mining Lease will be granted only through
auction. No discretionary allotment to any
company.
• Mining Lease shall be given for 50 years, then it
will be put up for auction (and not renewal unlike
the earlier system).
• Establish a National Mineral Exploration Trust.
Mining companies required to pay them. It will
carry out exploration of minerals.
• Establish ‘Not-for-Profit Trusts’ District Mineral
Foundations (DMF) in all districts where mining
takes place. Mining company required to pay them
in Rupees.
• DMF will be use it for the welfare of people in the
district who are affected by the mining related
 operations. State govt to prescribe the Imp states: Chattisgarh,
administrative structure and guidelines of DMFs. Jharkhand, WB, MP,
• Higher penalties and jail terms for illegal mining. Odisha
Anthracite Burns with short blue 80-90
Q. What is/are the purpose/purposes of 'District flame, lowest moisture
Mineral Foundations' in India? (CSE-2016) content, highest energy.
1. Promoting mineral exploration activities in
mineral-rich districts. Coal Ministry:
2. Protecting the interests of the persons affected by
mining operations. Attached Coal Controller’s Organization
3. Authorizing State Governments to issue licences PSU • Coal India Ltd (CIL) & its
for mineral exploration. subsidiaries. HQ: Kolkata,
Answer Codes: Maharatna company, single
(a) 1 and 2 only largest coal producing company.
(b) 2 only • Neyveli Lignite Corporation,
(c) 1 and 3 only Tamil Nadu.
(d) 1, 2 and 3 • Singareni Collieries Company
Limited: Telangana Govt 51%:
Other steps by Govt. Union: 49%
• Mining Surveillance System (MSS) has been Statutory Coal Mines Provident Fund
launched to check illegal mining. Organization
• E-auctioning of exploration blocks replaces the
current first-come- first serve basis of allocation • Coal Mines Nationalisation Act (1973): Coal
will ensure transparency and accountability. India and other CPSEs took over private coal
• Auctioning of exploration blocks on revenue mining companies. They will dig coal, sell it to
sharing basis rather than production sharing basis thermal power plants & other industries.
is a win-win for both government and the private • In 1993, Private mining allowed for only for captive
sector. use i.e. industrialist wanting coal for his own steel,
• The policy suggests setting up of National Central cement, aluminium etc. manufacturing processes.
for Mineral Targeting (NCMT) to address the In 2014, SC cancelled coal block allocations.
exploration challenges. • Coal Mines Special Provision Act (2015): It opens
up commercial coal mining for both private and
Effective implementation of the policy will surely public entities, and thus ends monopoly of Coal
revamp mining sector in India. However, other issues India.
like strengthening EIA, labour exploitation, involving
civil society need to be addressed. Mineral Laws (Amendment) Ordinance 2020
Ordinance aims to amends:
COAL: 1. Mines and Minerals (Development and Regulation)
• Top five largest coal reserves: USA > Russia > Act, 1957 (MMDR Act)
China > Australia > India 2. Coal Mines (Special Provisions) Act, 2015 (CMSP
Act).
Type Note Carbon%
Peat Highest moisture 40 Before ordinance After ordinance
content. smoke Only companies related Any India-registered
pollution. Most inferior to iron and steel, power company. So it’ll also
in energy. and coal sectors can do encourage competition
Lignite Important states: TN 40-60 bidding in the coal and attract FDI in such
/Brown (Neyveli), Gujarat, mining auction Indian companies
Coal Rajasthan
Bituminous Upon heating, it releases 60-80 Prior experience required No such requirements
a liquid called Bitumin. before bidding
Separate licenses for Single/Composite
prospecting (survey) license called

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 actual mining ‘prospecting license-
cum-mining lease’
SHAKTI Coal Policy (2017):
• Scheme for Harnessing and Allocating Koyala
(Coal) Transparently in India (SHAKTI).
• Nodal Agency: Coal Ministry.
• Previously, it was discretion of the govt. that which
thermal power plant company will get how much
coal from Coal India
• Shakti Policy replaces that discretion with an
online centralised bidding process.
• Coal Mitra App by Power Ministry to help
companies in buying / selling coal.
• UTTAM App by coal ministry to monitor coal
quality coming from a particular mine.
Q. Find correct statement(s):____ (CSE-2019)
1. Coal sector was nationalized by the Government of
India under Indira Gandhi.
2. Now, coal blocks are allocated on lottery basis.
3. Till recently, India imported coal to meet the
shortages of domestic supply, but now India is self-
sufficient in coal production.
Codes:
(a) 1 only
(b) 2 and 3 only
(c) 3 only
(d) 1,2 and 3
Economic survey observations:
• Carbon Imperialism is a modern day type of
imperialism wherein the 1st world nations are
trying to enforce their views about energy-
consumption upon the 3rd nations with hidden
agenda to:
➢ To sell their nuclear fuel and technology.
➢ To portray the third world in bad light for using
coal power and thereby reducing their own
culpability for global warming.
• For India coal based electricity is a necessary evil
because:
➢ Wind and solar power are Non-dispatchable,
meaning electricity can be generated only when
there is fast wind blowing or there is
appropriate sunshine
➢ Land requirement for solar based powerplant is
10 times that of thermal power plant.
➢ Bottlenecks in acquiring nuclear fuel and
nuclear Technology
➢ Unemployment if we shut down coal mining &
thermal plants.
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Budget-2020: Some of Indian thermal power plants that
are old and their carbon emission levels are high. Govt.
is planning to close them & use their vacated land for
alternative use.
Pradhan Mantri Khanij Kshetra Kalyan Yojana
(2015):
• Nodal Agency: Mining Ministry.
• It aims to use the funds of the DMFs to complement
the ongoing union and state schemes in that area,
related to like drinking water supply, health care,
sanitation, education, skill development, women
and child care etc.
Star Rating Of Mines, 2016:
• Indian Bureau of Mines (Ministry of Mining)
gives 0-5 Star to a mine depending on whether the
mining company is working without adversely
affecting the social, economic and environmental
well- being of present and future generation.
Illegal Mining:
• Mining Surveillance System (MSS): satellite-
based system by Indian Bureau of Mines under
Mining ministry.
• Khan Prahari App: Ministry’s app for reporting
illegal coal mining.
TAMRA Portal:
• Transparency, Auction Monitoring and Resource
Augmentation.
• To do ‘legal’ mining, entrepreneur has to obtain
approvals and participate in the mining block
auctions.
• For this purpose, Mining ministry launched
TAMRA Portal in 2017.
PRAKASH Portal (2019)
• Power Rail Koyla Availability through Supply
Harmony portal launched jointly by Power Ministry
and Coal Ministry
• To connect the Coal mining companies, Railways
and Thermal Power Plants on a single platform. It
will ensure better supply chain management.
ENERGY: ELECTRICITY
• Electricity is a key element in modern day life.
Right from running irrigation pumps to charging
mobile phones, electricity is a prerequisite for
agricultural growth and digital connectivity.
• Greater access to energy improves both economic Thermal Electricity: Coal > Gas > Diesel 63%
growth and human development of a country. Oil)
• India is the fourth largest consumer of energy in Renewable: Hydroelectricity 12%
the world after USA, China and Russia. However, Renewable Energy: (Solar, Wind, Biomass 23%
India is not endowed with abundant energy etc. except hydro)
resources. It must, therefore, meet its development Nuclear 2%
needs by using all available domestic resources of Total 100
coal, uranium, oil, hydro and other renewable Though India accounts for about 18 percent of world’s
resources, and supplementing domestic production population. India’s per-capita energy consumption of
by imports. only about 1/3rd of the global average.

According to the International Energy Agency (IEA), Ministry of Power:

nearly 240 million Indians lacked lack access to
electricity in 2017. By 2018, India has electrified all the Statutory • Central Electricity Authority
villages. Despite this, many Indians continue to linger Bodies (CEA) prescribes the standards
in the dark. for construction of electrical
plants, electric lines etc.
Current situation: • Central & State Electricity
• India’s energy mix is dominated by coal with a Regulatory Commissions for
49.6 percent share, followed by oil (28 percent), fixing the electricity tariff
biomass (11.6 percent), gas (7.3 percent), (prices).
renewable and clean energy (2.2 percent) and • Appellate Tribunal for
nuclear energy (1.2 percent). On energy supply, Electricity (APTEL)
India is still heavily dependent on petroleum • Bureau of Energy Efficiency
imports to meet its requirements. India imported (BEE);
approximately 82 percent of crude oil and 45 per
• Damodar Valley Corporation
cent of natural gas requirements during 2017.
(DVC);
India also import 200 million tonnes of coal.
• Bhakra Beas Management
• In the power sector, the all-India installed power
Board
capacity is about 334 GW, including 62 GW of
renewable energy. Renewable energy constitute
PSUs • National Thermal Power
almost 16% of total installed capacity. Corporation (NTPC)
• National Hydroelectric Power
Objectives: Corporation (NHPC)
• Make available 24x7 power to all by 2019. • Power Finance Corporation
(PFC)
• Achieve 175 GW of renewable energy generation
capacity by 2022. • Power Grid Corporation of India
(POWER GRID)
• Reduce imports of oil and gas by 10 per cent by
2022-23. • Power System Operation
• Continue to reduce emission intensity of GDP in Corporation Limited (POSOCO)
a manner that will help India achieve the intended • Energy Efficiency Services
nationally determined contribution (INDC) target Limited - joint venture of NTPC
of 2030. Limited, PFC, REC and
Powergrid- known for its
• In the coal sector, the government has recently in
2018 allowed commercial mining. subsidized UJALA LED bulbs
• THDC India Limited: Tehri
Hydro
If India wants to improve its Human Development • Rural Electrification
Index (HDI) from 0.64 to 0.80, it must increase its Corporation- known for DD
per capita energy consumption by four times. Gram Jyoti.
• North Eastern Electric Power
India’s present electricity mix (Feb 20) consists of: Corporation (NEEPCO)

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 Constraints in Power Sector:
• Poor financial health of DISCOMs: Only 11
states have subscribed to UDAY scheme till now to
close the gap between tariffs and cost of
procurement.
• Transmission losses and power theft:
Transmission and Distribution losses in the country
are around 23%. This increases the average tariff to
be charged to recoup losses. Power theft is very
common.
• Finances: Project cost over runs and high lending
rates are inimical to the growth of power sector in
the country. Power sector and Discoms are among
the sectors that have contributed the highest to
NPAs.
• Fuel: CIL accounts for around 80% of the domestic
coal requirement by coal based power plants,
leading to dependence on imported coal.
• Land: Concerns regarding land acquisition,
environmental clearance and consequential delays
and project overruns. High cost of renewable
energy devices, especially for households.
• Unmetered: Unmetered power supply to
agriculture provides no incentive to farmers to use
electricity efficiently.
• Old plants: Old inefficient plants continue to
operate whereas more efficient plants are
underutilised.
• Complexity of tariff structures: Presence of
different tariffs for different sectors leads to
inefficiency and confusion. Simplification of tariffs
with, perhaps no more than 2-3 tariff categories,
will improve transparency.
• Centre-state cooperation: According to DDUGJY
centre provides the infrastructure, the State
provides the power after working out its
availability. But sometimes the relationship is not
harmonious.
National Electricity Distribution Company:
• Objective: electricity distribution business on a
pan-India basis.
• GOVT. had announced 24x7 power to all by 2022.
But, since private and State- Government owned
electricity distribution companies are suffering
NPA AND debt issues, the electricity distribution
sector is not expanding fast enough to achieve this
target.
• So, in 2019, NTPC and Power Grid Corporation of
India have formed a 50:50 joint venture company:
National Electricity Distribution Company.
One Nation-One Grid:
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• Initially, individual states’ electricity grids were
interconnected to form 5 regional grid regions
namely Northern, Eastern, Western, North Eastern
& Southern region. If a state had surplus electricity,
it could sell only to other states in that region.
• So, One Nation-One Grid concept aims to
connect all 5 regional grids into one national grid
so, electricity can be transferred from surplus region
to deficient region.
• Here buying-selling of surplus electricity is done
through power exchanges like - Power Exchange of
India (PXIL) and India Energy Exchange (IEX).
• Nodal Agency: Power Grid Corporation of India
Limited (Power ministry)
Grid: Green Energy Corridor Project:
• Nodal Agency: Power Grid Corporation of India
Limited (Power ministry) along with loan support
from Asian Development Bank.
• Project will enable the flow of renewable energy
into this National Grid Network. So that renewable
energy rich States like Rajasthan (solar), Tamil
Nadu (wind) can sell the electricity to other states.
• Power Ministry’s Garv & Garv-II apps to monitor
progress of how many villages electrified under DD
Gram Jyoti Yojana.
• Power Ministry’s DEEP portal to help DISCOM
companies buy electricity from thermal plants
through auction.
• Power Ministry’s Vidyut PRAVAH & MERIT
app & to let people know how much electricity is
generated in India, vs. current price, demand &
shortages, inter-state purchase of electricity etc.
• Power Ministry’s Urja Mitra App to notify users
about upcoming electricity outages.
• Power Ministry’s TARANG App to monitor
upcoming power projects & stalled projects.
• National Power Portal (NPP) of Central
Electricity Authority (CEA) (Power Ministry),
where above Apps’ data can be displayed.
Integrated Power Development Scheme:
• Nodal Agency: Ministry of Power (2014).
• IPDS is Central Sector Scheme i.e. 100% funded
by Union.
• Target - To strengthen power infrastructure,
especially in urban areas.
• All Electricity Distribution Companies (Discoms)
are given financial assistance for improving
distribution network, installing ICT enabled smart
meters for billing and collection. Install solar panels
if not possible to join an area with grid.

Prepaid Smart Meters for Electricity:
• A smart prepaid meter has an internet modem.
• Electricity companies can remotely connect with
them, supplying the electricity as per the amount of
rupees balance left in the device.
• Electricity usage data collected in a server which
will in turn reduce the scope of electricity theft by
tempering with the meter box.
Budget-2020: Govt. will try to replace conventional
energy meters by prepaid smart meters in the next 3
years
NPA and UDAY(2015)
Nodal Agency: Ministry of Power (2014).
During UPA era, DISCOMs were suffering losses
because:
• Floods and cyclones, environmental activism by
NGT and SC, scams in coal allocation, so coal
mining declined which made Coal even more
expensive. As a result, thermal electricity
production became expensive.
• Under the Electricity Act 2003, Central Electricity
Regulatory Commission regulate the price of Inter-
State sale of electricity. While State Electricity
Regulatory Commissions regulate the price of intra-
state sale. The electricity price slabs are kept
different for industrial use, household use and
agriculture use. And to keep the farmers happy,
agriculture electricity will be subjected to lower
tariffs. Electricity thefts rampant but State Govts
ignore it for vote bank politics.
• While electricity production was become more
expensive because of decline in coal mining, but
Electricity commissions will not increase the
prices in a corresponding manner so DISCOM
were making huge losses. To lessen burden, Govt.
launches a scheme to help them called, ‘Ujwal
Discom Assurance Yojana’ (UDAY).
• Target - Financial revival of DISCOMs via
following method:
o State government will take over 75% of the
debt in a phased manner. (optional for States to
do this)
o To repay this debt, State govt. will mobilize
funds issuing bonds in the market. These bonds
will be non-SLR in nature.
o Union will give them extra funding for
Deendayal Upadhyaya Gram Jyoti Yojana
(DDUGJY), Integrated Power Development
Scheme (IPDS), and other such schemes of
Ministry of Power and Ministry of New and
Renewable Energy.
Challenges in Uday:
• Electricity is not a central subject, and states
cannot be made to participate in the programme.
• Also, the Centre is not providing any monetary
assistance.
• State governments are expected to convert the
discoms debt into bonds. Finding buyers for such
bonds might prove difficult especially since these
would not enjoy SLR status.
• Besides, there is nothing in the scheme to fix the
perverse political incentive that leads to T&D
losses and debts in the first place.
Pariwartan (2018): (proposed)
• Power Asset Revival Through Warehousing and
Rehabilitation (PARIWARTAN)
• Rural Electrification Corporation (REC) & other
public sector entities will create an Asset
Management Company (AMC) to take over the
NPA-assets of power sector companies. Since it’s
at a proposal stage, so we need not lose much sleep
over exact mechanism.
Deen Dayal Gram Jyoti Yojana (2015):
• Nodal Agency: Rural Electrification Corporation-
REC (2015) (Ministry of Power)
• Central Sector Scheme i.e. 100% funded by Union.
• In India, there is broad lack of rural lighting which
led to more use of kerosene lamps. This results in
increased pollution, import bill, subsidy bill and
health hazards.
• So, UPA launched Rajiv Gandhi Grameen
Vidyutikaran Yojana (RGGVY) which restructured
as DDUGJY by present Govt.
• Target: 24×7 uninterrupted ‘metered’ electricity
supply to each rural household by 2022, in
following way:
o Separate feeder lines for rural households vs
agricultural use.
o Strengthen sub-transmission and distribution
network to reduce power losses.
o Install electricity meters.
PM Sahaj Bijli Har Ghar Yojana (SAUBHAGYA):
• Nodal Agency: Rural Electrification Corporation-
REC (2017) (Ministry of Power)
• Central Sector Scheme i.e. 100% funded by
Union. (100% in the sense that State government is
not required to contribute money, although for the
remainder project.
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 • Target: To give electricity connections to all
remaining un-electrified households in rural and
urban areas. Scheme also aims to provide 24*7
power supply for all by 2019.
• Based on SECC-2011 data, govt. will identify
beneficiaries, give them free electricity connection
with meter.
• If for a household in remote area is not possible to
join with grid connected electricity lines, then solar
cell, DC battery pack, LED lights will be given.
• REC gives 75-90% of project cost as grants to
DISCOMs (public and private), state electricity
departments etc.
• Grant percentage depends on whether General or
Special Category state, & how much progress
achieved.
• As of march 2019: All the States have reported
100% electrification of all households except few
households in Naxal affected region of
Chhattisgarh.
Need for revision of power policy:
• Discoms in a financial crunch need to be bailed out
by banks and need refinancing every time due to
distorted subsidy regime which is the result of
populist pressure to keep tariffs low.
• Irregular access of electricity to domestic and
industrial consumers, power cuts and irrational
tariffs.
Provisions of the new power policy
• Rationalisation of tariff for end consumer, letting
DISCOM pass on some of the additional costs to the
consumer as a result of any cess levied on them.
• Compulsory procurement by Discoms from
waste-to-energy plants.
• There will be an increase in charge of electricity,
in tune with current inflation, cost of production and
other losses.
• Surplus power will be e-actioned, helping in
utilising full capacity of plant.
• Enabling micro-grids and their integration into
the national grid creating an veritable market for
electricity. Targeted to ensure 24/7 power supply
by 2021-22, through installation of micro grid in
remote villages.
• It will make mandatory for coal and lignite
thermal plants to install renewable energy
system to fulfil their power needs and supplement
production.
Conclusion:
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• Access to clean, reliable and affordable energy
increases the ease of living, improves education and
human development.
• Therefore, India required to provide it to all, under
SDG Goal-7
ELECTRICITY: ENERGY EFFICIENCY
The term energy efficiency means using lesser amount
of energy to produce a given amount of output. For
example, LED light bulb requires less energy than an
incandescent light. Thus LED is more energy efficient
than incandescent lights. Following reforms have been
taken in this regard:
PAT Mechanism:
• Nodal Agency: Bureau of Energy Efficiency
(BEE), Power Ministry.
• Environment Ministry’s National Action Plan on
Climate Change (NAPCC: One of its 8 components
is National Mission for Enhanced Energy
Efficiency (NMEEE) - PAT .
• Under Perform Achieve and Trade (PAT)
mechanism: 8 energy intensive industries are
given ‘quotas’ viz. Thermal Power, Aluminium,
Cement, Fertilizer, Iron-steel, Pulp-paper, Textiles
and Chlor-alkali.
• Identified sectors have to cut their energy
consumption according to the quotas, else face
penalties.
• Overachieving firm can obtain Energy Saving
Certificates (ESCerts) from BEE’s PATNET
portal and sell it to the underachieving firm (similar
to PSLC certificates).
• Central Electricity Regulatory Commission (a
statutory body) regulates the prices & purchase
procedure.
National LED Programme:
Nodal Agency: Power Ministry gives funds to Energy
Efficiency Services Ltd (EESL) for:
o Unnat Jeevan by Affordable LEDs and
Appliances for All (UJALA) for subsidized home
Light-emitting Diode (LEDs) bulbs. Previously
called DELP (Domestic Efficient Lighting
Program, renamed in 2015).
o Street Lighting National Program (SLNP):
whereas EESL replaces conventional halogen street
bulbs with LED street bulbs, free of cost.
Other schemes:
 AJAY ➢ Atal Jyoti Yojana (Ajay): FREE
Solar Street Light with LED in
Special category states
➢ 5 states - Assam, Bihar,
Jharkhand, Odisha and Uttar
Pradesh.
➢ NITI Aayog’s Aspirational
districts in other states as well.
➢ Andaman Nicobar and
Lakshadweep
➢ Funding: MNRE 75% + 25%
from MPLADS of given
constituency.
SAATHI Ministry of Power and Ministry of
Textiles give money to Energy
Efficiency Services Limited (EESL)
and give energy efficient
instruments to small and medium
Power looms to reduce their energy
consumption.
Star To help the customer to use energy
Labelling efficient appliances.
Smart ➢ Energy Efficiency Services Ltd.
Electricity (EESL) helps DISCOMs to
Meters install Smart Electricity Meters.
➢ Advantages: IT enabled
monitoring, no need to manually
read the meters, power theft
difficult etc.
Methanol To use ‘less’ petrol & diesel in
Economy transport & electricity generators:
Fund ➢ Methanol is can be generated
from bio waste. It is the simplest
alcohol and does not emit
particulate matter (PM), Sulphur
or nitrogen pollution.
➢ NITI Aayog proposed (2017) to
setup a Methanol Economy Fund
to finance R&D in this area.
PM Ji-VAN ➢ 2003: Oil Companies to blend
upto 10% of ethanol in Petrol, by
2022.
➢ 2019: "Pradhan Mantri JI-VAN
(Jaiv Indhan- Vatavaran
Anukool fasal awashesh
Nivaran) Yojana" for providing
funding to second generation
(2G) bioethanol projects through
Viability Gap Funding (VGF).
➢ Nodal: Petroleum Ministry.
➢ 100% Union funded.
UNNATEE BEE’s National strategy document
titled UNNATEE (Unlocking
NATional Energy Efficiency
Potential) for developing an energy
efficient nation (2017-2031).
Buildings 2018: BEE launched the Eco-Niwas
Samhita for minimum energy
conservation standards in
Residential Buildings.
Index related to Electricity
Energy • World Economic Forum’s
Transition index to measure countries
Index: on how much CO2 / pollution
is generated while producing
energy, And whether the
country is serious about
reducing it.
• Ranking 2019 (March):
Sweden ranked-1, India-76).
State Energy Developed by Power Ministry's
Efficiency Bureau of Energy Efficiency
Index 2019 (BEE) in association with a non-
profit body called Alliance for an
Energy Efficient Economy
(AEEE).
Way forward: Energy Efficiency
• Under the Paris agreement, India has pledged to
reduce the emissions intensity of its GDP by 33-
35% by 2030. Energy efficiency is a crucial factor
in this. Aforementioned initiatives will help in a
long way to achieve our promises under Intended
nationally determined contributions (INDC) under
UNFCCC’s Paris agreement.
• Promote the use of the public transport system.
Public transport systems may be converted to
electric in a time bound manner.
• For the MSME sector, BEE should develop
cluster-specific programmes for energy
intensive industries to introduce energy efficient
technologies.
RENEWABLE ENERGY:
United Nations Framework Convention on Climate
Change (UNFCCC)’s Paris Accord (2015) requires
nations to submit their Intended Nationally Determined
Contribution (INDC or NDC) about their global
warming mitigation commitments. India’s NDCs are as
following:
• By 2030, Govt. reduce emission intensity of GDP
by 33-35 % from 2005 level.
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 • By 2030, 40% of our installed power generation • Mission aimed to add 20,000 MW solar power by
capacity shall be from non-fossil fuel sources. 2022.
• Modi Govt. raised target to 1 lakh MW (100 GW)
Type Solar Wind Biomass Small By by 2022.
hydro 2022 • Out of that 100 GW from 40 GW Rooftop solar
GW 100 60 10 5 175 panel and 60 GW through Large & Medium Scale
Grid Connected Solar Power Projects.
Ministry of New and Renewable Energy:
Net-metering i.e. residential and commercial
MNRE consists of: customers generate their own electricity from rooftop
solar power and sell excess of this solar electricity to
Autonomous • National Institute of Solar DISCOM.
bodies Energy (NISE)- Gurugram
• National Institute of Wind “ARUN” Mobile app to help people install rooftop
Energy (NIWE). solar panels by themselves.
• Sardar Swaran Singh
National Institute of Amending Electricity Act for Renewable Purchase
Renewable Energy (SSS Obligation (RPO) & Renewable Generation
NIRE). Obligation (RGO):
Renewable Purchase Obligation (RPO) applicable to:
PSU • Indian Renewable Energy
• Power distribution companies, large electricity
Development Agency
consumers and captive power plants.
(IREDA) - Delhi, MINI
• They are obliged to buy min. “%” of the electricity
Ratna.
from renewable energy sources.
• Solar Energy Corporation of • This ensures solar, wind and other renewable power
India (SECI) - Delhi producers receive sufficient of consumers and
market demand. This “%” quota is decided by the
KUSUM (Solar for farmer) 2019 MNRE.
Nodal Agency: Ministry of New and Renewable • First time setup in 2014 (11.50%, With internal
Energy. Kisan Urja Suraksha evam Utthaan bifurcation for solar and non-solar)
Mahabhiyan (KUSUM) has components A, B, C but the • This mechanism is called Renewable Purchase
gist of the matter is: Obligations (RPOs). Its prices are decided by
• Farmers are encouraged to install Solar pump CERC/SERC depending on whether its Interstate
tube wells for irrigation so there will be less diesel or intrastate sale.
consumption in pump sets.
• Farmers, panchayats, cooperatives can install upto SARAL INDEX for Solar rooftop
2 MW renewable power plants in their barren or • Jointly developed by Ministry of New and
cultivable lands. Renewable Energy (MNRE), Shakti Sustainable
• Above people can sell the excess electricity to the Energy Foundation (SSEF), Associated Chambers
DISCOMS. Its price will be decided by the of Commerce and Industry of India (ASSOCHAM)
respective State Electricity Regulatory and Ernst & Young (EY).
Commissions (SERC). • State Rooftop Solar Attractiveness Index
• Funding: Union 30% + State 30% + Bank Loan (SARAL) ranks the States for their attractiveness
30% + 10% by the farmer himself for rooftop development.
• Benefit: Consumption of Diesel & Thermal • Ranking 2019: Karnataka > Telangana > Gujarat >
electricity will decline to the tune of 27 million CO2 Andhra Pradesh
emission reduced / per year.
Pratyaksh Hanstantrit Labh (PAHAL-2015):
Jawaharlal Nehru National Solar Mission 2008: • Nodal Agency: Ministry of Petroleum and Natural
• One of mission among 8 National Action Plan on Gas. Central sector scheme i.e. 100% funded by
Climate Change (NAPCC) missions. Union.
• Nodal Agency: Ministry of New and Renewable • Manmohan govt. started pilot project in selected
Energy (MNRE) districts.
• J.N. National Solar Mission launched in 2009-10. • Modi launched for all India in 2015

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• Previously, LPG dealers would divert the DBT in PDS • Nodal Agency: Ministry of
subsidized LPG cylinders to restaurants so Kerosene Petroleum and Natural Gas.
households would be deprived & forced to purchase (DBTK) 2016 Central sector scheme i.e.
LPG cylinder at a higher price in the black market. 100% funded by Union.
• Direct Benefits Transfer For LPG (DBTL): • Principle is same as PAHAL -
Beneficiary buys cylinder at market price, LPG. Kerosene is sold at
Petroleum ministry directly transfers subsidy market price and subsidy
amount in his bank account linked with his transferred to poor family’s
customer ID. bank account. This discourages
• A beneficiary is eligible to get subsidy on upto 12 PDS shopkeeper from diverting
cylinders per year. Although economic survey subsidized kerosene to the
suggested it should be reduced because most rickshaw-wallas and others.
household don’t need more than 10 cylinders in real • Govt. is trying to cover more
life. poor families under the LPG
and electricity schemes so in
Pradhan Mantri Ujjwala Yojana (PMUY) future they will not require
• Ordinarily, a customer has to pay about 1000 Rs as subsidized kerosene for
refundable security deposit to get the LPG cooking and lightening
connection from Oil Marketing Company purpose. Thus, India will
• Scheme gives Deposit-free LPG connections to become ‘kerosene free’.
the women of Below Poverty Line (BPL) families. City • Ministry of Chemicals and
• The BPL families are identified using SECC-2011 Compost Fertilizers pays subsidy to
data. Later, the beneficiary list was expanded to Scheme entrepreneurs to create compost
cover the forest dwellers, people residing in Islands (2016) from city (municipal) waste.
etc. whose name may not be in SECC- 2011 data. GOBARdhan • Its a sub-component of Swachh
• Nodal Agency: Petroleum Ministry pays to OMC. (2018) Bharat mission (Gramin). Core
• Central Sector scheme i.e. 100% funded by Union. Scheme, not 100% funded by
• Himachal Pradesh had become the first state in the Union.
country to have “100% LPG gas coverage” in 2019. • Nodal: Dept of Drinking Water
• Corona Lockdown 2020 - poor families’ income and Sanitation.
slashed, so can’t afford to pay for cylinders so, • (GOBARdhan) scheme helps
PMUY beneficiaries eligible for 3 free LPG farmers & rural entrepreneurs
cylinders upto June 2020. to convert cattle dung & other
biowaste to biogas and organic
PM LPG It is a gathering of 100 LPG manure.
Panchayat customers in an area, they will • Depending on the population of
Scheme discuss LPG benefits, women the gram panchayat, they will
empowerment. Petroleum Ministry be given up to ₹ 20 Lakh to
aimed to organize 1 lakh such setup such project.
Panchayats across India by CBG: • Bio-gas is produced naturally
31/3/2019. SATAT through anaerobic
PM Urja • To lay down Natural Gas Grid (2018) decomposition of agriculture
Ganga 2016 Pipeline across 5 states, viz. residue, cattle dung etc.
UP, Bihar, Jharkhand, Odisha • After Purification and
& West Bengal. Compression, it transforms into
• The supply of such Piped Compressed Bio-Gas (CBG)
Natural Gas (PNG) can help with more than 95% pure
homes, hotels, fertilizer methane. \
companies & electricity • 2018-SATAT Initiative by the
companies. Ministry of Petroleum and
• Helps creating a gas based Natural Gas to promote CBG as
economy. an automotive fuel.

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 WATER AND SANITATION:
Swachh Bharat Mission (SBM: 2014)
• Nodal Agency: Originally, Ministry of Drinking
Water & Sanitation (So Now Jal Shakti Ministry).
• While ancient Indus valley civilization accorded
prime importance to sanitation by integrating
sanitation systems into town planning. But over the
ages this domain received less attention of the
policy makers. As a result, even in 2012, more than
half the Indian population, still practiced open
defecation.
• PM Manmohan Govt. launched Nirmal Bharat
Abhiyan in 2012
• In 2014, above scheme was restructured as SBM.
• Core Scheme i.e. Not 100% funded by Union
(60:40 or 90:10) + Corporates’ CSR funding.
• In 2019, Modi given Global gatekeeper award by
the Bill and Melinda Gates foundation for SBM
Target of Swatchhta Diwas (Gandhi’s 150th Birth
Anniversary- 2 Oct 2019):
1. Open Defecation Free (ODF) India.
2. Eradicating manual scavenging
3. Improving Municipal Solid Waste Management
(MSWM)
Ways to achieve targets:
• Funds given for building toilets in individual
homes, community toilets and bathing house,
Public toilets at bus station, schools, temporary
construction sites
• Additional financial assistance for solid waste
management projects- trucks, garbage disposal
units etc;
• IEC, Awareness & behavioural changes through
Swachhta Doots, Social Media, Campaigns,
posters, advertisements.
• Darwaza Band: awareness campaign to ensure
villagers don’t defecate in the open.
• Research Development in sanitation.
• SBM assets have been geo-tagged. Many mobile
applications have been launched to complaint about
unclean areas to municipal corporations.
Implementing agency of the scheme:
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• SBM-Rural implemented by Jal Shakti Ministry,
Dept of Drinking Water and Sanitation. (Earlier it
was “Ministry” of Drinking Water and Sanitation)
• SBM-Urban implemented by Ministry of Housing
and Urban Affairs.
Economic surveys on SBM:
• The lack of access to toilet facility led to reduced
food & water intake by girls to avoid going during
day time - malnutrition and anaemia.
• Open defecation - infections among pregnant
women, Maternal mortality ratio, Infant Mortality
Rate chances increase.
• Intestinal infection (enteropathy) in children. Even
if children given good food their body will not
absorb the nutrients fully so poor brain
development as result, poor educational outcomes.
• Every household in an open defecation free village
saved about ₹ 50,000 per year due to lower chances
of disease, time saved due to a closer toilet,
Improved economic productivity
• Open defecation and municipal waste eventually
contaminate the water bodies- and harm the flora-
fauna.
Swatchh Bharat: ES-2019
CEA Subramanian K. suggested that:
• Goa, Odisha, Telangana, Bihar, W. Bengal, Sikkim
have not yet achieved 100% Open Defecation Free
status as of 2019-June.
• Some rural males still don’t use toilets. Even in
urban areas, people keep their homes clean but litter
in public places. So, we have to inculcate a
behavioral change for maintaining cleanliness at
public places as well.
• Recurrent water crisis in india, so we need to
adopt eco-friendly water conservation in toilets. e.g.
Bio toilets, dual flush toilets.
• Clean India should also be pollution free India, so
we should focus:
o Industrial effluent, plastic menace, controlling
air pollution etc.
o Bioremediation, river surface cleaning, river
front development.
o Afforestation and biodiversity conservation.
• To do the above things, we have to mobilise more
funds through: Micro-financing, Concessional
Loans, Corporate Social Responsibility,
Crowdfunding, Public Private Partnership
Budget-2019:
• Govt. will open Rashtriya Swachhta Kendra at • IWT eases traffic congestion on Road or Rail
Gandhi Darshan, Rajghat (New Delhi) on 2nd networks.
October, 2019.
• Culture Ministry’s autonomous body ‘National Inland Waterway Authority of India
Council for Science Museums’ is preparing a IWAI is a Statutory Body under Ministry of Shipping,
Gandhipedia to sensitize people about Gandhian responsible for the development, management, safety,
values. survey of inland waterways. Its notable portals are:
• 150th birth anniversary of Mahatma Gandhi is • FOCAL to connect cargo owners and shippers.
being celebrated for a period of 2 years from • LADIS – Least Available Depth Information
02.10.2018 to 02.10.2020. National Committee System so shippers can know whether it’s safe to
(NC) under the Chairmanship of President of India take their vessel further or not.
and Executive Committee (EC) under the
Chairmanship of the Prime Minister have been National Waterways:
constituted. • According to 7th Schedule, under Union List-
Parliament can make laws on inland waterways.
Budget-2020: • National Waterways Act, 2016: 5 existing
All 5.99 lakh villages, 699 districts and 36 States/UTs waterways and 100+ additional waterways declared
have declared themselves Open Defecation Free (ODF). as National Waterways. 5 existing waterways are:
Further, ₹12000 Cr allotted.
National Waterways State(s)
Conclusion: 1. Ganga-Bhagirathi- Uttar Pradesh,
• SDG- 6: “By 2030, achieve sanitation and hygiene Hooghly River System Bihar, Jharkhand,
for all, and end open defecation, paying special (Haldia - Allahabad) West Bengal
attention to women, girls and those in vulnerable 1620 Km
situations”. 2: Brahmaputra River Assam
• Sanitation for all ensures social, environmental (Dhubri - Sadiya)
and economic gains for all. 891 Km
• Mahatma Gandhi once said, “Sanitation is more 3: West Coast, Champakara Kerala
important than independence.” Therefore, only a and Udyogmandal Canals
Clean, Health and Beautiful India can be our fitting 205 kms
tribute to Gandhi’s 150th Birth anniversary. 4: Krishna, Godavari and a Tamil Nadu,
few Canals Andhra, Telanagana
Swachhta Udyami Yojana (2014): 2890 (when finished)
• Ministry of Social Justice gives fund to National 5: Mahanadi delta rivers & Odisha, West
Safai Karamcharis Finance and Development canals Bengal
Corporation. 588 Km
• Provision of Concessional loans to Safai Apart from above, NW68: Mandovi (Goa), NW111
Karamcharis and Manual Scavengers for: Zuari (Goa), NW97: others are presently operational.
o Building community toilets - they can charge
user fees. Jal Marg Vikas Project (2014)
o Buying Sanitation related Vehicles - NW-1 has low depth upstream of Farakka, difficult to
Beneficiaries can take contracts from the take big vessels.
Municipalities for garbage collection etc. to • This project aims to develop infrastructure,
earn livelihood. navigational locks to make NW1 enable
commercial navigation on Varanasi-Haldia
stretch of river Ganga.
INLAND WATERWAYS • Plus, provisions for Roll-on-Roll-off (Ro-Ro)
Inland Waterways Transport (IWT) has following ferries, Digital dashboard and portals for River
benefits: Information System (RIS) and Vessel Traffic
• Lower CO2 emissions & fuel in transporting per Management System (VTMS) etc.
tonne of cargo than Rail or Road. • Central Sector Scheme + loans from World Bank
• IWT requires very little land acquisition than Rail (IBRD) + PPP.
or Road.

404
 • 2018-Nov: Modi inaugurated India's first multi- Global • International Maritime
modal terminal at Varanasi & welcomed the cargo Cooperation Organization (HQ: London,
ship ‘MV Rabindranath Tagore’ coming from UK) – is a United Nations
Kolkata. specialized agency for
• Entire project will by finished by March 2023 & regulating shipping.
will help to convert Ganga into ‘Arth Ganga’ • Hong Kong International
(River of wealth). Convention (2009) deals with
the safe and environmentally
Varanasi also designated as India’s first ‘freight sound recycling of ships. 2019:
village’ i.e. an area where national and international India ratified it.
cargo operators carry out their activities.
Opportunities:
SHIPPING & PORTS
India’s long coastline of 7500 km is serviced by 12
major ports, 187 minor ports. Non-major ports are
gaining shares and a major chunk of traffic has shifted
from major ports to non-major ports. Maritime trade
accounts for 90% by volume and 70% for value. Thus
the development of ports is vital for our economic
sector.

Alang-Sosiya (Gujrat) is the largest ship recycling

yard in the world.

Ministry of Shipping consists of:

Major and Minor Ports:
Statutory • Inland Waterway Authority of • Indian Ports Act, 1908: State Governments
Bodies India (IWAI) responsible for 200+ minor ports and Union
• Tariff Authority for Major Government is responsible for 12 Major Ports.
Ports (TAMP) to decide the
fees charged by Major ports.
Attached • Directorate General of
offices Shipping, Mumbai
• DG Lighthouses and
Lightships
• Minor Ports Survey
Organisation,
PSU and • Shipping Corporation of India,
Statutory Mumbai.
corporation • Dredging Corporation of India
Limited.
• Kamarajar (Ennore,
Tamilandu) Port Limited,
Cochin Shipyard Limited, Additionally:
Cochin • In 2010, UPA govt. announced to setup Port Blair
• Central Inland Water Transport (Andaman Nicobar) as Major port.
Corporation Limited • In 2016, NDA govt. announced to setup Sagar in
• Hooghly Dock & Port west Bengal, Duggirajupatnam in Andhra Pradesh,
Engineers Limited. Vadhavan in Maharashtra, Enayam in Tamil Nadu
• Sethu - Samundaram as major ports.
Corporation Limited

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• In feb 2020, Government announced setting up a
new major port at Vadhavan in Maharashtra. It will
be developed by a Special Purpose Vehicle (SPV)
company wherein Jawaharlal Nehru Port Trust
(JNPT) will have 50% shareholding.
Dry Ports: They are inland terminal, directly connected
to a seaport by rail or road e.g. Patna in Bihar, Hazira in
Gujarat. 20+ such dry ports under development (2018).
Major Port Authorities Bill, 2020:
Before After
Major Port Trusts Act, This bill aims to replace
1963. it with simpler and more
modern framework
• All major ports were • For each board, there
managed by the will be separate
respective Board of Board of Major Port
Port Trusts. Authority
• Central government • Members from the
appointed members State Government,
Railways Ministry,
Defence Ministry,
Customs Department
etc.
Ports’ user fees/ tariffs Above boards will set up
were decided by Tariff Committees to determine
Authority for Major user fees/ tariffs.
Ports.
Board had to get Central certain technical
government’s relaxations given in this
permission before regard, so more
borrowing any loan. autonomy will be there.
Budget-2020: Govt will consider corporatizing at least
one major port (converting it into a Public limited
company) and subsequently listing its shares on the
stock exchanges.
Challenges to Ports in India:
• Problem of heavy silting and inadequate
dredging capacities as seen in riverine ports like
Haldia.
• Currently the ports operate on Trust model where
government is the owner and operator of the port.
We need to shift towards Land-lord tenant
model where private sector can operate the port.
• While India made great success in metro rails and
airport infra, But shipping infrastructure has been
neglected. We suffer from ageing fleet, manpower
shortage, we do not have world class ports.
Third-generation large sized ships are unable to
enter our ports so their goods are first offloaded in
Sri-Lanka, then sent to India in smaller ships.
• Port congestion, delay in turnaround, takes lot of
paperwork to load and unload cargo, customs
clearance and inspection is slow, inadequate road
and rail connectivity with the hinterland.
• Privately owned minor ports are more efficient,
whereas major ports suffer from labour unions and
politicization of the Board Of Directors.
• Problems of land acquisition and environmental
clearances while setting up new ports.
• Domestic Shipping companies buy or hire foreign
ships at higher cost because domestic shipbuilding
industry is underdeveloped. (Although shipping
‘breaking’ industry is well developed at Alang in
Gujarat.)
• Non-perennial rivers and requirement of constant
dredging poses challenges.
ES20: logistics Challenge in India
CEA Subramanian K. provided a case study:
If an apparel factory in Delhi has to export clothes to
USA through India’s largest port in Maharashtra i.e.
Jawaharlal Nehru Port Trust (JNPT) also known as
‘Nhava Sheva Port’, it will take more than 40 days.
Similarly, ES20 gave case studies of Electronics
export, carpet import etc. and found:
• Loading, unloading, customs inspection processes
at Indian airports is vastly superior to its seaports.
• Ironically, customs clearance processes for imports
are better/faster than those for exports. (whereas the
Government should focus on making it ‘easier’ to
export for improving our CAD & BoP)
Ways to make Indian ports more efficient and
competitive:
• It is important that the Indian shipping industry be
provided a level playing field for it to grow and
compete globally. This will require rationalisation
of restrictive policies, particularly related to
imposition of a variety of direct/indirect taxes.
• Having an integrated approach to port
development i.e. multi- modal port development.
Adequate rail and road connectivity must be
provided to these coastal terminals.
• Switching to landlord-tenant Model, where
operation is in the hands private player. Govt has
initiated the major port authorities bill, 2016 to
enact a more friendly land-lord tenant model.
• Efforts should be made to develop deeper
stretches of the rivers for IWT/navigational
purposes for round-the-year navigation
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 • Priority should be accorded to coastal ships by
setting up coastal terminals at the major ports
and identifying and developing five or six non-
major ports on the east and west coasts as
designated coastal ports.
• Building and maintaining infrastructure for
handling desired capacities. Ensure
mechanisation of ports through introduction of
new equipment and procedures, built new facilities
and upgrade existing ones.
Port Logistics: Authorised Economic Operator
(AEO):
• An importer, exporter, cargo company can apply to
the Central Board of Indirect Taxes and Customs
(CBIC) to get this ‘status’. Subject to conditions
like:
o Minimum 3 years’ experience
o Never filed bankruptcy
o Never caught in fraud / smuggling etc.
• Benefits: Faster clearance times, fewer physical
examinations on cargo etc.
• At International level, World Customs
Organization (WCO, HQ: Brussels, Belgium)’s
“SAFE Framework” guides this program.
Logistics Ranking:
LPI Index • World Bank’s Logistics
Performance Index, released every
2 Years
• 2018’s Ranking: Germany (1) >
Sweden > Belgium > Austria >
Japan >.... India (44)
LEADS • Commerce Ministry’s Logistics
Index Ease Across Different States
(LEADS) index
• 2019 Ranking: Gujarat > Punjab
> Andhra > ...Himachal (last)
Sagarmala Project:
• In 2003, PM Vajpayee proposed Project Sagarmala
• NDA Govt. revived idea in 2015.
• Nodal Agency: Shipping ministry.
• Scheme is Central Sector Scheme.
• Sagarmala aims to develop new major & minor
ports, improve existing ports, encourage coastal
shipping.
• Although in practice it is Sagarmala Development
Company Limited (2016) invest in Special
Purpose Vehicles (SPVs) companies (in which
State & private players may also have
shareholding).
407
• This SPVs implement various projects under
Sagarmala.
• Costal Economic Zones (CEZs) to create
manufacturing & employment opportunities. Give
them Hinterland connectivity through rail, road,
inland water transport.
• Skill development, training for coastal community.
Significance of the vision:
• Now, Indian ocean bears two-thirds of the
world’s oil shipments, one third of its bulk cargo
and half of its container traffic. Over three fourths
of its traffic goes to other regions of the world.
• India is also emerging as a new hub of
manufacturing, which needs well developed ports.
It also has an important role in making the Make in
India project a success and greater global
engagement and integration with its trading
partners.
• Waterways are environmentally friendly when
compared with other means of transport.
• Expansion of bilateral and multilateral naval
exercises with many of India’s neighbours in the
Indian ocean. For maritime capacity building,
especially in the island states that occupy critical
locations in the Indian ocean.
• In the light of increasing marine piracy and
terrorist attacks from sea frontiers (2008 Mumbai
attacks).
• Increasing share of maritime trade in overall
trade basket containing trade through land, air and
maritime routes.
• IO coastline is vital in providing livelihood
security to fishermen community in India.
• IO region is well endowed with resources in
Exclusive Economic Zones (EEZ) which are
important for energy exploration and resources.
Sethusamudram project (1997): to create a shipping
canal between Palk bay & Gulf of Manner to reduce
time & fuel consumption. But case pending in SC-PIL
that it’ll hurt marine biodiversity & Ram Sethu’s
religious sentiments.
Multi-Modal Transportation of Goods Bill, 2019
• Multimodal transportation implies using a
combination of more than one mode of movement,
such as rail, road, sea for transportation of goods.
• Original act of 1993 contained provisions for:
o Registration of such cargo company
o Their liability in case of cargo delay / damage.
• In 2019, Government planning to replace this old
act, with a new act.
TRANSPORT: ROAD 3. Border Roads Organization (under Defense
Ministry)
• National Highways, which are the responsibility of
the Central Government, account for around 2
In terms of total road length (bigger to smaller): Other
percent of the total road network in India.
roads >> State highways >> National highways >>
National Highways carry around 40% of the total
expressways
traffic across the length and breadth of the country.
Increased industrial activities, along with
NHAI (1988):
increasing number of two and four wheelers
National Highways Authority of India is a statutory
have supported the growth in the road transport
body under Road Ministry. It gets Funds from:
infrastructure projects.
• Road and Infrastructure cess on Petrol & Diesel-
• The government’s policy to increase private
Central Road and Infrastructure Fund (setup in
sector participation has proved to be a boon for the
2000, Non-Lapsable).
infrastructure industry. Also, the Government has
permitted 100 per cent foreign direct investment • External Assistance from World Bank, ADB etc.;
(FDI) in the road sector. Recently, the Market Borrowings by NHAI, Public Private
Government has launched Bharatmala Pariyojana Partnership (PPP).
which is expected to provide NH linkage to 550 • In 2019, Government allowed NHAI to setup
districts, and be a major driver for economic Infrastructure Investment Trust (InVITs) with
growth in the country. approval of SEBI.
• GATI Portal (2020) by NHAI to monitor the
Min. of Road Transport & Highways: progress of Highway construction in India.
Contractors can raise complaints through this portal
Statutory National Highways Authority of (e.g. Government engineer demanding bribes, not
Bodies India (NHAI) clearing files on time etc.)
PSU National Highways and
Infrastructure Development NHDP (1998):
Corporation PM Vajpayee started National Highways Development
Number plate Since 2019, Government allowed Programme (NHDP) to build:
“LA” number plate mark for • Golden Quadrilateral connecting the four metro
vehicles registered in UT of cities of Delhi, Mumbai, Chennai and Kolkata
Ladakh. (Lakshadweep: “LD” • North-South corridor to connect Srinagar to
plates) Kanyakumari.
E-Governance • Vahan Portal: vehicle • East-West corridors to connect Silchar to
modules registration, taxation, permit, Porbandar.
fitness and associated
services across the country. Budget-2014: Diamond quadrilateral proposed to
• Sarathi Portal: driving connect major metros through High Speed Railways.
license, learner licence,
driving schools and related The progress under NHDP has been somewhat
activities. slower than anticipated:
• Timeliness in awarding contracts.
Types Of Road: • Difficulties in acquiring land.
• Securing environmental clearances.
• Shortages in construction capacity.
• In a 2012 Report, the World Bank alleged the
presence of fraudulent and corrupt practices by
Indian contractors. Road safety is also a major
issue.
• Further optimization of energy and transport under
Organizations associated with highway NHDP is achievable with the accelerated
construction: construction of service lanes for local traffic in all
1. National highways authority of India (NHAI), existing four-lane and six-lane roads. Financing of
2. State Public Works Department (PWD), these roads should rely on user charge principle in

408
 form of tolls and continuing with the existing
Central Road Fund through additional levies on
petrol and diesel.
Pradhan Mantri Gram Sadak Yojana (2000)
• Nodal Agency: Rural Development Ministry.
• Centrally Sponsored Scheme: Core Scheme so not
fully funded by Union. (General-60:40, Sp. Cat-
90:10)
• In 2000, PM Vajpayee govt. launched to construct
all-weather single (lane) roads for all unconnected
rural habitations:
• Criteria:
o Upto min. 500 population (plains) by 2019
o 250 or above (Sp. Cat States, tribal districts
and desert areas) by 2019
o 100-249 population (if Naxal or Left Wing
Extremism affected areas) by 2020
• PMGSY – II (2013 onwards): To upgrade / repair
the previously constructed rural roads and to
construct new roads.
• PMGSY Phase-III (2019-20 to 2024-25): To
upgrade 1,25,000 kms of road in the next five years.
In this phase, we’ll also construct road bridges upto
150 m in plain areas and 200 m in Himalayan and
NE States.
• To reduce carbon footprint, PMGSY roads are built
using Green Technology, Waste Plastic and Cold
Mix Technology.
Bharatmala Pariyojana (2017):
• Nodal Agency: NHAI (Ministry of Road Transport
& Highways).
• It aims to upgrade & expand the highways that were
built under the previous NHDP.
• It has 7 phases. Phase-1 aims to upgrade 24,800
kms of national highways by 2022.
• Special focus on connecting the coastal areas,
economic corridors, and border regions (for easier
troop movement against China-Pak & increase land
based export-import with Nepal, Bhutan,
Bangladesh and Myanmar).
Setu-Bharatam:
• Nodal Agency: Road Ministry.
• Central Sector Scheme i.e. 100% funded by Union.
• Setu Bharatam aims to make all National Highways
free of railway level crossings by by constructing
Railway Over Bridges (ROB)/Railway Under
Bridges (RUB).
• Mandated timeline: 2019.
• Advantages:
o Less traffic condition & accidents in highways
409
o Less employees required for manning the
railway crossing signals.
Char Dham Mahamarg Vikas Pariyojana:
• Nodal Agency: Road Ministry
• Project aims to build and renovate roads to connect
four prominent Dhams in Uttarakhand viz.
Gangotri, Yamunotri, Kedarnath and Badrinath.
Electric Vehicle (EV)
• Electric vehicle is an automobile that is propelled
by the energy stored in rechargeable batteries. Such
vehicles are further classified into:
o Battery Electric Vehicles (BEVs) and
o Hybrid Electric Vehicles (HEVs) which can
run on both battery (using electric motor) and
petrol/diesel (using internal combustion
engine).
• In India, transport sector is the second largest
contributor to CO2 emissions after the industrial
sector. Electric vehicle can help reducing it.
• Shift to EV will result into:
o Less import of crude oil import so less CAD
o India can emerge as a hub for manufacturing
for EVs.
o This can provide employment opportunities
and earning of foreign exchange through
exports.
ES2020: Currently, the market share of electric cars is
less than 1% in India, compared to compared to 2% in
China and nearly 40% in Norway.
Steps taken to promote EVs in India:
• 100 % FDI through automatic route is permitted in
the automobile sector.
• 2013: National Electric Mobility Mission Plan
2020 (NEMMP) for promoting electric and hybrid
vehicles.
• 2015: Ministry of Heavy Industries & Public
Enterprises launched Faster Adoption and
Manufacturing of Electric vehicles (FAME)
scheme to fast-track the goals of NEMMP.
• 2019: FAME India Phase II has been launched
from April 2019 for a period of three years with
funding of INR10,000 crores. It will setup 2700
charging stations in major cities in such manner that
➢ at least one charging station is available in a
grid of 3 km x 3 km in cities.
➢ At least one charging station is available every
25 km on highways.
➢ It will also focus on electrification of public
transportation.
• GST on EVs is reduced to 5% from the current
rate of 12%.
• Budget-2019: Additional income tax deduction on
loans taken to buy EV.
• Ministry of Road Transport Highways (MoRTH)
notified Green Number plate for the use of
Electric Vehicles.
NITI vs Highway Ministry differences w.r.t 100%
EV Adoption:
• In 2017, NITI proposes at least 40% private
transportation should be electric by 2030.
• In Jun 2019, NITI proposed only electric vehicles
should be sold after 2030. However, automobile
makers have heavily criticized this move.
• In Aug 2019, Union Minister of Road Transport
and Highway cleared the air that
➢ There will be no ban on petrol and diesel
vehicles in the country.
➢ Government has not set any deadline for
automakers to switch to electric vehicles.
➢ I am the minister, NITI Aayog does not have
the authority to set Electric Vehicle deadline.
ES19: EVs Charging is the biggest challenge:
➢ Norway has the highest share of electric cars in its
private transport. Because they provide tax
incentives to EV buyers, waiver of toll fees, free
parking, etc. However, the Latest Economic Survey
observed that more than such tax incentives, need
of the hour is to develop charging station
infrastructure in India because:
• EV batteries’ primary components is Lithium.
China has secured a supply of this metals from
Congo, Bolivia, Chile and Australia. China controls
half the cobalt mines in Congo. India also has to
expand to such upstream areas to secure Lithium
supply.
• EV batteries have limited driving range. So,
charging stations must be available throughout the
road networks. Else, people will prefer Internal
Combustion Engines (ICE) vehicles like petrol-
diesel cars.
• Depending on the technology of charging stations,
it can take from 30 minutes to 8 hours to recharge
the battery. Therefore, universal charging
standards are required in India.
• Government should also inform users about the
availability of charging stations in their vicinity
with the help of physical science, GPS maps /
Apps.
• India's climate is much hotter than Norway. High
temperature degrades battery life cycle. We
needs to encourage R&D accordingly. Otherwise,
frequent battery replacement costs will discourage
potential buyers.
Conclusion:
Electric vehicles represent the next generation in
sustainable mobility. India must emphasize on them to
reduce its GHG emissions, and to provide new avenues
for employment and export earnings. Aforementioned
initiatives / reforms are important in this regard/need to
be addressed on priority basis.
Bharat Stage Norms and Fossil Fuel Emission:
• Central Pollution Control Board (CPCB) (Statutory
Body under Environment Ministry) has instituted
Bharat Stage emission norms (BS) norms .
• Higher the standard number means stricter the
norms and more expensive for automakers to design
such types of engines.
BS IV • April 2017: compliant vehicles made
compulsory.
• April 2020: SC banned their sale from
this date.
BSV Skipped by Govt.
BSVI Only this type of vehicles can be sold
from 1 April 2020 onwards Stage-VI
vehicles will emit less Sulphur and
Nitrogen Oxides than their predecessors.
• Many buyers awaiting new BS6 cars’ prices to fall
instead of buying BS4 models.
• Even though the BS4 car may be cheaper, it’ll not
have good re-sale value in the 2nd-hand used
market after 5-6 years. So buyers are hesitant.
• Among others, above reasons contributed to
decrease in automobile sales in 2019
• Separately, Department of Heavy Industry notified
Corporate Average Fuel Efficiency (CAFE) norms
for passenger cars, requiring them to cut down CO2
emission from 2017 onwards.
Motor Vehicle Amendment Act 2019
• Road accidents takes more than 1.5 lakh lives every
year. So, Union’s Motor Vehicles Act, 1988 was
amended in 2019 with severe penalties - such as
Drunk-driving fine increased from INR 2,000 to
INR 10,000 etc. Even road contractors and officials
can be punished with fine if faulty infrastructure
results in accidents.
• Concurrent List Entry 35: Mechanically
propelled vehicles. So, both union and states can
enact laws but Union’s law will prevail.
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 • But, some State Governments have notified reduced will finish by 2026-27, then it’ll
penalties. Union Highway Minister said, “States become longest bridge.
can revise fines if they want. However, peoples’ Diffo Bridge Built over Diffo River in Arunachal
lives should be saved." Pradesh.
SARDP-NE Road Ministry → extra funds for
Further, Motor Vehicle (Amendment) Act 2019 roads in North East. Special
mandates: Accelerated Road Development
• Aadhar card compulsory for getting a driving Programme (SARDP-NE)
licence and vehicle registration.
• Good Samaritan - who helps the injured victim in Transborder Connectivity:
good faith - will not be harassed in civil /criminal
cases. It will not be mandatory for them to disclose Kartarpur Sahib • Kartarpur Sahib is located
identity to police or doctors. Corridor (2019) on the bank of Ravi river,
• Road builder can be penalized if poor quality of Pakistan, about 4.5 km from
road leads to accident. the international border.
• Vehicle company can be penalized for sub-standard • Here Guru Nanak Sahib
components. Government can order recall of such spent his 18 years until his
faulty vehicles. death in 1539.
• Easier registration process of vehicles modified • 550th birth anniversary of
for Divyang(PH) Guru Nanak Sahib in 2019.
• A Motor Vehicle Accident Fund will provide • Govt launched Visa-free
compulsory insurance cover to all road users in corridor - Indian citizens
India for certain types of accidents. and OCI (Overseas Citizens
• Technical reforms in third party motor-vehicle of India) can travel from
insurance & claims. India to Pakistan.
Kaladan Multi- • To connect Haldia/Kolkata
Transport: Bridges Modal Port → Sittwe Port
(Myanmar) → Kaladan
IBMS Road Ministry developed an Indian River → Road transport to
Bridge Management System (IBMS) Mizoram.
web-portal to monitor 50,000+ • In other words, this project
bridges on National Highways of aims to provide alternate
India. Such database can help: connectivity between
1) Repair works eastern ports of India to
2) Mega-sized trucks could be Mizoram via Myanmar.
diverted to other routes to avoid IMT • India-Myanmar-Thailand
structural damage to small bridges. Trilateral Highway.
Bogibeel The longest Rail-cum-Road Bridge BBIN (2015) • Bangladesh-Bhutan-India-
Bridge of the India (4.94 km). Nepal (BBIN) Motor
Connects Assam’s two districts over Vehicles Agreement
Brahmaputra river. 2018: Modi (MVA) to enable
inaugurated. movement of passenger and
Dhola- Longest road bridge of India cargo vehicles across
Sadiya (9.15kms) to connect Dhola in borders. While Bangladesh,
Bridge Assam to Sadiya in Arunachal over India and Nepal have
river Lohit, a tributary of River implemented it but
Brahmaputra. 2017: Modi Bhutan’s Parliament yet to
inaugurated. pass the bill of 2019-April.
Dhubri- 19.3 kms road bridge to connect INSTC (2000) • International North–South
Phulbari Dhubri (Assam) and Phulbari Transport Corridor
Bridge (Meghalaya) over river • Members: India, Iran,
Brahmaputra. 2019: Modi approved, Russia, Turkey, Azerbaijan,
Kazakhstan, Armenia,

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 Belarus, Tajikistan,
Kyrgyzstan, Oman,
Ukraine, Syria. Observer
member - Bulgaria. (It helps
connecting Afghanistan
through Chabahar port
although directly it may not
be passing through it.)
• With ship, rail, and road
route for faster cargo
transport.
Ashgabat • Ashgabat Agreement For
agreement multimodal goods transport
(2011) between Central Asia and
the Persian Gulf.
• Signatories: Kazakhstan,
Uzbekistan, Turkmenistan,
Iran, Oman, Pakistan
(2016), India (2018). This
also creates synergy for
INTC.
Blue Dot • Proposed by the USA,
Network (2019) Japan and Australia. India is
yet to join.
• If an infrastructure project
gets ‘Blue Dot’
Certification, then that
Project has high standards
of quality, transparency,
sustainability, and
developmental impact.
• This will encourage private
investors from 1st world
nations to invest in such
projects.
Chabahar & • Chabahar Port in Iran. India
Gwadar helped building it.
• Gwadar Port in Pakistan. So
obviously China helped
building it.
Recommendations of Rakesh Mohan Committee:
• Roads should not be looked at in isolation, but as
part of an integrated multi-modal system of
transport. The planning and development of the
primary road network must tie up with planning of
railways’ dedicated freight corridors.
• The existing network of National Highways and
State Highways may be expanded in tune with the
economic growth and development of industrial
hubs, SEZs, ports, tourist centers and
connectivity to international routes – Asian
Highways and the European Road Network.
• Special needs of connectivity to ports, airports,
mining areas and development of power plants
should be factored in development of the road
programme.
• States should encourage citizen and user oversight
through undertaking road user satisfaction
surveys.
• The current program of PMGSY should be
expanded to achieve universal connectivity to all
habitations on time bound basis.
• Expand the reach of the electronic toll collection
(ETC) system. Complete the setup of ‘FASTag’,
which employs radio- frequency identification.
• There is need for continuous upgradation of
technology in the auto industry, especially the
commercial vehicle sector, to meet the objectives of
better comfort, productivity, energy efficiency.
• Private sector financing in the highways will remain
confined to commercially viable and high traffic
density stretches. It will be prudent to enhance the
availability of public sector funding.
• For capacity augmentation of state highways every
state should formulate and implement
programmes on the lines of NHDP.
Conclusion:
Good connectivity is a fundamental requirement
equitable industrial growth in all regions. SDG Goal-9
requires India to build resilient infrastructure including
all weather roads connecting all villages.
Transport: Railway
• First railway from Mumbai to Thane (34 kms).
Governor General Dalhousie in 1853.
• In 1921, Acworth Committee recommends
separation of rail budget from General budget;
practice started from 1924-25, ended in 2017 by
Govt.
• Today, Indian railways has the fourth largest in
terms of network (more than 65,000 route-km)
after the US, China and Russia.
Ministry of Railways consists of:
Zonal - • 17th zone is Metro Railway
Headquarter Zone Kolkata (proposed)
• 18th Zone is: South Coast
Railway - Vishakhapatnam
(Andhra)
Subordinate - • Railway Recruitment Boards.
Offices Railway Staff College,
Vadodara, Guj
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 • Indian Railway Engineering • Cross subsidization, poor operating ratio, poor
Institute, Pune. sanitation, dismal service quality & safety
Statutory • Railway Board, under the compromised.
Indian Railway Board Act, • Railways ill-equipped to combat robberies,
1905 vandalism, stone-pelting.
PSU • IRCON (Construction), • While truck transport-more pollution, expensive
IRFC (Finance), IRCTC and slow than trains, yet more than 2/3rd cargo
(Catering Tourism), carried by trucks.
• Konkan Railway Corporation
Ltd., Mumbai Rail Vikas Railways Modernization: Personnel &
Corporation, Organizational Reforms -
• Dedicated Freight Corridor • Earlier, Sam Pitroda Committee (2012) and
Corp. of India Ltd., Bibek Debroy Committee (2015) and many others
• Bharat Wagon and had suggested various organizational reforms for
Engineering Co. Ltd., Burn the Railways.
Standard Coy. Ltd, • PM Modi Cabinet had constituted Alternate
Braithwaite and Company Mechanism and approved following:
Ltd. 1. Unification of Services
• Container Corporation of 2. Restructuring of Railway Board.
India Ltd. (CONCOR)
Reforms in Unification of Services:
Key Issues: BEFORE AFTER
• Congested networks. Technical services • These eight services will
• Organisational structure: Delays in decision- recruited through Indian be merged
making, inadequate market orientation and long Engineering Service (IES) into Indian Railways
exam of UPSC viz. Management Service
project approval durations lead to slow turnover
1. Indian Railway Service of (IRMS)
times. Engineers • Benefit - Improved
• Internal generation of resources: Negligible non- 2. Signal Engineers coordination and
fare revenues and high freight tariffs have led to a 3. Mechanical Engineers efficiency.
sub-optimal freight share. The lower relative cost of 4. Electrical Engineers
5. Stores Services
transporting freight by road has led to a decline in 6. Non-Technical services
the share of the railways. recruited through Civil
• Safety and poor quality of service delivery: There Services Exam (CSE) of
have been a number of accidents and safety issues UPSC viz.
1. Indian Railway Traffic
in the IR in recent years. Service (IRTS)
2. Indian Railway Accounts
Cross Subsidization in Railways: Service (IRAS)
• To keep rail travel cheap for the poor people, 3. Indian Railway Personnel
Service (IRPS)
Railways keeps the passenger tickets lower than This resulted in fragmented
its input cost. manpower planning, lack of
• To compensate this loss, Railways keeps freight coordination with each other,
(goods transport) prices higher. This is called departmental rivalries.
“Cross subsidization” Indian Railway Medical It will be renamed as Indian
Service (IRMS), recruited Railway Health Service
through Combined Medical (IRHS)
Operating Ratio of Railway: Services Examination of
• Operating Ratio means Railways operating UPSC
expenses divided by its operating revenues.
• 2018: 96.2% Issues with Unification of Services:
• Budget-2019: aimed to improve it to 95% • Officers fear their seniority / promotion may be
affected with merger.
Railways Modernization: • Electrical / mechanical engineering works can’t be
manned by non-Engineers because they don’t have

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 subject knowledge. Therefore merger into a single • Government (Indian
service is irrational. Railways) provide
• Bibek Debroy Committee (2015) suggested merger timetable, track and
of these services into two services: signalling infra to
1. Technical and them.
2. Non-technical. • Private train operator
• That would have been more rational decision. will share % of its
revenue with
Railway Board Restructuring: Government.
• Passengers will
BEFORE AFTER benefit from world-
Railway Board, the apex Similar to a Company class train services
decision making body of board. e.g. No nuisance of
Railways had: • Chairman of the hawkers, beggars,
• One Chairman Railway board will be unhygienic toilets.
• Members selected the Chief Executive
• Lady train hostesses
from various Railway Officer (CEO)
departments. • 4 functional Members
to deliver food &
i.e. officers from amenities.
Railways selected on • Such trains will stop
merit cum seniority at very few stations,
basis. will have minimum
• Some independent 160 kmph speed will
members with assure faster and
knowledge & more pleasant
experience in industry, journey.
finance, economics
• Lately, Government
and management
fields.
itself started
Railway board members ‘premium trains’
were allocated subjects on such as Duronto,
functional lines, similar to a Tejas, Vande Bharat,
company board: Uday, Hum- Safar
1. Operation etc.
2. Business Development • But there is a long
3. Human Resources waitlist for tickets.
4. Infrastructure Which proves people
5. Finance are willing to pay for
good service, but
Private Train Operators: Govt alone doesn’t
have enough funds to
Before After launch many such
• Indian Railways On selected routes (not ‘premium trains’
itself responsible for all routes):
running the trains, • Private train • In 2006, Ministry of Railways allowed private
collecting ticket- operators will buy operators to run container trains on the Indian
fees, delivering their design/buy Railways (IR) network.
passengers and their own private • Railways constituted Amitabh Kant Panel for
goods. trains from anywhere entry of private operators in passenger trains.
• Affluent passengers in the world. They • First ‘Private’ train (2019): Lucknow-Delhi
prefer Airlines over will run it on Indian Tejas Express launched. It’s operated by IRCTC.
Railways because tracks with their own Although, IRCTC is a subsidiary company of the
they are faster, driver, staff, & Ministry of Railways. So, technically, it’s not ‘fully
cleaner & safer. charge market- private train’ but if this experiment is successful,
linked fares. then actual private operators may be allowed.

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 • In Jan 2020, Indian Railways has invited private on a railway track.
companies to apply for running 150 passenger Broad (1,676mm) →
trains on 100 routes. Meter (1,000mm) →
Narrow (762 mm,
Draft proposal is as following: 610mm).
• Project Unigauge to
Model Private player will Design, Build, convert selected
Finance and Operate (DBFO) his routes into broad
private trains on the routes given to gauge.
him. Train must have minimum 16 • Presently, in terms of
coaches. track length: Broad
Concession 35 Years. After that, the government > Meter > Narrow.
Period may renew or Government itself may Project Saksham 2018 Skill and Training
start operating it or select another program for railway
party depending on the mutually employees. Phase-II
agreed conditions in the contract. started in 2019.
Fees private train operator will share a % of Yatri Mitra Sewa Wheelchair cum porter
his revenue with the Government. services for PH
passengers (2016)
Challenges in allowing private trains:
• Apprehension among railway employees about Railways Fares and Rail Development Authority:
job-loss, if Government reduces number of • In 2017, Government setup “Rail Development
Government trains. Authority” - non-Constitutional, non-statutory
• Coordination issue between private crew running body via cabinet resolution.
the train and railways Government officials • It’s headed by a chairman + 3 members; 5 years
operating the track & signal system. term.
• Fixing responsibility and insurance claims during • RDA will Suggest Tariff (fares) determination,
train accidents. efficiency and performance standards, customer
• To keep their operational costs low, Private airlines satisfaction, technological upgrades..
not doing regular service- maintenance of aircrafts- • Although it can only ‘suggest’ because under
which endangers passenger security. Similar Railway Act, only the Railway Board can decide
danger in private railways. on the fares of rail services.
• In the aviation sector, Jet Airways et al engaged in
Predatory Pricing (selling tickets at deep Tatkal Tickets For booking the tickets in hurry /
discount) to kill rival companies. Eventually all emergency.
suffering from losses. So, fair competition & price Flexi-Fare or • In 2016 Government
regulatory mechanism required. Dynamic introduced this system on
• If private player imports railway from foreign pricing premium trains such as
country, its repair parts or mechanic may not be Rajdhani, Shatabdi and
easily available in India. Duronto trains.
• Here, base fare will keep
Conclusion: increasing by “specified” %
• Entry of private train operators will bring greater with every 10% of seats
investment, innovation, employment and pleasant booked.
travelling experience for the passengers. • Consequently, sometimes
• So, the Government has taken an appreciative step, train tickets became more
provided the aforementioned challenges are kept in expensive than airplane
check. tickets!
• Since 2018, Government
Railways Modernization Attempts: gradually stopping this
system.
Project uni- gauge • Track gauge is the
Started in 90s spacing of the rails

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Biotoilets with help DRDO: They contain anaerobic
microbial bacteria to decompose and convert human
excreta into water and gasses.
“Green corridors in Railways” = on these routes all
trains have bio-toilets to avoid direct discharge of
human excreta on Railway tracks/station premises.
Rail-Modernization and Electric Traction:
• It means replacing diesel and coal powered
engines with electric engines because they are
more environmental friendly and energy efficient.
• Earlier, PM Modi & NITI Member Bibek Debroy
raised doubts from strategic & economic angles
that:
o It will cost around 1 lakh crores, while our
existing investment in diesel engines will go to
waste.
o Difficult to accomplish in J&K & NE due to
topography.
o EU, China, Russia use electric trains for
passengers and diesel for cargo transport.
• In 2018, Committee on Economic Affairs (CCEA)
approved 100% Electric Traction by March
2022.
Rail-Modernization and Safety:
• 182 toll-free Helpline number
• Rashtriya Rail Sanraksha Kosh (2017) created to
finance the projects related to railway safety
e.g.Train Collision Avoidance System.
• Budget-2019: Govt. have removed all Unmanned
railway crossing in January 2019.
• Budget-2020: Rate of occurrence of rail accidents
has steadily decreasing from 2016 to 2019.
• RPGRAMs (Railway Passenger Grievance
Redressal and Management System) web- portal
and Rail Madad App have been launched
Rail Drishti Web dashboard: provides statistical
info related to railway operations.
Rail Safety: Railways Protection Force (RPF)
initiatives-2019
• Commando for Railway Security (CORAS)
battalion created by Railway Protection Force
(RPF), they will be responsible for fighting
terrorism and naxalism in Railways.
• Operation Thirst: RPF to crack down selling of
unauthorised Packaged Drinking Water in railways.
Metro Rail:
• Metro Rail is a Mass Rapid Transport System
(MRTS) for daily commuters. It runs on electricity
& usually confined within a given city.
• At present, India has operational metro rails at
Delhi, Mumbai, Kolkata, Chennai etc.
• City Roads are very congested, slow, accident
prone, air pollution. While metro rails provide relief
in daily commuting.
• However, metro trains are not panacea for India
because they are more capital and technology
intensive than ordinary public bus or local railways.
They require dedicated tracks, underground tunnels
and bridges. So there will be problems in land
acquisition and remodelling of existing urban road
infrastructure.
• Since metro rails cater urban middle class
commuters, so, fares can’t be raised beyond a point
for faster recovery. So it takes a very long time to
recover investment.
Metro Rail Policy 2017:
• Nodal Agency: Ministry of Housing and Urban
Affairs (MoHUA).
• Considering aforementioned challenges, Metro
train should be launched only after cost: benefit
compared to launching more buses and ordinary
trains.
• State Government will be responsible for Land
acquisition.
• Proposed Investment models for Metro rails:
o 50:50 joint venture between Union & State Or
o Public Private Partnership between State &
private company; while Union gives them
grants through Viability Gap Fund.
Budget-2019:
More metro railway initiatives via PPP. Because,
modernizing Indian Railway requires total INR 50 lakh
crore from 2019 - 2030, but in annual budgets we can
barely allot about INR1.6 lakh crore per year, so public
partnership necessary.
Bibek Debroy Committee recommendations:
• Streamline recruitment & HR processes. There
is a multiplicity of different channels through which
people enter the railway services
• Transition to commercial accounting.
• Establishment of Independent Regulator RRAI.
• Private entry into running both freight and
passenger trains in competition with Indian
Railways should be allowed
• Constructing new suburban lines should be
undertaken as joint ventures with state
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 governments. There are too many Zones and
Divisions and thus a rationalization exercise is
required.
• Decentralisation should happen at the bottom
level duties.
• Non-core areas.
• An Investment Advisory Committee may be set
up, consisting of experts, investment bankers and
representatives of SEBI, RBI, IDFC and other
institutions for raising resources for investment.
TRANSPORT: AVIATION
In the last decade, the Civil Aviation sector has grown
at a phenomenal pace. By 2020, India will be 3rd
largest aviation market.
Ministry of Civil Aviation:
Attached Directorate General of Civil
Offices Aviation (DGCA): registers civil
aircrafts, gives license to pilots,
supervises gliding clubs,
implements Chicago Convention
on International Civil Aviation.
Statutory • Airports Authority of India
(AAI, Act 1994): Statutory
body responsible for creating,
upgrading, maintaining
airports & runaways in India.
It operates 130+ airports in
India- some directly, some
via PPP basis e.g. GMR
group for Delhi and Mumbai
airports.
• Airports Economic
Regulatory Authority (Act
2008): Statutory regulator
setup with powers regulate
fees/tariffs charged at
airports. Govt introduced
new bill in 2019 to increase
its powers through some
technical reforms.
• Rajiv Gandhi National
Aviation University
• Commission of Railway
Safety (CRS) is under
Administrative control of
Aviation Ministry.
PSUs 1. Air India & its subsidiaries.
2. Pawan Hans (Helicopter) ltd.
Government planning to sell-
417
off both 1&2 through
strategic disinvestment.
3. Hotel Corporation of India
Ltd.
Autonomous Bureau of Civil Aviation
Security, Indira Gandhi Rashtriya
Uran Akademi
Civil Aviation Policy 2016:
Highlights:
• More airports and flights for North East & small
towns to improve regional connectivity.
• Making the air travel more affordable for middle
class
• Improving Airplanes’ Maintenance, Repair and
Overhaul (MRO) operations.
UDAN (Ude Desk ka Aam Naagrik) : RCS
• Nodal Agency: Civil Aviation ministry (2017).
• Earlier, Airlines avoided small towns, fearing that
not enough passengers will come.
• So, under Ude Desk ka Aam Naagrik- Regional
Connectivity Scheme (RCS), Govt. fixed INR
2,500 airfare per seat for one-hour travel on selected
regional / small town routes.
• Airlines fly at this rate, small town passengers will
come because it will affordable, and if airline
making any losses on such route then, they will be
covered by Union’s Viability Gap Funding (VGF)
and States also contribute 10-20% money
depending on whether NE or Non-NE.
• Govt arranges VGF money by charging about INR
5000 levy per flight on airlines operating at major
cities (E.g. Mumbai Bengaluru, A’bad-Delhi).
• In 2018, “International UDAN” launched to
connect India’s smaller cities directly to some key
foreign destinations in the neighbourhood.
Udan 3.0 (2018)
Civil Aviation Ministry invited the airline operators to
bid for new regional routes connecting:
• Additional tourist cities & North East cities.
• Seaplanes using Water Aerodromes (e.g. Statue of
Unity-Sardar Sarovar Dam in Gujarat, Sabarmati
River Front)
NABH Nirman: To Build More Airports
• Budget 2018 announced ‘NextGen Airports for
BHarat’ Nirman
• It aims to build 100 new airports in 15 years at the
cost of INR 4 lakh crore (mostly through PPP
investment.)
• It also aims to expand and upgrade existing airports now Government of India planning to tighten the
which will result into billion trips a year. drone regulations further.

No Frills airports
AAI develops No Frills airports at small towns and TOURISM INFRASTRUCTURE
North East with only basic safety and security features. Tourism contributes to over 1.60 lakh crore rupees in
No fancy lounges with air-conditioners, no aerobridges, Foreign exchange earnings & provides employments to
no conveyor belts for luggage. It is just a single storey thousands of people.
building without any posh facility so the low
operational costs. World Economic Forum’s Travel & Tourism
Competitive Index: India’s rank improved from 64
Challenges to aviation sector: (2014) To 34 (2019)
• ATF-Taxes: Airlines spend about 50% of the
revenues on Aviation Turbine Fuel (ATF). India’s PRASAD & HRIDAY Mission:
ATF excise & VAT are among the highest in Both are Central Sector Schemes i.e. 100% funded by
world so it impacts profitability of airlines. Union. Both aim to improve the city infrastructure &
• Predatory Pricing: It means deliberately selling amenities with special focus on improving the tourism.
product below the cost price, to eliminate rival
companies. AirDeccan, Spicejet etc. accused of PRASAD • Pilgrimage Rejuvenation &
this. It is bad practice for economy because in long (2014-15) Spiritual Augmentation Drive.
term, either the firm will collapse or it will establish
• Ministry of Tourism, initially 12
monopoly by eliminating rivals.
cities but then list keeps getting
• Passenger Safety Compromised: Due to higher
expanded to 20+.
operating costs, Indian Airlines not doing the
regular service & maintenance of the aircraft. HRIDAY • National Heritage City
• Govt. owned Air India is making losses, in 2018,
(2014-15) Development and Augmentation
Union tried to sell its 76% shares to privatize Air Yojana.
India, but no one came to buy. • Ministry of Urban
• Even Jet-Airways, a pvt. sector airline, shut down Development, 12 cities: Ajmer
(2019) due to heavy losses. (Rajasthan), Amaravati (Andhra
Pradesh), Amritsar (Punjab),
Drone Regulation: Badami (Karnataka), Dwaraka
• Nodal Agency: Civil Aviation ministry designed (Gujarat), Gaya (Bihar),
the rules effective from Dec 2018. Kanchipuram (Tamil Nadu),
• India’s airspace classified into: Mathura (UP), Puri (Odisha),
o Red Zone (flying not permitted), Varanasi (Uttar Pradesh),
o Yellow Zone (controlled airspace), Velankanni (Tamil Nadu),
o Green Zone (automatic permission). Warangal (Telangana).
• Drone-User will have to do one-time-registration
with Digital Sky Platform app. • In 2015, Ministry of Tourism launched the
• Then for every flight, Drone user must ask Swadesh Darshan Scheme to develop circuits
permission from mobile app. Based on the zone & having tourism potential e.g. Tourist reception
GPS location its system will automatically permit / Centers, Solid Waste Management, Streetlight,
deny. Landscaping, parking etc. where the Private Sector
• Any drone without a digital permit will not be is not willing to invest.
able to take-off. Thus, it has “no permission, no
take-off” (NPNT) mechanism. Budget-2020:
An Indian Institute of Heritage and Conservation
• In 2019-Sept, Iran-backed Yemenis Houthi rebels
under Ministry of Culture with the status of a deemed
used drone to destroy oil refineries in Abqaiq,
University.
Saudi Arabia.
• In 2019-Dec, USA used drone to kill Iran’s
military commander Gen. Qassem Soleimani. So, URBAN INFRASTRUCTURE

418
 Urban areas support about 30% of India’s population • Building Materials &
and contribute to more than 60% of India's GDP. Technology Promotion
These figures are expected to grow to 40% and 75% Council (BMTPC)
respectively by 2030. • Central Government
Employees Welfare Housing
2011 2030 Organisation
Urban population 31% 40% (and • National Cooperative Housing
50% by 2050) Federation of India (NCHFI)
Contribution to GDP 63% 75% Subordinate • Town & Country Planning
office Organisation
• Government of India
Urban: Census Definitions Stationery Office
Census-2011 definitions of urban area: • Department of Publication
(responsible for printing
Gazettes)
APP mHariyali App launched in 2019
Statutory towns Census towns to encourage Public to plant trees &
If an area is governed by If an area doesn’t have uploads it geo-tagged photos
a municipality, municipality etc. yet it through App.
corporation, cantonment could be counted as a PSU • Housing and Urban
board or notified town ‘town’ if it has: Development Corporation Ltd.
area committee, etc. 1. Min. 5000 people; (HUDCO)
and • National Buildings
2. Min. population Construction Corporation
density: 400/sq km Limited
and
• Hindustan Prefab Limited
3. Min.75% of males
(HPL)
engaged in non-agro;
Total 4000+ in india Total 3800+ in india
In 2015, NDA govt launched Urban Rejuvenation
Mission with two components:
Constitution (74th Amendment) Act, 1992 defines a
1. 500 AMRUT cities
metropolitan area in as, an area having a population of
2. 100 Smart cities.
ten lakhs or more comprising of one or more districts.
Amrut Mission (2015): 500 Cities
MOHUA:
• In 2005, UPA govt. launched Jawaharlal Nehru
In 2017, Govt. merged into:
National Urban Renewal Mission (JNNURM).
1. Ministry of Urban Development and Housing
2. Ministry of Urban Poverty Alleviation into a single • In 2015, govt. rechristened JNNURM as Atal
ministry called as Ministry of Housing & Urban Mission for Rejuvenation and Urban
Affairs which consists of: Transformation (AMRUT).
• AMRUT Aims to improve basic infrastructure -
public transport, water supply, sewerage, storm-
Attached • Central Public Works
offices water drains, green spaces and parks.
Department
• Scheme is not 100% funded by Union.
• National Buildings
Organisation (NBO) • Validity: 2015 to 2020. It is a five year sunset
scheme, covering 500 cities with population of 1
Statutory • Delhi Development Authority,
lakh and above.
Rajghat Samadhi Committee,
• Delhi Urban Arts Commission, Smart Cities Mission (2015): 100 Cities
National Capital Region
• SCS is a city with smart physical, civic and
Planning Board
economic infrastructure. It provide smart
Autonomous • National Institute of Urban technology, utility & mobility to its residents
Bodies Affairs through 0% bureaucratic hassles & 100% use of
Information and Communications Technology

419
 (ICT). Although ICT and computerization itself is
not the ‘end goal’ of a smart City. The end goal is
to improve quality of life, ease of living, economic
growth and sustainable development.
• Nodal Agency: Urban Development Ministry.
• Core Scheme i.e. not 100% funded by Union.
• To implement this project, every smart city is
required to set up a Special Purpose Vehicle (SPV)
company under the Companies Act.
Infrastructure Facilities in a Smart City
Electricity Automated streetlights, Smart
electricity grids, Rooftop Solar
Water Heavy penalties for littering &
water wastage. Facilities for
rainwater harvesting, storm
water drainage.
Transport • Walking lanes, public cycle
sharing, public transport
within 10-15m waiting time.
Multimodal transport: Bus
Rapid Transit System
(BRTS), Waterways,
railways (Metrorail,
Monorail, Trams etc.)
• Bypass, underpass,
overbridges, smart traffic
signals to prevent traffic
congestion. ICT to send
automated challans to traffic
violators.
Housing 100% housing to all with 24/7
water, electricity and Wi-Fi
connectivity. School, Mall, Parks
available within 400m of
residential area.
Education From nursery to college- all
educational facilities will be
available.
Healthcare From Primary Health Care
Centre to multispecialty hospital
and even veterinary hospital for
the pets will be available.
- 108 ambulance with maximum
30 minutes of response time.
Communication Wifi in all houses. Apps and
emergency helplines to connect
with medical / fire / police.
Economic Bank-ATM, Centres for Skill
Development & Startup
Incubation; Warehousing,
Freight Terminals, Export Parks
Arguments Against:
• India is a country of poor people and rural people.
So, instead of spending in big cities, it would have
been better to spend on 10,000 towns and villages
where people are struggling for basic amenities like
water and electricity.
• Excessive reliance on ICT in city administration
makes us more vulnerable to hacking & cyber
warfare. City will completely stop functioning if
electricity gone during natural disasters / nuclear
attacks.
• Nothing will be free except the Wi-Fi because the
SPV company will charge user-fees on
everything from water, sanitation, education and
healthcare.
• Soul of the city & sense of the community will be
lost. It will become an artificial jungle of concrete
and internet cables where nobody has time for
anybody except their electronic gadgets.
Arguments in favour:
Smart city will improve the quality of life & create
economic opportunities. And looking at such best
cities, even the voters in the small cities will become
more assertive in demanding better quality of city
administration from their municipal corporators, then
even small towns will become more clean and
comfortable to live.
Sister City project:
• In 2020, Urban ministry found some Smart cities
are lagging behind in implementation of projects.
• So, Top-20 best performing smart cities will be
paired with Bottom-20 worst performing smart
cities as ‘Sister Cities’.
• E.g. Ahmedabad (Rank 1) paired with Chandigarh
(Rank 81)
• Advantages: Sharing of best practices with each
other, inspiration & motivation etc.
Floor Space index (FSI)
• It prescribes the maximum construction that can be
done in a given area of land.
• Increase in FSI means more number of floors may
be created and more residents may be
accommodated in a single building.
• Norms are decided by the Municipal / Local bodies
/ State Government.
Indices for Quality of Life:
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 In 2020, Urban ministry launched two indexes/indices
to assess quality of life of citizens in 100 Smart Cities
and 14 other Million Plus Cities viz.
1. Ease of Living Index (EoLI)
2. Municipal Performance Index (MPI)
India is a fast urbanizing country and is witnessing a
steady increase in migration from rural areas to urban
centers. This poses stress on the already overburdened
infrastructure of the cities. SDG Goal 11 requires India
to work towards Sustainable cities and communities.
Sugamya Bharat Initiative (2014):
• Nodal Agency:
Divyang-jan Dept
(Ministry Social
Justice and
Empowerment)
• Ramps in public
buildings, railways, airports; toilets for wheelchair
users, Braille symbols and auditory signals in lifts,
disabled-friendly websites etc. so that life becomes
easier for the differently abled.
• Under Accessible India Campaign (Sugamya
Bharat Abhiyaan), Divyangjan Dept. hires auditors
to check public buildings & websites and then
respective organization required to do above things
under the Persons with Disabilities Act. Grants are
given as & where required.
• Awareness generation, IEC, mobile app etc.
Urban And Rural Infrastructure: Housing For All
By 2022-
• 1985: Indira Awas Yojana for rural areas gave
money to poor families to build homes,
• 2008: Rajiv Rinn Yojana for urban areas gave home
loan Interest subsidy to poor.
• 2015-16: NDA Govt. restructured them into
Pradhan Mantri Awas Yojana (PMAY).
• It is a Core Scheme i.e. not 100% funded by Union.
• PMAY has two components:
PMAY
PMAY (Urban) PMAY (Rural)
PMAY (Urban):
• Launched by Ministry of Housing and Urban
Affairs.
• It has four components:
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1. If person owns land: ₹ 1.50 lakh to build or
renovate his house.
2. If a builder is keeping 35% apartments’ quota
for EWS then he gets subsidy.
3. Slum redevelopment
4. Credit-linked subsidy scheme (CLSS):
Depending on the annual income, the
beneficiaries are classified into 3 groups:
1. Economically Weaker Section (EWS),
2. Low Income Groups (LIGs)
3. Middle Income Groups (MIGs: i.e. annual
income upto ₹ 18 lakhs).
These groups are given 3-4% interest subsidy on loan
amounts upto “specified” lakhs. Govt has setup Credit-
linked Subsidy Services Awas (CLAP) Portal where
beneficiary can track his application status in real-time.
PMAY (Rural):
• By Ministry of Rural Development .
• Beneficiaries are identified through SECC- 2011
data, and verified by Gram Sabha. They’re given
money to build home.
1. ₹ 1.50 lakh (plains area),
2. ₹ 1.60 lakh (hilly states)
3. Additionally, they can get upto ₹ 70,000 as
bank loans
• Money transferred to beneficiary’s bank account
via AwaasSoft web platform.
• Convergence with other schemes to provide
electricity, LPG, drinking water & toilet.
• Also provides skill programs for rural masons.
National Urban Housing Fund 2018:
• Nodal Agency: Ministry of Housing and Urban
Affairs: (Autonomous body) Building Materials
and Technology Promotion Council.
• They will raise mobilize ₹ 60,000 crores in next 4
years to finance the PMAY (Urban).
• This money will be raised through ‘extra
Budgetary Resources’ i.e. BMTPC itself
borrowing from market / CPSEs / lenders without
involvement of Govt.
Sustainable Housing and Global Housing
Technology Challenge (GHTC) 2019:
• Nodal Agency: Ministry of Housing and Urban
Affairs.
• Asked experts and private sector companies to
propose disaster-resilient, environment friendly,
cost-effective and speedy construction
technologies.
• They will be implemented on a pilot basis in some
cities to see the results.
Model Tenancy Act, 2019:
• In 2019, RBI’s quarterly residential asset price
monitoring survey (RAPMS) found that housing
affordability has worsened over the past four years.
People’s income failed to keep pace with rising
property prices. In Mumbai, difficult to find home
even with a budget of ₹ 45 lakhs.
• Since it is not possible to construct houses for
each and every one, we also need to promote rental
housing especially for migrant workers. But,
current Rental Laws are archaic.
• So, 2019-July Ministry of Housing & Urban Affairs
drafted a Model Tenancy Law with following
features, and asked States to adopt it:
o It covers properties rented for residential,
commercial, educational use.
o Specific provisions about security deposit,
mechanism to increase rental amount- in a way
that it protects both the tenant and landlord.
o If tenant doesn’t vacate the premises after rent-
period is over or damages the property, then
heavy penalties on him.
o Dy. Collector rank officials will be designated
as ‘Rent Authority’.
o Higher appeal to Rent Court - Rent Tribunal.
Disputes will be settled within 60 days
deadline.
Conclusion:
A homeless family is more vulnerable to crime, disease
& disasters. SDG Goal 11 requires India to provide safe
and affordable housing to all by 2030.
INFRASTRUCTURE: RURAL
Ministry of Rural Development:
Dept •
Dept. of Rural Development.
•
Dept. of Land Resources.
Autonomous •
National Institute of Rural
Bodies Development and Panchayati
Raj- Hyderabad.
• Council for Advancement of
People’s Action and Rural
Technology (CAPART)
chaired by the Union Minister
for Rural Development to
coordination with NGOs &
Government.
Shyama Prasad Mukherjee Rurban Mission:
• In 2004, President Dr. Kalam suggested PURA
(Providing Urban Amenities in Rural Areas), but
failed to take off because inter-ministerial
miscoordination in UPA.
• NDA govt. repacked PURA as SPMRM in 2016
• Nodal Agency: Rural Development Ministry.
• Core Scheme i.e. not 100% funded by Union.
• Strategy: 15-20 villages clusters are selected. They
are given finance to improve Electricity, water,
roads; centres for Agri Processing, Tourism, Skill
development etc.
• As a result, the economic opportunity and ease of
living will improve in the rural areas itself. Hence,
cities also will face less migration and congestion.
Rashtriya Gram Swaraj Abhiyan (2018):
• Under UPA-era, the Panchayati Raj Ministry had
following schemes:
1. Backward Region Grant Fund (BRGF):
Additional Funds to backward areas to build
schools, roads, streetlights etc.
2. Rajiv Gandhi Panchayat Shasaktikaran
Abhiyan: Funds for Panchayat Building
renovation.
3. Rashtriya Gram Swaraj Yojana (RGSY) for
training of PRI’s elected representatives & civil
servants.
• Since 14th Finance Commission provided huge
grant in aid to the Panchayati Raj bodies, so govt.
stops these schemes from 2015.
• In 2018, Govt. launches Rashtriya Gram Swaraj
Abhiyan (restructured) with basically above
features i.e. Panchayati Raj Institutions (PRIs)
given funds to improve e-governance, repair and
renovate panchayat building. PRI officials given
training & exposure visits, improvised their
capacity building so that they become capable to
achieve SDG goals.
• Nodal Agency: Panchayati Raj Ministry.
• Core Scheme i.e. not 100% funded by Union.
(Gen-60:40, Sp.Cat-90:10)
MPLADS (1993): Members of Parliament Local
Area Development Scheme
• Nodal Agency: Ministry of Statistics and
Programme Implementation (MoSPI).
• Central Sector Scheme i.e.100% funded by Union.
• Each MP can suggest development works worth ₹
5 crore per year in his constituency. For Rajya
Sabha MP, any district in his State. Nominated
MP can select any district in anywhere in India.
• Role of the Members of Parliament is limited to
recommend works. Thereafter, it is the
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 responsibility of the district authority (Collector) to minimum 3 targets from a
sanction, execute and complete the works long list of targets related to
recommended within the stipulated time period. school enrollment, 100%
• If area inhabited by SC then 15% fund quota for adult literacy, 100%
their development works, 7.5% for STs. vaccination, 100% ODF-free,
• Max. 20 lakhs / year (out of his 5 cr quota) for PH 0% child marriage, 0%
welfare e.g. giving tricycles, artificial limbs, drinking of liquor in public
hearing aids etc. places etc.
• Further, if any MP wishes, he may also recommend
works anywhere in India upto Max. 25 lakhs per
year (out of his 5 cr quota) e.g. during natural INFRASTRUCTURE: COMMUNICATION
disaster or to promote national unity.
Ministry of Communication:
• MPLADS Funds are non-lapsable in nature i.e. if
not used this year, it is carried forward to the next
Dept • Dept. of Telecommunications
year.
• Dept. of Posts
Statutory • Telecom Regulatory Authority
Corona-2020: Govt suspend this scheme for 2 years
Bodies of India (TRAI)
which will save about ₹8000 crores. Total amount will
• Telecom Disputes Settlement
be transferred into the Consolidated Fund. Govt
and Appellate Tribunal
justified it, “every rupee was needed to bolster the
(TDSAT)
resources available to our nation as we address the
PSU / PSB • BSNL: Bharat Sanchar Nigam
impact of Covid-19”
Limited & MTNL: Mahanagar
Adarsh Gram Yojanas: Telephone Nigam Ltd for Delhi
& Mumbai.
• BBNL: Bharat Broadband
Saansad Adarsh • Rural Development
Network Ltd.
Gram Yojana Ministry (2014).
• Telecommunications
(SAANJHI) • Members of Parliament adopt
Consultants India (TCIL) Ltd
village in their constituency
• Indian Telephone Industries
(if nominated member then
(ITI) Ltd
adopt anywhere)
• India Post Payments Bank
• MP to give personal attention
(IPPB) Ltd.
to develop these villages
Attached / • Universal Service Obligation
through better
subordinate Fund
implementation of existing
• Telecommunication
schemes.
Engineering Center
• MP to encourage the villagers
to build library via donation, Autonomous Centre for Development of
prepare village song, Telematics (C-DOT)
remember martyrs, celebrate
girl child birth, plant trees Data Security Council is a (private sector) not-for-
etc. profit body on data protection by NASSCOM.
Pradhan Mantri • Social Justice Ministry (in NASSCOM is a not-for-profit association of Software
Adarsh Gram 2009, by UPA launched- companies.
Yojana NDA continued)
• Govt to focus on villages TRAI:
• 1999: Telecom Regulatory Authority of India
with than 50% Scheduled
Caste (SC) population: (TRAI), a statutory body under the
• Develop these villages Communications Ministry.
• Higher appeal lies to Telecom Dispute Settlement
through better
implementation of existing And Appellate Tribunal (TDSAT).
• TRAI regulates the operators of telecom, internet,
schemes.
• A village is declared ‘Adarsh DTH/cable TV sector.
Gram’ once it achieves

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• TRAI’s notable initiatives for consumer interest
are:
o DND (Do Not Disturb) registry to prevent
Telemarketing Calls/SMS.
o Strong directives to reduce Call-drops in
mobile plans.
o MySpeed App to help customers to measure
3G/4G speed & share with TRAI.
o Directives for Net Neutrality i.e. Internet
Service Providers (ISPs) must treat all internet
traffic equally without increasing/slowing
down speed towards any website.
o DTH / Cable operators required to give
customer the freedom of choosing channels,
and fixed prices for services.
o Telecommunication Consumers Education and
Protection Fund (TCEPF) introduced in 2007.
Requires Telecom service providers to deposit
all unclaimed money of consumers, including
excess charges and security deposit.
Central Equipment Identity Register portal:
• By Dept of Telecom
• If your mobile gets stolen or lost, file First
Information Report (FIR) in Police and upload FIR
details and International Mobile Equipment Identity
(IMEI) on this portal.
• Government will block the IMEI number of the
phone so phone will become unusable for the thief.
Telecom Sector:
Tele-density is number of telephones per 100
population, is an indicator of telecom penetration in the
country.
Tele-density in 2019:
National Urban Rural
90 160 58
2G Spectrum Scam:
• To run telecom business, following things
required:
1. License,
2. Access to Spectrum. Spectrum refers to the
radio waves that are used by mobile phones to
transmit data.
• UPA-1: Govt. will give license by “First Come
First Serve Basis”, and whoever gets the license,
he will automatically get free 2G spectrum linked
with his License.
• Scam: Certain shell companies who had no
intention of actually running telecom business
applied and got licence & free spectrum. Later on,
they sold it to the needy companies at higher prices,
thus, making windfall profit without doing any
business at all.
• Company has to separately
apply for Unified License
Present system: (i.e. valid for both voice and
data services)
• Company has to separately
buy Spectrum through Dept
of Telecom’s auctioning.
Adjusted Gross Revenue (AGR):
• In early 90s, Under the LPG reforms, private sector
telecom companies were allowed to begin operate
in India.
• They had to obtain telecom licenses & pay certain
fees to the Government every year.
• This fees is calculated as a % of their Adjusted
Gross Revenue (AGR).
• Later, Department of Telecommunications (DoT)
and Private Telecom Companies differed over the
definition or formula of AGR. Appeal went to
Supreme Court.
• SC ordered companies to pay, but they are making
excuses.
• But, technical controversy beyond the scope of
competitive exams.
Interconnect Usage Charges (IUC) and
Controversy:
• IUC is a fee that one telecom company (e.g. Jio)
pays to another company (e.g. Airtel) when its (Jio
customers’) makes a call to a user of that other
company (to airtel)
• The charge is decided by TRAI on a per minute
basis.
2019 Jio started levying IUC from its Jio-
customers when they make calls to non-jio
customers.
2020 TRAI is likely to reduce IUC to ZERO paise.
Digital India Programme:
• Nodal Agency: Ministry of Electronics & IT.
• Central Sector Scheme i.e. 100% Funded by
Union.

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 1977 - : National Informatics Centre (NIC) to develop
websites, softwares, ICT services for government of
India
2006: Manmohan’s National e-Governance Plan
(NeGP)
2014: Modi’s Digital India Mission by restructuring
above things:
• Digital India program 9 Pillars:
1. Broadband Highways:
• Communication Ministry’s Department of Telecom
(DoT)
o Bharatnet Project/ National Optical Fibre
Network (NOFN): Connect all 2.50 lakh+
village Panchayats with broadband.
o National Broadband Mission: To provide
broadband access to all villages by 2022.
• State Wide Area Network (SWAN) to run State
Government website & e-governance services.
• MeghRaj platform: To provide Cloud Computing
services
o Advantages: Cloud servers can store the file
& run the software Apps so that individual
Govt. organizations needn't buy very powerful
CPU/large hard disks etc.
• National Knowledge Network (NKN): to provide
highspeed internet (Gbps speed) to all universities,
libraries, laboratories, healthcare, research &
agricultural institutions.
2. Universal Access to Mobile Connectivity:
• Telecom companies required to pay to DoT’s
Universal Service Obligation Fund (USOF) to fund
and support new mobile towers in unconnected
rural / remote / LWE (naxal) areas.
3. Public Internet Access Programme:
• MEITY: Setup Common Services Centre (CSC) in
all 2.50 lakh+ gram panchayat. So, even if a poor
man doesn’t own PC/mobile, he can use CSC to
apply online for exams/schemes/certificates, check
result, pay bills etc.
• Dept of Post to create similar facilities in 1.50
Lakh post offices.
4. e-Governance and 5. e-Kranti - Electronic
Delivery of Services
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• Develop more apps, websites and portals to reduce
to improve Govt’s efficiency, reduce corruption.
e.g. Finance Ministry’s Dept of Expenditure
Controller General of Accounts (CGA) → Public
Financial Management System (PFMS) web portal
to disbursal of scheme money.
• Same CGA → Bharatkosh webportal for
transactions related to govt’s “Non-tax revenue
receipts” e.g. selling Yojana / Kurukshetra
magazines online.
• Dept of Post: online tracking of speed post, online
sale of postal stamps.
• Similarly, portals and apps for paying taxes, getting
passport, registering a company, applying for
admissions etc.
6. Information for All:
• MyGov.in: to facilitate 2-way idea exchange
between citizens and Government for good
governance.
• Data.gov .In: researchers can obtain datasets
related to ministries, departments, Macroeconomic
indicators etc.
• E-taal portal: It tracks the statistics of govt-citizen
transactions e.g. “x” number of RTI applications
filed online by the people in “y” age group from “z”
state.
• IGNOU, Delhi University etc. given funding to put
their courses / learning modules online.
• mKisan app/portal for e-extension services to
farmers. And so on....
7. Electronics:
• Refer National Policy on Electronics (NPE)
Manufacturing
8. IT for Jobs:
• IT companies given subsidies and tax benefits for
setting up BPO/call centers in North East.
• More computer courses for villagers and ITIs.
9. Early Harvest Programmes:
• It focuses on the projects which are to be
implemented within short timeline. e.g Biometric
attendance in govt organisations to check the
absenteeism of employees, teachers and students
•
• Women and Child Ministry: Khoyapaya portal to
announce lost children so others may inform the
authorities.
• Labour Ministry: Pencil portal to send complaint
about child labour.
• HRD Ministry: Convert all school books into
ebooks.
• IMD + NDMA: SMS based weather information
and disaster alerts
• MEITY’s CERT-In: Cyber Swachhta Kendra
webportal for free tools for removal of botnet /
malware / ransomwaresuch as Petya, WannaCry
etc.
• MEITY’s Digilocker: It’s similar to google drive
to store files. citizen opens an online account linked
with Aadhar number.
o He can store his important documents
o Organizations can send electronic copies of
documents (e.g. driving license, Voter ID,
School certificates) directly into his lockers.
o He can even sign documents using eSign
facility.
• 5g waves have wider coverage, so less number of
towers required to cover large area, so less energy
compared to 4g towers.
• People will have to upgrade their devices to use 5g.
this will benefit in Make in India, employment
opportunities.
• Considering these benefits, USA, China, S. Korea
are working on war-footing to implement 5g. Our
Department of Telecom too had setup A.J.Paul Raj
Committee, it prepared a roadmap for rollout of 5G
telephony in India by 2020.
• 5g technology can work in the millimetre bands
of 24.75 to 27.25 GHz spectrum. So, Government
planning to auction these “millimetre bands
spectrum auction” in 2020.

Q. Which of the following is/are the aim/aims of 5G Hackathon by DoT (2020):

"Digital India" Plan of the Government of India? • 2020: Department of Telecommunications (DoT)
(CSE-2018) has launched ‘5G Hackathon’ in association with
1. Formation of India's own Internet companies like NITI Aayog, MEITY, MSME Ministry, IITS &
China did. other academic and industry stakeholders.
2. Establish a policy framework to encourage overseas • Individuals and teams to give innovative ideas and
multinational corporations that collect Big Data to solutions related to 5G, reward kept as prizes worth
build their large data centres within our national total ₹2.5 crores.
geographical boundaries. NEST Division in MEA
3. Connect many of our villages to the Internet and New, Emerging and Strategic Technologies (NEST)
bring Wi-Fi to many of our schools, public places division created by the Ministry of external affairs
and major tourist centres. (MEA) for collaboration with foreign nations for 5g,
Answer Codes: artificial intelligence etc.
a) 1 and 2 only
b) 3 only Private Initiatives For Internet:
c) 2 and 3 only
d) 1, 2 and 3 Star-link • By Elon Musk, the founder of
Network Tesla e-cars & Space-X
5G Revolution In India: Project company.
Fifth generation (5G) of wireless technology which has • Aims to launch 12,000
capability to clock 2 to 20 Gbps speed, which is much internet-providing satellites
higher than present 4G which gives 6-7 Mbps speed. by 2027.
Latency It is the of time taken by data to travel • It will provide high-speed
between its source and destination. 5G and affordable internet at
has very low latency. global level.
Network Mobile operators to create multiple Aquila • Facebook project to use solar
slicing virtual networks within a single powered drones for
physical 5G network. Provide faster delivering internet in remote
data to tele-surgery in rural areas,
areas.
driverless car, etc.
• Although 2018, company
abandoned the project.
• Thus, 5g is useful in Internet of Things (IoT) and Project Loon • Google company’s project to
machine to machine (M2M) communications,
provide internet connectivity
CCTV surveillance, drones, real time data
in remote / hilly locations
analytics, industrial revolution 4.0.
using helium balloons.

Conclusion:

426
 SDG Goal 9 (infrastructure) requires India to provide
Universal telephone and internet connectivity to all.
Above scheme / policy helps in digital access, digital
inclusion, digital empowerment and bridging the digital
divide. Thus, it will play an important role in
transforming India into a knowledge-based economy
and digitally empowered society.
ES2019: Public Data: For The People, By The
People
• ES2019 define Data is a set of factual information
stored in digital form.
• When people conduct their day-to-day activities
online, they leave digital footprints- in chatting,
searching google, buying on amazon, file taxes,
posting on social media etc. While doing these
activities online, people produce data about
themselves which is stored on public and private
servers.
Types of Government Data:
• Birth-death records, pensions, tax
Administrative records, marriage records, crime
reports, land-property registrations,
data: vehicle registrations etc.
• Census data, National Sample Survey
data about employment, education,
Survey data: nutrition, literacy etc.
• e-National Agriculture Market data,
Transactions Taxes, User-fees such as railways etc.
data:
• Public school data on pupils, public
Institutional hospital data on patients, etc. Most such
data are held locally, predominantly in
data: paper based form.
Data: Opportunities through Data integration:
Since the Administrative, Survey, Transaction and
Institutional datasets are unconnected, each ministry
only has a partial picture. If all these public data sets are
integrated then:
427
(a) While filling every new form, Person will not have
to provide same details e.g. his education, address
proof, farm-land ownership proof etc.
(b) Weeding out bogus beneficiaries from one and all.
(c) National health register: Similar to Digilocker it’ll
contain medical records of patient tied with his
Aadhar. Benefits:
o During emergency doctor can access the
medical history, even if patient is unconscious
o surveillance of syndromes
o immunization information.
Digital Dashboard for Transparency &
Accountability:
• A district education officer can make better
decisions if he knows, for each school in his district,
attendance rates of students and teachers, average
test scores and status of school toilets.
• Parents can make better decisions about which
school to send their children to if they know the
average absenteeism rate of teachers in their village
and can compare the rate to that in the neighboring
village.
• Researchers can use such data to validate the
efficacy of Govt schemes and suggest remedies for
future. (Union government’s already launched
Open Government Data platform for this.)
• Private sector should be given selected databases
for commercial use, after paying fees to Govt. for
example:
o If school test scores’ data of a given district and
city is sold to a coaching company, it can use it
for more targeted advertising/setting new
classrooms in the areas accordingly. So, the
company will benefit, parents will benefit.
o Similarly, Uber can use public bus transport /
passengers data to identify congested areas,
deploy more taxis / rickshaws in the peak hours
accordingly.
o Since govt is selling data → It will earn a new
stream of revenue to control fiscal deficit.
Considering these benefits, in Sept 2019 MEITY setup
Kris Gopal Krishnan Committee for the regulation of
non-personal data such as community data, anonymous
data.
Telangana Government’s Samagra Vedika
initiative:
Using the name and address of an individual as common
identifier, Telangana Government linked 25
Government datasets such as:
➢ crimes, assets, electricity connection, subsidies, spirit of the Constitution of India, data “of the
education, taxes etc people, by the people, for the people” must therefore
➢ Each individual was then further linked to relatives become the mantra for the government.
such as spouse, siblings, parents and other known
associates.
➢ This helps in detection of crime. Identifying INVESTMENT MODELS:
ineligible/fictitious beneficiaries. • Infrastructure projects require large amount of
investment. Govt alone can’t finance it due to fiscal
Union Government is also “linking” of Bank account deficit targets.
datasets – primarily through Aadhaar number, PAN
• Such projects also require the level of technical
database, mobile numbers. It helps combing through
expertise, management skills and professionalism
transaction records, find out tax evaders and Benami
that may not be available in the traditional
accounts.
bureaucratic apparatus.
• Therefore, Infrastructure investment / development
Govt efforts to release statistical data
has to be done through:
Following initiatives to help the policymakers,
o PPP: BoT , BOOT
researchers, innovators, data scientists, journalists and
o Non-PPP: such as EPC, Outsourcing
citizens to find statistical information related to
(Contracting-Out)
governance:
o Or a mixture of both using Hybrid Annuity
o National Informatics Centre (NIC) → Open
Model
Government Data (https:// data.gov.in)
o NITI announced to launch National Data and
1. PPP (Public Private Partnership):
Analytics Platform (NDAP) in 2021
• PPP is a long-term contract between a public sector
Challenges in public data: organization (Union/State/Local Body/PSU) and a
private sector company:
• If Data Privacy is breached or data is leaked
o to build a public infrastructure (highway, ports
accidentally, it may bring forth legal consequences,
etc.) or
financial implications and disruption in family /
o to provide a public utility service (electricity,
social life. E.g. if death certificate leaked online that
gas, water, transport, health etc.).
patient has died of HIV/AIDS. His entire family
may be ostracized by the neighbors. • In such PPP contract the ownership, risks &
rewards are shared in some fashion. (Unlike
• If data is hacked: financial loss, national security.
privatization where it's completely transferred from
• A majority of the poor still have no digital footprint.
public sector to private sector.)
Existing paper-based data need to be converted into
• PPP can be:
digital form. Govt can ask citizens to become
1. For a Greenfield project: e.g. GMR group
volunteers, even launch App.
building fresh new airport in Hyderabad. or
• District government official should be trained in
2. for a Brownfield project e.g. Private companies
“How to use data for analytical decision
upgrading the existing airports at Delhi and
making?” Otherwise mere collection of data will
Mumbai.
be of limited use.
3. Done by forming a Joint Venture (50:50) or
• Many State govt create ‘online dashboards’ for Special Purpose Vehicle (SPV) company with
monitoring schemes but These dashboards are not equity from public and private sector. Or
easily accessible to citizens, they require password; 4. Done by Govt granting ‘Concession / lease /
sometimes portals are not functional or contain licence / permit’ (a legal right) to private
outdated data. company (Concessionaire) to design, develop,
finance, construct, operate, maintain a
Public Data: Way forward greenfield / brownfield infrastructure asset.
If scattered public data is integrated it will bring greater
accountability in public services and improve targeting PPP (GREENFIELD) MODELS:
in welfare schemes. Therefore, just like highways,
• Build-Operate-Transfer(BoT)
government needs to view data as a public good and
• Design-Build-Finance-Operate(DBFO)
important infrastructure. Govt should make necessary
investments in it, while protecting data privacy. In the

428
 Parameters (BoT: Toll / DBFO / o Advantages:
Annuity) BOOT o To Government: we got upfront money to
Owner Private player but after time limit finance schemes / build new roads; no need to
is over / his investment recovered, pay salary of those toll-booth employees.
the ownership transferred to Govt. o To private player: we will make profit
Financer Govt. Private player depending on how much traffic comes.
responsible to • 2018: NHAI award projects worth 680+ kms in
arrange from Andhra Pradesh and Gujarat.
his pocket /
market. Budget-2020: due to FASTAG toll collection became
Who is the Private player during the contact more easier. So, Govt. will monetise at least twelve
responsible for period, then government itself highway bundles worth 6000+ Kms before 2024
the building, may start operating it (or 2. Non-PPP
operation and outsource it to a third private In these models, the private player is not given
maintenance company) ownership of infrastructure or right to collect toll/user
(O&M)? fee at any point of time. So, they’re not PPP. Notable
Toll/Fees - If BoT: Toll Could be toll or examples are:
collecting model then annuity - Engineering, Procurement and Construction (EPC)
authority Private player depending on - Outsourcing / Contracting out
levies toll from project.
users (e.g. E.g. Delhi- Parameters PPP model Non PPP
highway)- but Mumbai (BoT: Toll) models e.g.
he’ll face a risk- highway - EPC,
what if less private players outsourcing,
traffic! would love to GoCo
- If BoT: have a Toll Owner Private player Govt owns in
Annuity model model, whereas owns until perpetuity.
then Govt pays in Nagaland contract time
private player Manipur expired/ his
fixed fund at highway they’d investment
regular period prefer annuity recovered.
from its budget. model due to Who is the Private player Private player
less growth responsible for
projection in the building,
traffic. operation and
Examples NHAI Water pipelines maintenance?
highways contract by Toll/Fees Private player Govt pays the
Corporations collecting private player.
authority Govt itself will
PPP (Brownfield): collect user fees
• Build-Lease-Transfer (BLT): Usually associated or arranging
with brownfield projects e.g. Govt owned existing finance from
airport is leased to private player for operation, he budget.
renovates it and charges user fees for same. After
the contact period is over / investment recovered Non-PPP: GOCO For Indian Army-
then govt again assumes operational responsibilities • Army’s Central Ordnance Depot (COD) and
(or gets another private player). Thus Govt remains Army Base Workshops (ABWs) are responsible
the owner in perpetuity. for manufacturing & warehousing, maintenance,
• Toll-Operate-Transfer (TOT): Private player repair and overhaul (MRO) of: Weapons,
pays upfront fees (e.g. ₹ 15000 crore) to the Ammunition, Tanks, Trucks, Radars, Air defense
government to obtain the ‘right to collect toll’ on system etc.
an existing road (brownfield) for a fixed period (e.g. • Clothing, footwear, headgear, tent & camping
50 years). gears, kitchen equipment etc. But,

429
• 2015: CAG audit found them to be overstaffed,
inefficient and slow.
• 2016: Defence Ministry’s Lt. Gen. DB Shekatkar Hybrid Annuity Model (HAM):
(Retd.) committee to “enhance combat capability • HAM is mix of PPP and Non-PPP models.
and re-balancing defence expenditure.” Committee • 2016: Introduced for highway projects in India.
recommended GOCO Model. Suppose the cost to build a new highway is INR
1000, then.
Government - Owned Contractor - Operated o ₹ 400: Govt pays in phased manner (as road
(GOCO) model: construction progresses).
• GOCO model: private contractors operate the o ₹ 600: private player arranges from his pocket
army’s base workshops that repair equipment from and / or market borrowing.
guns and vehicles to tanks and helicopters. o Once the highway is finished, Govt (NHAI)
• Government remains the owner of the ABW starts collecting toll → pay the private player at
workshop / COD depot regular interval (called as annuity) till the
• But a private player is given a contract to take over private player recovers ₹ (60+some profit).
the operation / running of such a workshop / depot.
He will be responsible for warehousing operations, PPP Model Non PPP Hybrid
transportation of material, repair, maintenance etc. (BoT: Toll) Model (EPC) Annuity
• He will have to absorb the existing civilian Govt. has to bear the burden, Private player
employees working there. results into more fiscal deficit. bears higher
• Private player must be an Indian registered burden of
company with at least 10 years of working financing the
experience & “y” crore of turnover. project = less
fiscal deficit for
Benefits Challenges Govt.
• Decreased salary bill • Private operators BoT: Toll- Private player has no right to
for Government may not have the Private player collect toll (But at the same time,
• Private operators can expertise to deal has the right to he is also saved from the risk if
easily go into with military collect toll sufficient traffic did not come)
partnership with equipment;
Original Equipment In Bharatmala Pariyojana, NHAI has decided that:
• Manufacturer (OEM) • Private companies
for service, repair and interested in bidding Hybrid Annuity Model (HAM) 60%
spare parts. mostly for BOT (Toll) Model 10%
• Private firms will not workshops/Depots Engineering, Procurement, 30%
have to invest in land, that handle Combat Construction (EPC)
infrastructure, Tanks because they Total projects under Bharatmala → 100%
machinery. Because can easily charge Rs
Government already 8-9 crore for tanks’ Swiss Challenge:
built that. repair/services/spare • Without waiting for the government advertisement,
parts every time. suppose a private company sends a suo-moto or
Whereas not much unsolicited proposal to develop a railway station.
profit in • Government puts it online so other private
clothing/kitchen companies can challenge it.
utensils/cooking • In 2015, While Govt of India was considering to
stove related work. allow Swiss challenge method for infrastructure
• Strategic & development, but Vijay Kelkar committee on PPP
Security reforms suggested not to do it.
challenges: what if • Because there is a scope for non-transparency
private player sells and collusion.
the tank/radar
blueprints to Viability Gap Funding (VGF):
Pakistan/China?

430
 • Sometimes, the project is justifiable from social Govt. will invite them to India through annual
welfare and human development point of view but ‘Global Investors Meet in India’, using NIIF.
it’s not financially profitable or viable e.g. solar
panels in remote villages, or airport in Q. With reference to ‘National Investment and
Ladakh/Lakshadweep. Infrastructure Fund’, which of the following
• Then, Union Government / Multilateral Bank may statements is/are correct?_____(CSE-2017)
provide grant (not Loan) in the form of Viability 1. It is an organ of NITI Aayog.
Gap Funding (VGF). 2. It has a corpus of Rs. 4,00,000 crore at present.
Answer Code:
(a) 1 only
INFRASTRUCTURE FUNDS: (b) 2 only
(c) Both 1 and 2
Global • By World Bank to help (d) Neither 1 nor 2
Infrastructure emerging economies
Facility (GIF: 2004) and developing Q. The Global Infrastructure Facility is
countries. a/an_____(CSE-2017)
• It provides fund & a) ASEAN initiative to upgrade infrastructure in Asia
advisory to design PPP and financed by credit from the Asian Development
contract. Bank.
National Investment • During UPA era, the b) World Bank collaboration that facilitates the
Fund (NIF: 2005) revenues from preparation and structuring of complex
disinvestment were infrastructure Public-Private Partnerships (PPPs) to
transferred in this fund enable mobilization of private sector and
to finance various institutional investor capital.
schemes, projects, PSB c) Collaboration among the major banks of the world
recapitalization. working with the OECD and focused on expanding
India Infrastructure Setup in Dept of Economic the set of infrastructure projects that have the
Project Affairs with ₹ 100 crores to potential to mobilize private investment.
Development Fund help PPP projects. d) UNCTAD funded initiative that seeks to finance
(IIPDF: 2007) and facilitate infrastructure development in the
world.
National Investment and Infrastructure Fund
(NIIF: 2015) National Infrastructure Pipeline (NIP):
• Total Corpus is INR 40,000 crore. Out of that 49% • 15th Aug, 2019: PM Modi announced Rs.100 lakh
from Dept of Economic Affairs (Finance Ministry), crore would be invested on infrastructure over the
remaining by domestic & foreign investors & next five years.
financial intermediaries.
• SEBI registered NIIF as Category II Alternative
Investment Funds.
• NIIF is ‘fund of funds’ → gives funding to other
funds. E.g. 2017: India & UK set up Green Growth
Equity Fund (GGEF) to finance green infrastructure
projects in India. So, from Indian side NIIF invested
money in GGEF.

Budget-2019: NIIF, Investment & PPP

• Presently, union ministries and Central Public
Sector Enterprises have many unused land assets.
Govt. will create public infrastructure and
affordable housing on such land.
• India requires annually ₹ 20 lakh crores (about
$300 billion) investment in Infrastructure. For this,
Govt. have to encourage foreign pension, insurance
and sovereign wealth funds to invest in India. So,
• 2019-Sept: Finance Ministry set up a task force
under the Secretary of Dept of Economic Affairs
(DEA). Based on its report,
• 2019-Dec: FM Nirmala S. announced NIP. It aims
to mobilize 102 lakh crore worth infrastructure

431
 investment in the next five year (2019-20 to 2024-
25).
• This funding will be spread across Energy (24%),
Roads (19%), Urban (16%), Railways (13%),
Irrigation (7%) etc.
Further, the Government will also initiate following
reforms: Infra Finance Reforms-
Finance Market Reforms:
• Government and SEBI will undertake technical
reforms to strengthen municipal bond market, and
NBFCs such as:
o infrastructure investment trusts (InvITs),
o Infrastructure Development Funds (IDFs),
• Stringent monitoring to prevent ILFS-NBFC type
crisis in future.
• FDI, FPI investment norms will be relaxed.
Credit Enhancement Fund (CEF)
• Pension and insurance companies usually avoid
investing in bonds lower than ‘AA’ rating, due to
strict regulatory norms by PFRDA and IRDAI
respectively.
• So Government will ask them to relax the
investment norms for infrastructure projects.
• Many of Indian infrastructure companies / projects
have poor bond-rating. So, Government will setup
a Credit Enhancement Fund (CEF), which will
basically provide guarantee to such projects’
lenders → bond rating upgraded → more investors
attracted.
Others reforms: NIP
• Monetization of land assets owned by Govt.
• Market based pricing mechanisms to increase user
fees on infrastructure. (e.g. if electricity price
increased by x% then raise metro-train- fares by
y%)
• Technical guidelines for uniform quality, disaster
resilient roads, buildings, etc. (e.g. x% cement with
y% sand etc.)
• Training and capacity building for legal and
financial experts so they can frame better type of
PPP contracts - less chances of project delays or
disputes or NPA.
• Legal reforms so PPP contract disputes can be
settled through arbitration outside courts.
Challenges To PPP:
While the PPP-led infrastructure sector witnessed boom
before the supreme crisis but afterwards facing
following challenges:
• Environment groups / Civil society protest / PILs
makes land acquisition difficult.
• Fall in demand post subprime crisis - less cargo
traffic in highways / seaport / airports etc. so those
developers wanted extension of toll collection
period / loan restructuring / extra money to finish
remainder of projects but UPA’s coal scam, 2G
scam and subsequent ‘policy paralysis’ where
ministers, IAS & public sector bankers avoided
taking decisions on any file due to fear of media &
courts. All resulted into time & cost overruns for the
infra-developers- NPA problems.
• Crisis in IL&FS & other NBFCs in the
infrastructure finance sector.
• In PPP projects the fees paid by the users may be
higher than when the project was government
operated. Excessive reliance on PPP may
eventually result in exclusion of poor persons from
infrastructure facilities.
• Private players providing substandard services
and poor construction material to keep bigger profit
margin. This warranted to make Performance and
service audit.
• PPP not appropriate for small sized projects e.g.
building a school.
• In India, PPP model projects have confined mostly
to airports and highways. In other sectors, the
growth is either mostly private sector led (e.g.
Telecom / ICT) or mostly public sector led (e.g.
Railways & atomic energy) even though there is lot
of scope for synergy.
Way Forward:
• Infrastructure is a critical determinant of
economic growth. It has a direct bearing on
investment, manufacturing sector, logistics and
productivity. Infrastructure is equally important for
social sectors - be it education or health.
• Therefore SDG Goal 9 focuses on building resilient
& sustainable infrastructure.
• In India, infrastructure gaps exists in most of the
sectors- posing a serious threat to our economic
growth and sustainable development.
432
 CH-16 INCLUSIVE GROWTH
“Inclusive Growth refers both to the pace and pattern of
growth, which are interlinked and must be addressed
together.” -- World Bank
Inclusive growth entails comprehensive growth,
shared growth, and pro-poor growth.
In broad sense, IG implies the inclusion of all sections
of society in the process of economic development
and sharing of its benefit. Therefore, IG is not only an
outcome or end but a process or a mean in itself.
According to United Nations Development Program
(UNDP), inclusive growth is “the process and the
outcome where all groups of people have
participated in the organisation of growth and have
benefited equitably from it”. This implies that
inclusive growth should include all sections as
beneficiaries as well as partners in growth and that
inclusion of the excluded should be embedded in the
growth process.
Inclusive growth is also defined in terms of reduction
in inequalities in incomes, assets as well as in vertical
inequalities (individual inequalities) and horizontal
inequalities (group inequalities).
Salient Features of Inclusive Growth
▪ Address the constraints of the excluded and
marginalised.
▪ Participation from all sections of society
▪ Reduction in disparities among per capita incomes
between:
▪ Different sectors of economy
▪ Different Sections of society
▪ Rural And Urban Areas
▪ Different genders
▪ Non – discriminatory
▪ Higher potential of poverty reduction
▪ Ensure access of people to basic infrastructure and
basic services/capabilities such as basic health and
education. This access should include not only the
quantity, but also quality of these basic services.
▪ Include poor, lagging socio – economic groups and
lagging regions as well as they are partners in this
growth.
Need for Inclusive Growth in India:
▪ There is a severe lack of accessibility to core public
services.
433
▪ The public sending across core services stay at a
dismal percentage of GDP (1 – 2%). Though
institutions have been erected but quality is uneven.
▪ Malnutrition and undernourishment has been
prevalent in society among marginalised section
especially among adolescent girls.
▪ Economic and Social inequalities exist at intra-
state level and inter-state level. Poor growth rates
and poor public services in lagging states make sure
that disparity increases. The data is reflected in the
Human Development Index and Per Capita Income
across different states.
▪ Low agriculture growth, low quality employment
growth, low human development, rural-urban
divides, gender and social inequalities, and regional
disparities etc. are the problems for the nation
▪ Reducing poverty and inequality and increasing
economic growth are the main aim of the country
through inclusive growth.
▪ Growth has been uneven across sectors and
locations. For instance, agriculture has been lagging
behind and in countries such as India and China,
some regions have advanced faster than others.
Policies are also relatively ignored the agriculture
sector.
▪ Due to trade competitiveness, foreign direct
investment and new technologies has demanded
skilled labour. In some cases, labour laws also often
Equitable
distribution of
income
Agriculture Social Sector
Development Developmen
Broader
components
of Inclusive
growth
Reduction in
Industrial
regional
Development
disparities
Protecting the
environment
 discriminate against formal employment and
encourage 'casualization' of labour.
▪ Unsustainable economic growth.
Elements of Inclusive growth:
Inclusive growth is a multi-dimensional concept that
facilitates inclusion from a variety of fronts that include:
o Skill Development: Harnessing the
demographic dividend will depend upon the
employability of the working age population,
their health, education, vocational training and
skills. Skill development plays a key role here.
India is facing a dual challenge in skill
development:
▪ First, there is a paucity of highly trained workforce
▪ Second, there is non-employment of conventionally
trained youths
According to the Economic Survey 2017, over 30%
of youth in India are NEET (Not in education,
employment or training).
o Financial Inclusion: Financial Inclusion is the
process of ensuring access to financial services
to vulnerable groups at affordable costs.
Financial inclusion is necessary for inclusive
growth as it leads to the culture of saving,
which initiates a virtuous cycle of economic
development.
o Technological Advancement: The world is
moving towards an era of Industrial
Revolution 4.0. These technological
advancements have capabilities to both
decrease or increase the inequality depending
on the way these are being used. Several
initiatives have been taken by the government,
e.g. Digital India Mission, so that a digitally
literate population can leverage technology for
endless possibilities. Technology can help to
combat other challenges too.
o Economic Growth: India is among the fastest-
growing major economies in the world.
However, currently Indian economy is facing
slowdown due to both cyclic and structural
challenges. However, the target of becoming a
$ 5 trillion economy by 2024-25 can allow
India to reduce inequality, increase social
expenditure and provide employment to all.
o Social Development: It means the
empowerment of all marginalised sections of
the population like SC/ST/OBC/Minorities,
women and transgenders. Empowerment can
be done by improving institutions of the social
structure i.e. hospitals especially primary care
in the rural areas, schools, universities, etc.
Investment in social structures will not only
boost growth (by fiscal stimulus) but will also
create a healthy and capable generation to
handle future work.
Inclusive Growth and 12th Five Year Plans:
▪ The plan document begins with anticipating three
economic scenarios at the end of the 12th plan.
These three scenarios are “Strong inclusive
growth”, “Insufficient action” and “Policy
Logjam”.
▪ The first one viz. Strong inclusive growth is the
most optimistic one but needs effective
implementation and a robust government.
The plan document discusses the following aspects of
inclusiveness:
▪ Inclusiveness as Poverty Reduction: So that
adequate flow of benefits to the poor and the most
marginalised.
▪ Inclusiveness as Group Equality: The poor are
certainly one target group, but inclusiveness must
also embrace the concern of other groups such as
the Scheduled Castes (SCs), Scheduled Tribes
(STs), Other Backward Classes (OBCs),
Minorities, women, the differently abled and other
marginalised groups.
▪ Inclusiveness as Regional Balance: This aspect of
inclusiveness relates to whether all States, and
indeed all regions, are seen to benefit from the
growth process. Improvement in infrastructure
must therefore be an important component of any
regionally inclusive development strategy.
▪ Inclusiveness as Reducing Inequality: There is a
need to keep inequality into tolerable limits.
▪ Inclusiveness as Empowerment: The Plan
document says that inclusiveness is not just about
ensuring a broad-based flow of benefits or
economic opportunities; it is also about
empowerment and participation.
▪ Inclusiveness through Employment
Programmes: The document stresses on the
quality of assets created, which will determine
whether MGNREGA can go beyond the safety net
to become a springboard for entrepreneurship, even
at the lowest income levels.
434
 ▪ Poor nutritional, health and educational indicators
▪ Agriculture Backwardness
▪ Issues with Social Development
Access to
essential ▪ Regional Disparities
services
▪ Inadequate infrastructure
▪ Social inequality and discrimination
Poverty Employment
Reduction Generation
India and Inclusive Growth:
By the 12th five years plan the focus increased when the
slogan was designed as “Faster, sustainable and More
Components of
Inclusive inclusive growth”. The government evolved a clear
Growth - 11th
5year Plan
Women
short term and long-term policy towards the cause of
Equality of
opportunity
empowerme inclusive growth.
nt

▪ Short term policy: It aimed at supplying those

goods and services to the disadvantaged and
marginalised sections of the society which are bare
Good
Skill building
governance minimum and essential in nature. Sponsored
schemes are run by the governments for this
purpose. The following areas are touched by this
policy:
▪ Food and nutrition – Annapurna, Antyodaya,
NITI Aayog's Strategy for inclusive growth:
Mid-Day Meal, National food security act etc.
New India @75 vision has the following objectives for
▪ Healthcare and sanitation - National health
the inclusive growth:
mission, Swachh Bharat Abhiyan, ASHA, Mission
6. To have a rapid growth, which reaches 9-10%
Indradhanush etc
by 2022-23, which is inclusive, clean, sustained
▪ Housing - Indira Awas Yojana, Rajiv Awas yojana
and formalized.
etc
7. To Leverage technology for inclusive,
▪ Drinking water - National rural drinking water
sustainable and participatory development by
programme etc.
2022-23.
▪ Education - Sarva Shiksha Abhiyan, Rashtriya
8. To have an inclusive development in the cities
Madhyamik Shiksha Abhiyan etc.
to ensure that urban poor and slum dwellers
including recent migrants can avail city
▪ Long term policy: This is aimed at bringing in self
services.
dependence in the target population. An element of
9. To make schools more inclusive by addressing
sustainability is present in it. The attempts by the
the barriers related to the physical environment
government are classified as:
(e.g. accessible toilets), admission procedures
▪ All the schemes which aim at poverty alleviation
as well as curriculum design.
and employment generation
10. To make higher education more inclusive for
▪ All the programmes which promote education at
the most vulnerable groups.
any level
11. To provide quality ambulatory services for an
inclusive package of diagnostic, curative, ▪ Vocationalisation of education
rehabilitative and palliative care, close to the ▪ Skill development
people.
12. To prepare an inclusive policy framework with The strategy for inclusive growth in 11th and 12th five
citizens at the center. year plans aims at achieving the objectives of
sustainability and inclusiveness. The strategy
Challenges in Achieving Inclusive Growth: emphasised that GDP is not an end in itself but the
▪ Unemployment and underemployment means to an end.
India is committed to securing inclusive growth, leading
▪ Poverty and resultant poor human resource
to sustainable development and to usher in a governance
development
of transparency and accountability.
▪ Poor skilling and professional competencies
▪ Lack women’s in mainstream economic activities.

435
India believes that poverty eradication and job • As per the recent UNICEF report, atleast one
creation are primary objectives to achieve inclusive million children under five die in India due to
growth under the ambit of Sustainable Development malnutrition related issues.
Goals in United Nations Framework. • Here, the burden among the schedule castes,
scheduled tribes, other backward castes and
Schemes For Inclusive Growth: rural communities is highest in terms of acute
malnutrition.
Financial ▪ Pradhan Mantri Jan Dhan ▪ Among the states, it is Madhya Pradesh and
Inclusion: Yojana Rajasthan that have acute problems in terms of
▪ Pradhan Mantri Jeevan malnutrition.
Jyoti Beema Yojana • Social enterprises can play a key role in
▪ Pradhan Mantri Suraksha India’s agenda of inclusive developments.
Beema Yojana However, just like in many other countries, they
▪ Atal Pension Yojana are not officially or legally recognised as a
▪ Pradhan mantra mudra sector in India, even while they play an
yojana important part in the fight against poverty.
▪ Jan Dhan, Aadhaar and • The main reasons for India’s failure to
Mobile (JAM Trinity) achieve inclusive growth and distributive
Employment and ▪ MGNREGA justice are:
inclusive growth: ▪ Skill Training for ▪ The failure of land reform
Employment Promotion ▪ The wrecking of the well-designed community
amongst Urban Poor development programme that aimed at the all-round
(STEP-UP) development of the village
▪ Swaran Jayanti Shahari ▪ The lack of success in providing adequate
Rozgar Yojna employment opportunities at living wages to a
Agriculture and ▪ Pradhan Mantri Krishi rising population
inclusive growth: Sinchayee Yojana ▪ The neglect of school education and the absence of
▪ National Agriculture special measures designed to help children of the
market poor to get a good school education.
▪ National Food Security ▪ Continued dependence of some 60 per cent of the
Act workforce on low-productivity agriculture and
Technology and ▪ Digital India Program: allied occupations for employment and living.
inclusive growth:
Skill development 5. National skill World Economic Forum on social inclusion and
and inclusive development mission: economic growth:
growth: 6. Pradhan Mantri ▪ First, countries should increase public and
Kaushal Vikas private investment in their citizens’ capabilities,
Yojana (PMKVY) which is the most important way they can durably
7. Deen Dayal lift their rate of productivity growth.
Upadhyaya Grameen Second, governments, together with employers’
Kaushalya Yojana and workers’ organizations, should upgrade
(DDU-GKY) national rules and institutions relating to work.
8. Pradhan Mantri Vidya These influence the quantity and distribution of job
Lakshmi Karyakram opportunities and compensation, and thus the level
9. Self- Employment of purchasing power and aggregate demand within
and Talent Utilisation the economy.
(SETU) mechanism. ▪ Third, countries should increase public and
10. Atal Innovation private investment in labour-intensive economic
Mission (AIM) sectors that generate wider benefits for society.
Concerns with Inclusive Growth Schemes in India: These include sustainable water, energy, digital,
• Despite the high and fast growing emerging and transport infrastructure, care sectors, the rural
market economy, India has some shocking economy, and education and training.
statistics when it comes to food security.
Way Forward:

436
 ▪ With the onset of the IT revolution it has become
obligatory for new entrants to acquire even higher
levels of skills. Hence it is a matter of urgency to
provide adequate facilities for quality school
education and impart relevant skills to the
disadvantaged.
▪ Education: The working of existing government
schools should be improved as a matter of priority.
Hence the need to improve the functioning of
government schools without losing more time.
There is also a need to expand and modernise
teacher-training facilities.
▪ It is also important that growth in developing
economies continues to remain more labour-
intensive and broad-based, as a generation of
production employment opportunities on a large
scale is perhaps the best way for including the
excluded and marginalized sections of the
population.
▪ Agricultural: research needs to be greatly
strengthened both in terms of the resources devoted
437
to it and also by implementing institutional reform
along the lines recommended by the Mashelkar
Committee and the Swaminathan Committee.
▪ Taxation: More progressive tax system in India
would help raise capital for expenditure on
infrastructure, healthcare, basic services and
education.
▪ It is critical to adopt a rights-based approach
accepting the citizenship’s rights of people.
▪ Provision of education, healthcare, basic
infrastructural needs are part of the basic rights
of every citizen. A persistent increase in social
investments such as education and healthcare are
attached with long-term benefits and are part of a
macro strategy for improving productivity of
workers and for enhancing aggregate effective
demand in the economy.
▪ Gram Sabha should be empowered and made
effective especially in tribal areas and as per FRA
their consent should be made mandatory of mining
lease.
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