GS3 Core Economy Section

PRAHAAR ReDEFINED 3.
0: ECONOMY
Index
CHAPTER 1 ECONOMY ................................................................................................................................................. 6
ECONOMICS - AN INTRODUCTION ..................................................................................................................................... 6
FEATURES OF INDIAN ECONOMY ...................................................................................................................................... 6
INDIAN ECONOMY - GENERAL ISSUES .............................................................................................................................. 7
SLOWDOWN IN INDIAN ECONOMY .................................................................................................................................... 7
STEPS NEEDED TO BUILD A RESILIENT ECONOMY ........................................................................................................... 8
IMPACT OF COVID-19 ON INDIAN ECONOMY .................................................................................................................. 8
CHAPTER 2 GROWTH & DEVELOPMENT ............................................................................................................. 10
ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT ..................................................................................................... 10
MEASUREMENT AND INDICATORS OF ECONOMIC GROWTH AND DEVELOPMENT: ......................................................... 12
INCLUSIVE GROWTH: ...................................................................................................................................................... 14
ENVIRONMENT AND DEVELOPMENT LINKAGE: .............................................................................................................. 18
CHAPTER 3 PLANNING ............................................................................................................................................... 20
WHAT IS PLANNING? ...................................................................................................................................................... 20
EVOLUTION OF THE IDEA OF PLANNING IN INDIA: .......................................................................................................... 20
ACHIEVEMENTS OF PLANNING IN INDIA ......................................................................................................................... 20
FAILURES AND SHORTCOMINGS OF INDIAN PLANNING .................................................................................................. 21
THE NEW ECONOMIC POLICY OF 1991 ........................................................................................................................... 23
NITI AAYOG ................................................................................................................................................................... 24
CHAPTER 4 BUDGET AND MOBILISATION OF RESOURCES........................................................................... 27
GOVERNMENT BUDGETING ............................................................................................................................................ 27
COMPONENTS OF THE BUDGET ....................................................................................................................................... 27
GOVERNMENT DEFICIT AND ITS MEASUREMENT ........................................................................................................... 28
FISCAL POLICY ............................................................................................................................................................... 29
FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT, 2003 .................................................................. 31
DIFFERENT TYPES OF BUDGETS...................................................................................................................................... 32
MOBILISATION OF RESOURCES ....................................................................................................................................... 32
DISINVESTMENT ............................................................................................................................................................. 35
CHAPTER 5 TAXATION ............................................................................................................................................... 38
CLASSIFICATION OF TAXES ............................................................................................................................................ 38
IMPORTANCE OF TAXATION ............................................................................................................................................ 38
TAXATION SCENARIO IN INDIA ....................................................................................................................................... 39
DIRECT TAXATION.......................................................................................................................................................... 39
INDIRECT TAXATION ...................................................................................................................................................... 41
GOODS AND SERVICES TAX (GST) ................................................................................................................................. 42
GST COMPENSATION TUSSLE - CHALLENGES FOR FISCAL FEDERALISM ....................................................................... 44
LOW TAX- TO-GDP RATIO IN INDIA................................................................................................................................ 46
EQUALISATION LEVY...................................................................................................................................................... 48
TAXATION LAWS (AMENDMENT) ACT, 2021 .................................................................................................................. 49
TAXATION ON VIRTUAL ASSETS ..................................................................................................................................... 49
GLOBAL MINIMUM CORPORATE TAX ............................................................................................................................. 51
SOME TERMS RELATED TO TAXATION ........................................................................................................................... 52
2
PRAHAAR ReDEFINED 3.0: ECONOMY
CHAPTER 6 MONETARY POLICY AND TARGETING OF INFLATION ........................................................... 54

MONETARY POLICY ........................................................................................................................................................ 54
INFLATION TARGETING................................................................................................................................................... 55
CHAPTER 7 BANKING, INSURANCE AND FINANCE IN INDIA ......................................................................... 57
BANKING SECTOR ........................................................................................................................................................... 57
MAJOR ISSUES IN BANKING SECTOR .............................................................................................................................. 58
STATUS OF NON-PERFORMING ASSETS (NPAS)........................................................................................................ 60
ASSET RECONSTRUCTION COMPANY (ARC) .................................................................................................................. 61
INSURANCE SECTOR ....................................................................................................................................................... 63
FINTECH SECTOR ............................................................................................................................................................ 64
DIGITAL LENDING ECOSYSTEM ....................................................................................................................................... 65
CENTRAL BANK DIGITAL CURRENCY (CBDC) .............................................................................................................. 66
DIGITAL BANK UNITS (DBU) ......................................................................................................................................... 66
NATIONAL STRATEGY FOR FINANCIAL EDUCATION (NSFE) - (2020-2025) ................................................................... 67
DEVELOPMENT BANK FOR INFRASTRUCTURE FUNDING ................................................................................................. 67
NEW UMBRELLA ENTITY (NUE) FOR PAYMENT SYSTEM .............................................................................................. 68
FINANCIAL INCLUSION ................................................................................................................................................... 70
AN ANALYSIS OF JAM ................................................................................................................................................... 71
UNIVERSAL BASIC INCOME (UBI) .................................................................................................................................. 72
CHAPTER 8 FINANCIAL SECTOR............................................................................................................................. 74
FINANCIAL MARKET ....................................................................................................................................................... 74
CORPORATE BOND MARKET .......................................................................................................................................... 76
NON-BANKING FINANCIAL COMPANIES (NBFCS) ......................................................................................................... 77
CHAPTER 9 INDIA’S EXTERNAL SECTOR............................................................................................................. 79
INTRODUCTION ............................................................................................................................................................... 79
TRENDS IN EXTERNAL SECTOR - OBSERVATIONS OF ECONOMIC SURVEY 2022-23 ....................................................... 79
FREE TRADE AGREEMENTS (FTAS) ................................................................................................................................ 81
FOREIGN EXCHANGE/FOREX RESERVES ......................................................................................................................... 81
DEPRECIATION OF RUPEE ............................................................................................................................................... 82
INTERNATIONALISATION OF RUPEE ................................................................................................................................ 83
CHAPTER 10 AGRICULTURE SECTOR IN INDIA ................................................................................................. 86
SIGNIFICANCE OF AGRICULTURE SECTOR FOR INDIA ..................................................................................................... 86
ISSUES IN AGRICULTURE SECTOR IN INDIA .................................................................................................................... 87
DOUBLING FARMERS INCOME ........................................................................................................................................ 87
HORTICULTURE SECTOR ................................................................................................................................................. 89
PRECISION FARMING....................................................................................................................................................... 90
CROP INSURANCE- PM FASAL BIMA YOJANA (PMFBY) ............................................................................................... 90
ZERO BUDGET NATURAL FARMING (ZBNF) .................................................................................................................. 91
INTEGRATED FARMING SYSTEMS ................................................................................................................................... 91
RECENT DEVELOPMENTS IN AGRICULTURE ................................................................................................................... 92
BIOTECHNOLOGY IN THE AID OF AGRICULTURE ............................................................................................................ 93
AGRICULTURAL CREDIT AND INDEBTEDNESS IN INDIA .................................................................................................. 94
IRRIGATION SYSTEM ....................................................................................................................................................... 95
STORAGE OF AGRICULTURAL PRODUCE ......................................................................................................................... 97
TRANSPORT OF AGRICULTURAL PRODUCE ..................................................................................................................... 99
MARKETING OF AGRICULTURAL PRODUCE .................................................................................................................... 99
E-TECHNOLOGY IN THE AID OF FARMERS ................................................................................................................... 102
DIRECT AND INDIRECT FARM SUBSIDIES ....................................................................................................................... 104
3
CHAPTER 1 ECONOMY
ECONOMICS - AN INTRODUCTION
● According to Lionel Robbin, ‘Economics is a science which studies human behaviour as a relationship between ends
and scarce resources that have alternative uses.’
● Economics can also be defined as the study of how people and society choose to employ scarce resources that could
have alternative uses
in order to produce
various commodities
that satisfy their
wants and to
distribute them for
consumption among
various persons and
groups in society.
Different Economic
Systems:
An Economic System is a
Mechanism with the help
of which the government
plans and allocates
accessible services,
resources, and
commodities across the
country.
FEATURES OF INDIAN ECONOMY

● Middle Income Developing Market Economy: The economy of India is characterised as a middle-income
developing market economy on the basis of Gross National Income by IMF.
● Liberalisation Policy (1991): The end of the Cold War and an acute Balance of Payments crisis led to the adoption
of a broad economic liberalisation in 1991. It started with opening the economy to FDI and gradually dismantling
the licence to economy sectors.
● Inequality: According to a report by the Johannesburg-based company New World Wealth, India is the second-
most unequal country globally, with millionaires controlling 54% of its wealth. Recent report by Oxfam has
found that the Covid-19 pandemic deeply exacerbated existing inequalities in India and around the world.
● Demographic Dividend: In the age group of 15- 59 years, India has 62.5% of its population in working age. Share
of India’s working age population to total population will reach its highest level at 68.9% by 2030.
● Mixed Economy: India has adopted a mixed economy model, public sector (government owned) business enterprises
exist alongside the private sector.
● Agriculture Based Economy: Agriculture and allied sectors provide around 20.2% of GVA in Indian Economy while
53% of total Indian population is based on the agriculture sector.
● Overpopulation: In every decade the Indian population increases by about 20%. During the 2001-11 population
increased by 17.6%.
● Low Capital Formation: The Indian Economy has registered a fairly robust growth in the four years between 2014-
15 and 2017-18, but the story on savings and investment in the economy has not been so heartening.
● Poor Saving Rate: India’s slowing economy took a toll on much-needed savings with the savings rate touching a 15-
year low. The Covid-19-induced spike in household financial savings rate in 2020-21 waned substantially in a counter-
seasonal manner.
● International Trade: India's main partners are the United States, China, the United Arab Emirates, Saudi Arabia,
Iraq, Hong Kong and Singapore. Indian trade balance is structurally negative, given that India imports nearly 80%
of its energy needs.
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● Gross Domestic Product: According to the Fiscal Policy statements, 2023-24, the Nominal GDP is projected to grow
at 15.4 % year-on-year (Y-o-Y) in FY 2022-23 and the real GDP is projected to grow by 7% (Y-o-Y).
● India’s Position: India is the world's Fifth-Largest Economy (recently overtaken UK) by nominal GDP. The third-
largest by Purchasing Power Parity (PPP) according to the IMF’s World Economic Outlook.
INDIAN ECONOMY - GENERAL ISSUES

● Low National and Per Capita Income: India's GDP per capita almost tripled from $439 in 2000 to $1,346 in 2010,
but has since only increased to around $2,000 in 2019.
o The Per Capita Income in real terms during 2020-21 is estimated to attain a level of ₹85,929 as compared to
₹94,566 in the year 2019-20.
● Inequalities in Income and Wealth: According to Oxfam International, the top 10% of the Indian population holds
77% of the total national wealth.
● Overdependence on Agriculture: With around 20% of the GDP contribution 50% of the population depends on
agriculture. However, the contribution of this sector toward GDP came down to 19.9 % (ES- 2021). In 2022, 41.49 %
of the workforce were employed in agriculture.
● Population Pressure: In 2023, India will become the most populous country in the world. According to the United
Nations data, India has surpassed China to become the world's most populous nation with 142.86 crore people.
● Unemployment: Economic growth rate being slow on the one hand, and rapid growth of population on the other hand,
has accentuated the problem. Indian agriculture had a considerable amount of underemployment and disguised
unemployment.
● Scarcity of Capital & Low Rate of Capital Formation: India is a capital-poor country, capital per head is low.
This scarcity of capital causes overall backwardness of the Indian economy. Net savings and net investments
increased to 31.4 % and 29.5 % of GDP respectively in 2020-21.
● Underdevelopment of Infrastructure: India’s physical infrastructure financing gap is huge, and it is growing
exponentially. It is estimated by the World Bank that India’s infrastructure financing gap is $1 billion a day.
● Low Level of Productivity: Use of Advanced and sophisticated technology is rather an exception in India. With
limited growth of technological institutions, we are using primitive methods of technology leading to overall low
productivity.
● Climate Change:
o India is particularly vulnerable to the effects of climate change, with around 68% of the country being prone
to drought and 60% to earthquakes.
o The Impact of climate change is evident from the fact that India incurs losses of around $9-10 billion annually,
due to extreme weather events as pointed out by the Economic Survey of 2017-18.
o More than 6 crore Indians are facing acute water shortages in 2020-21. Delhi and Bangalore are two of the 21
cities that could deplete their groundwater by 2025.
SLOWDOWN IN INDIAN ECONOMY

Economic Slowdown - A general decline in the growth rate of the Gross Domestic Product (GDP) of a country is
Economic Slowdown. It is also called the Growth Recession. According to the UN Report – India's Economic growth
is projected to decelerate to 6% in 2023 as compared to 6.6% in 2022.
REASONS FOR SLOWDOWN

● Low Investment: Calculation of Gross Fixed Capital Formation is a way of measuring investment in economy
and capital formation. It has declined from 34.3% in 2011 to 28.8% in 2018.
o The private sector investment in capital formation has also declined from 26.9 percent in 2011 to 21.4 percent
in 2018.
● Lethargy in Insolvency and Bankruptcy Code (IBC): Implementation of IBC has met limited success. It has been
unable to resolve insolvency cases in a time-bound manner which is mandatorily to be completed within 330 days.
● Restriction in Global Trade: Trade war between USA and China and other global trade wars has impacted growth
all over the world. Overall top economies in Europe and North America restrict their market access to other countries.
● Prevalence of Unemployment: India’s unemployment rate in October 2020 rose to 8.5%, the highest level since
August 2016, according to data released by the Centre for Monitoring Indian Economy (CMIE).
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● Crisis in Agriculture: There is a crisis in agriculture that runs deep. The agriculture sector employs over 50% of
the workforce, contributing to only about 14% of the GDP.
● Credit Issues in Agriculture: Outstanding agricultural credit amounts to more than half the agriculture sector’s
output. As per NABARD All India Rural Financial Inclusion Survey (NAFIS) (2021), the institutional source has
emerged as a dominant source to 70 percent of loans. Still, 40 percent of the cultivator households are reported to
have taken loans from informal sources.
● De-Industrialisation: The share of manufacturing in GDP and employment is lower than it was 25 years ago. About
80,000 jobs are expected to be cut by retailers due to the COVID-19 pandemic.
● Decline in Exports: India’s exports in April 2020 contracted by 60% year-on-year (Y-o-Y). The US dollar value of
merchandise exports stagnated during the last three years.
● Consumption: Private consumption contributing nearly 55-60% to India’s GDP has been slowing down. According
to reports, the latest consumption expenditure survey shows that real household consumption fell by 3.7 percent, to
Rs 1,446 in 2017-18, from Rs 1,501 in 2011-12.
● Global Slowdown and Retreat of Globalization: With rising retreat of globalisation like Brexit, Trump’s
protectionist policies and the US-China trade war, global sentiments have remained poor making the prospects of an
export-led growth bleak.
● Structural Shift in the Economy: The slowdown is also part of a long-term structural shift wherein the Economy is
shifting gears from the high investment era to a low investment era as well as a transition from being a cash-driven
economy to a digitally enabled economy.
● Demonetisation and GST Implementation: The process of both Demonetisation and the implementation of GST
have affected mainly the Small and Medium Businesses (SMEs).
STEPS NEEDED TO BUILD A RESILIENT ECONOMY

● Spendings: Increased spending on Health, Education and Infrastructure and cut on spending on wasteful subsidies,
thus restructuring India’s Public Finance.
● Investments: Increase in Capital Expenditure with emphasis on durable assets and Decrease in Revenue Expenditure.
National Infrastructure Pipeline aims to invest Rs 111 lakh crore by 2025 in a range of projects spanning across
sectors to boost the infrastructure sector.
● Human Capital: To become an Alternative Global Manufacture and Economic Powerhouse, India needs to focus
upon its Human Capital, huge internal Consumer Demand and clinical implementation of policy prescriptions.
● Employment Generation: Need to reduce the existing disguised unemployment in Agriculture and shift the extra
workforce towards Manufacturing and Services by creating opportunities for them.
● Reforms: Second Generation Land reform by fixing Land Titling, and acquisition issues.
Thus, through these measures Economic Complexity can be changed into Economic prosperity.
IMPACT OF COVID-19 ON INDIAN ECONOMY

● At -23.9% contraction for the first quarter of 2020-21, India’s growth showed one of the highest contractions
globally.
● Projections: Various projections for India’s Growth were -
o The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8% (RBI) to (-) 14.8% (Goldman Sachs).
● In response the Government announced Rs 20 Lakh Crore Atma Nirbhar Bharat COVID-19 Economic stimulus
package. The salient features of the package include:
o A stimulus to MSMEs through a Rs 3 Lakh Crore ($40bn) loan scheme.
o Helping other stressed business sectors such as NBFCs, power distribution companies and the real estate sector.
o Provisioning of free food grains to migrant workers for the next two months
o Provisioning of a Rs 1 Lakh Crore ($13bn) subsidy to agricultural cooperative societies
o Hiking the allocation for the MGNREGS by Rs 40,000 cr ($5.3bn)
● The combined (Centre + State) fiscal deficit amounts to 13.8% of GDP.
● Reversal of Economic Progress: Economic contraction is not merely a GDP number for economists to analyse and
debate. It means a reversal of many years of progress.
● Employment Scenario: Around 27% to 30% of the households had no income during the lockdown. Urban
households (43%) reported more loss of income compared to their rural counterparts (24% ).
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● Societal and Psychological Elements: There is an upsurge in social issues, including psychological disorders,
domestic violence, suicides, depression among Children, etc.
V-SHAPED ECONOMIC RECOVERY

A V-shaped recovery is characterised by a quick and sustained recovery of economic performance indicators after a
sharp economic decline.
India’s V-Shaped Recovery Post Pandemic
● The Economic Survey 2020-21 had forecast a ‘V-shaped’ economic recovery for the country after the COVID-19
pandemic ravaged all key sectors of growth and disrupted demand.
● While there was a 23.9% contraction in GDP in Q1, the recovery has been a V-shaped one as seen in the 7.5%
decline in Q2 of 2020-21.
● It was made possible due to India's policy response to Covid-19 for the recovery, introduced to save lives and
livelihoods.
● V-shaped economic recovery was made possible due to the timely stringent lockdown and the demand-side
initiatives during the unlock phase like the National Infrastructure Pipeline.
● The 20 lakh crore Atma Nirbhar Bharat package also aided in the recovery by adopting the idea of self-reliant
India based on 5 pillars of - Economy, Infrastructure, System, Vibrant Demography and Demand.
Case Study
Twin Transition: Recently, the World Economic Forum (WEF) stated that the 'twin transition' approach can help
leaders bring the digital and sustainability agendas together to future-proof their organisations.
● The strategy combines digital and sustainability to unlock huge benefits in terms of efficiency and productivity.
● Optimises digital assets and infrastructures to reduce environmental impact
Key Terms
Self Reliant India, Gross Domestic Product (GDP), Green GDP, Capitalist Economy, Socialist Economy, Mixed
Economy, Demographic Dividend, Sustainable Development, Sustained Recovery, Resilient Economy, Twin Transition.
PYQs Year
1. Do you agree that the Indian economy has recently experienced V-shapes recovery? Give reasons in 2021
support of your answer.
2. While we flaunt India’s demographic dividend, we ignore the dropping rates of employability. What are 2014
we missing while doing so? Where will the jobs that India desperately needs come from? Explain.
Students Note:
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CHAPTER 2 GROWTH & DEVELOPMENT

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENT
Judicious use of resources is central to economic progress, which can be studied under two heads, one is Economic
Growth and second is Economic Development.
Economic Growth Economic Development
● It is the increase in the value of all goods and ● It is described as a rise in a country's or region's
services generated in the economy. economic riches for the benefit of its citizens.
● It denotes the percentage rise in the country's ● Both Economic Growth and Economic development
GDP or GNP each year. together leads to better Economic Progress.
● It primarily emphasises GDP and total ● It strongly emphasises qualitative developments to
output and assesses the formal economy in produce quantitative outcomes.
extremely quantitative terms and
observable outcomes.
HOW ECONOMIC GROWTH LEADS TO ECONOMIC DEVELOPMENT?
DIMENSIONS OF GROWTH AND DEVELOPMENT

Development is a complex process that includes all the social, psychological, and political parts of a society. In other
words, "development" is not just about economic growth, and it should be looked at in a wider sense.
Development has Four Major Dimensions:
● Economic Dimensions: Economic Development creates the conditions for economic growth and improved quality
of life by expanding the capacity of
individuals, firms, and communities to
maximise the use of their talents and skills
to support innovation.
o Eg: Lower transaction costs, and
responsibly produce and trade valuable
goods and services.
o SDG 12: Responsible Consumption
and Production.
● Social Dimensions: Social development is
about putting people at the centre of
development. This means a commitment
that development processes need to benefit
people. It includes a system that is socially
sustainable and can make sure that
everyone gets enough and similar social
services, like schooling and health care, and that people have the same rights and responsibilities.
o Eg: Civic activism, Gender equality, Interpersonal safety and trust etc.
o SDG 3: Good Health and Well Being.
● Environmental Dimension: A system that is good for the environment must grow out of the use of natural resources
or environmental investment functions that keep the resource base stable. Agenda 21 - UNCED's blueprint for
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Sustainable Development - gives high priority to the implementation of "win-win" policies that exploit the
complementarity between poverty reduction, economic efficiency and sound environmental management.
o Eg: Sustainable use of wetlands
o SDG 11: Sustainable Cities and Communities.
● Human Dimensions: The human development approach, developed by the economist Mahbub ul Haq, is anchored
in Amartya Sen’s work on human capabilities, often framed in terms of whether people are able to “be” and “do”
desirable things in life.
o Eg: Freedom of Choice, well fed, sheltered, healthy.
o SDG 2: Zero Hunger.
o The Human Development Report published by the United Nations Development Program measures the
achievements of Human Development across four indicators, namely, Life Expectancy at Birth, Expected Years
of Schooling, Mean Years of Schooling, and Gross National Income. As per the recent report of 2022, India
slipped two ranks from 130 in 2020 to 132 in 2022 due to the COVID-19 pandemic.
IMPORTANCE OF ECONOMIC GROWTH

Economic Growth is the most potent tool for decreasing poverty and improving living standards in a country. It manifests
in the following ways:
● Higher Per Capita Incomes: If economic growth surpasses yearly population increase, it may result in a drop in
severe poverty rates.
o All India Annual Per Capita Net National Income (NNI) for 2014-15 and 2022-23 at current prices are Rs.
86,647 and Rs. 1,72,000 respectively. (As per MoSPI data)
o Eg: 415 million people were lifted out of poverty in India between 2005-06 to 2019-21 as per UNDP's Global
Multidimensional Poverty Index (MPI) 2022.
● Increased Consumption and Savings Per Capita: Higher savings boost the financial system's ability to lend for
beneficial ventures.
o Rate of Gross Saving to Gross Net Disposable Income for 2021-22 is estimated at 30 % as against 28.4 %
for 2020-21.
o The rate of Gross Capital Formation to GDP at constant (2011-12) prices was 31.7 % in 2020-21 and 35.5 %
in 2021-22. This shows the translation of savings into Capital formation (Second Advance Estimate of
National Income, 2022-23).
● Growth in Employment: Higher economic growth leads to increased employment generation in the economy.
o The employment rate increased to 36.9% in March 2023 from 36.6% in December 2022, as per the Centre
for Monitoring Indian Economy.
● Increase in Capital Expenditure: Investment in infrastructure (Road Transport and Highways, Railways, Energy,
Ports, etc.) increases productive capacity and has a large multiplier impact on growth and employment.
● The budget 2023-24 increased the capital expenditure outlay by 37.4 % to 10 lakh crores.
● Increase in Tax Collection: Increased income creates more tax money (a fiscal dividend) that may be spent on
public services such as education, retirement, and healthcare.
o Eg: Tax collection in India increased with economic growth. The same is shown in the graph below.
LIMITATIONS OF ECONOMIC GROWTH

The process of economic expansion is not without constraints. Thus, we must not lose sight of these in the reckless
pursuit of progress, since they may have major social and economic consequences for society.
● Inequality of Income: Economic development may lower social wellbeing since increased output may lead to
relative scarcity of certain other resources or similar variables for future generations, making it more difficult for
them to sustain the current level of welfare in the future.
● Pollution and Other Negative Externalities: The push for more productivity tends to put increasing strain on the
environment, resulting in increased pollution - air, water, and noise.
● Loss of Non-Renewable Resources: Growth is seldom distributed equally. As a result, the distribution of the
rewards of the growth process becomes the first significant restriction of the economic growth process.
● Trade Deficit: Higher per capita income and consumption might contribute to an increase in the trade imbalance.
● Balanced & Unbalanced Growth: There are two ideas on economic growth strategy:
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o Theory of Balanced Growth: According to Rodan, Nurkse, and Lewis, these economies should invest in all
sectors at the same time to attain balanced growth.
o Unbalanced Growth Theory: According to Hirschman, Singer, and Fleming, these economies should create
an unbalanced condition by making huge investments in any area.
Case Study
Urban Sprawl:
● It has increasingly become a major issue in the global trend towards urbanization.
● Faced not only by developed countries but also by developing countries, and by large urban centers and medium
and small cities alike.
● It raises social and environmental concerns at the same time.
● In the case of India, with the increasing population, the pressures on land and resources are also increasing.
● Urban sprawl is therefore seen as one of the potential threats to sustainable development where urban planning
with effective resource utilization and allocation of infrastructure initiatives are key concerns.
● Example: Case of Vijayawada city Sprawl spreading across the river Krishna appears to be leaf frog sprawl
patron. Expansion of the city is more rapid in the east zone of poranki, peddapulipaka, chowdavaram and
penamaluru while it is less in the Western zone of Vijayawada. It is present just near to the new capital of Andhra
Pradesh Amaravati so it causes rapid growth of the city in coming years.
MEASUREMENT AND INDI CATORS OF ECONOMIC G ROWTH AND DEVELOPMENT:

● Gross Domestic Product (GDP): It is the market value of all the final goods and services produced within a
domestic territory in a financial year by a normal resident.
○ Simon Kuznets, an economist at the National Bureau of Economic Research, initially proposed the concept
of GDP in a report to the United States Congress in response to the Great Depression.
● Gross Domestic Product and Gross Value Added (GVA): According to the RBI, the GVA of a sector is defined
as the value of output minus the value of its intermediary inputs. This “value added” is shared among the primary
factors of production, labour and capital. GVA calculates the national income from the supply side.
GDP = GVA + (Net Taxes Earned by the Government) — (Net Subsidies provided by the Government)
The Difference Between GDP and GVA:

GDP GVA
The entire number of goods produced in a nation is its GVA stands for the value added to the product to
GDP. improve its many features.
GDP provides information from a consumer or demand GVA provides a snapshot of the state of economic
standpoint. activity from the supply-side or producer perspective.
GDP Comprises Four Components: Government GVA = Gross Investment + Government Investment +
Investment, Government Spending, Net Foreign Trade, and Private Consumption + Government Spending +
Personal Consumption (the difference between exports and (Exports-Imports)
imports).
● Significance of GDP:
o Important Metric: GDP is often recognized as the most essential of the metrics used by economists throughout
the globe to determine an economy's growth.
o Performance Indicator: It is a crucial criterion for assessing an economy's performance and a vital determinant
in influencing the economy's development.
o Investment Indicator: GDP and GDP growth rate is an important indicator used by investors throughout the
world, while making investment decisions.
o Policy Making: GDP data is used by governments and central banks in policy making.
12
● Limitations of GDP
o Inclusivity: Non-market transactions are not included in GDP. It is unable to determine if a country's growth is
sustainable.
o Environmental Factors: It ignores the influence on human health and the environment that may develop as
a result of the output's creation or use as externalities.
o Other Aspects: It cannot measure normative aspects like social justice, happiness, political freedom etc.
o Wealth Distribution: GDP gives information about overall economic activity but it fails to record the distribution
of wealth/income in the economy.
GDP CALCULATION IN INDIA

● The government switched to a new base year of 2011-12 for national accounts in January 2015, replacing the
previous base year of 2004-05.
● The then Central Statistics Office (CSO) (now National Statistical Office) discontinued GDP at factor cost and
embraced the worldwide practice of GDP at market price and the Gross Value Addition (GVA) measure.
● The new database is also much more comprehensive, covering financial institutions as well as regulatory bodies like
SEBI, PFRDA, and IRDA.
● The newer system uses data from MCA 21 (MCA 21 is a Ministry of Corporate Affairs e-governance initiative
that was launched in 2006 and allows firms/companies to electronically file their financial results).
ALTERNATIVES TO GDP CALCULATION:

● Various Indices: Indicators like the human poverty index, the Infant Mortality Rate, the Maternal Mortality Rate,
the Happiness Index, and so on, can be used to measure Economic Development.
● Economic Development: In contrast to economic growth, economic development looks at both the quality and size
of changes in the economy.
● The following are ways to measure the Development of the Economy:
o Green GDP:
▪ Green GDP - also known as Environmentally adjusted domestic Product is with regards to the
environmental damage in calculation of GDP.
▪ It is calculated by accounting for net natural capital consumption (includes environmental degradation;
depletion of resources and protection initiatives) in the national income.
▪ It helps find a sustainable GDP.
o Challenges of Green GDP:
▪ Possibility that calculations may rely on speculation or hypothetical assumptions.
▪ Particular difficulty in cases where the environmental asset does not exist in a traditional market and is
therefore non-tradable.
▪ Some of the natural resources exist beyond the national boundaries (e.g. High seas) - accounting for the
same is difficult.
▪ The calculation of Green GDP resulted in a figure lower than conventional GDP, which resulted in
resistance from local governments e.g. China discontinued focussing on Green GDP in 2004, after
resistance from local and regional governments.
o Human Capital Index: The Human Capital Index tries to be a tool that helps people understand how
complicated education, jobs, and the workforce are so that they can make better choices
India’s Green GDP
● In October 2022, a RBI’s Bulletin published first of its kind estimates about India’s Green GDP.
● Green GDP adjusts the conventionally calculated GDP for the environmental costs of economic growth. Thus, it is
less than GDP if economic growth is not eco-friendly.
● The Bulletin suggested that India’s trajectory of green GDP has displayed an upward movement with visible
improvements, particularly since 2012.
● India’s green GDP ratio has mostly seen an upward trend, indicating a greater emphasis on maintaining a healthier
balance between the country’s growth aspirations and environmental protection.
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INCLUSIVE GROWTH:
● Inclusive growth is economic growth that creates opportunity for all segments of the population and distributes
the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society - OECD.
● 11th Five Year Plan (2007-12) laid special emphasis on Inclusive Growth for the first time. It was later carried
forward by the 12th Five Year Plan.
Key Data and Facts:
● According to the Multidimensional Poverty Index 2022, released by UNDP, India has the largest number of poor
people worldwide at 22.8 crore.
● According to the World Inequality Report 2022, released by World Inequality Lab India was among the most
unequal countries in the world.
● In 2018, India ranked 62 amongst the 74 emerging economies, in the Inclusive Development Index released by
World Economic Forum (WEF).
● The Global Gender Gap Report published by the World Economic Forum measures the Gender gap between
men and women across the four indicators, namely, Political Empowerment, Educational Attainment, Economic
Participation and Opportunity, and Health and Survival.
○ As per the 2022 edition, India was ranked 135 out of 146 countries (seventh rank in the world).
○ There was an improvement in India’s score indicating reduction in the Gender Gap.
○ Globally, 68.1% of the Gender Gap has been closed and with the present rate of progress it would take
132 years for the world to close the Gender Gap.
ELEMENTS OF INCLUSIVE GROWTH:

● Employment Generation: Generation of stable employment is a sign of political, economic and social progress.
● Poverty Alleviation: To be inclusive of all sections of society, the most vulnerable, poverty-stricken individuals have
to be brought above the poverty line.
● Skill Development: Skill development enables an individual to increase his or her choices in life such as educational
scope or career development.
● Agriculture and Industrial Development: Around 50-55% of people in India have agriculture-related
employment but its contribution to the Indian GDP is only 16.5% which leads to widespread poverty.
● Good Governance: Measured by the eight factors of Participation, Rule of Law, Transparency, Responsiveness,
Consensus Oriented, Equity and Inclusiveness, Effectiveness and Efficiency, and Accountability helps in
inclusive growth of the economy.
● Access to Essential Services: Such as basic health, education, defense services, sanitation etc.
● Economic Growth: 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.
● Social Development: It means the empowerment of all marginalised sections of the population like
SC/ST/OBC/Minorities, women and transgenders.
● Financial Inclusion: Financial inclusion is necessary for inclusive growth as it leads to the culture of saving, which
initiates a virtuous cycle of economic development.
● Energy Security: According to the International Energy Agency (IEA), energy security means uninterrupted
availability of energy sources at an affordable price. It is important to ensure the availability, affordability and
accessibility of energy.
● Access to Justice for All: Access to justice for all means the ability of people to seek and obtain a remedy through
formal or informal institutions of justice for grievances. Here justice should not only be legally available, but it
should also be financially accessible.
NEED FOR INCLUSIVE GROWTH IN INDIA:

● Industrial Development: To improve the situation of Stunted Industrial Development of the Indian industrial
sector.
● Mass Poverty and Low Per Capita Income: These are prevalent scenarios in India that need to be addressed.
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● High and Broad based Population: High Population puts extra pressure on limited resources of the country that
needs to be rationalised. India accounts for about 18% of the world's population with lots of diversity within the
nation. India recently surpassed China as the world's most populous nation (UN DESA Policy Brief No. 153).
● Literacy: Low Level of Literacy is still prevalent in India. The literacy rate in the country is 74.04%, with females
having 65.46% literacy rate according to the 2011 decadal census.
● Infrastructural Issues: Lack of infrastructure is hindering economic growth, there is fear amongst economists that
due to such issues India might be stuck in the middle-income trap.
● Poverty Reduction: Despite lifting a record 271 million people out of poverty between 2005-06 and 2015-16, India
has the largest number of poor people worldwide at 22.8 crore (Multidimensional Poverty Index 2022). Therefore,
inclusive growth can ensure adequate flow of benefits to the poor and the most marginalised.
● To Ensure Group Equality: The poor are certainly one target group, but inclusiveness must also embrace the
concern of other groups such as the SCs, STs, OBCs, Minorities, women, the differently abled and other
marginalised groups.
● To Ensure Regional Balance: This aspect of inclusiveness relates to whether all States, and indeed all regions, are
seen to benefit from the growth process, for instance:
o The per-capita GSDP of Western and Southern states having more than 50% of the national average while the
Empowered Action Group (EAG) States (erstwhile BIMARU) having less than 50% of the national average.
o The regional disparity in development causes challenges like violent conflicts, unplanned and haphazard
migration. E.g. Insurgency in North-east and Left wing extremism in large parts of central and eastern states
of India.
● To Ensure Even Growth across Sectors and Locations: For instance, agriculture has been lagging behind and some
regions have advanced faster than others. Policies are also relatively ignored in the agriculture sector
o Agricultural Backwardness: More than 50% of the workforce in India is occupied in agriculture but the
contribution of agricultural and related sectors in GDP is only around 14%. Agriculture sector is marred by poor
investment, research, labour productivity, high income vulnerability and regional disparity.
● To address Unemployment: Periodic Labour Force Survey (2020-2021) of NSSO puts India’s total
unemployment at 4.2% (6.7% for urban and 3.3% for rural). The COVID-19 Pandemic has adversely impacted
the above number.
● To Counter Poor Nutrition Levels: India ranks 107th out of 121st in Global Hunger Index with chronic under-
nutrition, stunting and wasting.
MEASURE TAKEN TO ENSURE INCLUSIVE GROWTH:

● Land Reforms: Land is considered an important resource in any society. In India the ownership of land is also seen
as a symbol of social status. When India got independence, there was significant inequality in land ownership. To
deal with this, following steps were taken:
o Prevailing land tenure systems like mahalwari, zamindari and ryotwari were abolished.
o Tenancy reforms like regulations of rent, security of tenure and ownership rights to tenants were undertaken.
o Ceiling laws were promulgated for redistribution and consolidations of land.
● Planning: The major focus of Planning right like the 11th to 12th plans was Inclusive Growth, for Instance - The
theme for 11th FYP was “more inclusive and rapid growth”. The 12th FYP had "Faster, More Inclusive and
Sustainable Growth" as its theme.
● Legislative Measures:
o 86th amendment, 2002 made free and compulsory Education to the Children of 6-14 years age group, a
Fundamental Right
o Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) 2005 to provide Right to work to
people of rural areas.
o National Food Security Act to ensure people's food and nutritional security by assuring access to enough high-
quality food at reasonable prices. (rice at Rs 3 per kg, wheat at Rs 2 per kg, and coarse grains at Rs 1 per kg).
o Self Help Groups (SHGs): SHGs is an informal association of 10 to 25 persons who come together as a
community to address their common concerns. It plays an important role in ensuring Financial inclusion, Poverty
alleviation, women empowerment, and overall social development.
▪ The Government targets to have 10 crore SHGs members by 2024.
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▪ Recently, an agreement was signed by the Ministry of Rural Development and Panchayati Raj with
Meesho (e-commerce) platform for the marketing of products produced by SHGs under the Deendayal
Antyodaya Yojana- National Rural Livelihood Mission (DAY-NRLM).
SCHEMES TO ENSURE INCLUSIVE GROWTH:

● Pradhan Mantri Awas Yojana-Gramin: It was launched to provide pucca houses to the houseless living in
dilapidated houses in rural areas by 2022.
● Prime Minister’s Employment Generation Programme (PMEGP): It is for generation of employment
opportunities through establishment of micro enterprises in rural as well as urban areas.
● Ayushman Bharat Mission: World’s largest government funded healthcare program targeting more than 50
crore beneficiaries. It aims to bring inclusivity in the field of healthcare services, by reducing out of pocket
hospitalisation expenses, fulfilling unmet needs and improving access of identified families to quality inpatient care
and day care surgeries.
● Mudra Yojna: It was launched in 2015 for providing loans up to Rs. 10 lakh to the non-corporate, non-farm
small/micro-enterprises.
● PM Jan Dhan Yojna (PMJDY): It was introduced for Financial Inclusion to ensure access to financial services,
namely, basic savings & deposit
accounts, remittance, credit,
insurance, pension in an affordable
manner.
● Digital India: Digital India was
launched in 2015 is the flagship
initiative of the Ministry of
Electronics and Information
Technology and aims to digitally
empower the citizens of India.
● According to the Prime Minister,
Digital Technologies and Direct
Benefit Transfer have saved 2.23
lakh crores from the middlemen in
India.
● Budget: Inclusive Development has
always been an agenda of the budget
in India. For e.g. In the 2023 budget, inclusive development is one of the components of SAPTARISHI.
CHALLENGES IN ACHIEVING INCLUSIVE GROWTH:

● Economic Challenges:
o Poor Industrial Base: As compared to China and Asian ‘Tiger economies’, Indian manufacturing lags far behind.
Despite rapid growth, the manufacturing sector is still short of the 25% of GDP, a target set up under the National
Manufacturing Policy
o Poor Resources: States in the Northern plains are devoid of a strong mineral resources base which hampers their
industrial growth.
o Agricultural Backwardness: Poor land & water productivity, vagaries of monsoon and markets along with poor
infrastructure base and processing ecosystem means that there is a structural imbalance between the labour force
employed and the GDP contribution by Agriculture.
● Social Challenges:
o Social Divisions: It is based on caste, class, religion, language, ethnicity, etc hampers the social capital necessary
for inclusive growth and promotes parochial loyalties.
o Lack of Women Participation: Poor Labour Force Participation Rate (LFPR) among women (under 25% as per
NSSO) along with poor nutritional indicators (e.g. at least 50% women are anaemic) combined with numerous
restrictions due to patriarchal society is cause of the underperformance of the economy
o Urban-Rural Divide: The rural-urban divide has led to the emergence of two opposite poles - India and Bharat.
The rate of poverty reduction in urban areas is higher than that of rural areas. 70% of the population living in rural
areas has 20% of the hospitals.
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● Administrative Challenges:
○ Corruption: India ranks an abysmal 85th out of 180 countries on Corruption Perception Index, 2022 by
Transparency International.
○ Red Tape and Unfriendly Business Environment: Despite massive gains, India is still 63rd in World Bank’s
Ease of Doing Business ranking. It is lagging significantly in sectors such as Enforcement of Contracts.
○ Inadequate Social Welfare Expenditure: India’s total spending on sectors such as Health (target 2.5% of
GDP) and Education (target 6% of GDP) is far from being achieved. This is due to the impact of neo-liberal
policies and budget constraints.
● Environmental Destruction and Disasters: It has a disproportionate impact on the already marginalised sections
such as Tribals, Slum dwellers, Farmers etc. This is compounded by alienation of land from these sections for mega
projects.
● Regional Disparities: Some areas of the country lag behind on major developmental indicators while others are
leading far ahead. Kerala is the most literate state in the country, with a literacy rate of 93.1 percent, while literacy
rate in Bihar is only 63.82 percent.
● Intergenerational Inequality: India ranked 44th in terms of “intergenerational equity and sustainability,” in WEF’s
Inclusive Development Report.
Way Forward:
● Ensure last-mile-delivery of Welfare Schemes such as PM Awas Yojana, PM KISAN, PM Jan Arogya Yojana.
● Earnest implementation of National Education Policy directives such as vocational training, vernacular learning,
accessible school complex etc.
● Boost social welfare expenditure by tapping into resources of Disinvestment proceeds and encouraging Civil
Society and Corporate sector involvement.
● Leverage Technology to ensure E-Learning, E-Governance and Tele-Medicine reaches the remote corners of the
country.
● Systemic reforms in a consensual democratic manner in sectors of Labour laws, Agriculture and Land acquisition.
● Encourage innovation and research by creating a conducive environment for start-up ecosystems and word-class
research facilities to promote disruptive solutions.
● NITI Aayog's Strategy for New India @75: Inclusive Growth
o To have a rapid growth, which reaches 9-10% by 2022-23, which is inclusive, clean, sustained and formalised.
o To Leverage technology for inclusive, sustainable and participatory development by 2022-23.
o To have an inclusive development in the cities to ensure that urban poor and slum dwellers including recent
migrants can avail city services.
o To make schools more inclusive by addressing the barriers related to the physical environment (e.g. accessible
toilets), admission procedures as well as curriculum design.
o To make higher education more inclusive for the most vulnerable groups.
o To provide quality ambulatory services for an inclusive package of diagnostic, curative, rehabilitative and
palliative care, close to the people.
● World Economic Forum’s three suggestions to boost social inclusion as well as economic growth:
1. Countries should increase public and private investment in their citizens’ capabilities, which is the most
important way they can durably lift their rate of productivity growth.
2. Governments, together with employers’ and workers’ organisations, should upgrade national rules and
institutions relating to work.
3. Countries should increase public and private investment in labour-intensive economic sectors that
generate wider benefits for society.
o These include sustainable water, energy, digital, and transport infrastructure, care sectors, the rural
economy, and education and training.
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Conclusion:
● Inclusive and Sustainable Growth is inevitable for a diverse and large country such as ours to ensure the goal of
'Atma Nirbhar Bharat'. Inclusive growth will help in the empowerment of vulnerable and marginalized populations,
improve livelihoods, and augment skill-building for women.
ENVIRONMENT AND DEVELOPMENT LINKAGE:

● Industrialisation and Urbanisation are considered sine qua non for economic development and egalitarian
growth. At the same time, they also led to Pollution, Deforestation and Habitat Destruction, Climate Change, Species
Extinction, Health hazards, Disruption of Traditional Livelihood, Dead Zones in Oceans, Chronic Water Scarcity.
DEVELOPMENTAL FACTORS AFFECTING ENVIRONMENTAL SUSTAINABILITY:
● Poor compliance to environmental laws such as EIA rules, Coastal Regulatory Zone guidelines, etc.
● Poorly planned Subsidies such as those on electricity and water consumption encourages overuse and rampant
wastage harming the environment.
● Negative externalities of development projects are not factored into product costs as access to natural resources is
often open and no individual bears full cost of the degradation.
● Population explosion: According to the UN, Rapid population growth makes it more difficult for low-income and
lower-middle-income countries to afford the increase in public expenditures on a per capita basis that is needed to
eradicate poverty, end hunger and malnutrition, and ensure universal access to health care, education and other
essential services.
● Weak authorities and institutional setup: unplanned urbanisation leads to urban flooding, loss of wetlands etc.
● Natural corollary: The Environmental Kuznets curve states that environmental degradation peaks as the income
levels grow and then gradually settle to a lower value. This is due to growth in financial and technological capabilities,
the capacity to restore environmental quality is enhanced
Way Forward:
● Consensual framing and robust implementation of legal safeguards such as Environmental Impact Assessment
guidelines.
● Smart Regulation that leverages technology and markets such as Perform Achieve and Trade scheme of Bureau of
Energy Efficiency.
● Institutional strengthening of the Ministry of Environment, Forest & Climate Change, National Green Tribunal,
National Board for Wildlife, etc.
● Internalisation of Negative Externalities using fiscal instruments such as Carbon Tax.
● Natural Capital Accounting and Green GDP must be introduced to factor in the environmental costs of
developmental processes.
● Green Economy and Sustainable Growth must be actively pursued to balance environmental and developmental
commitments.
● Need for coordinated global response to the threats of climate change, deforestation, etc.
● Greater Investments in developing green solutions to current environmental problems. E.g. affordable
technologies for carbon sequestration.
● Focus on emerging areas of Renewable Energy, Circular Economy, Electric Vehicles etc is necessary.
● Global Environment Facility (GEF) launched the GEF GOLD programme to help miners in 8 countries replace
toxic mercury with cleaner techniques for gold mining. It will reduce mercury emission.
● African Development Bank’s Safeguard Policy which aims to ensure environmentally sustainable development in
Africa.
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Key Terms
Growth Vs Development, Capital Formation, Balanced and Unbalanced Growth, Negative Externalities, Green GDP,
Stunted Industrial Development, Access to Justice for All, Regional Development, Land Reforms, Environmental
Kuznets Curve
PYQs Year
Growth and Development
1. Explain the difference between computing methodology of India's Gross Domestic Product (GDP) 2021
before the year 2015 and after the year 2015.
2. Define potential GDP and explain its determinants. What are the factors that have been inhibiting 2020
India from realising its potential GDP?
3. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy 2019
in good shape? Give reasons in support of your arguments.
4. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product (GDP) 2017
in the post-reform period” Give reasons. How far are the recent changes in Industrial Policy capable
of increasing the industrial growth rate?
5. Among several factors for India’s potential growth, the savings rate is the most effective one. Do 2017
you agree? What are the other factors available for growth potential?
6. The nature of economic growth in India is described as jobless growth. Do you agree with this 2015
view? Give arguments in favour of your answer.
Inclusive Growth
1. Explain intragenerational and intergenerational issues of equity from the perspective of inclusive 2020
growth and sustainable development.
2. What are the salient features of ‘inclusive growth’? Has India been experiencing such a growth 2017
process? Analyze and suggest measures for inclusive growth.
3. Comment on the challenges for inclusive growth which include careless and useless manpower in 2016
the Indian context. Suggest measures to be taken for facing these challenges.
4. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional 2016
finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian
society? Give arguments to justify your opinion.
5. Capitalism has guided the world economy to unprecedented prosperity. However, it often 2014
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.
Student’s Note:
19
CHAPTER 3 PLANNING
WHAT IS PLANNING?
Planning, in the economic sense, refers to the plans for the economic development and activities to attain specific social
and economic goals.
EVOLUTION OF THE IDE A OF PLANNING IN IND IA:

● At the time of independence, besides mass poverty there were problems of food shortage, inflation, illiteracy, lack of
health care, lack of infrastructure etc.
● The leaders during the freedom struggle had envisioned a developmental model that can provide for self-reliance,
self-sufficiency, modernisation, equity and ameliorate the sufferings and provide for welfare of all. Their vision was
reflected in the Industrial Policy Resolution of 1948 and the DPSPs of the Indian Constitution.
● To actualise their vision, the founding fathers adopted ‘Planning’ for economic development as a long-term strategy
for mobilising and allocating resources in the desired manner.
● The Planning Commission (1950) was thus set up with the Prime Minister as its Chairperson and with it the era of
five-year plans had begun.
THE GOALS OF THE FIVE YEAR PLANS
OBJECTIVES OF PLANNING
Considering the socio-economic problems, the various objectives of planning in India are:
● Sustainable and Inclusive Growth ● Regional Development
● Social Justice and Welfare ● Economic Modernisation and Stability
● Economic Growth and Development ● Increase the Standard of Living
● Employment Generation ● Decrease Inequalities
● Self Sufficiency
ACHIEVEMENTS OF PLANNING IN INDIA

● Increase in National Income and Per Capita Income: During the planning period national income has increased
manifold.
o A review of different plans shows that the first five year plan was a success as it achieved a growth rate of 3.6
per cent against a target of 2.1 percent growth rate in national income. (Present Scenario: As per the National
Statistical Office (NSO), the annual per capita (net national income) at current prices is estimated at Rs 1,72,000
in 2022-23, up from Rs 86,647 in 2014-15.)
20
● Development in Agriculture: Agricultural productivity has also marked an upward trend during the plan period.
The production of food-grains which was 510 lakh tonnes in 1950-51 increased to 176.4 million tonnes in 1990-91
and further to 211.9 million tonnes in 2001-02 and 332 million tonnes in 2023.
● Development of Industry: In the first five-year plans much of the capital was invested to develop the industry and
defence. About fifty per cent of the total outlay of the plans was invested for their development. As a result, industrial
production has increased to a great extent.
● Development of Transport and Communication: In the first two plans, more than one-fourth of the total outlay was
invested on the development of transport and communication.
● Self-Reliance: During the last five decades, considerable progress seems to have been made towards the achievement
of self-reliance. We are no longer dependent on other countries for the supply of food-grains and a number of
agricultural crops.
● Employment Generation: Schemes such as Mahatma Gandhi National Rural Employment Guarantee Act
(MGNREGA) and Aajeevika - National Rural Livelihoods Mission (NRLM) were launched under the Planning
Commission which covers almost 20% of the country’s total population.
● Price Stability: With the exception of war torn years and 1991 crisis, core inflation had never breached the double
digit mark.
● Capital Formation: In India due to the development of agriculture, industry and defence, the rate of capital formation
has also increased i.e., from 20% in 1980 to 34% in 2014 (World Bank).
● Social Justice: The planning in India has an objective of sustained growth with social justice.
o As a result, these plans have been ensuring the improvement of living standards of the people, removal of
poverty, creation of additional jobs, and reduction in inequalities of income and wealth.
● Development of Science and Technology: In the era of planning, India has made much progress in the field of science
and technology. India ranked 40th out of 132 in the Global Innovation Index (GII) 2022 rankings released by World
Intellectual Property Organization (WIPO).
● Social and Miscellaneous Services: It consists of such vital services as education, health and family planning,
housing, labour welfare and welfare of backward classes etc. and a considerable amount has been allotted in our five-
year plans for the provision of these services.
FAILURES AND SHORTCOMINGS OF INDIAN PLAN NING

● Rise in Prices: While the Price Level came down in the first plan, they recorded a steep rise in almost all other plans.
● Increase in Unemployment: During the period of five-year plans, unemployment went on rising. At the end of the
first five-year plan 53 lakh persons
were unemployed.
● Neglect of Agriculture: The five-year
plans failed to pay attention to the
agricultural sector except for the first
five-year plan and can be seen in the
form of –
o Low productivity as compared to
other developing nations.
o Lack of consolidation of land
holding.
o Lopsided Green Revolution,
which was region centric and few
cereals centric.
o Almost no financial support for
farm mechanisation in its policies.
● Slow Growth in Production Sector:
Capital intensive industries in urban
areas were given precedence over
small scale industries in the rural areas. In agriculture, the green revolution continues to be confined largely to wheat
and rice crops.
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● Inequality in Distribution of Income and Wealth: One of the main objectives of five-year plans has been to
minimise inequality in distribution of income and wealth. But the plan witnessed only an increase in inequality. This
inequality is found not only in the industrial sector but in the agriculture sector also.
● Widespread Poverty: Failure to address the problem of unemployment has resulted in widespread poverty in the
country.
o According to the survey conducted in 2011- 12 (Planning Commission), the percentage of persons below the
poverty line in India for the year 2011-12 has been figured out as 25.7% in rural areas, 13.7% in urban areas
and 21.9% for the country as a whole. The first four plans failed to address the problem of poverty.
● Lack of increase in the Standard of Living vis-à-vis other developed countries: All the five-year plans of India
aimed at raising the standard of living of the people and even the basic necessities have not yet been provided to the
people.
o On an average, a normal healthy person needs 2500-2700 calories per day (for men) but in India per capita
availability of food is 2200-2400 calories.
Nature of the Indian Economy

Since independence, the Indian Economy has evolved from broadly a centrally planned mixed economy to liberalised
mixed market economy. The nature of Indian Economy can be studied under two heads:
Nature of Economy before 1991:
● Under economic socialism in the initial years of independence, India identified industrialization as the key to
economic growth. The implementation of socialist-styled five-year plans (from 1951) and the centralization of
industry began.
● The early five year plans followed policies of promoting import substitution, extensive state ownership of
production and complex controls and regulations governing the private sector.
● In planning there was a significant role for State intervention in ensuring a fair distribution of wealth, meaning that
the process was government-driven and controlled. It was also successful in increasing the productivity of the
industrial and agricultural sectors which increased the per capita income and the national income as well.
● Better infrastructure, irrigation, and hydroelectric projects, better roads, and railway networks were built.
● There was an increase in the export of manufacturing and engineering goods. Thus, ultimately, foreign trade has
increased.
● Between 1951 and 1993, India’s share of world trade plunged from 2.4 to 0.5 percent owing to over-reliance on
central planning as an economic policy.
● Also, the system of planning was highly regulated, over-bureaucratized severely inhibited competition, innovation,
efficiency, and economic growth and resulted in severe economic crisis, commonly referred to as Balance of
Payment Crisis. India had to secure an emergency loan of $ 2.2 billion from the International Monetary Fund by
pledging 67 tons of Gold as collateral security.
● Thus, this Crisis Forced India to Change its Nature of Economy.
Nature of Economy after 1991
● Inefficient Management led to the origin of the financial crisis of the Indian economy in the 1980s.
● Government Expenditure began to exceed its revenue by such large margins that meeting the expenditure through
borrowings became unsustainable.
● Inflation, that is, prices of many essential goods rose sharply.
● Foreign Exchange Reserves declined to a level that was not adequate to finance imports for more than two weeks.
● India approached the IMF and received $7 billion as loan with conditions to liberalize and open the economy.
● Removing the Restrictions on the private sector, reducing the role of the government in many areas, and removing
trade restrictions between India and other countries were the main conditions India had to follow.
● In the New Economic Policies (NEP) of 1991, India agreed to the conditionalities of the World Bank and IMF.
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THE NEW ECONOMIC POLICY OF 1991

India faced its worst economic crisis in 1991. This crisis led India to adopt The New Economic Policy. This policy aimed
to move India towards a higher economic growth rate. Also, it proposed to convert the Indian economy into a market
economy, free of restrictions. The thrust of the policy was to create a more competitive environment in the economy
and remove the barriers to entry and growth of firms.
These reforms can broadly be classified into two groups:
1. Stabilisation Measures: These are short term measures, to correct the weaknesses developed in the balance of
payments and to bring inflation under control.
2. Structural Reform Policies: There are long-term measures, improving the efficiency of the economy and increasing
its international competitiveness
These reforms came to be known as LPG Reforms because India from now onwards followed the policy of
Liberalisation, Privatisation, and Globalisation (LPG). These can be defined as follows:
LIBERALISATION
Liberalisation is the process or means of the minimizing/elimination of control of the state over economic activities. It
provides a greater autonomy to the business enterprises in decision-making and eliminates government interference.
Liberalisation is achieved through –
● Industrial licensing was abolished for almost all but a few product categories remain such as —
alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and
Deregulation drugs and pharmaceuticals.
of Industrial
● Only Public sector industries reserved were related to defence equipment, atomic energy
Sector:
generation and railway transport.
● The market was allowed to determine the prices of goods.
Aim: To reduce the role of RBI from “regulator to facilitator” of the financial sector.
Financial ● The reform policies led to the establishment of private sector banks, Indian as well as foreign.
Sector ● Foreign investment limit in banks was raised to around 50 percent and Foreign Institutional
Reforms: Investors (FII) such as merchant bankers, mutual funds and pension funds, are now allowed to
invest in Indian financial markets.
Foreign ● Before 1991, the Indian rupee was overvalued in terms of US $ and other important currencies.
Exchange This overvaluation of the Indian rupee discouraged our exports and encouraged imports.
Reforms: ● To correct this distortion the devaluation of Rupee in 1991 was made.
Aim: To promote the efficiency of local industries, adoption of modern technologies and to increase
Trade and international competitiveness of Indian Industrial production.
Investment ● Quantitative restrictions on imports were decreased in order to protect domestic industries.
Policy
Reforms: ● Tariff rates were reduced.
● Removal of licensing procedures for imports
● Tax reforms concerned with government’s taxation and public expenditure policies, which are
collectively known as its fiscal policy.
● Since 1991, there has been continuous reduction in the taxes on individual incomes as it was felt
Tax Reforms that high rates of income tax were an important reason for tax evasion.
● The rate of corporation tax, which was very high earlier, has been gradually reduced to just
15%.
● Tax procedures and laws were also simplified.
PRIVATIZATION
● Privatization has a very broad meaning in economics. Everything that ranges from the introduction of private capital
to selling government-owned assets to transitioning to a private economy is included under Privatization.
● This was done in two ways:
1. Withdrawal of the government from ownership and management of public sector companies
2. Outright sale of public sector companies
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● Special status to the PSUs has been granted as Maharatnas, Nauratnas and Miniratnas to improve the efficiency
of PSUs by giving them autonomy in taking managerial decisions.
GLOBALIZATION
● Globalization means the integration of the economy of the country with the world economy.
● It is the outcome of the set of various policies that are aimed at transforming the world towards greater
interdependence and integration.
● Creation of networks and activities that will transcend economic, social and geographical boundaries.
● Outsourcing: In outsourcing a company hires regular service from external sources, mostly from other countries,
which was previously provided internally or from within the country like legal advice, computer service,
advertisement. Multinational corporations, and even small companies, are outsourcing their services to India where
they can be with a reasonable degree of skill and availability of cheaper cost of labour.
POSITIVE OUTCOMES OF THE LPG REFORMS

● Increase in India’s GDP Growth Rate: During 1990-91, India’s GDP growth rate was only 1.1% but after LPG
reforms of 1991, GDP growth rate increased year by year and in 2015-16 it was estimated to be 7.5% by the IMF.
● Foreign Investment Destination: Since 1991, India has firmly established itself as a lucrative foreign investment
destination and FDI equity inflows in India in 2019-20 (till August) stood at US$ 19.33 billion.
● Decrease in Unemployment Rate: In 1991, the unemployment rate was high. However, LPG reforms of 1991 led to
the arrival of new foreign companies and more jobs were generated thus leading to decrease in unemployment rate.
● Per Capita Income: The Per Capita Income increased due to an increase in employment.
ISSUES RELATED TO LPG REFORMS

● Decrease in Agriculture GVA: In 1991, agriculture provided employment to 72% of the population and contributed
29.02 percent of the GDP. Now, the share of agriculture in the GDP has gone down drastically to 18%. This has
resulted in decrease in per capita income of the farmers and increase in the rural indebtedness.
● MNC vs Local Business: Due to opening up of the Indian economy to foreign competition, more MNCs started
competing with local businesses. This led to highly unequal business competition.
● Environmental Impacts: Globalization has also contributed to the destruction of the environment through pollution
by emissions from manufacturing plants and clearing of vegetation cover.
● Widening Income Gaps: LPG reforms of 1991 have led to widening income gaps within the country. The higher
growth rate was achieved at the cost of declining incomes of the majority of people, thus leading to increase in
inequality.
Conclusion
There have been impressive gains in terms of double digit economic growth, reduction of poverty, hunger and malnutrition,
increase in agriculture income, per-capita income etc. But there are issues of rising inequality, unemployment, and
environmental degradation which need to be addressed through proper, targeted and evidence based policy making.
NITI AAYOG
● National Institution for Transforming India (NITI) Aayog, was formed via a resolution of the Union Cabinet on
1 January 2015.
● The Governing Council of NITI Aayog is chaired by the Prime Minister and comprises Chief Ministers of all the
States and Union Territories with legislatures and Lt Governors of other Union Territories.
● NITI Aayog acts as the quintessential platform of the Government of India to bring the States to act together in
national interest, and thereby fosters cooperative federalism.
KEY FUNCTIONS OF NITI AAYOG

● Vision of National Development: To evolve a shared vision of national development, priorities sectors and strategies
with the active involvement of States in the light of national objectives.
● Foster Cooperative and Competitive Federalism: Through structured support initiatives and mechanisms with the
States on a continuous basis, recognizing that strong States make a strong nation.
● Planning: To develop mechanisms to formulate credible plans at the village level and aggregate these progressively
at higher levels of government.
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● Economic Strategy and Policy: To ensure, in areas that are specifically referred to, that the interests of national
security are incorporated in economic strategy and policy.
● Work on Marginalised Society: To pay special attention
to the sections of our society that may be at risk of not
benefiting adequately from economic progress.
● Policy Framework Developments: To design strategic
and long-term policy and programme frameworks and
initiatives, and monitor their progress and their efficacy.
● Advisory Functions: To provide advice and encourage
partnerships between key stakeholders and national and
international like-minded Think tanks, as well as
educational and policy research institutions.
● Collaborative Community: To create a knowledge,
innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and other partners.
● Settle Disputes and Differences: To offer a platform for resolution of inter-sectoral and inter departmental issues in
order to accelerate the implementation of the development agenda.
● Modernisation and Evolution: To maintain a state-of-the-art Resource Centre, be a repository of research on good
governance and best practices in sustainable and equitable development as well as help their dissemination to stake-
holders
● Monitoring and Evaluation: To actively monitor and evaluate the implementation of programmes and initiatives,
including the identification of the needed resources so as to strengthen the probability of success and scope of delivery
● Capacity Building: To focus on technology upgradation and capacity building for implementation of programmes
and initiatives
NITI AAYOG VS PLANNING COMMISSION
Parameters NITI Aayog Planning Commission

NITI Aayog has not been given the mandate or The Planning Commission had the power to
powers to impose policies on States. NITI Aayog is impose policies on States and for the projects
Function basically a think-tank or an advisory body. approved by the Planning Commission.
The powers for allocation of funds have not been The Planning Commission had the power to
given to the NITI Aayog. The powers are with the allocate funds to the State Governments and
Allocation of
Finance Ministry. various Central Government Ministries for
Funds
various programmes and projects at National
and State Levels.
In NITI Aayog, State Governments have to play a State Governments did not have much role to
Role of State more proactive role. play apart from taking part in the meetings.
Governments The State Government’s role was confined to
the National Development Council.
The Governing Council of NITI Aayog has The National Development Council had
Lieutenant Governors of Union Territories and Lieutenant Governors and State Chief
Governing
State Chief Ministers. Ministers. Planning Commission had to
Council
report to the National Development
Commission.
NITI Aayog is an Executive Body as it is not The now-defunct Planning Commission
Constitutional
mentioned in the Constitution of India, and it was not was also an Executive Body.
Backing
established by an Act of Parliament.
CRITICISMS OF NITI AAYOG

● Limited Role or Influence in Policy Making: It has no role in influencing public or private investment. It does not
seem to have influence in policy making with long-term consequences. For instance, demonetisation and the Goods
and Services Tax.
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● Not Evolved as per Recent Needs: NITI Aayog has still not evolved and its role remains unclear. An organisation
bestrode with too many powers but no accountability and answerability.
● Non-Critical Body: If it is a think-tank, it has to maintain a respectable intellectual distance from the Government of
the day. Instead, we see uncritical praise of the Government-sponsored schemes/programmes.
● Limited Answerability: It is not able to answer specific questions like, why 90% are working in the unorganised
sector? And moreover, as on date, more and more informalisation is taking place in the organised sector.
● Untouched Areas: Labour force participation rate of women is also declining, when neighbours like Bangladesh are
registering an increase.
Way Forward:
● Dedicated Time Period: Decentralization of planning should be done, but within a five-year plan framework.
● Administrative Lacunae: Bureaucratic inertia needs to be shaken, specializing it and fixing the accountability on the
basis of performance.
● Should be an Opinion-Based Body: NITI Aayog should act as a force for persuasion, not control centre. Its role
should be to promote local systems solutions to national problems.
● Diversification and Women Inclusion: All stakeholders including women must be involved in the implementation
of a plan in a large, diversified and democratic country. Thus, planning should be devolved to State governments, and
even to the third tier of city and district governance.
● Transformational Approach Needed: It requires new methods to speed up ‘organisational learning’ amongst
stakeholders in the system who must make plans together and implement them together. Thus, it is not good enough
to have a plan, there must also be a strategy for its cooperative implementation.
Conclusion
NITI Aayog could emerge as an agent of change over time and contribute to the government’s agenda of improving
governance and implementing innovative measures for better delivery of public services as the Aayog continues to be
representative of an efficient, transparent, innovative and accountable governance system in the country with
distinguished work ethics thus paving the way for India becoming Vishwa Guru (World Leader).
Key Terms
Self-reliance, Self-sufficiency, Modernization, Equity, Inclusive Growth, Social Justice, Cereal centric policies,
Capital vs Labor intensive industries, Liberalisation, Privatisation, Globalisation, Gross Domestic Product, Gross
Fixed Capital Formation, Cooperative and Competitive Federalism
PYQs Year
1. How are the principles followed by the NITI Aayog different from those followed by the erstwhile 2018
Planning Commission in India?
2. How globalisation has globalization led to the reduction of employment in the formal sector of the 2016
Indian economy? Is increased informalisation detrimental to the development of the country?
3. Examine the impact of liberalization on companies owned by Indians. Are they competing with the 2013
MNCs satisfactorily?
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CHAPTER 4 BUDGET AND MOBILISATION OF

RESOURCES
GOVERNMENT BUDGETING
● Budgeting refers to the estimation of receipts and expenses of the government over a specific future period that is
usually compiled and re-evaluated on a periodic basis. It involves estimation of availability of resources and their
allocation to various activities based on predetermined priorities.
● The Budget division of the Department of Economic Affairs is the nodal agency responsible for preparing the
Budget.
● A budget is a consolidated financial statement prepared by the government on expected public expenditure and
public revenue during a financial year.
● Article 112 of the constitution provides for the Union Budget and it has been referred to as Annual Financial
Statement.
The Budget Includes:
● Projections of revenue and capital receipts, Strategies for Generating revenue, Projections of expenditure,
● Information on the actual receipts and expenditure from the previous financial year and explanations for any deficit
or surplus,
● The economic and financial policies for the upcoming year, such as taxation proposals, revenue prospects, spending
programs, and the introduction of new schemes/projects.
NEED OF GOVERNMENT BUDGETING

● Political Need: Control over Public Purse as it is also constitutionally required, Financial Accountability of the
government to the Parliament and Administrative Management.
● Socio-Economic Need: Such as declaration of economic policies, encouraging and impacting economic growth,
allocation of resources, tax related concessions and other provisions, production of goods and facilitation of services
(e.g., the Kisan rail for marketing agricultural products) when necessary, targeting inflation and fiscal deficit to ensure
economic stability and finally redistribution of resources for managing regional inequalities.
● Taxing Demerit Goods with high rates and promotion of employment is done through government budgeting.
COMPONENTS OF THE BUDGET
REVENUE BUDGET
That part of the Budget that deals with the
income and expenditure of revenue by the
government.
Revenue Receipt:
It refers to those receipts of the government
which do not directly impact the assets and
liabilities of the government. Revenue receipts
are recurrent receipts. It includes money earned
by the government through Tax receipts and
Non-Tax receipts.
● Tax Receipts: It includes all the money
earned by the government via the different
types of taxes, i.e., all direct and indirect tax collections. It includes Personal income tax, Corporate tax, Excise
duties, Customs duties, Service tax, Wealth tax etc. Taxes such as wealth tax, gift tax, and estate duty (now
abolished) have had limited significance in terms of revenue generation and are often referred to as Paper taxes.
● Non-Tax Receipts: This includes all money earned by the government through the sources that are other than taxes.
Such as Profits and dividends from the Public Sector Undertakings, Interests received by the government out of all
loans forwarded inside and outside of the country, Grants received by the government etc.
Revenue Expenditure:
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It refers to all expenditures incurred by the government that do not create any asset or impact its liabilities. It is
synonymous with maintenance and consumption expenditure. It includes Interest payment by the government on all
internal and external loans, Salaries, pension and provident fund paid to the government employees,Subsidies
forwarded to all sectors by the government, Grants given by the government to Indian states and foreign Nations etc.
CAPITAL BUDGET
The part of the Budget that deals with the receipts and expenditures of the capital by the government.
Capital Receipt:
It includes all non-revenue receipts of the government that increase liability or decrease assets. It includes loan recovery
in which the borrower pays capital amount, borrowings by the government which includes all long-term loans raised by
the government, Money earned via disinvestment of public sector undertakings etc.
Capital Expenditure:
The expenditures which either create physical or financial assets or reduce financial liabilities. It includes loan
disbursal by the government, both internal and external ,loan repayment by the government (Capital part of the loan),
long-term investments by the government on creation of assets such as roads, schools, hospitals etc.
Changes in Budgetary Process (2017)
● Presentation of the Budget advanced by one month to 1st February, which was earlier done on the last
working day of February.
o Reasons: Timely release of funds and availability of the same for various programmes and schemes
under different Ministries.
● Merger of Railways and General Budget
o For putting a check on corruption, commercial inefficiency and populism and allowing synergetic
transportation policy making and fund allocation.
● End of Plan and Non-plan Expenditure Terminology
o For giving due importance to maintenance of existing assets also along with creating new assets, this
way optimizing the utilisation of resources.
GOVERNMENT DEFICIT AND ITS MEASUREMENT

Government deficit is the amount of money in the outlined Budget by which the government expenditure exceeds the
government revenue account. Various Measures that capture Government Deficit are mentioned below in detail.
Fiscal Deficit And its Implications
● It refers to the gap between the government's expenditure requirements and its receipts. It can also be put as the
amount that the government needs to borrow to meet all its expenses. It is an indicator of how well the government is
managing its finances.
Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
● Level of the fiscal deficit determines the borrowing requirements of the government, dependence on the
borrowing from the rest of the world (e.g. IMF loan during 1991). Higher fiscal deficit also hampers future growth.
● Fiscal deficit has also direct relation with investor sentiments, it may also lead to crowding out effect. Fiscal deficit
also results in higher government debt which may lead to a debt trap.
● While entire borrowing from the Fiscal deficit is not available for growth and development of the economy, yet deficit
financing may cause inflationary pressure.
Primary Deficit its Implications
● Primary deficit is calculated by excluding the interest liabilities for the year from the fiscal deficit (because the loan
was taken in the earlier years).
Primary Deficit = Fiscal Deficit – Interest Payment
● Lack of Development: Primary deficit shows the borrowings are only for interest payment that leads to no further
development in the economy.
● Reduction in Credibility: A low primary deficit is an indicator that the government has a high burden of interest
payment which reduces credibility for future borrowings.
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● Higher Taxes: The situation of high interests and loans might force the government to impose high taxes on citizens
and corporations.
● Crowding out effect: More government borrowing leads to a crowding out effect on the private sector.
Revenue Deficit and its Implication
● It refers to the excess of government’s revenue expenditure over its revenue receipts.
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipt
● Dissaving: When the government incurs a revenue deficit, it implies that the government is dissaving (i.e. spending
money beyond its income) and is using up the savings of the other sectors of the economy to finance a part of its
consumption expenditure.
● Borrowing for Consumption: Government may have to borrow
not only to finance its investment but also for its consumption
requirements, which leads to an inflationary situation in the
economy.
● Cut in Expenditure: This will lead to a build-up of stock of debt
and interest liabilities and force the government, eventually, to
cut expenditure.
● More Revenue Deficit: It promotes a vicious cycle of problems
in the economy where large borrowings to meet revenue deficit
will raise debt burden.
Effective Revenue Deficit
● The concept was introduced in Union Budget 2011-12 and it
refers to exclusion of revenue expenditures of the government
which were done in the form of Grants for Creation of Capital
Assets from revenue deficit.
ERD = Revenue Deficit – Grants for Creation of Capital Assets (GoCA)
● Significance: Focusing on the effective revenue deficit helps in reducing the consumptive part of the revenue
deficit and creates space for increased productive capital spending.
Measures to Reduce Government Deficit
● NK Singh Committee: Establishing an Independent Fiscal Council that can review the fiscal targets decided in the
Budget.
● New Act for Budget Management: The targets outlined under the FRBM Act, 2003 have been postponed a number
of times and there is a need for a new Act that is effective and transparent in deficit management.
● Improved Taxation: Emphasis on tax-based revenues should be increased with measures to expand tax base and
appropriate measures should be taken to reduce tax evasion.
● Disinvestment: Disinvestment targets should be achieved with monetisation of government assets through National
Monetisation Plan.
● Rationalisation of Subsidies: Subsidies in the economy should be rationalised in order to promote qualitative
production in the economy.
FISCAL POLICY
Fiscal policy refers to the policy regarding government spending, borrowing and taxation to achieve various economic
objectives. The major fiscal measures are:
● Public Expenditure: Government spends money on a wide variety of things, such as public procurement (for
construction of roads, railways, ports etc.), services like education and health as well as transfer payments in the
form of various subsidies, welfare benefits.
● Taxation: Government imposes new taxes or changes rates of existing taxes to influence certain sectors of the
economy, e.g. recent reduction in corporate taxation to promote investment in the economy.
o Tax rates affect people’s income, disposable income with them, consumption and standard of living.
o Taxes also affect savings which affect investment and level of investment has direct bearing on level of output
(GDP) and hence per capita income.
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o With direct impact on production cost (factor cost), taxes affect general prices and this way they determine
behaviour of economic activities.
● Public Borrowing: Government raises money from the public or from the foreign markets through various bonds,
Kisan Vikas Patra, National Saving Certificates etc.
● Other Measures:
o Rationing and Price Control: It refers to policy measures that address the scarcity of resources, commodities,
goods and services by controlling their allocation and prices.
o Regulation of wages, e.g. wages of MGNREGS or floor wages for industrial workers
o Increase or decrease in production of goods and services.
Difference between Fiscal Policy and Monetary Policy:
Fiscal Policy Monetary Policy
Associated with government spending, borrowing and Associated with changes in money supply in the economy
taxation through interest rates
Measures are taken by the Government Measures are taken by the Central Bank
There is no specific target Targets inflation (±4%)
It has side effect on government budget/ borrowings It has side effect on exchange rate and housing market
Can have strong political dimension in changing Mostly independent from the political process
taxation rates
IMPORTANCE OF FISCAL POLICY IN INDIA

● Capital Formation: Fiscal policy plays an important role in elevating capital formation in the economy, e.g. Budget
2023-24 has increased capital expenditure by 37%.
● Mobilisation of Resources: Through taxation, the fiscal policy helps the government to mobilise resources for its
expenditure.
● Incentivise the Private Sector: The fiscal policy is also important from the perspective of raising the confidence of
the private sector which in turn encourages investment and drives demand in the economy.
● Promotion of Income Equality: Fiscal policy is also important to promote income equality by levying direct taxes
on higher-income individuals and subsidising the consumption items of low-income households. E.g. Food subsidy
from taxation of luxury items.
● Controlling Inflation: Fiscal policy is also important to maintain a healthy inflation rate in the economy. Government
increases taxes during high inflation periods in the economy.
● Protection of Domestic Industry: Fiscal policy is also important to protect domestic industry from foreign
competitors, e.g. high custom duty on Harley-Davidson bikes in India.
● Protection of Individual Investors: The fiscal policy is used by the government to protect individuals from highly
fluctuating assets, e.g. taxation on virtual digital assets by Budget 2022-23.
DEFICIT FINANCING
Deficit financing refers to the act/process of financing or supporting a deficit budget by the government.
There can be following ways to finance deficit of the government:
● External Debt: Involves borrowing from outside the country
● Internal Debt: Borrowing from within the country
● Expanding sources of revenues through measures such as raising taxes
● Monetisation of Fiscal Deficit: By printing money by the Central Bank. It can be of following two types:
o Indirect Monetization: It is undertaken through Open Market Operations, where RBI buys bonds from the
secondary market by printing fresh money to infuse liquidity.
o Direct Monetization: Under this type of monetization, RBI directly purchases government bonds in the
primary market by printing money to finance the spending needs of the government.
Arguments in Favour of Direct Monetisation
● Multiplier Effect: This method encourages the government to utilise unemployed and underemployed resources
which results in employment generation in the economy.
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● Benefit for Taxpayers: With direct monetisation of the deficit, the government can cut taxes or increase expenditure
without any additional burden on the taxpayers.
● Promotion of Entrepreneurship: During high inflation, private investors tend to invest more with the hope of earning
additional profits.
● Resource Optimisation: If the resources are optimised and channelised in the proper direction then it can accelerate
the development activities.
● Cost Free Method: Interest payments to RBI against this borrowing come back to the government in the form of
profit.
● No New Debt Creation: Government’s excess expenses are monetised immediately and there is no new debt creation
for the government.
● Meeting Fiscal Deficit Targets: With direct monetisation the fiscal deficit target remains constant and the
government can continue to adhere to its fiscal deficit target.
● Social Sector Expenditure: More money with the government can lead to greater expenditure in the social sector
thereby improving the quality of living standards of people.
Arguments Against Direct Monetisation
● High Inflation: Direct monetisation leads to excess money supply in the economy which can lead to inflationary
spiral during the global uncertainty.
● Rising Income Inequality: The inflation helps producing classes and businessmen to flourish while the middle class
suffers from the inflation.
● Distorted Investment Pattern: The higher profit motive induces investors to invest their resources in quick profit-
yielding specific industries. This makes long-term borrowing costly in the economy.
● Balance of Payment Crisis: The direct monetisation has caused the Balance of Payment crisis in 1991 and nearly
in 2013.
● Losing Investor Confidence: With the direct monetisation path, the investors might see the government planning to
solve its fiscal problems by inflating away its debt.
● Losing Control over Monetary Policy: Direct monetisation as a way of financing fiscal deficit gives control of the
monetary policy to the government and RBI loses its mandate over monetary policy.
● Depreciation of Rupee: Rising inflation leads to depreciation of rupees which would make energy imports costly.
● Moral Hazard: Direct monetisation leads to moral hazard where governments would spend on populist measures
thinking about this easy way out.
FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT, 2003

The FRBM Act, 2003 is an Act of the Parliament that aims to reduce India’s fiscal discipline, institutionalise fiscal deficit,
improve macroeconomic management and overall management of public funds in India in order to move towards a
balanced budget.
Key Provisions of The Act:
● FRBM Act provides a legal institutional framework
for fiscal consolidation.
● The Act specified a reduction of the fiscal deficit to
3% of the GDP by 2008-09 with an annual reduction
target of 0.3% of GDP per year by the Central
government.
● Similarly, revenue deficit has to be reduced by 0.5%
of the GDP per year with complete elimination to be
achieved by 2008-09.
● The Act also requires the government to lay before
the parliament three policy statements in each
financial year namely:
o Medium Term Fiscal Policy Statement;
o Fiscal Policy Strategy Statement, and
o Macroeconomic Framework Policy Statement.
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RECENT AMENDMENTS TO THE ACT:

● 2012 Amendment: The Finance Act, 2012 amended the FRBM Act, 2003 and provided that in addition to the
existing three documents, the Central Government shall lay another document i.e. the Medium-Term Expenditure
Framework Statement – before both Houses of Parliament.
o Effective Revenue Deficit to be reduced to zero by the end of FY15.
o Fiscal deficit to be reduced to 3% by the end of FY15.
● The FRBM Rules have been amended time-to-time since then and in the Budget 2022-23 government aimed to reduce
the fiscal deficit to below 4.5% of GDP by 2025-26.
N.K. SINGH COMMITTEE:

The Committee was established in 2016 to review the FRBM Act. It recommended following measures for fiscal
consolidation:
● Using debt as the primary target for fiscal policy.
● Debt to GDP ratio: The Debt-to-GDP ratio should be 38.7% for the central government and 20% for the state
governments together by FY23.
● Fiscal deficit should be 2.5% of GDP by FY23.
● Provision of escape clause in the event of:
o Considerations of national security, war, national calamities and collapse of agriculture affecting output and
incomes,
o Structural reforms in the economy resulting in fiscal implications, or
o Decline in real output growth of at least 3% below the average of the previous four quarters.
DIFFERENT TYPES OF B UDGETS

1. Zero Based Budget
● It is a method of budgeting in which all expenses are evaluated each time a Budget is made and expenses must be
justified for each new period.
● It starts from the zero base and every function of the government is analysed for its needs and cost. Budget is then
made based on the needs.
2. Outcome Budget
● It is a kind of result-oriented budgeting. It was first introduced in 2005 and analyses the progress of each ministry and
department and what the respected ministry has done with its Budget outlay. It measures the development outcomes
of all government programs.
3. Gender Budgeting
● Gender-Budgeting is defined As “Gender-Based assessment of budgets, incorporating a gender perspective at all
levels of the budgetary process and restructuring revenues and expenditures in order to promote Gender
Equality”.
● Through the Gender Budget, the Government declares an amount to be spent over the Development, Welfare,
Empowerment Schemes and Programmes For females.
MOBILISATION OF RESO URCES

● Resource Mobilization is the identification, organization and utilization of the available material resources
within the country (including financial resources) to further its objectives of development missions and plans.
● It is the process of-
o Assembling and organizing things for achieving collective goals.
o Freeing up locked resources.
o Essential for the development, implementation and continuation of work.
● Practically speaking, resource mobilization means expansion of relations with the resource providers, the skills,
knowledge and capacity of proper use of resources.
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INSTRUMENTS OF FINANCIAL RESOURCE MOBILIZATION

● Cooperatives: These are autonomous associations of persons united voluntarily to meet their common economic,
social, and cultural needs. E.g. Gujarat Cooperative Milk Marketing Federation Ltd
● Finance and Leasing Association (FLA): It is the trade association for the consumer credit, finance and asset finance
sectors. Members of FLA include banks, subsidiaries of banks and building societies etc.
● Banks: These are the financial institutions that accept deposits from the public and create credit. Banks are
indispensable resource mobilization.
● Angel Investors: These are affluent individuals who provide capital for business set up.
● Venture Capital (VC): It is a type of private equity, a form of financing that is provided by firms or funds to small,
early-stage, emerging firms that are deemed to have high growth potential. E.g. SEBI registered India Innovation
Fund.
● Capital Network: Finding investors, pitching, due diligence, term sheets, exits and more.
● Merchant Banks: It is a company that deals mostly in international finance, business loans for companies and
underwriting.
● International Trade Financing Companies: These companies provide services which include such activities as
lending, issuing letters of credit, factoring, export credit and insurance.
● Specialized Financial Institutions: they concentrate mainly on financing specialized economic and social activities.
E.g. National Bank for Financing Infrastructure and Development.
ROLE OF FISCAL POLICY IN RESOURCE MOBILIZATION

● Fiscal Policy can be so devised that not only the objective of rapid capital accumulation or growth, but also other
objectives of economic policy, such as equitable distribution of income and wealth, price stability and promotion of
employment opportunities can be achieved. Thus, fiscal policy is of crucial importance in accelerating the pace of
economic growth in developing countries.
● Public Investment: Fiscal policy, if properly designed, is an efficient and equitable way of mobilizing resources for
augmenting public investment.
● Taxation: A well-conceived scheme of taxation is an important way of raising the ratio of savings to national income
which is one of the crucial determinants of the rate of economic growth.
o To raise the saving ratio for acceleration of growth.
o To improve investment in the private sector so that a higher rate of investment is achieved.
● Expenditure Side: There is a positive need for public investment, especially in those spheres of economic activity
where the private investments are not easily attracted.
ISSUES AND CHALLENGES IN MOBILISING RESOURCES:

Legacy Issues
● Limited Domestic Public Resources: It makes Least Developed Countries (LDCs) highly dependent on external
resources which limits their policy space and creates some dependency.
● Weak Domestic Taxation: Taxes are not broad-based and tax evasion is common in developing countries which
squeeze out the chances for public expenditure.
● Fiscal Policies: The fiscal discipline is hardly seen in developing countries. They often resort to deficit financing to
pursue development.
● Lack of National and Sub-regional Development Banks with Rural Penetration: Though India is enjoying the
presence of big national and international banks but the financial inclusion at rural level has been a myth.
● Illicit Financial Flows: It involves resources that have been obtained, transferred or used illegally or illicitly. A
common concern with regard to illicit financial flows from developing countries is the identification of flows
considered potentially damaging to economic development.
● Opaque International Financial System: In small and developing economies, vital development resources are being
lost because of the ease with which capital flight can flourish in the context of a burgeoning yet opaque international
financial system.
● Structural Problems of Political Governance: It is closely related to the idea that illicit capital flows from
developing economies are indicative of deeper structural problems of political governance in these countries.
● International Tax Cooperation: In general, international tax cooperation assumes particular importance in a world
of hyper globalization, in which tax systems in some countries can affect public revenue collection in other countries.
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● Lack of Multilateral Development Banks: Enormous financial support is needed for achievement of the
Sustainable Development Goals.
Contemporary Issues
● Lower Revenue: The COVID-19 has disrupted the domestic economic activities and earnings of the economies,
especially those based on the service sector such as tourism. This has reduced revenues of the governments.
● Debt-trap: Countries such as China are using their deep-pockets and exploiting the economic necessity of developing
countries under debt trap.
● Impact of Policies of West: The rise of interest rates in the developed countries has reduced investment by FIIs and
thereby creating financial crunch for startups.
● Bank Failures: The failure of Silicon Valley Bank in the USA has affected the startups in India and the withdrawal
of money from their accounts is affected.
● Global Geopolitical Situation: The ongoing Russia-Ukraine conflict has increased inflationary pressure on the
developing economies and disrupted their budget with higher expenditure on oil imports.
STEPS TAKEN FOR EFFECTIVE UTILISATION OF RESOURCES

● Effective Utilisation of Economic Resources:
o PM Gati Shakti: It is an ambitious scheme with an aim of integrated planning and execution of infrastructure
projects with focus on expediting works and to improve the logistics cost.
o National Infrastructure Pipeline: It is a collection of projects and programmes totalling around 102 lakh crores
infrastructure development over a period of five years.
o National Monetisation Pipeline: The pipeline aims to unlock aggregate monetisation potential of Rs. 6 lakh
crores through monetisation of core assets of the Central government.
o Infrastructure Development: National Housing and Habitat Policy, 2007 and the Pradhan Mantri Awas
Yojana (PMAY), 2015 emphasize on developing appropriate ecological design standards for building
components, materials and construction methods.
o Manufacturing Stage: Flagship programmes like “Make in India” that provide special assistance to energy
efficient, water efficient and pollution control technologies through Technology Acquisition and Development
Fund (TADF).
● Qualitative Improvement:
o Reduced Waste Generation: It will contribute towards fulfilling the goals of Swachh Bharat.
o Reduce, Reuse and Recycle: There are policies existing to tackle all types of waste ranging from hazardous waste
to Municipal Solid Waste (MSW), Construction and Demolition (C&D) waste, plastic waste and e-waste.
● Other Steps:
o Policy of Reservation: it aims to bring the weaker section into mainstream and is an important tool for human
resource mobilization.
o Judicious use of resources is an important part of several SDGs i.e., GOAL 2: Zero Hunger; GOAL 6: Clean
Water and Sanitation; GOAL 7: Affordable and Clean Energy.
o Paris Climate Change Agreement: Utilisation of resources can help meet India’s Nationally Determined
Contributions (NDC) commitments under the 2015 Paris Climate Change Agreement.
RECOMMENDATIONS FOR EFFECTIVE UTILISATION OF RESOURCES

● For Human Resource:
o Promotion of Human Capital Formation: This can be done with right employment opportunities by providing
skilling and re-skilling opportunities in order to utilise demographic dividend.
o Empowering Weaker Sections: The weaker sections of the society like women, SCs/STs etc. should be provided
special training in order to bring them into the mainstream.
● For Financial Resources:
o Widen Tax Base: The tax base should be widened through integration of the dataset of Aadhar, PAN Card and
business activities and preventing instances of tax evasion.
o Tax Reforms can play an important role in steering the economy towards resource efficient practices and circular
economy. Value-added taxes should be levied on value-added activities like mining, construction, and
manufacturing.
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o Viability Gap Funding (VGF) that can help businesses overcome the barriers and become competitive over time
by building scale and upgradation of technology.
o Improving Industrial Efficiency: Effective resource utilisation in the manufacturing sector can be done through
adoption of new generation digital technologies along with industrial cluster development.
● For Natural Resources:
o Promotion of Green accounting: Promotion of green accounting can account for the utilisation of environmental
resources and improve resource use efficiency.
● Institutional Development:
o Policy reforms across life cycle stages focussing on their design, emphasis, integration or implementation.
o A dedicated institutional set up for development, assessment of resources measures should be established.
o Greater reliance on Domestic Resource Mobilisation (DRM) is vital to elevating economic growth,
accelerating poverty reduction and underpinning sustained development.
Conclusion
Resource in the form of investment is the most important factor affecting growth. Hence, resource mobilization to boost
investment has always been a priority. The task of mobilizing resources involves deliberate decisions on selection of major
investments, control of expenditures, monitoring of performance and realization of planned level of economic activity.
Going further, it also includes prevention of tax evasion and tax avoidance.
DISINVESTMENT
“Government Has No Business Being in Business”
Disinvestment is defined as the process through which a company, government, or other entity sells or liquidates a
company, asset, or subsidiary.
REASONS FOR DISINVESTMENT OF INDIAN PSUS:

● Reduced Growth: Indian PSUs had shown a very negative rate of return on capital employed.
● Inefficiency: Indian 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.
● Negative Impact on Economy: The national GDP and Gross
National Savings were also getting adversely affected by low
returns from PSUs.
● Underutilisation of Capacity: Many public sector companies are
losing money as a result of the underutilization of capacity.
Underutilization of capacity results in an increase in production
costs.
● Lack of Autonomy: The lack of autonomy inhibits the ability of
PSUs to invest and grow, resulting in their tardy performance. This
must change. Autonomy and investment are closely linked. For
Example: Maruti Udhyog after disinvestment got autonomy of
operations and showed remarkable growth.
● Reducing Fiscal Burden of Government: The government
chooses a disinvestment strategy to reduce the fiscal burden and raise money to meet public needs. Ex. In Union
Budget 2023-24, disinvestment target of Rs. 510 billion for the fiscal year.
● Decontrol non-essential Services: Through Disinvestment non-essential services such as scooter and watch making
PSUs have been disinvested
● For Creating a Competitive Market: A company may choose to disinvest in acquired assets and instead focus on
its competitive abilities. For Example: IDBI Bank was disinvested to increase competitiveness in the market.
● Increasing Open Share of Ownership: disinvestment gives out a larger share of PSU ownership to the open market,
it sets the groundwork for India's firm capital market.
DISINVESTMENT JOURNEY
● In August 1996, the Disinvestment Commission, chaired by G V Ramakrishna was set up to advise, supervise,
monitor and publicize gradual disinvestment of Indian PSUs. However, the Disinvestment Commission ceased to exist
in May 2004.
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● National Investment Fund (NIF) was constituted in November, 2005, into which the proceeds from disinvestment
of Central Public Sector Enterprises were to be channelized.
● The Department of Disinvestment has been renamed as Department of Investment and Public Asset Management
(DIPAM) from 14th April, 2016 which has been made the nodal department for the strategic stake sale in the PSUs.
Difference Between Disinvestment and Privatisation
Disinvestment Privatisation
● Dilution of ownership, Government retains control ● Transfer of ownership and control changes hand
● More than 50% shareholdings ● Less than 50% shareholding
● Done to ease public finance and increase the ● Strategic in terms of achieving operational efficiency
productivity of Government capital
Importance of Disinvestment
● In the short run, it is helpful in financing the increasing fiscal deficit.
● Financing large-scale infrastructure development.
● Investing in the economy to encourage spending.
● Expansion and Diversification of the firm.
● Repayment of Government Debts: Almost 40-45% of the Centre’s revenue receipts go towards repaying public
debt/interest.
● Investing in social programs like health, education and welfare schemes for the poor.
● It can help in generating a better environment for investment.
● Disinvestment also assumes significance due to the prevalence of an increasingly competitive environment, which
makes it difficult for many PSUs to operate profitably. This leads to a rapid erosion of the value of the public assets
making it critical to disinvest early to realize a high value.
● It is expected that the strategic buyer/acquirer may bring in new management/technology/ investment for the
growth of these companies and may use innovative methods for their development.
CHALLENGES OF DISINVESTMENTS
● Loss of regular income: Sale of profit-making and dividend paying PSUs would result in the loss of regular income
to the Government
● “Asset Striping”: There would be chances of “Asset Striping” by the strategic partner. Asset Striping means the
process of buying an undervalued company, the intention behind the same is selling off its assets to generate a profit
for the shareholders.
● Strategic and National Security Concerns: Strategic Disinvestment of Oil PSUs is seen by some experts as a threat
to National Security since Oil is a strategic natural resource and possible ownership in the foreign hand is not
consistent with our strategic goals.
● Social Security: Disinvestment affects the social security of the labour force.
● Crony-Capitalism: It also raises concerns about cronyism.
● Unworthy Deals: The depressed state of the markets and the paucity of reasonable buyers would land in a bad deal.
● End-use of Funds: Using funds from disinvestment to bridge the fiscal deficit is an unhealthy and a short-term
practice.
● Private Monopolies: Complete Privatisation may result in public monopolies becoming private monopolies, which
would then exploit their position to increase costs of various services and earn higher profits.
Way Forward
Disinvestment has numerous advantages as it can stimulate competition in diverse areas and boost efficiencies. It also
produces income for the government, which can be used for welfare programmes. To protect social commitments and
strategic interests related to these sectors, the government must exercise caution and continue to be present in key industries
like banking and energy.
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Provisions of Budget 2023-24
● Budget 2023-2024 has adopted the Saptarishi priorities to

create a world-class infrastructure, strengthen a trust-based
governance framework and provide an impetus to micro, small
and medium enterprises (MSME).
● Budget 2023-24 has pushed for measures such as simplification
of the Know Your Customer (KYC) process, establishing a
common identifier for businesses via the PAN card and the
introduction of the landmark ‘Jan Vishwas Bill’ in the
Parliament.
● India is moving forward firmly for the ‘Panchamrit’
principles and Net-Zero Carbon Emission by 2070 to spur a
movement of environmentally conscious lifestyle and usher in
green industrial and economic transition.
● Budget 2023-24 takes this vision forward by explicitly
emphasising the importance of Green Growth. From Natural
Farming to scrapping of old vehicles, the energy transition
has been prioritised with investment programs such as the
National Green Hydrogen mission, Green Credit Program,
PM-PRANAM and the GOBARdhan scheme.
Key Terms
Annual Financial Statement, Financial Accountability, Crowding Out Effect, Inflationary Pressures, Debt Trap,
Resource optimization, Fiscal Consolidation, Zero Based budget, Outcome Budget, Gender Budgeting, Sabka Sabka
Vishwas
Previous Year Questions Year
1. Distinguish between Capital Budget and Revenue Budget. Explain the components of both these 2021
Budgets.
2. The public expenditure management is a challenge to the Government of India in the context of budget 2019
making during the post liberalization period. Clarify it.
3. Comment on the important changes introduced in respect of the Long Term Capital Gains Tax (LTCGT) 2018
and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.
4. One of the intended objectives of Union-Budget 2017-18 is to ‘transform, energize and clean India’. 2017
Analyze the measures proposed in the Budget 2017-18 to achieve the objective.
5. Women empowerment in India needs gender budgeting. What are the requirements and status of gender 2016
budgeting in the Indian context?
6. What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) 2013
Act, 2003? Discuss critically its salient features and their effectiveness.
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CHAPTER 5 TAXATION
● Tax is defined as a means of income redistribution. The event of tax being imposed is referred to as Incidence of
Tax and the effect of tax being imposed is known as Impact of Tax.
● 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 levied and extracted by the government through legislation. If taxpayers fail 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 divided between the Central, State Governments
and the Local Government (such as Municipality and Panchayats).
CLASSIFICATION OF TAXES
CLASSIFICATION OF TAXES BASED ON NATURE
CLASSIFICATION OF TAXES BASED ON INCIDENCE

● Direct Tax: Direct taxes are those in which the incidence and impact of tax falls on the same person/point. E.g.
Income tax, Corporation tax.
● Indirect Tax: Indirect taxes are those in which the incidence and impact of tax falls on different persons/points.
E.g. GST, Service tax etc.
IMPORTANCE OF TAXATION
● Resource Mobilisation: Resource mobilisation is important for economic development and around 58% of revenue
of the Government is collected from various types of taxes.
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● Distributive Justice: Taxes are an important part of distributive justice and to reduce inequalities in the economy
with efforts such as PM Garib Kalyan Anna Yojana.
● Investment in the Economy: With effective taxation policy the government can improve the investment in the
economy, e.g. recent reduction in corporate taxes by the government.
● Price Stability: Taxes are effective means of controlling inflation. By raising income taxes, personal disposable
income of an individual can be reduced.
● Administration: Taxes are used by the government to provide for salaries, pension and other expenditure of various
administrative departments.
● Allowance: Government can promote any particular sector, initiative with taxation policy. E.g. promotion of exports
with the RoDTEP (Remission of Duties and Taxes on Exported Products) scheme.
TAXATION SCENARIO IN INDIA

Constitutional Provisions
● Article 265 of the Constitution of India says that "No tax shall be levied or collected except by authority of law".
● Article 112 of the constitution enjoins the President of India to get the budget presented in both houses of
Parliament in every financial year that contains the receipt and expenditure of that year.
RECENT TRENDS IN TAX COLLECTION

● The tax collection has been buoyant for both indirect and direct taxes.
● Direct Tax collections (provisional) for the Financial Year (FY) 2022-23 exceeded the Union Budget Estimates by
₹2.41 lakh crore i.e. by 16.97%.
● Net Direct Tax collection for the FY 2022-23 increased to Rs. 16.61 lakh crore marking a growth of 17.63%.
● Corporate and Personal income tax constitute half of Gross Tax Revenue.
DIRECT TAXATION
MERITS OF DIRECT TAXATION

● Progressive in Nature: It is based on the ability to Pay Principle. So, an important tool to reduce inequalities of
income and wealth.
● Elasticity: A direct tax can be varied according to the needs of the government as well as according to the changes in
the income of the people. For example – if the income of the people rises, the government may increase the direct tax
and vice versa.
● Certainty: A person liable to pay direct tax knows with certainty how much he has to pay and when he has to pay.
● Equity: It is generally progressive (based on ability to pay principle). Through its rich people can be made to pay
more taxes than poor. Similarly, in case of necessity, low-income group people can be given relaxation and the super-
rich can be made to pay more. Thus, an important tool to reduce income inequalities.
● Important Tool in Fiscal Policy: Taxes can be used to control inflation by increasing direct taxes during high inflation
rate to reduce money in the hands of people to reduce demand. Similarly, taxes can be reduced during recession periods
to boost demand.
● Reduce Volatility: The Direct tax helps in international currency exchange rates by imposing Tobin Tax.
ISSUES IN DIRECT TAXES AND NEED OF REFORMS

● Tax Evasion and Avoidance: People in India try to evade tax by some illegal means or by taking the benefit of some
loopholes in the Indian tax system.
● Scope of Rationalization and Simplification: The rate structure has broadly remained the same in the last 20 years.
Further, there is a need for rationalization of exemptions and a rethink of incentives on savings (such as small savings
schemes like PPF).
● Corporate Tax Rate Structure: Current differential in effective corporate tax rate across sectors is very high and
there is lack of vertical equity. Indian Corporate Tax Rate is several points higher than even the median countries
from OECD which acts as an incentive to carry out Transfer Pricing.
● Outdated Income Tax Act: Certain provisions of the Act that have become superfluous, outdated or inconsistent.
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● Balance between Direct and Indirect Taxes: The contribution of direct taxes has declined from 60% in 2010-11 to
51.5% in 2022-23. Increasing share of indirect taxes in revenue is alarming as indirect taxes are regressive which hurt
poor people more.
● Cross Border Transactions: Source rule of taxation for non-residents was linked to physical presence (permanent
establishment) which has led to protracted litigation, base erosion and profit shifting.
● Narrow Tax Base: Presently only around 15 million or 1% of the population pays income taxes. Widening the tax
base will help to deal with the problem of potential revenue loss due to lower tax rates and simplified tax structure.
● Double Taxation: The income from operations of partnership firms is subjected to a tax twice: first, profits of the
business entity are taxed and then individual owners’ incomes are taxed.
● Protracted Tax Litigation: It has not only put a burden on the Indian judiciary but has also cost the government
exchequer. Tendency of tax officials to initiate an action without the necessary justification or assessment is reflected
in the low success rate of appeals (~30%).
● Technology Infusion: There is a lack of integration of digital technology in the tax administration that can improve
efficiency of tax collection as well as simplify the procedure for the taxpayer.
Important Statistics from Central Board of Direct Taxes (CBDT):

● Net Direct Tax Collections have increased by 121.18% in FY 2021-22 from FY 2013-14.
● There is an increase in Direct tax to GDP ratio from 5.62% in FY 2013- 14 to 5.97% in FY 2021-22.
● Tax buoyancy, which refers to responsiveness of tax revenue receipts to changes in national income, is recorded at
2.52 for Direct tax highest in the last 15 years.
● A tax buoyancy greater than 1 signifies that tax revenues grow at a faster rate than growth in national income.
GOVERNMENT INITIATIVES TO IMPROVE DIRECT TAXATION

● Monetary Threshold Raised for Appeals before ITAT: The monetary threshold has been raised for filing of cases
from Rs. 20 lakhs to Rs. 50 lakhs for appeal before Income Tax Appellate Tribunal (ITAT), from Rs. 50 lakhs to
Rs. 1 crore for appeal before the High Court and from Rs. 1 crore to Rs. 2 crores for appeal before the Supreme
Court.
● Extension of TDS/TCS Coverage: In order to broaden the tax coverage, additional transactions were included under
the purview of Tax Deduction at Source (TDS) and Tax
Collection at Source (TCS).
● Reduced Tax Rate: The Finance Act of 2020 introduced
the opportunity for individuals and cooperatives to pay
income tax at concessional rates, provided they do not avail
specific exemptions and incentives.
● Vivad se Vishwas: For generating timely revenue for the
government and reducing existing legal disputes related to
direct taxation and litigation cost for the taxpayers, the
Vivad Se Vishwas scheme was introduced as part of the
Union Budget 2020.
● Encouraging Digital Transactions and Formalization: In
order to facilitate the digitalisation of the economy and
reduce unaccounted transactions. Push towards
digitalization and formalization will increase the expansion
of the tax net.
● Increasing Tax Compliance: The CBDT launched E-
Sahyog portal to facilitate online filing of the returns. In
extension of Indian Customs Single Window Interface for
Facilitating Trade (SWIFT).
● General Anti-Avoidance Rules (GAAR): Effective from
April 1st, 2017, is a set of rules which helps the revenue
authorities to decide whether a particular transaction has
commercial substance or not and tax liability associated with a genuine transaction.
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● Place of Effective Management (POEM): The guidelines were introduced for the determination of residency of
foreign companies, applicable from FY 2017-18. If PoEM of a firm is in India, then its worldwide income would be
taxed here.
● Information Sharing Agreement: India has also entered into an information sharing agreement with the USA under
Foreign Account Tax Compliance Act (FATCA) of USA.
● Operation Clean Money and Project Insight: They were launched to use data analytics to improve tax compliance
and effectively utilize information in tax administration.
● Corporate Rate Cut: To boost industrial activity and increase compliance, tax rate for all corporations is reduced
from 30% to 22%. Effective tax rate for all domestic companies would now be 25.17%. New manufacturing
companies will have to pay an even lower corporate tax rate of 15%.
● Faceless Assessment: Launched in 2020, to eliminate discretionary powers of taxmen, provide ease of compliance to
taxpayers and curb corrupt practices.
● Tax Charter: Launched to elaborate tax payers on their rights and responsibilities to help them familiarise with the
whole process of tax collection.
● Roll Out of Common IT Return Form: A next-generation Common IT Return Form for taxpayer convenience
and strengthening of grievance redressal mechanism to further improve Taxpayers Services has been rolled out.
Raja Chelliah Committee Vijay Kelkar Committee Akhilesh Ranjan Committee
● Reducing the Tax Rate and Direct Taxes: ● Replace the 57-year old
narrowing the gap between the ● Increasing the Personal Income Tax Income Tax Act, 1961.
lowest and highest Tax Rates, exemption limit, ● Widening of the Tax slabs
● Eliminating Double Taxation, ● Streamlining exemptions, and removal of
● Decreasing the Corporate Tax ● Eliminating preferential treatment for surcharge/cesses, etc.
Rate disparity between domestic long-term Capital Gains, ● Common Corporate Tax
and foreign companies, ● Doing away with the Wealth Tax. Rate for Foreign &
● Simplifying the Capital Gains Domestic Companies.
Indirect Taxes:
Tax, ● Elimination of Dividend
● Broadening the Tax Base,
● Rationalising the Wealth Tax, Distribution Tax (DDT).
● Abolishing Exemptions,
and
● Extending the scope of the Service tax.
● Reduction of Tariffs.
INDIRECT TAXATION
MERITS OF INDIRECT TAXATION

● Wider Coverage and Broad Based: The effect of Indirect taxes is 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.
● Sin Tax/Consumption Control: It can be used as a tool to discourage consumption of undesirable goods. For
example, by Imposing taxes on luxury goods and making them more expensive.
● Convenience: Govt imposes indirect taxes on manufacturers. However, they are finally paid by consumers. They are
convenient in the sense that taxpayers (consumers) pay taxes in small amounts.
● Elastic: It is elastic in nature. Since it has wider coverage, any small increase in tax will bring in large revenue.
ISSUES IN INDIRECT TAX

● Regressive Nature: Both rich and poor are subjected to the same rate of taxation.
● Civic Consciousness: Unlike direct taxation, indirect taxation doesn’t promote much civic awareness of performing
one’s duty of paying taxes as taxes are hidden in the price in indirect taxation.
● High Tax Rate: On automobiles and building & construction material at a time when demand conditions are
compressed has caused further slowdown in these sectors.
GOVERNMENT INITIATIVES TO IMPROVE INDIRECT TAXATION
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● Introduction of Goods and Services Tax: GST was introduced on July 1, 2017 (by 101st Constitutional
Amendment) as the biggest indirect tax reform by subsuming around 17 indirect taxes such as excise duty, VAT,
service tax, luxury tax etc.
● Turant Customs: Central Board of Indirect Taxes and Customs has rolled out faceless assessment of consignments
under the initiative ‘Turant Customs’.
● Administrative Reforms: Based on the recommendations of the Tax Administration Reforms Commission under
Parthasarathy Shome, a Tax Policy Research Unit headed by the Revenue Secretary has been created for better
research capability on fiscal topics and a Tax Policy.
GOODS AND SERVICES TAX (GST)
WHAT IS GST?
● Goods and Services Tax (GST) is a comprehensive indirect tax system introduced on July 1, 2017. It replaced
multiple indirect taxes levied by the central and state governments, such as excise duty, service tax, value-added tax
(VAT), and others. GST is a consumption-based tax levied on the supply of goods and services across the country.
● GST is one indirect tax for the whole nation, which will make India one unified common market. It is imposed on
the supply of goods and services, right from the manufacturer to the consumer.
BASIC FEATURES OF GST

● Comprehensive Tax: It is meant to be a single, comprehensive tax and destination-based tax that will subsume all
the other smaller indirect taxes.
● Coverage: GST is currently levied on every product [except petroleum products, alcohol, real estate & electricity] in
four slabs of 5%, 12%, 18% and 28% along with cess & surcharge, if applicable.
BENEFITS OF GST REGIME

Most of the challenges faced by the previous taxation system have been addressed by the introduction of GST. Some of
the more important ones are listed here:
● Improved Coverage: GST encompasses both goods and services,
employing standard rates and minimizing the number of additional
charges.
● Reduced Human Interaction: The implementation of an online
GST portal and E-Way Bill system decreases the interaction
between tax officials and taxpayers, this helps in reducing the
potential for harassment, bribery, and excessive regulation.
● Ease of Doing Business: GST contributes to an improved business
environment and facilitates ease of doing business overall.
● Incentivized Input Credits: GST offers input credits to suppliers,
encouraging them to issue invoices at each stage of the supply
chain. This expands the tax base, improves tax collection, and
discourages tax evasion. The input credit system in GST minimizes
the cascading effect of taxes.
● Mitigated Tax Cascading: The introduction of GST has
significantly reduced tax cascading by enabling better utilization of input tax credit and incorporating taxes such as
central sales tax, octroi, purchase taxes, and luxury taxes.
● Revenue Growth: Countries like Canada and Australia, which transitioned from VAT to GST systems, witnessed
an increase in revenue, GDP, and exports. Similarly, GST fosters the creation of a unified national market in India,
supporting initiatives like "Make in India."
● Addressing Rate Disparities: Under GST, the SGST/UTGST rates are uniform across India, eliminating the
possibility of rate arbitrage. Whether purchasing a laptop in Chennai or Mumbai, the GST tax rate remains the same.
SUCCESS OF INTRODUCTION OF GST REGIME

Success of a system can only be assessed post its employment. Following points highlight the areas where the introduction
of GST has been a success:
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● Tax Collection: The total gross collection for FY23 is Rs. 18.10 lakh crore with average monthly collection being
Rs. 1.51 lakh crore.
● Tax Compliance: GST has been successful in increasing compliance among small traders through the Composition
Scheme.
● Self-policing Mechanism: GST helps to check tax evasion and expand the tax net.
● Seamless Flow of Input Tax Credit: It is made possible when all the suppliers of a business pay GST on the GSTN
network. So, each business will make sure that its suppliers have paid the GST, so that they can take input tax credit.
● Revenue Base: GST has helped the Government to expand the revenue base by about 85% in the past two years from
65 lakhs to 1.2 crore.
● Integration of Technology: For all front-end services (registration, payments etc.) and backend IT modules
(processing of returns, audits, assessments, appeals) reduces interface between tax collector and taxpayer, thereby
reducing corruption, generates quality quantifiable data to enable better policy making, improves GDP estimation,
encourages compliance gain due to linkage & exchange of information between income-tax & GST departments.
● GST Council as a Template for Cooperative Federalism: GST council has emerged as a successful example of
cooperative federalism and its functioning has been free from political predilections.
● Revenue Collections and Buoyancy: Relative buoyancy of GST revenue compared to pre-GST period is a result of
integrating the entire value chain from raw material to retail.
● Rationalization of Taxes Type: Currently, around 97.5% articles are covered by 18% or lower GST slab, a
significant reduction from tax rates under VAT regime where standard VAT rate was 14.5% along-with excise duty
at 12.5%
● Re-engineering of Supply Chain: GST has presented an opportunity to reduce physical supply chain costs.
● Consolidation of Storage Points: Lead to the reduction in the number of inefficient nodes (e.g. opening branch offices
merely to avoid inter-state sales tax) in supply chains has helped such companies to reduce their distribution costs.
● E-Way Bills: It marks a shift from departmental policing model to self-declaration model for movement of goods,
enabling hassle free inter-state movement of goods by eliminating the requirement of separate transit pass for each
state.
CHALLENGES
● Digital Infrastructure and Data Privacy: Implementation of GST required registration at humongous scale for input-
based tax crediting and creating a common database of registered traders to be managed centrally. This has emerged
as a major challenge to GST’s IT landscape, along with technical glitches.
● Input Tax Credit: Matching concept for claiming input tax credit requires a buyer to reconcile his tax payments with
the tax collected and deposited. Any incorrect or unmatched transactions filed by the supplier leads to denial of credit
to the buyer.
● Refund Problem for Exports: Exporters are facing an acute crunch of working capital due to issues such as delays
in refund of Integrated Goods and Services Tax (IGST) on export.
● Multiple Tax Slabs and Complex Structure: Four different rates, several exemptions & cesses, separate rate for
gold etc undermine eventual goal of simplifying tax compliance & leads to foregoing efficiency gains.
● High Tax Rates: On automobiles and building & construction material at a time when demand conditions are
compressed has caused further slowdown in these sectors.
● Agriculture: Farmers are required to pay GST on agro-chemicals, fertilisers, safety kits (eyewear, masks and gloves),
drip irrigation systems etc. but don’t receive input tax credit.
● GST Dues: Several states had written to the finance minister regarding delays in payment of GST due by the centre.
● Tax Frauds: In absence of viable means of invoice matching, the fake invoice industry has emerged. In FY23, nearly
48,000 cases of tax evasions have been detected amounting to Rs. 22,000 crores.
o To curb tax evasion by way of fake invoicing, the Central Board of Indirect Taxes and Customs (CBIC) had
recently made it mandatory for businesses with monthly turnover of more than ₹50 lakhs to pay at least 1%
of their GST liability in cash.
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● List of Exclusions: Petroleum products (crude oil & natural gas), diesel, petrol, aviation turbine fuel, potable alcohol
and real estate, which contribute 35-40% of indirect tax revenue, are still out of GST’s ambit.
Recommendations of The Goods and Services Tax (GST) Council are Not Binding on Either The Union
Government or The States
● The Supreme Court has ruled that recommendations of the Goods and Services Tax (GST) Council are not
binding on either the Union government or the states.
● Parliament and state legislatures possess simultaneous power to legislate on GST, the court said that the
“recommendations” of the GST Council, as enunciated under Article 279A of the Constitution, must be construed
as only recommendatory in nature.
● To regard them as binding edicts would disrupt fiscal federalism, where both the Union and the States are
conferred equal power to legislate on GST.
● The GST Council has the power to make recommendations on a wide range of subjects relating to GST. Since the
Constitution does not envisage a repugnancy provision to resolve inconsistencies between the Central and state laws
on GST, the GST Council must ideally function, as provided by Article 279A(6), in a harmonised manner to reach
a workable fiscal model through cooperation and collaboration.
● Even if it is Parliament that has enacted laws making the recommendations of the GST Council binding on the
central government for the purpose of notifying secondary legislations, it would not mean that all the
recommendations of the Council made by virtue of its power under Article 279A have a binding force on the
legislature.
Way Forward:
● Enhanced Collaboration: Improved coordination between the Central Board for Direct Taxes (CBDT) and the
Central Board for Indirect Taxes & Customs (CBIC) can yield better outcomes. The Income Tax Department has
already incorporated GST registration and turnover information into their return formats.
● Ensuring System Stability: GST began on a positive note, with evident benefits for all stakeholders. It is now crucial
for the government to stabilise the system, reduce uncertainty, facilitate compliance by streamlining processes, and
broaden the tax base to achieve real success for GST.
● Streamlined Refund Process: A proposal has been made to establish a single authority responsible for sanctioning
and processing GST refunds. This reform aims to simplify the refund procedure for exporters, with a single tax office
assessing, verifying, and approving refunds for both central and state GST portions.
● Expanding Tax Base: The GST taxable base should encompass petroleum products, including aviation turbine
fuel and natural gas, real estate, and electricity. The inclusion of real estate will help regulate the land market and
generate revenue gains, benefiting both direct tax revenues and increased reporting of transactions.
● Optimal Tax Structure: While indirect taxes tend to be regressive, the ideal GST structure should strive for a
low standard or modal rate with a concise list of exemptions. Any revenue loss can be compensated by increased
demand and improved compliance.
● Improving Composition Scheme Performance: Efforts should be made to enhance compliance among small traders
and improve the revenue performance of the composition scheme. The introduction of a new single format annual
return and matching of invoices is expected to significantly boost compliance.
● Strengthening the GST Council: The GST Council should be supported by a robust technical secretariat
comprising administrators, economists, accountants, lawyers, and other experts. Currently, the GST Council relies on
the analysis conducted by the "fitment committee," which consists of nominated officials from the Tax Research
Unit in the CBIC and officials from certain state commercial tax departments.
● Promoting Investments through Stable Tax Policy: Supporting investments can be achieved by simplifying tax
laws and regulations and minimizing discretionary powers granted to tax authorities under existing statutes.
GST COMPENSATION TUS SLE - CHALLENGES FOR FISCAL FEDERALISM
BACKGROUND - PROVISION OF GST COMPENSATION

● GST is a consumption-based tax regime and the manufacturing states like Gujarat, Haryana, Karnataka,
Maharashtra and Tamil Nadu feared loss of revenue.
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● In order to assuage this fear of State, GST Compensation provision was introduced through GST (Compensation to
States) Act, 2017, which assured 14% growth in revenues every year and any shortfall is to be compensated from the
GST Compensation Fund for a period of five years.
● GST Compensation Fund is to be funded through a compensation cess that is levied on so-called ‘demerit’ goods.
GST COMPENSATION SHORTFALL

● As per the estimates the GST Compensation Fund was projected to face a shortfall of about ₹2.35 lakhs crore in
July 2022.
● Out of this total shortfall estimated Rs. 97,000 crore was due to GST implementation.
● Rest Rs. 1.38 lakh crore was attributed to COVID-19 situation and the subsequent low economic activities.
ISSUES AND IMPACT OF GST TUSSLE

● Morality Versus Legality: The attorney general previously stated that the government is not legally obligated to
provide full GST compensation to states. However, morally, the central government should fulfill its obligations since
the states have relinquished their taxation rights.
● Challenges to Fiscal Federalism: The dispute between the central government and the states regarding GST
compensation is the most significant point of contention within the federal system.
● "Act of God" Defense: The Union government, in a letter to the states, refused to compensate them for GST shortfalls,
citing the COVID-19 pandemic as an unforeseen circumstance beyond their control.
● Macroeconomic Constraint: The government perceives the dispute primarily as a revenue-sharing issue between the
central government and the states, rather than recognizing its impact as a macroeconomic constraint on India's growth.
● Persistent Tax Burden: Goods and services subject to an additional compensation cess will continue to bear this
burden even beyond the originally intended removal in 2022.
● Impact on State Revenues: Constraining the revenues of the states, which collectively outspend the central
government by nearly 10% of GDP in a normal year, will undoubtedly hinder economic demand and dampen growth.
● Consequences for State Finances: Compelling states to borrow from the market will increase their debt liabilities,
particularly when they are already strained due to higher healthcare expenditures related to COVID-19.
● Strained Inter-Governmental Relations: The issue of GST compensation is a major source of tension in cooperative
federalism, as some states vehemently oppose any reduction in compensation. Most states have rejected the central
government's proposals to bridge the revenue gap through market borrowing.
● Obstacle to Economic Recovery: During a time when the private sector is struggling, government expenditure must
play a crucial role in facilitating economic recovery. However, the ongoing dispute over GST will impede India's
economic recovery efforts.
HOW WAS THE ISSUE RESOLVED?

● Subsequent to deliberation in 43rd GST Council meeting, the centre borrowed 1.59 lakh crore from market through
a special window and passed it on to the States/UTs as a back-to-back loan, as was done in the FY21.
WAY FORWARD TO PREVENT SUCH SITUATION IN FUTURE

● Formula-Based Distribution: There is a need to devise a formula for distribution of IGST between centre and state,
which is presently missing.
● Conciliatory Approach: The Union Government of India needs to take a conciliatory approach toward solving the
GST tussle. It will be beneficial if problems get sort of outside the judiciary. Beginning with the accepting the moral
obligation for GST compensation to the states, who have submitted their taxation rights.
● Reducing the Compensation: At the same time states should also accept the realities and ideally ask for compensation
that is linked to the growth rate of the Indian economy in nominal terms.
● Need to Accept Current Realities: States government can’t turn blind sight to the aftermath of the pandemic and
reduction in overall GST revenue due to it.
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● Taking Macroeconomic Picture into Account: There is a need to take macroeconomic picture into account as
strained state finances can put them towards populist measures such as returning to the old pension scheme.
Conclusion
● The tussle between the Centre and the states over how to compensate the states for GST revenue shortfalls deprives
the economy of this vital source of growth. That is bad policy, quite distinct from the failure to meet a statutory
promise, repeated on the floor of Parliament by the Central Government. They need to reassure states on their fiscal
security on transiting to GST, Which would mean for federal relations.
GST Appellate Tribunal (GSTAT)

● The GST Appellate Tribunal (GSTAT) is established under Chapter XVIII of the CGST Act to handle appeals and
reviews related to disputes in the GST system.
● As per Section 109 of the CGST Act, the Central Government, based on the recommendation of the GST Council,
can form the Goods and Services Tax Appellate Tribunal through a notification.
● This tribunal is responsible for hearing appeals against orders issued by the Appellate Authority or the
Revisional Authority.
LOW TAX-TO-GDP RATIO IN INDIA

● Tax-to-GDP Ratio denotes tax collected as compared to national GDP. It denotes the size of a country's tax revenue
as compared to its GDP.
IMPORTANCE OF TAX-TO-GDP RATIO

● Direction of Economic Resources: The Tax-to-GDP ratio is used to determine the direction of economic resources
by the government of the country.
● Development Expenditure: A higher tax-to-
GDP ratio means a better financial position of
the country and the government can fund its
expenditure without much borrowing from the
market.
● Wider Fiscal Net: A greater tax-to-GDP ratio
means that the government has larger fiscal net,
which can be utilised during the shock periods
such as pandemic, war etc.
● Net Investment: Better fiscal situation on the
basis of higher tax-to-GDP ratio ensures higher
credit rating for the government, which provides
for foreign investment, cheaper credit etc.
● Welfare Measures: A government with better
tax-to-GDP ratio can take welfare measures for
its population without much dependence on borrowings and associated liabilities. E.g. GoI receives around 34% of
receipts from borrowings and other liabilities.
REASONS FOR LOW TAX TO GDP RATIO

● Parallel and Black Economy: Huge flow of unaccounted income and expenditures exists which goes untaxed in
various parts of the parallel economy.
● Tax Evasion: Because of complex tax structure, bribery and corruption, high taxation rate and lack of proper
implementation of tax laws, people find ways to evade taxes.
● Large Informal Sector: In India has a relatively large informal/unorganised sector, and tax evasion is more rampant
in the informal sector compared to organised sector.
● Indirect Tax Ratio: Budget 2023-24 has estimated the Direct and Indirect taxes contribution in Gross Tax Revenue
(GTR) to be 54.4% and 45.6% respectively. This is in contrast to most OECD economies where the contribution of
direct taxes is close to 70%.
● Tax Exemption: High tax exemption systems in India have benefited the richer private sector.
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● Populist Government Policy: Multiple central governments have not paid heed to the low tax to GDP ratio due to
various political issues.
● Zero Tax Liabilities: The actual number of people who pay tax is lower because of those who report zero tax
liabilities.
● High Tax Dispute: India has one of the highest numbers of disputes between tax administration and taxpayers, with
lowest proportion of recovery of tax arrears.
● Vast Agriculture Sector: Out of 25 crore households in India, 15 crores belong to the agricultural sector which are
exempted from taxes.
● Low Per Capita Income: Another factor that contributes to the low tax to GDP ratio is low per capita income and
high poverty.
IMPLICATIONS OF LOW TAX TO GDP RATIO

● Difficulty in Financial Management: Due to a decrease in tax revenues, the Indian State becomes less capable of
spending on national security, welfare system, public goods, etc.
● Fiscal Deficit: There is heavy borrowing due to the low tax revenue of the government, this causes a persistent deficit
bias in fiscal policy.
● Cost on Political Economy: Such a system creates political incentives for the government to borrow money for
populism rather than working for an effective tax system that will lead to economic growth and development.
● Skewed Sectoral Impact: Widespread tax evasion goes unchecked which hampers growth and most of the tax burden
falls on the high-productivity sectors that need growth.
● Constrained Welfare: Lower tax collections decrease the capacity of the government to incur expenditure for welfare
schemes.
● Regressive Taxation System: In light of low tax-to-GDP ratio there is increased dependence on indirect taxes which
are regressive in nature.
● Social Inequality: There is an increase in social inequality due to the asymmetric distribution of economic resources
in society.
GOVERNMENT INITIATIVES TO IMPROVE TAX-TO-GDP RATIO

● Simplification: The Budget 2022-23 introduced a new income tax regime to make it easier for taxpayers.
● GST: GST has been implemented with integrated infrastructure and system of input tax credit to avoid instances of
tax evasion and tax avoidance.
● Digitalization: Government has been promoting the digital economy to ensure that the financial transactions are
tracked. E.g. banning cash payment for over Rs. 2 lakhs.
● Amnesty Scheme: Government has given a window to tax evaders to pay taxes with a certain amount of penalty.
● Effective Management:The provision has been implemented to reduce the instance of Base Erosion and Profit
Shifting by multinational companies.
● Pan aadhaar link: Government has made it mandatory to link PAN with Aadhar to make an audit trail of all
transactions.
Way Forward:
● Widening Tax Base: There is a need to widen the tax base to bring a larger population under the tax cover.
● Digitalisation in Real-Estate: Real estate and property transactions should be completely digitised to ensure that tax
evasion does not happen in these sectors.
● Behavioural Change: Citizens’ attitude towards tax payment should be changed by instilling a feeling of national
responsibility.
● Simplification of Tax Filing: Tax filing should be simplified with app-based softwares to simplify tax filing for
individuals.
● Re-Assessing Tax Exemptions: Tax exemptions provided under various provisions such as transfer pricing, Base
Erosion and Profit Shifting should be reassessed to prevent misuse of these provisions.
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● Effective Dispute Settlement: Effective dispute settlement mechanism should be established to ensure reduced
litigations at the same time promoting ease of doing business.
EQUALISATION LEVY
EQUALISATION LEVY AND TAXATION PROVISIONS

● Equalisation Levy is a type of direct tax introduced in 2016 to tax business-to-business transactions. In India, it
was implemented to tax the income generated by foreign e-commerce companies through digital transactions. Initially,
it covered online advertising and other provisions related to digital advertising space.
● The scope of the Equalisation Levy was expanded by the Finance Act of 2020 to include all non-resident e-
commerce operators engaged in e-commerce supply or services. A 2% levy is imposed on the consideration
received by an e-commerce operator for such transactions involving the following individuals or entities:
o A person resident in India
o A non-resident
o A person who purchases goods or services using an IP address located in India.
● The Equalisation Levy applies to the following types of transactions:
o Online sale of goods owned by the e-commerce operator
o Online provision of services offered by the e-commerce operator
o Online sale of goods or provision of goods facilitated by the e-commerce operator
NEED/ADVANTAGES OF EQUALISATION LEVY
● Level Playing Field: It was imposed to create a level playing field between Indian businesses who pay tax in India
and foreign e-commerce companies who do business in India but do not pay any income tax here.
● Business Model: The business model employed by non-resident digital service providers does not require physical
presence in India which enables easy escape of profit earned from the income tax net in India.
● Right to Tax: India has a right to tax incomes as it provides a large market for digital corporations in the changing
global economic order.
● Significant Revenue: The revenue from equalisation levy has surged from 200 crore in FY17 to around Rs. 4000
crores in FY22.
ASSOCIATED CONCERNS
● Against Kolkata Tribunal: The equalisation levy is against the judgement of Kolkata Tribunal in ITO v. Right
Florists Ltd. (2013) wherein it was held that payment for online advertisement is not taxable because of absence of
“Permanent Establishments”.
● Retaliatory Action: The levy could promote retaliatory action from the US under Section 301 of US Trade Act,
where the Office of US Trade Representative (USTR) called it unreasonable, burdensome and discriminatory against
American companies like Amazon, Google and Facebook.
● Double Taxation: A USTR report has described Digital Service Tax (DST) as “an outlier” which burdens U.S.
companies by subjecting them to double taxation.
● Discriminatory Criteria: The USTR in the federal register stated that DST, by its structure and operation,
discriminates against U.S. digital companies.
o Due to the selection of covered services and its applicability only to non-resident companies.
o It also alleged that the U.S. non-resident providers of digital services are taxed, while Indian providers are not.
● Permanent Establishment in India: The DST taxes companies with no permanent establishment in India,
contravening the tax principle that companies should not be subject to a country’s corporate tax regime absent a
territorial connection to that country.
● Principles of International Taxation: The USTR alleged that DST is unreasonable because it is inconsistent with
principles of international taxation, including due to its application to revenue rather than income, extraterritorial
application, and failure to provide tax certainty.
● Disadvantage for Startups: Startups are very reliant on these online advertising platforms and the increased cost
associated with online advertisements could make their financing difficult.
● Rise in Cost: Equalisation levy could set the stage for cross-border digital transactions and drive up cost for
advertisers.
● Cost for Small Businesses: The levy could increase cost for small Indian businesses who advertise on these platforms.
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Conclusion
Thus, Equalisation Levy ensures fair competition, reasonableness and exercises the ability of the government to tax
businesses operating in Indian market through digital operations in alignment with the one of the methods suggested by
2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling taxation challenges arising out of
digitisation of the economy.
TAXATION LAWS (AMENDMENT) ACT, 2021

Recently, parliament enacted the Taxation Laws (Amendment) Act, 2021 to amend the Income-tax (IT) Act, 1961 and
the Finance Act, 2012, scrapping the 2012 retrospective tax law.
Provisions of the Act
● Amendments to the Income-Tax Act and Finance Act, 2012 to effectively state that no tax demand shall be raised
for any indirect transfer of Indian assets if the transaction was undertaken before 28th May 2012.
● Tax Raised for the Indirect Transfer of Indian Assets Before May 2012 would be "nullified on fulfillment of
specified conditions" such as the withdrawal of pending litigation and an undertaking that no damages claims would
be filed.
● It also Proposes to Refund the Amount Paid by Companies Facing Trail in these cases without interest thereon.
SIGNIFICANCE OF THE ACT

● Better Tax Clarity: The bill marks a step in the direction of addressing the long-pending demand of foreign investors
seeking the removal of retrospective tax for the sake of better tax clarity.
● Investment-Friendly Business Environment: This would help in establishing an investment-friendly business
environment, which can increase economic activity and help raise more revenue over time for the government.
● Restore Reputation of India: This could help restore India’s reputation and improve ease of doing business.
● Reasonable Opportunities: The amendment, while maintaining the “sovereign right to taxation”, also provides a
reasonable opportunity to companies to resolve the issue.
● Welcomed by Foreign Investors: It is a welcome move for foreign investors, and it will directly result in attracting
more foreign investments.
● Quick Recovery of the Economy is the need of the hour. In this direction, foreign investment would play an important
role in promoting faster economic growth and employment
● Non-Adversarial Tax Environment: It is in line with the government’s commitment to creating a non-adversarial
tax environment.
● End Litigations: The move is expected to end litigation with 17 companies, including Vodafone and Cairn, apart
from addressing criticism about uncertainty
● A Balancing Approach: The amendment also balances two different objectives.
o One, the policy of the government to have a predictable tax regime.
o Two, India’s concern towards the adjudication of Indian tax law happening through foreign tribunals.
o This is an attempt to find a solution through the sovereign means of Indian law and not through arbitration
Conclusion
An investment-friendly business environment is the need of the hour to boost the economy post pandemic. Bureaucrats
need to continuously keep themselves updated about possibilities and learn from international practices to avoid such tax
avoidances.
TAXATION ON VIRTUAL ASSETS

The government has prepared for a particular tax framework on taxation of virtual digital assets in Budget 2022-23, in
response to the remarkable surge in transactions in virtual digital assets.
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PROPOSED TAXATION FRAMEWORK

● Definition of Virtual Digital Assets: The term "virtual digital assets" is defined under Section 2 of the Income Tax
Act, which largely means:
o Any information, code, number, or token excluding Indian Status of Cryptocurrency in India:
o or foreign currency which has been generated through The Subhash Chandra Garg Committee
cryptographic means or otherwise and provides a digital (2019) recommended a ban on private
representation of exchanged value or can function as a store cryptocurrencies on account of concerns such as
of value or a unit of account including investment schemes. volatility, instability, security risk and risk of
o The central government by publication in the Official funding illegal activities.
Gazette can include or exclude any other digital asset in the The Government has sought to introduce the
definition of virtual digital asset. Cryptocurrency and Regulation of Official
● Tax on Virtual Digital Asset: Under Section 115BBH of the Digital Currency Bill, 2021.
Income Tax Act, any income from transfer of any virtual digital This bill seeks to (a) Ban all the private
asset shall be taxed at the rate of 30%. cryptocurrencies (b) Issue official digital
● Payment on Transfer of Digital Asset: 1% TDS (Tax currency to be issued by RBI.
Deducted at Source) will be deducted under Section 194S on
payment made above a monetary threshold in relation to transfer of virtual digital assets.
SIGNIFICANCE OF TAXING VIRTUAL DIGITAL ASSETS

● High Volatility: Owing to the high volatility and risky nature of income, people will be discouraged from investing
due to high tax rates and the inability to balance losses against other sources of income.
● Regulation of Digital Assets: It will pave the road for virtual digital assets to be classified as a distinct asset class.
Giving virtual assets as an example.
● Dynamic Definition: Since definitions are dynamic, the government can include or reject new virtual digital assets
as needed.
● Revenue for Government: Taxes will aid in the development of more revenues, lowering the fiscal deficit, and
giving funding for a country's overall economic growth.
ASSOCIATED CONCERNS
● Broad Definition: The broad definition of Virtual Digital Assets carries a risk of potentially including vouchers,
reward points issued by shopping sites or credit card companies etc.
● Concerns of Financial Instability: The taxation provisions fall short in addressing concerns raised by RBI and IMF
over greater financial instability from virtual digital assets.
● Issues with Taxation Provisions: There is lack of clarity on cost of acquisition and sales consideration along with
brokerage or fair market valuation in calculating the amount for taxation.
● Lack of Comprehensiveness: The taxation provisions do not clearly include the income of miners, persons minting
non-fungible token (NFT) etc. and also there is risk of peer-to-peer or wallet-to-wallet transactions escaping this tax.
● Losses on Virtual Digital Assets: Losses incurred from one kind of Virtual Digital Assets cannot be set off against
gains from any transaction involving another Virtual Digital Assets while computing tax. E.g. A person making Rs.
100 gains on Bitcoin but losing Rs. 10 on Ethereum will have to pay tax on Rs. 100.
● Defrauding and Misselling of Products: Defrauding and misselling of products still remain due to limited or
inadequate disclosure/oversight and chances of using taxability to show transactions in them as legal.
Way Forward:
● Finalisation of Legal Status of Crypto Assets: There is a need to expedite Cryptocurrency and Regulation of
Official Digital Currency Bill, 2021 to determine legal status of crypto assets in the country.
● Expansion of Central Bank Digital Currency: CBDR should be expanded to wider public to promote financial
inclusion and ensure effectiveness of RBI’s monetary policy.
● Awareness Among Public: There is a need to generate awareness among the public through social media and other
mediums to caution the public about the volatility and risk associated with crypto assets.
● Clarity in Taxation: There is need to provide greater clarity about TDS process w.r.t. income calculation, swap
transactions between two virtual digital assets etc.
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GLOBAL MINIMUM CORPO RATE TAX

● Corporation Tax: It is a direct tax imposed on the net income
or profit that enterprises make from their businesses.
● Applicability: It would apply to companies’ overseas profits.
Therefore, if countries agree on a global minimum,
governments could still set whatever local corporate tax rate
they want.
● Least 15% Rate: G7 aims to impose Global Minimum
Corporation Tax of at least 15%, and put in place measures
to ensure taxes were paid in the countries where businesses
operate.
● Avoiding Double Taxation: If companies pay lower rates in a
particular country, their home governments could “top-up” their Recently, EU members have agreed to
taxes to the agreed minimum rate, eliminating the advantage of implement a minimum tax rate of 15% on big
shifting profits to a tax haven. businesses in accordance with Pillar 2 of the
● The agreement calls for countries to bring it into law in 2022 global tax agreement framed by OECD.
so that it can take effect by 2023.
NEED FOR GLOBAL MINIMUM CORPORATE TAX

● Huge Tax Loss: India’s annual tax loss due to corporate tax abuse is estimated at over USD 10 billion.
● Reducing Tax Loss: Income from intangible sources such as drug patents, software and royalties on intellectual
property has migrated to low tax jurisdictions (tax base erosion of the higher-tax jurisdictions).
● Loophole in Current System: These companies typically rely on complex webs of subsidiaries to hover profits out
of major markets into low-tax countries such as Ireland or Caribbean nations, Panama etc.
● Uniformity: GMCR will end a decades-long “race to the bottom” in which countries have competed to attract
corporate giants with ultra-low tax rates and exemptions. And it will bring uniformity in corporate taxation worldwide.
CHALLENGES
● Lower Tax Rate: It is a tool they can use to alternatively push economic activity. Also, a global minimum tax rate
will do little to tackle tax evasion.
● Uniting Nations: Getting all major nations on the same page is a problem, since theGlobal Minimum Corporate
Tax impinges on the right of the sovereign to decide a nation’s tax policy.
● Policy Issues: A global minimum rate would essentially take away a tool that countries use to push policies that suit
them.
● Favouring G7 Countries: Recently OECD released final guidance for governments on how to bring the new global
minimum corporate tax into their law book. The guidance are based on U.S. minimum tax known as the Global
Intangible Low-Taxed Income, or GILTI, thus favouring developed countries.
● Challenge for India: The countries that have created national digital services taxes (like equalization levy Indian
government) will have to repeal them.
INDIA’S STAND
● Steps in the Same Direction: In September 2019, the government had reduced the corporate tax rate to 22% for
companies that gave up all exemptions and incentives. Further, a 15% rate was offered to new manufacturing firms.
The effective tax rate, inclusive of surcharge and cess, for Indian domestic companies is around 25.17%.
● Positive Interpretation: India is likely to benefit from the global minimum 15% corporate tax rate pact as the
effective domestic tax rate is above the threshold, and the country would continue to attract investment.
● Open to Discussion: While taxation is ultimately a sovereign function, and depends upon the needs and circumstances
of the nation, the government is open to participate and engage in the emerging discussions globally around the
corporate tax structure.
Way Forward:
● Making Further Discussion: Much still needs to be ironed out, especially for pillar one and its technical metrics that
will determine how and to which multinational companies the tax will be applied.
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● Scope of Increased Coordination: There should be appropriate coordination between the application of the new
international tax rules including the Digital Services Taxes. Any final agreement could have major repercussions for
low-tax countries and tax havens.
Conclusion
The step towards Global Minimum Tax is a laudable and fair step in the digitalised world. There is a need to work towards
making this arrangement better by taking into consideration the requirements of the low-income countries to ensure that
they are not at disadvantage in impending global recession and climate change.
SOME TERMS RELATED TO TAXATION
TAX EVASION
This is where an entity wilfully does not pay taxes that are due to the government. It employs illegal methods to conceal
income.
REASONS FOR TAX EVASION

● High Rate of Taxation: High rate of taxation causes a burden to taxpayers. So, they find ways to evade tax.
● Failure to Curb Bribery: There should be an adequate system to curb bribery and corruption among officials. They
help taxpayers to avoid tax by taking an agreed share of profit out of evaded tax.
● Complex Taxation: Tax structure in India is complex with a large number of taxes and people find provisions to
escape tax liability.
● Lack of Stability in Taxation System: Due to political instability different governments implement different taxes
which become difficult to follow due to confusion among taxpayers and officials.
● Deficiencies in Implementing Penalty Provisions: it leads to lax behaviour in the taxpayer which further deteriorates
the situation.
INITIATIVES OF GOVERNMENT FOR ELIMINATING TAX EVASION

● PMLA- 2002: This act provides a mechanism for preventing money laundering and empowers the RBI, SEBI, IRDAI
and other regulators to make norms for Bank/NBFCs and punish errant parties.
● 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 person to avoid tax authorities’
attention.
● Tax (Evasion) Disclosure Schemes: Under such amnesty schemes, a tax-evader can declare his undisclosed income,
pay the taxes and penalty. The Income Tax Department will not pursue a case against him. E.g. PM Garib Kalyan
Yojana after Demonetisation, Income Declaration Scheme etc.
● Sabka Vishwas Scheme (Legacy Dispute Resolution) in budget-2019: Above ₹ 3.75 lakhs crore tax revenue is
locked in the service tax and excise duty related cases.
● SC’s SIT on Black Money 2014: Chairman: Retd. SC Justice M. B. Shah, and senior tax officials. They
recommended various measures against Black Money hidden in India, in overseas banks, P-Notes etc.
● Operation Clean Money 2017: Income Tax Dept. verified large bank deposits made in the aftermath of
demonetization.
● Project Insight 2017: Income Tax Dept. hired L&T Infotech Ltd. to develop an integrated platform for data mining
& tracking tax evaders.
Key Terms
Tax Evasion, Tax Avoidance, Tax Terrorism, Transfer Pricing, Income Redistribution, Civic Consciousness, Cascading
Effect, Conciliatory Approach, Non-Adversarial Taxation System, Progressive Tax, Global Minimum Tax.
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1. Explain the rationale behind the Goods and Services Tax (Compensation to states) act of 2017. 2020
How has COVID-19 impacted the GST compensation fund and created new federal tensions?
2. Enumerate the indirect taxes which have been subsumed in the goods and services tax (GST) in 2019
India. Also, comment on the revenue implications of the GST introduced in India since July 2017.
3. Comment on the important changes introduced in respect of the Long Term Capital Gains Tax 2018
(LTCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.
4. There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial 2015
development, manufacturing and exports. Recognising this potential, the whole instrumentality
of SEZs require augmentation. Discuss the issues plaguing the success of SEZs with respect to
taxation, governing laws and administration.
5. Discuss the rationale for introducing Goods and Services Tax (GST) in India. Bring out critically 2013
the reasons for the delay in roll out for its regime.
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CHAPTER 6 MONETARY POLICY AND TARGETING OF

INFLATION
MONETARY POLICY
● Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money
supply and interest rate and is the demand side economic policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption, growth and liquidity.
● Under the Reserve Bank of India, Act,1934 (RBI Act,1934), RBI is entrusted with the responsibility of conducting
monetary policy in India with the primary objective of maintaining price stability while keeping in mind the
objective of growth.
● Monetary policy can be expansionary and contractionary in nature. Increasing money supply and reducing interest
rates indicate an expansionary policy. The reverse of this is a contractionary monetary policy.
MONETARY POLICY TOOLS

● Liquidity Adjustment Facility (LAF): The LAF refers to the Reserve Bank’s operations through which it
injects/absorbs liquidity into/from the banking system. It consists of overnight as well as term repo/reverse repos
(fixed as well as variable rates), SDF and MSF. Apart from LAF, instruments of liquidity management include
outright open market operations (OMOs), forex swaps and market stabilisation scheme (MSS).
● LAF Corridor: The LAF corridor has the marginal standing facility (MSF) rate as its upper bound (ceiling) and
the standing deposit facility (SDF) rate as the lower bound (floor), with the policy repo rate in the middle of the
corridor.
● Standing Deposit Facility (SDF) Rate: The rate at which the Reserve Bank accepts non collateralized deposits, on
an overnight basis, from all LAF participants.
o The SDF is also a financial stability tool in addition to its role in liquidity management and the SDF rate has
replaced the fixed reverse repo rate as the floor of the LAF corridor.
● Marginal Standing Facility (MSF) Rate: The penal rate at which banks can borrow, on an overnight basis, from the
Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2%).
o This provides a safety valve against unanticipated liquidity shocks to the banking system. The MSF rate is
placed at 25 basis points above the policy repo rate.
● Repo Rate: Repurchase Agreement or Repurchasing Option is referred to as "repo." It is the interest rate at which the
Reserve Bank provides liquidity under the Liquidity Adjustment Facility (LAF) to all LAF participants against the
collateral of government and other approved securities.
● Repo is a process in which the Reserve Bank of India (RBI) sells securities and subsequently buys them back at
a predetermined price. This price is determined based on an interest rate known as the repo rate.
o This transaction is particularly significant for banks as it allows them to obtain funds from the RBI by selling
securities.
o A higher repo rate implies that the cost of funds for banks increases, leading to higher interest rates for
customers. When the repo rate is high, it indicates that accessing money is expensive for banks, resulting in
reduced credit flow into the system and decreased liquidity in the economy.
o A reduction aur increase in the repo rate will affect loans like personal, vehicle home and gold loans.
o Currently, the repo rate stands at 6.50%.
● Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral
of eligible government securities under the LAF.
o Following the introduction of SDF, the fixed rate reverse repo operations are at the discretion of the RBI for
purposes specified from time to time. Currently, the reverse repo rate is at 3.35%.
Inflation and the Repo Rate

The Reserve Bank of India utilises the repo rate as a tool to manage the money supply within the Indian market. A
higher repo rate serves to decrease the borrowing capacity of commercial banks, thereby reducing the circulation of
cash in the market. This approach aids in controlling inflation.
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● Cash Reserve Ratio (CRR): CRR is the proportion of a bank's total deposits that must be maintained as cash reserves
with the RBI. The central bank has the authority to adjust this ratio within certain limits.
o A higher percentage indicates that banks have a smaller amount available for lending, which restricts liquidity.
Conversely, a lower CRR has the opposite effect.
o Currently, the Cash Reserve Ratio stands at 4.50%.
● Statutory Liquidity Ratio: The Statutory Liquidity Ratio (SLR) denotes the percentage of a bank's total deposits
that they are required to invest in government-approved securities (typically in unburdened government securities,
cash and gold).
o A lower SLR allows banks to have a larger amount available for lending purposes.
o Currently, Statutory Liquidity Ratio stands at 18%.
● Open Market Operations: This term refers to the buying and selling of government securities by the RBI in order to
regulate short-term money supply.
● Bank Rate: The bank rate represents the rate at which the RBI re-discounts securities like bills of exchange,
commercial papers, and other approved securities from banks.
o The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash
reserve ratio and statutory liquidity ratio).
MONETARY POLICY TRANSMISSION

● Monetary policy transmission is the process through which policy action of the central bank is transmitted to meet the
ultimate objectives of inﬂation and growth.
● These policy rates should reach the ultimate customers. For example, A decrease in rates by the RBI should also be
transmitted and reach the customers.
Challenges to Monetary Policy Transmission
● The transmission of monetary policy through the financial market does not meet expectations due to various factors
that hinder its effectiveness.
● The asset quality of banks is highlighted by the RBI as a key factor impeding the smooth transmission of
monetary policy, particularly in India where banks play a dominant role in the financial market.
o Banks with significant NPAs are hesitant to issue new loans despite a more accommodative monetary policy.
● Another obstacle to policy rate transmission is the long and fixed maturity rates of deposits. Until these funds mature
or are renewed, they remain outside the purview of the transmission mechanism.
● The rigidity of interest rates on savings deposits is another reason for incomplete transmission.
● While there has been a shift to the Marginal Cost of Funds-based Lending Rate (MCLR) and the application of
External Benchmark Lending Rates to some extent, a significant amount of loans are still linked to the base rate.
● Competitive Pressure from mutual funds and small saving schemes like the Public Provident Fund (PPF), Senior
Citizen Saving Scheme (SCSS), Sukanya Samriddhi Accounts (SSA), and National Saving Certificate (NSC)
indirectly prevent effective transmission by offering higher interest rates compared to bank deposits.
o The interest rates on these small saving schemes are determined by the government and linked to the
secondary market. The administration of interest rates disrupts the equilibrium of the saving-investment system,
impacting the transmission process.
INFLATION TARGETING
● In May 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible
inflation targeting framework.
● Inflation Target: The Central Government, in consultation with the RBI, determines the inflation target in terms of
the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette.
o The Government has notified in the Official Gazette 4% inflation as the target with the upper tolerance limit of
6% and the lower tolerance limit of 2% .
● Monetary Policy Committee (MPC): The RBI Act provides for the constitution of a six-member Monetary Policy
Committee (MPC) to determine the policy rate required to achieve the inflation target. The MPC determines the policy
repo rate required to achieve the inflation target.
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● Monetary Policy Report: Once in every six months, the Reserve Bank of India publishes the Monetary Policy
Report containing the explanation of inflation dynamics in the last six months and the near term inflation outlook and
projections of inflation and growth and the balance of risks etc.
ISSUES AND CHALLENGES WITH INFLATION TARGETING IN INDIA

● Neglecting the Diverse Role of RBI: In a developing nation like India, it is impractical for the central bank to focus
solely on inflation without considering the broader developmental context.
● Empirical Evidence against Inflation Targeting in India: Over the past 2-3 years, the RBI has managed to maintain
a stable inflation rate within the mandated range. However, despite this stability, the Indian economy is facing
challenges on multiple fronts, including sluggish GDP growth.
● Absence of a Clear Link between Price Stability and Financial Stability: The global financial crisis of 2008
demonstrated that price stability alone cannot ensure financial stability. Overemphasising price stability by central
banks may result in neglecting other critical functions such as regulation, leading to economic crises.
● Unemployment Situation: Unemployment in India has reached a 45-year high of 6.1%. Manufacturing activity has
contracted, and the agriculture sector is experiencing agrarian distress.
● Inadequate Monetary Policy Transmission: Inflation targeting is better suited for developed economies with
efficient monetary policy transmission. However, in India, the transmission mechanism is inefficient, which can
diminish the effectiveness of inflation targeting.
● Impeding GDP Growth: In order to curb inflation, the RBI would need to raise interest rates through contractionary
monetary policy. However, this increase in interest rates leads to reduced investment and consumption expenditure,
resulting in a decline in GDP growth rates.
● Failure to Address Supply-Side Inflation: Inflation in India can arise from supply-side bottlenecks such as global
crude oil price increases, poor monsoons, or floods. In such circumstances, the RBI's ability to alleviate inflationary
pressures is limited
BENEFITS OF THE INFLATION TARGETING

● Improved Transparency: The explicit inclusion of inflation targets provides greater clarity and predictability
regarding inflation rates and the formulation of monetary policies.
● Stimulating Growth: A low to moderate level of inflation serves as an incentive for investors to engage in economic
investment, thus promoting higher levels of growth and development.
● RBI Autonomy and Accountability: If the RBI fails to maintain inflation within the designated target range, it is
required to provide a written explanation for the reasons behind the failure. This provision grants autonomy to the RBI
while ensuring that the government holds enhanced accountability for the actions of the central bank.
● Empirical Support: Inflation targeting has demonstrated considerable success in advanced economies like the UK
and New Zealand. These economies have achieved sustained periods of moderate inflation, resulting in increased
macroeconomic stability.
Conclusion:
● COVID-19 has altered the near-term outlook, necessitating urgent policy interventions, active monitoring and further
timely measures to prevent emergence of supply chain bottlenecks and build-up of retail margins. At this juncture,
policy support from all sides – fiscal, monetary and sectoral – is required to nurture recovery and expedite return to
normalcy.
Key Terms
Monetary Policy, Monetary Policy Tools, Liquidity Adjustment Facility (LAF), Marginal Standing Facility (MSF) Rate,
Cash Reserve Ratio (CRR), Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Monetary Policy
Transmission, Inflation Targeting.
1. 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.
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CHAPTER 7 BANKING, INSURANCE AND FINANCE IN

INDIA
BANKING SECTOR
The Indian Banking System consists of 12 Public Sector Banks, 22 Private Sector Banks, 46 Foreign Banks, 43
Regional Rural Banks, 1485 Urban Cooperative Banks and 96,000 Rural Cooperative Banks in addition to
cooperative credit institutions. The banks are the lifelines of the economy and play a catalytic role in activating and
sustaining economic growth.
IMPORTANCE OF BANKING SECTOR FOR THE ECONOMY

● Facilitation of Trade and Commerce: Indian
banks facilitate trade and commerce by providing
payment facilities to various local and
international business houses.
● Financial Security to the People: The Indian
banking system ensures financial security through
competitive loans, reliable remittance services,
and opportunities for savings and investment in
various financial instruments.
● Priority Sector Lending: Banking Sector
advances loans to individuals and institutions and
plays an important role in providing funds to
different priority sectors (vulnerable as well) like
Agriculture, Small scale industries, trading
enterprises, real estate, etc.
● Helps Manage Money Transfers: Indian banks provide quick cash and money transfer. Thus, helps in managing
money transfers carried out by various business houses and a large number of industrial units.
CHALLENGES IN THE BANKING SECTOR

● Poor Asset Quality: These are loans which are not repaid back by the borrower and prone to become Bad loans or
NPA.
● Poor Capital Adequacy: The Capital Adequacy Ratio measures how much capital a bank has to meet its obligations.
Capital Adequacy is helpful in protecting depositors and promoting stability and efficiency.
● Unhedged Forex Exposure:Sharp fluctuations in the forex market can cause significant strain on Indian companies
with substantial foreign borrowings, potentially impacting their ability to repay debts to domestic banks.
● Employee and Technology: Public sector banks especially government-owned banks have yet to fully embrace
technology to offer better products and services.
● Balance Sheet Management: Many banks have tried to delay setting aside money as provisions and tried to
restructure loans off-record. This is even more problematic considering the poor capital adequacy in Indian banks.
● Not Enough Rural Branches: Most of the rural branches are running at a loss because of high overheads and
prevalence of the barter system in most parts of rural India.
● Politico- Bureaucratic Hurdles : characterised by red-tapism, lengthy delays, lack of initiative, and slow decision-
making, coupled with political pressures influencing personnel selection and loan approvals, has hindered the
efficient functioning of banks.
VARIOUS MEASURES TAKEN TO PROMOTE GROWTH OF BANKING SECTOR

1. Structural Measures
● Big Banks: The Narasimham Committee Report (1991), emphasised that India should have three or four
large commercial banks, with domestic and international presence, along with foreign banks.
● Need for Differentiated Banks: Though the universal banking model has been widely preferred, there is a
need for niche banking to cater to the specific and varied requirements of different customers and borrowers.
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● Improvement in Systems and Procedures: Refining the systems and procedures may help banks economise
their risk-weighted assets, which will help reduce capital requirements to some extent.
2. Technological Measures
● Advancement in Technology: The RBI has established the Reserve Bank Innovation Hub (RBIH) in
Bengaluru.
o Its mandate is to promote innovation across the financial sector by leveraging technology and creating
an environment which would facilitate and foster innovation.
● Blockchain Banking: Risk management can be more specific and the neo-banks can leverage the technology
to further (digital) financial inclusion and finance higher growth of aspirational/new India.
3. Governmental and RBI Measures
● Improving governance and bringing transparency: Banks Board Bureau providing assistance to Public
Sector Banks to restructure their business strategies.
o Assisting banks with the strategies to deal with issues of bad loans or stressed assets.
● Empowering Banks: The government should tighten the loose ends by allowing them to build diversified loan
portfolios, establishing sector-wise regulators, bestowing more powers to deal effectively with wilful
defaulters.
●Priority Sector Lending is a significant responsibility assigned by the RBI to banks, mandating them to allocate
a portion of their loans to specific sectors such as agriculture or small-scale industries.
4. Social Measures
● Mitigating Moral Hazard: Fifth generation banking reforms should focus on the need for higher individual
deposit insurance and effective orderly resolution regimes to mitigate moral hazard and systemic risks with
least cost to the public exchequer.
Conclusion
● The present scenario calls for a paradigm shift and there has to be a multidimensional approach through which
existing digital platforms, infrastructure, human resources, and policy frameworks are strengthened and new
technological innovations are promoted to improve its resilience and maintain financial stability.
MAJOR ISSUES IN BANKING SECTOR
PRIVATISATION OF BANKS
● The Union Budget 2021-22 had announced the privatisation of two Public Sector Banks (PSBs) and one general
insurance company. But after that in the 2022-23, 2023-24 budget no bank has been privatised.
● History: The government decided to nationalise the 14 largest private banks in 1969. The idea was to align the
banking sector with the socialistic approach of the then government. SBI had been nationalised in 1955 itself, and
the insurance sector in 1956.
● The current steps of privatisation, along with setting up an Asset Reconstruction Company (Bad Bank) entirely
owned by banks, underline an “approach of finding market-led solutions” to challenges in the financial sector.
Reasons for Privatisation
● Degrading Financial Position of Public Sector Banks (PSBs): Years of capital injections and governance reforms
have not been able to improve the financial position of public sector banks significantly.
● Stressed Assets: Many PSBs have higher levels of stressed assets than private banks, and also lag the latter on
profitability, market capitalization and dividend payment record.
● Part of a Long-Term Project: Privatisation of two PSBs will set the ball rolling for a long-term project that envisages
only a handful of state-owned banks, with the rest either consolidated with strong banks or privatised.
● Strengthening Banks: The government is trying to strengthen the strong banks and also minimise their numbers
through privatisation to reduce its burden of support.
● Fall in Market Share of PSBs: Private banks’ market share in loans has risen to 37.3% in Sept 2022 from 21.26%
in 2015, while PSBs share has fallen to 54.5% from 74.28% in Sept 2022.
● Better Products and Services: Private sector banks have expanded the market share through new products,
technology, and better services, and also attracted better valuations in stock markets.
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ADVANTAGES OF PRIVATISATION OF BANK

According to National Council of Applied Economic Research (NCAER Report):
1. Market Share: Private banks have emerged as a credible alternative to PSBs with substantial market share. PSBs
have lost ground to private banks, both in terms of deposits and advances of loans.
2. Better Performance of Private Sector Bank over PSBs: Barring SBI, most other PSBs have lagged behind private
banks in all the major indicators of performance during the last decade. They attained lower returns on assets and
equity than their private sector counterparts.
3. Substantial Rise of NPA of PSBs: The Non-Performing Assets (NPA) of PSBs remain elevated as compared to
private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help
them tide over the bad loan crisis. The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds
infused in such banks as of May 31, 2022.
4. Underperformance of PSBs: The under-performance of PSBs has persisted despite several policy initiatives aimed
at bolstering their performance. These initiatives include:
a. Recapitalisation of PSUs
b. Constitution of the Bank Board Bureau to streamline and professionalise hiring and Governance practices.
c. Prompt corrective action plans
d. Consolidation through mergers.
5. Declining Trust in the Market of PSBs: The steady erosion in the relative market value of PSBs is indicative of a
lack of trust among private investors in the ability of PSBs to meaningfully improve their performance.
6. Inability of Government to Recapitalise Regularly: The current fiscal position of the Union Government is not
strong enough to provide huge sums for recapitalization and keep on sustaining sick PSBs.
7. Positive Impact on Economy: The privatisation of banks will have a positive impact on the economy by bringing
stability at the macroeconomic level.
8. Ripple Effect on Other PSBs: Privatisation of a few loss-making PSBs will ensure that market discipline forces
them to rectify their strategy, and this will have a ripple effect on other PSBs.
9. Help in Reviving the Banking Sector: The pandemic has led to the severe decline in the economic curve of the
nation and has made a negative impact on banks as a whole, which makes it imperative to take all possible steps to
revive the banking sector.
CHALLENGES ASSOCIATED WITH PRIVATISATION OF BANKS

● Profit Maximisation: The privatised banks will focus on maximising their benefit and it will put an adverse effect on
the welfare measures directed towards the middle class and poor people of the society.
● Implementation of Schemes: Many government schemes like “Jan-Dhan Yojana” and “Pension Yojana” worked
well and also became successful only because they were applied in Public Sector Banks.
● Loss of Jobs: There is a concern for the present Employees that they may lose jobs due to the privatisation of banks.
● Market Exit by Banks: There is a risk of Private Sector Banks exiting the market at any time.
● Apprehension of Loss of Reservation: There is a fear among SC/ST/OBC categories that they may lose reservation
benefits due to no legal backing of reservation in the private sector.
● Rise in Service Charges: Service charges on transactions and other services may also rise according to the profit
motive of the bank.
● Safety of Public Money: Private sector banks provide limited security and safety of the public money as compared
to public sector banks (Claimed by All India Bank Officers Confederation).
● Fear of Lopsided Development Policies: Power in the hands of big business houses may result in Greater disparities
in income and wealth and lopsided development of industries in the country Also it may not uphold principles of
Social Justice and Public Welfare.
● Issue of Accessibility: Public sector banks’ coverage of rural areas is far better than their private sector counterparts.
Private Banks are lagging in the deployment of rural ATMs, with 6,112 (18.34 per cent) in total rural ATMs of
33,312( 2020).
● Private Banks are often termed as Risk Averse Banks: Private Banks can never match PSBs in the real sense, due
to PSBs’ higher risk-taking capacity and the dual nature of their profitability — social and commercial profits.
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Way Forward
In order to improve the governance and management of PSBs, there is a need to implement the recommendations of the
PJ Nayak Committee. Rather than blind privatisation, PSBs can be made into a corporation like LIC. While maintaining
government ownership, this will give more autonomy to PSBs.
STATUS OF NON-PERFORMING ASSETS (NPAS)

● According to the Financial Stability Report (FSR) the Gross Non-Performing Assets (GNPA) ratio has decreased
from 8.2% in March 2020 to a seven year low of 5.0% in September 2022, while Net Non-Performing Assets
(NNPA) have dropped to a ten-year low of 1.3% of total assets.
o Lower slippages and the reduction in outstanding GNPAs through recoveries, upgrades and write-offs led to this
decrease.
o Lower GNPAs, combined with high provisions accumulated in recent years, contributed to a decline in NNPA.
FACTORS THAT LED TO RISE IN NPAS

1. Historical Factors:
● Between early 2000’s and 2008 Indian economy was in the boom phase. During this period, Banks, especially
public sector banks lent extensively to corporations.
● However, a combination of global economic slowdown, mining project bans, environmental permit delays, raw
material price volatility, and a shortage of available funds has resulted in decreased corporate profits and
increased NPAs for Public Sector Banks.
2. Poor Governance of Banks and Government:
● Poor Management in public sector banks, stemming from government ownership and policies that impede
project timelines, contributes to NPAs. The issue is compounded by willful defaulters due to a close nexus
between corporates, banks, and government officials.
3. Policy Factors:
● Relaxed Lending Norms, increased focus on unsecured loans, extensive loan restructuring, and inadequate
creditworthiness assessment contribute to the rise in NPAs, particularly in public sector banks.
Lowering Trend
● According to the 'Report on Trends and
Progress of Banking' by the RBI, the Non-
Performing Assets (NPAs) of banks have
shown a decline. The NPAs, which
accounted for 7.3% of total advances in
2021, decreased to 5% by September
2022.
● Reasons for the decline in NPAs:
o Drop in Slippage Ratio: The slippage
ratio, representing the rate at which
good loans deteriorate, has decreased.
As of September 2022, the slippage
ratio for scheduled commercial banks
(SCBs) reached its lowest point since
2015, standing at around 2%. This
reflects effective management of asset quality by banks.
o Increased Write-offs: Banks have proactively opted to write off NPAs in order to maintain healthy balance
sheets. According to data provided by the Finance Ministry, bad loans worth ₹10,09,511 crore were written
off by banks over the past five years. In the first half of FY 2022-23, the ratio of loan write-offs to gross NPAs
rose to 22.6%.
IMPACTS OF RISE IN NPAS

● Loss of Profit: Lenders suffer a lowering of profit margins.
● No Money for Priority Infrastructure Projects: Stress in the banking sector causes less money available to fund
other projects, therefore, negatively impacting the larger national economy.
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● Rise in Interest Rates by Banks: Higher interest rates by the banks to maintain the profit margin.
● Inappropriate use of Funds: Redirecting funds from the good projects to the bad ones.
● Rise in Unemployment: As investments get stuck, it may result in unemployment.
● Not Good Returns: Investors do not get rightful returns.
● Balance Sheet Syndrome and its Repercussions: Halting of the investment led development process due to Balance
sheet syndrome of Indian characteristics in which both the banks and the corporate sector have stressed balance sheets.
● Piling up of Cases: NPAs related cases add more pressure to already pending cases with the judiciary.
Benefits of Lower NPA Level
● For Borrowers: Banks may begin lowering interest rates on some products once NPAs decrease.
● For 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.
● For Banks: It increases the profitability & liquidity of the banks as annual return on assets increases and also the
amount given as loan gets opened which can now be used for some return earning asset otherwise.
o Banks can grow faster when the availability of credit increases.
o The Monetary Policy Transmission becomes faster for banks to pass on the RBI-induced rate reductions.
o Banks ease credit to Small and Medium Enterprises (SMEs) that are India's potential for prosperity of an
entrepreneurial middle class.
Way Forward
● Recapitalising the Banks: The government infused Rs 3,10,997 crore to recapitalise banks during the last five
financial years i.e., from 2016-17 to 2020-21. Both demand and time have recorded acceleration in their growth,
leading to an increase in aggregate deposits by 9.6 percent.
● Reforms for Better Transparency and Objective Lending: Under the PSB Reforms Agenda, PSBs have created
Stressed Asset Management Verticals to focus attention on recovery and entrusted monitoring of loan
accounts of above Rs. 250 crores to specialised monitoring agencies.
● The consolidation of Banks is also seen as a way out of the NPA issue through the “strong” banks absorbing
the strain on the books of weaker banks.
● Project Sashat: To resolve the problem of NPAs through a market led approach.
o The Reserve Bank of India (RBI) allowed domestic banks to directly sell their bad loans in
manufacturing and infrastructure sectors to investors abroad as part of one-time settlement (OTS)
exercises.
ASSET RECONSTRUCTION COMPANY (ARC)

Asset Reconstruction Company: It is a specialised financial institution that buys the NPAs or bad assets from banks
and financial institutions so that they can clean up their balance sheets. In other words, ARCs are in the business of
buying bad loans from banks.
ORIGIN OF ARCS
● At the time of the Asian Financial Crisis, India’s NPAs stood at a whopping 14.4 per cent. It was in this context
that the Narasimhan Committee (1998) recommended setting up an ARC specifically for purchasing and resolving
stressed assets.
● Following this, the SARFAESI Act, 2002 was enacted in December 2002 which provides the legal basis for the
setting up ARCs in India.
OBJECTIVE
1. To help banks to concentrate in normal banking activities rather than wasting their time and effort in going after
the defaulters by.
2. To sell the bad assets to the ARCs at a mutually agreed value.
3. To create a specialised financial institution that buys the Non-Performing Assets (NPAs) from banks and financial
institutions so that they can clean up their balance sheets.
4. To speed up the process of resolution of Non-Performing Assets (NPAs).
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NEED OF ARC
● Effective Bankruptcy System: India lacked an effective bankruptcy system. There was no market for corporate
control of distressed firms.
● Peculiar Institutional Ecosystem: ARCs were originally designed for this peculiar institutional ecosystem. They
were required to hand over the distressed business back to the original promoter once they had generated enough value
to repay the debt.
● For Acquiring Strategic Control: ARCs should be able to fully participate in this market and attempt successful
turnarounds by acquiring strategic control over distressed businesses.
● For Public Welfare: In a solvent company, shareholders have stronger incentives than creditors to maximise
enterprise value. If ARCs could hold more equity instead of debt in the resolved company, they would also have a
stronger incentive to take strategic control to ensure successful turnaround.
● Softening Provisioning Requirement: High level of NPAs makes the lending difficult for banks, as they have to
keep supplementary capital (provisioning requirement) under the Basel Accord. Bad banks by way of absorbing
NPAs.
● High NPA: According to the Financial Stability Report of RBI, in September 2022 GNPA was 5%.
● Problems with IBC: There was already an IBC to deal with bad loans, but the recovery rate was not higher. The
current framework of bankruptcy code is not yielding a good value for banks.
● Limitations of Existing ARCs: Existing ARCs have acquired a debt of ₹3.88 trillion as of June 2019. However,
there are still nearly ₹10 trillion worth of stressed assets in the system so clearly the extent of the problem (and
opportunity for ARCs) continues to be immense.
BAD BANK
● Budget 2021 -22 suggested setting up of National Asset Reconstruction Company Ltd (NARCL), the proposed
Bad Bank for taking over stressed assets of lenders, was announced in the Budget for 2021-22.
● The plan is to create a Bad Bank to house bad loans of ₹500 crore and above, in a structure that will contain an
ARC and an Asset Management Company (AMC) to manage and recover due assets.
● Improvement in the Balance Sheet of the Banks due to decrease in the NPAs.
● Unlocking of the capital that was earlier locked up as provisioning requirements.
● Enable the Bank to focus on their core areas of accepting deposits and lending loans. The function of recovery of bad
loans gets transferred to the specialist Bad Bank.
ISSUES WITH ARC

● Mere Shift of Bad Asset: Ex-RBI Governor Raghuram Rajan highlighted that with PSBs as stakeholders and at
top positions, NARCL risks the mere shift of bad loans from government owned banks to government backed NARCL.
● Risk of Moral Hazard: Shifting of NPAs without accountability risks the moral hazard of reckless lending which can
further amplify the problem.
● Organisational Issues: Lack of adequately trained man force which leads into unprofessional and intimidating
attitude of the recovery agents.
Way Forward
● Focus on EASE 4.0 (Enhanced Access quality service Excellence): commits PSBs to tech-enabled, simplified and
collaborative banking to further the agenda of customer-centric digital transformation.
● Strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management
Verticals (SAMVs) in banks for large-value NPA accounts have brought sharper focus on recovery.
● Strengthen IBC regime and promote pre packed insolvency.
Conclusion
● The arrival of NARCL comes at a good time, as the assets of the existing 28 ARCs are restricted, and the RBI is trying
to expand the role of ARCs in stressed asset resolution.
● At the same time, we must not lose sight of the need to train the workforce at ARCs and banks in order to improve
not only ARC performance but also to reduce future hazards.
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Key Words
Universal Banking, Niche Banking, Neo Banking, Blockchain Banking, Priority Sector Lending, Capital Adequacy, Non
Performing Assets, Bad Loans, Financial Inclusion
INSURANCE SECTOR
● Insurance is the cardinal element in the operation of national economies. It protects the health and assets of the
people and stimulates business activities to operate in a cost-effective manner.
● The insurance market in India holds great potential to act as a booster for the Indian economy. With the rise of
population and poverty in the country, there is a looming risk of uncertain financial losses.
Background
● General Insurance Business (Nationalisation) Act, 1972: The entire general insurance sector in India was
nationalised by the GOI with taking over shares of 50+ Indian insurance companies and undertakings of 52 insurers
carrying general insurance business in India and it was nationalised through this Act.
● Insurance Regulatory and Development Authority of India (IRDAI) Establishment: GOI set up the Malhotra
Committee to suggest reforms for the insurance sector in India. Following the recommendations, the IRDAI was
established in 1999 to regulate and develop the insurance sector in India.
● Private Sector Insurance Reforms:
o Opened the sector to both private and foreign players in 2000.
o For insurance intermediaries, like brokerages and others, who bring together customers and insurance firms,
100% foreign investment is allowed.
o At present FDI in the insurance sector is 74% and Foreign Ownership and control is allowed with safeguards.
Significance of Insurance Sector
● Generates Long-term Financial Resources: Funds generated through premium drive infrastructure investment,
boost employment, and spur economic capital formation.
● Promotes Economic Growth: Insurance turns domestic savings into productive investments.
● Spreads Risk: Insurance facilitates moving of risk of loss from the insured to the insurer. The basic principle of
insurance is to spread risk among a large number of people.
● Increased health insurance coverage decreases catastrophic and impoverishing health expenditure by setting a
limit on the maximum health expenditure that an individual or household can spend.
● Provides Safety and Security: It provides an ideal risk mitigation mechanism against events that can potentially
cause financial distress to individuals and businesses.
● Save out-of-pocket expenditure (OOPE): Insurance is a vital mechanism for individuals to protect themselves from
catastrophic, unpredictably high healthcare costs, which can force families into poverty.
● To achieve Universal Health Coverage: Expanding health insurance coverage is a critical step and a road in India's
efforts to achieve Universal Health Coverage.
Issue in The Insurance Sector
● Low Penetration: Life insurance penetration was 3.2% in 2022, very well in line with the world average of 3%,
the penetration of non-life was 1%, much less than the global average of 3.9%.
● Government Sector Domination: The insurance sector has transitioned from being an exclusive state monopoly to
a competitive market, but public-sector insurers hold a greater share of the insurance market.
● Nascent Non-life Insurance: Life insurance dominates the sector with a huge share of 74.7%, with non-life
insurance accounting for the remaining 25.3%.
o In the non-life insurance sector, motor, health, and crop insurance segments are driving growth.
● Women’s access to insurance is limited: In emerging markets, women are overly represented in the informal sector,
with no ‘employer’ in the traditional sense.
● General risk involved: Insurance products catering to speciality risks such as catastrophes and cyber security are at
a nascent stage of development in the country.
● Rural-Urban insurance divide: According to the NSO report, people in rural areas about 79.5% and for urban
areas about 83.7% paid for their medical expenses from their savings.
● Capital Starved Insurers: Insurers in India lack sufficient capital, and their financial health is in a precarious state.
Further, investment in the insurance sector got dwindled due to the crisis in the banks and NBFCs sector.
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● Awareness of the general public: Majority of the population are not aware about the various government initiatives
and schemes for insurance coverage.
Way Forward
● Model Insurance Village (MIV): The IRDAI has mooted the concept of MIV to boost insurance penetration in rural
areas.
● Need For awareness generation: There is a need for complementary thrust to spread awareness and improve financial
literacy, particularly the concept of insurance, and its importance.
● Equality with women: Women should also have a broader policy framework in insurance by collecting proper data
and the approach should have practical solutions.
● Rural centric approach: In this context, government insurance schemes such as Pradhan Mantri Jan Arogya Yojana,
Pradhan Mantri Fasal Bima Yojana, etc. are notable steps in the right direction.
● Technology intervention: Another area that necessitates regulatory scrutiny is that of application of technology in
insurance. E.g., the emergence of ‘InsurTech’, ‘Policy Bazaar’ designed to make the claim process simpler and more
comprehensible.
● Insurance Amendment Act, 2021: The Act amends the Insurance Act, 1938 to increase the maximum foreign
investment allowed in an Indian insurance company.
● Subsidised Health Insurance: Health insurance systems subsidised by the government, such as the Centrally
Sponsored AB-PMJAY and state-specific schemes like the 'Arogya Karnataka Scheme.'
Conclusion
Demographic factors, coupled with increasing awareness and financial literacy, are likely to catalyse the growth of the
sector. An enhanced regulatory regime that focuses on increasing insurance coverage is the need of the hour.
Data and Figures

● The life insurance penetration was 3.2% in 2022, very well in line with the world average of 3%, the
penetration of non-life was 1%, much less than the global average of 3.9%.
● The Indian Insurance market is expected to reach $200 BN by 2027.
● India is 9th largest Life Insurance Market globally
● India is the 14th largest Non-Life Insurance market globally.
● Insurance Ayushman Bharat PM-JAY is the largest health assurance scheme in the world and is funded by the
Government.
Key Words
Insurance Penetration, Insurance Density, Non-life Insurance, Out-of-pocket expenditure,
Retirement Planning, Subsidised Insurance.
FINTECH SECTOR
Introduction
● Fintech is a broad term that refers to technology-based enterprises that compete with, facilitate, and/or work with
financial institutions. Paytm, MobiKwik, and Google Pay are among examples.
● Its driver in India: Increased usage of cellphones, internet access, and online shopping; younger population;
technological advancements such as Big Data, AI, and others; Increased Financial Inclusion.
SIGNIFICANCE OF FINTECH SECTOR

● Digital Payments are on the rise.
● Peer to Peer (P2P) financing, crowdfunding, and other new techniques have improved lending and investment.
● Provide funds to SMEs for the exchange of invoices.
● Credit creation has improved because of account aggregator services.
RECOMMENDATIONS OF SUBHASH CHANDRA COMMITTEE TO LEVERAGE POTENTIAL OF

FINTECH:
● Supervision Technology Development: Supervision technology is the use of technology by financial regulators to
improve their regulatory and supervisory functions.
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● Customer Protection Legal Framework: With the expansion of fintech and digital services, a legislative framework
for consumer protection should be established.
● Regulation Technology (RegTech) Development: Regtech is a new sector in the financial technology business that
uses information technology to improve regulatory operations.
● Credit and insurance companies are using remote sensing and drone technology.
● Creating a marketplace model of debt financing can meet the credit demands of MSMEs, families, and people.
DIGITAL LENDING ECOSYSTEM

● Digital lending involves the online provision of loans through mobile apps, with processes such as credit
assessment and recovery conducted remotely.
● These service providers can be categorised into two groups:
o Regulated entities, including credit information companies, RBI-regulated NBFC-Peer to Peer Lending
Platforms (NBFC-P2P), and credit rating agencies regulated by SEBI.
o Entities that are not subject to specific regulation by any financial sector regulator.
Existing Legal Framework for Lending in India
● Banking Regulation (BR) Act, 1949: All banks, including small finance banks, regional rural banks, and co-operative
banks, must register with the Reserve Bank of India (RBI) to engage in digital lending.
● Reserve Bank of India (RBI) Act, 1934: Non-Banking Financial Companies (NBFCs) involved in digital lending
must be registered with the RBI in accordance with the provisions of the RBI Act.
● Companies Act, 2013: Companies registered under the Companies Act, 2013 are permitted to undertake lending
activities. For example, Nidhi Companies are registered and regulated by the Ministry of Corporate Affairs.
● Chit Funds Act, 1982: Chit fund companies are regulated under the Chit Funds Act, 1982, which is a Central Act
implemented by State Governments.
MODELS OF DIGITAL LENDING

● Balance sheet lending (BSL) Model: Banks and NBFCs lend from their own balance sheets, assuming credit risk.
● Marketplace lending (MPL) Model: It does not involve lending money directly and therefore does not bear credit
risk. Examples of MPL include:
o Peer-to-peer (P2P) lending platforms that connect lenders and borrowers through an online platform. Examples
include Faircent, Lendenclub, Cashkumar, and others.
o Fintech companies that collaborate with banks and NBFCs to facilitate loan extensions.
Status of Digital Lending in India
● Exponential growth: Disbursed loans through digital channels have increased by 12 times from 2017 to 2020.
● The value of digital lending in India rose from USD 33 billion in FY15 to USD 150 billion in FY20 and is projected
to reach USD 350 billion by FY23 (RBI report)
● Dominant entities: Private sector banks hold a 55% share, followed by NBFCs with a 30% share in the digital
lending ecosystem.
● Loan nature: Personal loans are the major product disbursed digitally by banks, followed by loans to MSMEs.
● Disbursal methods: Public sector banks primarily rely on their own apps/websites for digital loan disbursal, while
private sector banks have a higher dependency on outsourced/third-party apps.
Reasons for Regulating Digital Lending
● Increase in illegal apps: There has been a significant rise in unregistered lending apps operating without regulation
or approval from the RBI, posing risks to consumers. Examples include apps like Rupee Day, Real Rupee, and First
Cash.
● Consumer protection concerns: Digital lending apps may not always act in the best interests of consumers.
● Financial sector risks: Indiscriminate lending through digital apps without proper verification and credit appraisal
processes could impact the stability of the financial sector.
● Data breaches and leaks: Lending apps collect sensitive user information, making them vulnerable to cyber-attacks.
RBI's Regulations for Digital Lending
● RBI has categorised digital lenders into three groups: regulated entities, entities authorized under other provisions
but not regulated by RBI, and entities operating outside the purview of any regulations.
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● The current regulations apply only to regulated entities, while RBI has recommended that concerned regulators
formulate guidelines for the second category and the central government enact a separate law to address illegitimate
lending in the third category.
Conclusion
The regulation of digital lending is crucial to address the rise of illegal apps, protect consumers, mitigate financial sector
risks, and prevent data breaches.
CENTRAL BANK DIGITAL CURRENCY (CBDC)

In News: The Reserve Bank of India (RBI) has initiated
pilot launches of the Digital Rupee (e₹) for specific
purposes. In October 2022, the RBI introduced the first pilot
project for the Digital Rupee in the Wholesale segment
(e₹-W). Subsequently, the RBI operationalized the first
pilot project for the Digital Rupee in the Retail segment
(e₹-R).
About CBDC:
● Central Bank Digital Currency (CBDC) is a legal
tender backed by the central bank, offering stability
and programmable features.
● It is recognized as a liability on the central bank's
balance sheet and its legality was established through
the amendment of the RBI Act in the Finance Act
2022.
BENEFITS OF CBDC
● Cost Reduction: CBDC issuance is expected to save significant costs associated with managing physical cash,
including security printing expenses (seigniorage costs).
● Digitalization: CBDC promotes the transition to a less cash-dependent economy, advancing the cause of
digitalization.
● Competition and Innovation: CBDC supports competition, efficiency, and innovation in the payments sector.
● Cross-border Payments: CBDC usage can improve cross-border payment processes.
● Financial Inclusion: CBDC implementation contributes to financial inclusion efforts, ensuring broader access to
financial services.
● Trust and Currency Stability: CBDC helps maintain trust in the national currency in the face of increasing crypto
asset proliferation.
● Transparent and Private Payments: CBDC offers transparency, privacy, and finality in payment transactions.
CHALLENGES OF CBDC
● Bank Disintermediation: Poorly designed CBDC implementation may lead to adverse consequences for financial
stability by displacing banks and impacting their core business.
● Technical Hurdles: Challenges include issues of internet connectivity, especially in rural areas, interoperability with
existing systems, and cyber-attack vulnerabilities.
● Financial Literacy: Limited financial literacy poses obstacles for certain population segments in adopting and
effectively utilizing new technologies, potentially hindering financial inclusion efforts.
Conclusion
The pilot projects initiated by the RBI will serve as a blueprint for expanding and implementing CBDC in the future, taking
into account the identified benefits and challenges.
DIGITAL BANK UNITS ( DBU)

● Budget 2022-2023 dedicated 75 Digital Banking Units (DBUs) as part of efforts to spread the benefits of digital
banking to every nook and corner of India.
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WHAT IS A DBU?
● A digital banking unit is a specialised fixed point business unit or hub housing certain minimum digital infrastructure
for delivering digital banking products and services as well as servicing existing financial products and services
digitally in self-service mode at any time.
RBI GUIDELINES FOR DBUS

● The RBI guidelines allow Scheduled Commercial Banks (SCBs) with prior digital banking experience to open
DBUs.
● SCBs can establish DBUs in Tier 1 to Tier 6 centers without seeking permission from the RBI.
● The DBUs will be considered as Banking Outlets and must have separate facilities for entry and exit.
● The guidelines emphasize the need for physical separation between the DBUs and existing banking outlets, with
appropriate formats designed for digital banking users.
● Each DBU should be led by an experienced senior executive of the bank, designated as the Chief Operating Officer
(COO) of the DBU.
Need for DBU
● NITI Aayog has released a Discussion Paper titled “Digital Banks: A Proposal for Licensing & Regulatory
Regime for India”, according to this:
o India has made rapid strides towards enabling financial inclusion catalyzed by PMJDY and India stack.
However, credit penetration remains a public policy challenge, especially for the nation’s 63 million odd MSMEs.
o With the help of unprecedented level of technology-led digitization and digital disruption heralded by Jan
Dan-Aadhar-Mobile (JAM) trinity, biometric Aadhar systematic., financial inclusion has become a viable
reality for the citizens of India. This has been furthered by the Unified Payments Interface (UPI) which has
witnessed extraordinary adoption.
o In parallel, India has also taken steps towards operationalizing its own version of “Open banking” through the
Account Aggregator (“AA”) regulatory framework enacted by the RBI.
Conclusion
The current credit gap and the business and policy constraints reveal a need for leveraging technology effectively
to cater to the needs of this segment and bring them further within the formal financial fold.
NATIONAL STRATEGY FO R FINANCIAL EDUCATIO N (NSFE) - (2020-2025)

● In News: The RBI has released a national strategy for financial education to be implemented in the next five years
(2020-2025).
● It is mainly for creating a financially aware and empowered India. The strategic objective is improving usage of
digital financial services in a safe and secure manner; as well as bringing awareness about rights, duties and
avenues for grievance redressal.
The Organization for Economic Co-Operation & Development (OECD) Definitions
● Financial Literacy: It is defined as a combination of
financial awareness, knowledge, skills, attitude and
behaviour necessary to make sound financial decisions
and ultimately achieve individual financial well-being.
● Financial Education: It is defined as the process by
which financial consumers/investors improve their
understanding of financial products, concepts and risks and through information, instruction and/or objective advice.
Conclusion
The latest available World Bank’s Findex Report 2021 has revealed that the proportion of adults with a formal account
in the country has risen from 35% in 2011, to 78% in 2021. However, the country still needs to tread a long path to
achieve a respectable financial literacy rate which is crucial for inclusive growth.
DEVELOPMENT BANK FOR INFRASTRUCTURE FUNDING

● In News: The Central government has proposed to set up a new Development Finance Institution (DFI) essentially
to fill the gap in long-term finance for infrastructure sectors.
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● DFIs are set up for providing long-term finance for such segments of the economy where the risks involved are
beyond the acceptable limits of commercial banks and other ordinary financial institutions.
● Unlike banks, DFIs do not accept deposits from people. They source funds from the market, government, as well as
multilateral institutions, and are often supported through government guarantees.
Key Pointers
● Proposed DFI: It will be used to finance both social and economic infrastructure projects identified under the
National Infrastructure Pipeline (NIP). NIP will enable a forward outlook on infrastructure projects which will
create jobs, improve ease of living, and provide equitable access to infrastructure for all, thereby making growth more
inclusive.
● Role of Government in DFI: The DFI can either be promoted by the government or it should be given a private sector
character with the government restricting its holding to 49%.
o SLR Eligibility: The securities from the DFI could be made SLR eligible. This will encourage banks to subscribe
to the securities issued by DFI and fulfil their SLR obligations.
o RBI Requirements: The RBI requires banks to set aside 18% of their NTDL towards SLR.
o Government trust on private sector: DFI with a private sector character will require the government to believe
and trust the private sector.
● Asset/Liability Management Mismatch: In India, most lenders borrow funds with maturity under 5 years. The reason
is primarily the absence of a deep bond market to borrow from. As a result, they lend to a project with a maturity of,
say 20 years, with funds of 2-year maturity. This leads to a mismatch in the maturities of assets and liabilities for the
lender.
● Issues in Infrastructure Funding: Funding Gap i.e., banks are unable to provide long-term finance to infrastructure
projects. Infrastructure financing is currently dominated by bank lending, with outstanding credit to the infrastructure
sector touching 15% until FY16 due to rising NPA in the banking sector driven by declining asset quality in the
infrastructure sector.
DFI in India
● Institutional Framework for Development Banking: Soon after independence, the institutional framework for
development banking began- IFCI (1948), IDBI (1964), IIBI (1972), NABARD (1982) and EXIM Bank (1982),
SIDBI (1990), etc.
Conclusion
If India has to grow 8-10% continuously, credit growth for infrastructure must be 12-14%. India needs wide-ranging
institutional and regulatory reforms, and not just a DFI, to bolster the corporate bond market, the size of which stands at
only about 15-16% of GDP. Nevertheless, the DFI proposal could be one of the important steps and way forward in that
direction.
NEW UMBRELLA ENTITY (NUE) FOR PAYMENT SY STEM

● In News: The private companies have shown interest in setting up New Umbrella Entities (NUEs) for payment
systems - an idea floated by the RBI. The aim is to create an alternate mechanism to the existing National Payments
Corporation of India (NPCI).
● New Umbrella Entity or entities will carry out various payment services, similar to the ones being provided by the
NPCI right now.
Need for New Umbrella Entity (NUE)
● Enhance the competition: At present, the NPCI is the only entity handling the payment system. So, it is not for sure
that the transaction costs are the lowest, or they cannot be reduced further. Similarly, the competition will also provide
a variety of product offerings in the payment system.
● Manage and operate new payment systems: They will set up, manage and operate new payment systems including
wallet transactions, Aadhaar-based payments, and remittance services, UPI transactions, ATMs, white-label PoS, etc.
● To reduce the monopoly of NPCI: Private players in the payments space have expressed few concerns with the
NPCI. So, the NUEs will enhance the competition and improve the service delivery in the retail digital payment
ecosystem.
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Functions of New Umbrella Entities (NUEs)

● Develop: They will develop new payment standards, methods, and technologies.
● Risk Management: They will operate in clearing and settlement systems. Furthermore, they will also identify and
manage relevant risks. This includes risks related to settlement, liquidity, credit, and operation.
● Preserve the Integrity: New Umbrella Entities will also preserve the integrity of the retail payment system.
● Monitoring Role: These entities will monitor the system both nationally and internationally to prevent shocks, frauds,
and challenges that affect the system in general.
RBI Framework Related to The NUEs
● Capital Requirements: The pan-India NUEs will focus on retail payment systems with a minimum paid-up capital
of Rs 500 crore. However, the RBI will not permit any single promoter or group to hold more than 40% investment
in the NUE. Also, the NUE should maintain a minimum net worth of Rs. 300 crores at all times.
● Ownership of NUE: The promoter or the promoter group of the NUE should be ‘owned and controlled by residents’
with 3 years of experience in the payment’s ecosystem.
● Governance of NUE: The entity has to follow corporate governance norms set by the RBI. The RBI will retain the
right to approve the appointment of directors and nominate a member on the entities’ board.
● Foreign Investment: As long as the NUE’s comply with the other guidelines the Foreign Investment is allowed.
Need for the New Regulator
● Number of Digital Transactions in the Country: The retail transfers in the country expanded enormously. For
example, in 2022-23 (till December 2022) alone Rs.2050 lakh crores of money transferred in 9,192 crore
transactions. This requires a regulator to oversee the transactions and ensure proper service delivery.
● RBI Lack of Capacity: RBI will need a huge upfront cost to create a regulatory body for these NUEs. So the RBI
thinks it can be left to NPCI or any new regulator.
● Better functioning of NUEs: The new regulator/NPCI can handle the customer queries, granting licenses, monitoring
the functions of the NUE in a better way.
Challenges
● NPCI Monopoly on Regulating NUEs: Many of the NUEs are also the shareholders of the NPCI. So, if the regulatory
control is vested with them, then there will be a conflict of interest between developing the NUE and controlling NUE.
● Promote Inefficiency: NPCI is performing very well in promoting the digital leap of India. Asking it to take over the
regulatory function will also reduce its capacity and hamper India’s digital progress.
● Creating a New Regulator: Creating a new regulator with enough capacity, manpower and regulatory capability
from the top-down is a great challenge. Delay in creating the regulator or hurrying it to work faster will pave the way
for the NUEs to exploit the loopholes.
● Need for a Capable Body: By leaving the power of regulation to NPCI or a new body will distance the RBI from the
digital payment ecosystem. As the digital payment ecosystem is considered as the future of the economy, thus it is
important that it is regulated directly by a capable body like RBI.
● Data Privacy and Data Theft: The new regulator/NPCI will have to strengthen the data security infrastructure right
from the beginning as digital payments are already increasing in the country.
● Ambiguity in the Function of the Regulator: There is no clarity on RBI’s relationship with the regulator post the
formation. For example, will the RBI have regulatory control over the regulator? If the regulator is independent, then
it may not function as efficiently as the RBI.
Way Forward
● Cost Saving: The cost of setting up the infrastructure for the regulator will be the least for a regulator like RBI than
the new regulator. As there is enough manpower, capital, technological capability available. So, the RBI has to set up
a separate branch/division to regulate these New Umbrella Entities.
● Multiple Regulator: India so far has created too many regulatory bodies in the financial space such as RBI, SEBI,
PFRDA, IRDAI, etc. So, the government has to perform the review and consolidation of these regulatory bodies.
This will ensure consistent and predictable signals to the market.
● Building Privacy by Design: The government has to pass the Data Protection Law. This will make NUE store data
within India and provide users the right to privacy in the digital space. Further, the government has to strengthen the
RBI’s digital capability.
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Conclusion
● New Umbrella Entities are transforming India’s retail payment system from cash to cashless economy and further
digitization, their operations are going to increase. So, regulating them is a necessary step to infuse checks and balances
in the retail digital payment space. But the RBI has to take responsibility for that, instead of transferring power to
others.
FINANCIAL INCLUSION
● RBI defines financial inclusion as the process of ensuring access to financial services and timely and adequate credit
where needed by vulnerable groups such as weaker sections and low-income groups at an affordable cost.
SIGNIFICANCE OF FINANCIAL INCLUSION

● Economic Growth : Financial inclusion brings untapped sections of the population into the banking sector. It
improves the overall savings in the economy, which in turn pools investment resources for economic growth.
● Poverty Alleviation :Financial inclusion leads to increased access to financial services. It means better reach of
banking services. Which makes it easier for people to access poverty alleviation e.g. DBT, MGNREGA etc.
● Reduces Leakage: Financial inclusion makes it easier to deliver the social services to the targeted population. It helps
in curbing leakages and corruption.
● Timely Delivery of Services: Direct Benefit Transfer helps in removing delays and hence results in timely delivery
of services.
● Women Empowerment: Inclusion of females in the financial sector makes them financially independent and secure.
● Promotion to Digital Economy: Financial inclusion leads to better penetration of online payment services and hence
gives support to digital and cashless economy.
STEPS TAKEN IN DIRECTION OF FINANCIAL INCLUSION

● Jan Dhan Aadhar (JAM): The government of India introduced Jan Dhan Yojana to provide banking services to a
particular section of population, and along with Aadhar and mobile it is critical in transferring cash benefits directly
to the beneficiaries.
● Initiatives by RBI and NABARD: Both RBI and NABARD have taken numerous steps to improve financial
inclusion. These include opening of bank branches in remote areas, linking self help groups with banks and issuing
Kisan Credit Cards etc.
● Digital Payments: NPCI has introduced UPI which has revolutionised the online payments sector.
● Project Financial Literacy: The RBI has launched Project Financial Inclusion to spread information and awareness
about central bank and general banking concepts to various target groups, including, school and college going children,
women, rural and urban poor, defiance personnel and senior citizens.
● Pocket Money: Securities and Exchange Board of India (SEBI) and National Institute of Securities Markets (NISM’s)
launched this programme to increase financial literacy among school students.
CHALLENGES IN FINANCIAL INCLUSION

1. Issues with respect to Digitalization:
o Digital Divide: There is an inequality in case of access to digital services in India. e.g. According to the India
Inequality Report 2022 by Oxfam, only 31 percent of the rural population uses the Internet compared to 67
percent of urban population.
o Digital Literacy: Many of the users lack the basic skills to use digital services. 20% of Indians above the age of
5 years had basic digital literacy.
o Digital Infrastructure: There are concerns related to digital infrastructure as well. According to NSO, only 15%
are connected to the internet.
2. Lack of Access to Banking: Although the Jan Dhan Yojana has provided bank accounts to people but still there is a
gap that needs to be filled. In a country of 140 crore ,only 48.87 crore Jan Dhan accounts have been opened so
far.
3. Lack of Identification Documents: Many beneficiaries fail to avail banking services due to lack of formal
identification documents.
4. Gender Gap: The gender inequality also affects the process of financial inclusion. As per data from Findex,
approximately 1.1 billion of the 2 billion unbanked individuals around the world are women.
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5. Rural-Urban Divide: For per 1 lakh adults, there are only 14.6 banks in India. This even gets worse in the case of
rural areas, where the lack of access to banking infrastructure combines with lack of staff and connectivity issues, to
further deteriorate the matter.
6. Issues with DBT: The DBT suffers from multiple issues including lack of grievance redressal mechanism, lack of
awareness among beneficiaries and lack of accountability.
Way Forward
● Increase Banking Penetration: Since the brick and mortar banks can’t be built in every corner of the nation, the
banking correspondents can be used to increase the reach of banking services. The banking correspondents can be
encouraged by providing better incentives and commission.
● Utilize Available Infrastructure and Resources: As we know India has a large network of Post offices and Fair
price shops. These can be utilized to provide banking counters to the unbanked section.
● Diversify the Banking Products: The one size fits all approach can be dropped and different schemes and products
can be introduced on the basis of nature of employment, level of income and place of residence (rural/urban).
● Address Technical Concerns: The connectivity issues in remote areas can be dealt with using innovative ideas and
handheld devices can be upgraded in such a manner that they contain basic information even when they are offline.
● Increasing Awareness: To improve awareness among the beneficiaries, advertisements on TV/Radio/Newspapers
can be done in local languages, using local icons and artists as brand ambassadors.
● Leverage the Support of Local Bodies: The Panchayati Raj institutions, municipalities and city councils can help in
identifying as well as encouraging the unbanked to start operating in formal banking channels.
AN ANALYSIS OF JAM
● In the News: Nine Years Of Pradhan Mantri Jan Dhan Yojana
● PM Jan Dhan Yojana - The National Mission for Financial Inclusion is set to complete 9 years in August 2023.
● The Government of India took multiple initiatives for financial inclusion and poverty alleviation. But the efficacy of
these initiatives was compromised due to alleged corruption and leakages. Also, a major section of rural India
remained unbanked.
● To address all these issues the government came up with the JAM initiative. The purpose of this initiative was to link
Jan Dhan accounts, Mobile numbers and Aadhar cards of Indians to directly transfer subsidies to intended
beneficiaries and eliminate intermediaries and leakages.
● PMJDY was launched as The National Mission for Financial Inclusion on 15th August 2014.
Achievements Under PMJDY
● 49.08 crore accounts were opened as of 25th May 2023.
PMJDY Accounts ● Rural Accounts: 32.77 crore and
● Women PMJDY accounts: 27.27 crore
● Out of 40.35 crore, over 34.81 crore (86.3%) were operative.
Operative
PMJDY Accounts ● As per RBI, an account is considered inoperative if there are no transactions for a period of
two years.
IMPACT OF PMJDY ON THE FINANCIAL SYSTEM

● Prevent Leakage: DBTs have empowered and provided financial security to the vulnerable sections of society via
PMJDY accounts as well as ensured every rupee reaches its intended beneficiary and prevented systemic leakage.
● Financial Inclusion: PMJDY has been the foundation stone for people-centric economic initiatives. Whether it is
DBTs, COVID-19 financial assistance, PM-KISAN, increased wages under MGNREGA, which PMJDY has nearly
completed.
● Formalization of the Financial System: Jan dhan provides an avenue to the poor for bringing their savings into the
formal financial system, an avenue to remit money to their families in villages besides taking them out of the clutches
of the usurious money lenders.
CHALLENGES ASSOCIATED WITH THE PMJDY

● Financial and Technological Illiteracy: Rural people lack the financial literacy, awareness, information, and skills
needed to make educated savings, borrowing, investment, and expenditure decisions.
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● Connectivity Issues: In the hinterlands and steep parts of the Northeast, Jammu and Kashmir, there is a lack of
physical and digital connectivity.
● Problems with Technology: Banks are affected by issues ranging from inadequate connection, network outages,
power shortages, and bandwidth issues to managing infrastructure maintenance expenses.
● Managing the Business Correspondents (BC) Ecosystem: Because of the following factors, it is a difficult and
time-consuming process for banks.
o Delay in BC paying villages subsidies and payments under MGNREGA, DBT, pensions, and other programmes.
o The Bank's unwillingness to scrutinise BC's operations.
o There are no efficient grievance redressal processes in place.
STEPS NEEDED TO OVERCOME THESE CHALLENGES

● Financial empowerment: Moving from financial inclusion to financial empowerment through credit is necessary in
the future.
● Developing Digital Infrastructure: This would necessitate a shift away from cash transactions and toward digital
transactions, as well as the development of credit models employing artificial intelligence approaches to encourage
the use of digital payments, such as the RuPay debit card, among PMJDY account users.
● Providing on time Information: Improving PMJDY account holders' access to microcredit and micro-investment
opportunities, such as flexi-recurring deposits.
● Create an inclusive database: It is necessary to create a database that captures the income and transaction history of
Jan Dhan account users so that credit distribution models may be developed.
Conclusion
The National Mission for Financial Inclusion thus represents an important facet of the Government’s inclusive and
sustainable growth agenda.
UNIVERSAL BASIC INCOME (UBI)

● In News: After Madhya Pradesh and Punjab, Tamil Nadu became the latest state to implement the scheme to a targeted
section of women.
About UBI:
● A Universal Basic Income is a regular, periodic cash payment delivered unconditionally to all citizens on an individual
basis, without requirement of work or willingness to work.
● History of Universal Basic Income in India:
o The Economic Survey 2016-17 suggested monetizing the existing schemes with universal targeting by providing
a transfer of Rs 7,620 to all citizens.
o SEWA with support from UNICEF has been running cash transfer pilots in rural India.
o The Sikkim government has decided to implement the Universal Basic Income Scheme in India by 2022.
NEED FOR A UNIVERSAL BASIC INCOME

● Safety net against technological disruptions likely from the advent of Artificial Intelligence and associated
technologies.
● Relief from disasters due to Climate Change.
● Poverty alleviation would be substantially boosted due to elimination of leakages and direct agency to the poor and
would enable the fulfillment of Sustainable Development Goals.
● Social Justice due to last mile delivery to hitherto untouched sections of society.
● Better targeting as exclusion errors would be reduced if universal in nature.
● Less leakages due to direct bank transfers and hence improved efficacy.
● Maladies of existing schemes would be eliminated. For instance, the Nature of Fertiliser subsidy incentivises
unscientific and heavy use of Urea.
● Administrative costs of several schemes would be eliminated due to direct bank transfers. E.g. Grain storage costs
due to PDS schemes.
● Freedom to the poor to choose the best way to bring welfare to their families rather than a prescriptive approach of
government subsidies.
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● Social benefits due to improved economic conditions. For instance, 42% drop in crime in Namibia and the 8.5%
reduction in hospitalizations in Dauphin, Manitoba
● Economic Growth due to rise in consumer demands from the erstwhile poor sections.
MAJOR ISSUES INVOLVED

● Financial Model: whether the scheme is to be financed by recycling existing schemes, increasing tax rates or other
monetising endeavour.
● Federal Challenge is also involved on the issue of whether the Centre should bear a full burden or share it with the
states.
● Beneficiaries: Whether it should be extended to all citizens or targeted sections.
o Moral challenge of providing the same quantum of support to the rich as the poor.
o NITI Aayog CEO has proposed limiting it to the bottom 20% of BPL population.
o The Ministry of Women and Child Development has proposed including all women heads of family.
● Amount of Transfer : NITI Aayog CEO suggested a quantum of Rs 1000 per month.
● Moral hazard of paying people for doing nothing and may disincentive going to work.
● Fiscal burden of a viable payoutspay-outs would be tremendous which may lead to heavy debt and inflationary
pressures. Raghuram Rajan, former RBI governor has predicted a potential Rs 7 Lakh crore burden on the public
exchequer for a living wage sized Basic Income Support to the poor.
● Difficult to roll back if unsuccessful due to political pressures.
● Withdrawal of existing schemes (necessary to create fiscal space for the scheme) is untenable and may have drastic
social impacts. For e.g., withdrawal of the Mid-Day meal scheme may reduce attendance in schools.
● No means of ensuring productive use of the amount provided.
● Scalability of Pilot Projects is questionable due to differences of time, place and socio-economic realities.
● Financial Inclusion is needed at near universal scale with a robust ecosystem comprising a poor friendly banking
system, digital payment infrastructure and financial literacy.
● Delivery of services is not guaranteed merely by transferring income to geographical and infrastructural challenges.
● Diversion of resources from productive sectors such as infrastructure is likely due to the heavy financial burden of
the scheme.
ALTERNATIVES TO UNIVERSAL BASIC INCOME

● Qualified Basic Income: restricted to a section of society
● Universal Basic Services: a buffet of essential services promised to every citizen
● Smart Subsidies: targeted only to deserving with minimal inclusion and exclusion errors.
● Employment: Create good jobs in emerging sectors such as the green economy, Artificial Intelligence and sustainable
industries.
Conclusion
Universal Basic Income promises a strong safety net to ensure dignified life for everyone, particularly those affected by
economic uncertainties and technological disruption. Global deliberation and localised pilot projects are necessary to
gauge its viability and efficacy.
Key Terms
Poverty Alleviation, Social Justice, Leakages, Administrative costs, Economic Growth, Qualified Basic Income,
Employment Opportunities,Digital Banks, Jan Dan-Aadhar-Mobile, Banking Outlets, Account Aggregator,
Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance 2016
fold. Do you agree with this for financial inclusion of the poor section of Indian society? Give arguments to
justify your opinion.
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CHAPTER 8 FINANCIAL SECTOR

● Commercial banks, non-banking financial firms, investment funds, money markets, insurance and pension
companies, and real estate are all part of the financial industry.
● The Financial Sector lies at the heart of an economy, allowing for the efficient mobilisation and distribution of
financial resources.
● It works with customers in the business and retail sectors to provide financial services.
FINANCIAL MARKET
● A financial market is a market that brings buyers and sellers together to trade in financial securities or assets such as
stocks, bonds, derivatives, currencies etc.
● The financial market consists of two major segments:
○ Money Market: It is for short-term credit and includes call money, treasury bills, commercial papers etc.
○ Capital Market: It is for long-term credit and includes primary market (IPOs etc.) and secondary market
(equity market, debt market etc.)
IMPORTANCE OF THE FINANCIAL MARKET

● Fuel India’s Growth: Financial market is important to fuel India’s growth through investment in National
Infrastructure Pipeline etc and to make India a $5 trillion economy.
● Reduce Burden on Banks: A strong financial market reduces burden on banks for long-term financing that suffers
from issues such as NPAs.
● Monetary Policy: Financial market helps RBI in implementation of monetary policy with instruments like Open
Market Operations, Long-Term Repo Operations etc.
● Fulfilling Financial Requirements of Government: The financial market helps the government to meet its financial
requirements with instruments like ways and means advance etc.
● Green Growth: The financial market can fulfil the requirement of India’s green growth through green bonds and
other innovative products as India needs around $100 billion per year investment to achieve net zero target by
2070.
● Global Investment: A strong financial market can attract investment from various global investors such as FPIs etc.
that would fulfil the shortage of finance for Indian businesses.
● Retail Investment: A strong financial market can promote retail investment from the small investors and thus
mobilise their savings into a more profitable area both for individuals and the Indian economy.
● Social Development: A well-developed financial market can attract investment towards the social sector through the
social stock exchange and fulfil the financial requirements of NGOs and other organisations working in the social
sector. It also helps the vulnerable sections through Microfinance.
● Women Empowerment: The stock exchange can play a key role in promotion of women’s economic empowerment
in the private sector through addressing gender equality in the listed companies and ensuring enhanced access to
finance for women entrepreneurs.
● Better Allocation of Resources: With the financial market the resources flow from less profitable to more
profitable enterprises and they avail of the greater potential for growth.
● Barometer of Growth: Financial markets such as secondary markets reflect the changing conditions of economic
health of a country as the share prices are highly sensitive to changing economic, social and political conditions.
● Soundness of Companies: Companies that are listed on the stock exchange enjoy a better goodwill and credit-
standing as they are supposed to be financially sound.
● Economisation of Utilisation of Cash: Financial market contains various close substitutes of money other than actual
cash, therefore it economises the usage of cash.
● Finance Urban Governance: India’s urban local bodies can become self-reliant with greater access to financial
markets with instruments like municipal bonds. Municipal revenues/expenditures in India have stagnated at around
1% of GDP for over a decade. In contrast, municipal revenues/expenditures account for 7.4% of GDP in Brazil and
6% of GDP in South Africa.
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ISSUES WITH THE FINANCIAL MARKET

● Technical Nature: The financial market is complex in nature which is not understood by common people easily.
● Fluctuations: The financial market fluctuates according to the policies of developed countries. E.g. pulling out of
1.34 lakh crore by FPIs in 2022.
● Prone to Scams: It is prone to scams due to manipulation, e.g. Harshad Mehta scam etc.
● Risky Nature: The financial market is risky and households in India prefer to invest in safer options like FDs, RDs
etc.
● Unorganised Financial Market: The presence of an unorganised financial market such as money market, which is
outside the purview of regulators. It is an exploitative sector that creates debt traps for borrowers.
● Insider Trading: It refers to buying or selling of a security by a person who can access ‘non-public’ or ‘unpublished
information’ for personal benefit.
● Multiple Interest Rates: There is a lack of mobility of funds from one section of the market to another and because
of this there exists multiple rates in the Indian financial market such as borrowing rates of the government, deposit
and lending rates of commercial banks.
● Shortage of Funds: Usually there is shortage of funds in the financial market with low savings, lack of banking habits
etc.
● Seasonal Nature: There exists wide fluctuations in the interest rates from one season to another in Indian financial
market, e.g. there are high interest rates in money market during busy season, i.e. November to June.
● Credit Rating Agencies: Credit rating agencies presently work on the issue-pay model, wherein an entity to be rated
pays fees to the credit rating agencies. This creates a conflict of interest for these rating agencies.
INITIATIVES FOR REFORMING THE FINANCIAL MARKETS

● Foreign Exchange Management Act, 1999: Government has passed FEMA, 1999 that regulates all financial
transactions concerning foreign securities or exchange.
● SEBI (Prohibition of Insider Trading) Regulations, 2015: The regulations aim to regulate, monitor and report
trading by Designated Employees and other Connected Persons.
● National Bank for Financing Infrastructure and Development: The government has established NaBFID as an
All-India Financial Institution for infrastructure financing.
● Retail Direct: RBI launched Retail Direct scheme as a one-stop solution to facilitate investment in Government
securities by individual investors.
● Tightening of Disclosure Norms: SEBI has mandated enhanced disclosure norms for IPO-bound companies.
Companies would have to disclose KPIs, details of pricing of shares etc.
● Norms on Alternative Investment Funds: SEBI has amended the rules governing AIFs and provided for better
protection of investors with appointment of registered custodian with the SEBI.
● SEBI (Credit Rating Agencies) Regulations, 1999: SEBI has notified regulations for Credit Rating Agencies.
Recently the regulations have been amended to provide for greater transparency and improve the rating process
for Credit Enhancement ratings.
● Shortening of Settlement Cycle: SEBI has allowed T+1 settlement on an optional basis. This can reduce the risk of
pay-in/pay-out defaults, lower margin requirements and give investors more liquidity with the availability of funds
and securities.
● Framework for Social Stock Exchange: SEBI has issued a framework for social stock exchange in the country that
provides for registration of not-for-profit organisations, disclosure requirements etc.
ADDITIONAL REFORMS NEEDED

● TK Viswanathan Committee on Fair Market Conduct: The committee was constituted to recommend measures to
tackle insider trading. It submitted its report in 2018 and recommended:
o Companies to maintain details of immediate relatives of designated persons who might deal with sensitive
information.
o Giving direct power to SEBI to tap telephones and other electronic communication devices.
● Focus on Tier-II and Tier-III Cities: There should be focus on these cities to tap retail investors with appropriate
analytics, including stock performance metrics etc.
● Legal and Regulatory Framework: There should be a legal and regulatory framework that ensures investor
protection by acting as a deterrent against market abuse and malpractices.
● Regulate Unethical Selling: Stringent measures should be taken against companies as well as financial intermediaries
engaged in unfair or unethical buying/selling practices.
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● Reforming Credit Rating Agencies: The working and financing of credit rating agencies should be reformed with
investor-pay model (as against Issuer-pay model), higher transparency standards while issuing ratings etc.
● Carbon Market: For green growth of the economy, there is a need to establish a strong carbon market that can
improve the efficiency of the economy with alternative modes of finance.
● Financial Redressal Agency (FRA): A FRA can be set up to handle consumer complaints so as to take it out of the
ambit of the regulator.
CORPORATE BOND MARKET

● Bonds are contracts for loans that specify the terms of repayment and maturity between an issuer and a holder. These
can be issued at a discount or a premium and have a face value that must be repaid upon maturity.
● A corporate bond is a type of debt security, issued by private and public enterprises and sold to investors. The
investor receives a predetermined rate of interest payments in exchange for offering capital to the company.
● The ability of the company to repay the bond often serves as its security, and this ability is based on its forecasts
for future revenues and profitability. Physical assets of the company can also be utilised as collateral. For instance:
The corporate bonds of blue-chip companies have higher demand as compared to the newly established and loss-
making enterprises.
NEED FOR THE CORPORATE BOND MARKET

● Provides Alternative Source of Finance: A thriving corporate bond market can replace bank loans for long-term
financing. Furthermore, it will facilitate the investment in long-term assets by investors like insurance companies and
pension funds.
● Lower the Cost of Lending: It will bring competitiveness and diverse options for the corporate to raise capital as a
result, the cost of lending gets reduced.
● Ease of Doing Business: Easy access for capital will facilitate fast growth of enterprises and therefore ease of doing
business further gets improved.
● Growth of New-Age Startups: New tech startups need funds for their growth, which can be provided by the corporate
bond market. For Example – Unicorn startups have been raising capital through the bond market.
● Corporate-Led Development: Corporate bond market will reduce burden of investment from the government and
development will be complemented by the corporate as well.
PRESENT STATUS OF CORPORATE BOND MARKET IN INDIA

● The bond market in India stands at around $1.8 trillion, which is further split into $1.2 trillion for government
securities and $0.6 trillion for corporate bonds.
● As per Crisil report, the total corporate bond market in India is expected to double and reach ₹65-70 lakh crore
by 2025.
● Corporate Bond Market as percentage of GDP is highest at 120 in the U.S., while in India, it is only 18% as
against 80% in Korea and 36% in China. Although, the size of the corporate bond market in India lags behind other
Asian nations such as South Korea, Thailand, China and Malaysia etc., it is catching at a faster rate.
BENEFITS OF CORPORATE BOND MARKET

Liquidity in the Market: Can be converted to cash as per the need.
Reduces the cost of Lending: Offers competitive rates of interest to new startups.
High and Fixed Source of Income: Offers predictable income at a predefined interval, reduces the risk of capital losses.
Diversified Options to investors: Availability of various alternative options to raise capital by corporates
CHALLENGES:
● Size of the Corporate Bond in India: The Indian corporate bond market has remained small in size despite a long
history, several committee recommendations and being a country with GDP more than Two Trillion Dollar.
● Regulatory Concerns: Although, the Securities and Exchange Board of India (SEBI) and the government have
taken various steps to develop the corporate bonds market. However, it still remains relatively underdeveloped
compared to bank lending. Governance issues from time to time also retard the growth of the bond market in India.
Such as recent governance issues of Adani group.
● Sovereign Bonds: Bonds issued by the government appear more attractive and hence it causes crowding out of the
private borrowers.
● Financial Illiteracy: This has also impacted the growth of the corporate bond market, as people invest more in
traditional investing tools such as – Shares, government bonds and small savings like PPF etc.
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● Domination by a few large corporations.
STRATEGIES FOR FURTHER DEVELOPMENT

● Further Increase in Participation of Corporates: The increase in participation of corporates in the bond market will
lead to a simultaneous growth of the bond market and further open up more avenues for institutions to participate.
● Regulator Overdrive: A regulatory push to increase the share of public issues could diversify the investor base and
bring more transparency. One of the reasons why the corporate bond market has been thin in India is the dominance
of private placements in the primary market. Less than 2% of the funds are raised through public issues.
● Robust Credit Swap Market: It can also improve trading in lower-rated papers. It will allow insurance companies,
in particular, to participate in the corporate bond market by providing protection against defaults.
● Democratisation of the Bond Market: To fuel the growth of the Indian Economy.
NON-BANKING FINANCIAL COMPANIES (NBFCS)

● A NBFC is a company registered under Companies Act, 1956 (now, Companies Act, 2013), engaged in the business
of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government, leasing, hire-
purchase, insurance business, chit business.
● NBFCs cannot engage in agriculture activity, industrial activity, purchase or sale of any goods (other than
securities) or providing any services and sale/purchase/construction of immovable property.
Difference Between NBFCs and Banks
NBFCs Banks
Cannot accept Demand deposits. Can accept demand deposits.
Do not form a part of the Payment and Settlement Form a part of the Payment and Settlement System.
system.
Cannot issue Cheques drawn on itself. Can issue cheques drawn on itself.
Deposit Insurance facility of Deposit Insurance and Deposit Insurance facility of Deposit Insurance and Credit
Credit Guarantee Corporation is not available to Guarantee Corporation is available to depositors of Banks.
depositors of NBFCs.
IMPORTANCE OF NBFCS
● Macroeconomic Goals: NBFCs through microfinance help attain the objective of macroeconomic policies of
creating greater employment opportunities by promoting individual customers, small and medium scale enterprises
and private industries through loans.
● Financing of Economy: NBFCs play an important role in the financial market, e.g. according to Economic survey
2022-23, the aggregate outstanding credit by NBFCs is Rs. 31.5 lakh crore at the end of September 2022.
● Long-Term Financing: NBFCs extend long-term credits to infrastructure, commerce and trade companies. E.g.
NBFCs constitute around 54% share in infrastructure financing as on December 2022.
● Mobilisation of Resources: NBFCs help in mobilisation of resources from different sources such as retail investors,
high-net worth individuals, institutional investors etc.
● Investment services: NBFCs provide investment services in the economy in the form of portfolio management,
investment advisory and distribution of financial products.
● Financial Inclusion: NBFCs cater to the unbanked and underbanked population of the country and thus promote
financial inclusion in the economy.
● Diverse Products: NBFCs provide different kinds of credit including personal loans, consumer loans, mortgage loans,
auto loans, gold loans etc.
ISSUES ASSOCIATED WITH NBFCS

● Multiple Regulators: There is absence of a single regulator for all the NBFCs in the economy. They are regulated
by RBI, IRDAI, SEBI etc.
● Asset Liability Mismatch: Several NBFCs have borrowed from the short-term market for 3 to 5 years and lent
for long tenures – 10 to 15 years. This has created asset-liability mismatch, e.g. IL&FS crisis.
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● Misalignment with Consumer Needs: In an effort to capture markets, many small NBFCs have expanded into new
geographic locations and diversified their product portfolio but are misaligned with consumer needs.
● After Effect of IL&FS Crisis: Many corporates, mutual funds and insurance companies had invested in short-term
instruments as commercial papers, non-convertible debentures of IL&FS. This has impacted large NBFCs such as
HDFC and Bajaj Finance’s market cap eroded by around Rs. 32,000 crore.
● Ponzi Schemes: Because of poor regulation by state governments over chit funds, NBFCs have engaged in ponzi
schemes, e.g. Popular Finance in Kerala.
STEPS TAKEN BY THE GOVERNMENT TO ADDRESS THE ISSUES ASSOCIATED WITH NBFCS
● Scale-based Regulation: RBI has brought scale-based regulation, in which NBFCs have been classified into four
layers like Top , Upper layer, Middle layer, Base layer based on their size, activity and perceived riskiness
● Lending and Disclosure Guidelines: Recently, RBI tightened NBFC Lending and Disclosure Guidelines with
limiting the exposure on upper layer NBFC to 20% of its capital base etc.
● Special Liquidity Scheme: Government launched a special liquidity scheme for NBFCs/HFCs to address their
liquidity crisis.
● Systemically Important NBFCs: NBFCs having Rs. 500 crore or more assets are classified as Systemically Important
NBFCs (NBFC-SI) because their activities have higher impact on the financial stability of the economy.
● Liquidity Management Framework for NBFCs: NBFCs have to now maintain a liquidity buffer of high-quality
liquid assets to meet short-term obligations so that they can survive any acute liquidity crisis.
● Partial Credit Guarantee Scheme: The scheme provides for a one-time partial credit guarantee to PSBs for purchase
of pooled assets of financially sound NBFCs.
● Ombudsman Scheme for NBFCs: It provides cost-free and expeditious complaint redressal mechanism relating to
deficiency in the services offered by the deposit-taking NBFCs.
● Chit Fund Amendment Act, 2019: The amendment provides for better regulation of chit funds by the state
governments by fixing maximum commission for foreman etc.
Way Forward
● Stronger Bond Market: The bond market should be strengthened in order to provide long-term finance for the
NBFCs.
● Unified Framework for Chit Funds: There should be a unified digital framework for chit funds in order to reduce
frauds such as ponzi schemes.
● Cheaper Micro-Credit: The microfinance institutions should be provided cheaper finance from the refinance
institutions in order to cater to the lower sections of the society.
● Customer Data Acquisition and Management: Technology can be leveraged to accurately capture, analyse and
leverage data about the current and potential customers of NBFCs. This will help them better understand customers
and make better lending decisions.
● Customised Products: NBFCs need to focus on the tailor-made products and customisation of services such as
targeted automated messages, personal access to customers etc.
Key terms
New Age Startups, Ease of Doing Business, Corporate-led Development, National Infrastructure Pipeline, 5 trillion
Dollar Economy, Retail Investment, Green Growth, National Bank for Financing Infrastructure and Development,
Social Stock Exchanges, Asset Monetization Plan, Democratization of Bond Market, Scale Based Regulation.
PYQs Year
1. Investment in infrastructure is essential for more rapid and inclusive economic growth”. Discuss in the 2021
light of India's experience.
2. Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to 2020
be considered while designing a concession agreement between a public entity and a private entity.
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CHAPTER 9 INDIA’S EXTERNAL SECTOR

INTRODUCTION
Export, import, foreign investment, external debt, current account, capital account, balance of payment, and other
economic operations that take place in foreign currency fall within the external sector.
Importance of Export for Indian Economy
● India's goal of reaching a $5 trillion economy by 2024 is inextricably connected to a focus on exports.
● Prior to the LPG reforms, inward-oriented and protectionist policies had a negative impact on the economy,
resulting in lower exports, lower foreign investment, inferior industry competitiveness, and a lower GDP growth
rate overall.
TRENDS IN EXTERNAL SECTOR - OBSERVATIONS OF ECONOMIC SURVEY 2022-23

● Goods: India achieved an all-time high annual merchandise export of US$ 422 billion in FY’22. Significant strides
in exports were registered in drugs and pharmaceuticals, electronic goods and organic and inorganic chemicals sector
in FY '22.
● Services: India’s services export stood at US$ 254.5 billion in FY’22 recording a growth of 23.5 % over FY ‘21'.
India is 7th Largest service exporter in the world.
● The combined value of goods and services exports in April-December 2022 is estimated to be US$ 568.6 billion,
showing a growth of 16% compared to April-December 2021.
● India’s Forex Reserves as of the end December 2022 stood at US$ 562.72 billion, accounting for 9.3 months of
imports.
● Ratio of External Debt to GDP is at a comfortable level of 19.2 per cent as of end-September 2022.
● Record FDI Inflows: India has recorded the highest ever annual FDI inflow of USD 83.57 billion in the Financial
Year 2021-22 as per the Ministry of Commerce and Industry.
EXPORT LED GROWTH MODEL FOR INDIA

● An export-led growth strategy is one where a country seeks economic development by opening itself up to
international trade. India has set for itself the goal of $2 trillion export by 2027. India aims to raise the share of
its exports in global trade to 3% by 2027 and 10% by 2047 from the current 2.1%.
India’s Growth Targets
● An export-led strategy would assist
us in attracting foreign investment,
integrating into global value chains
(GVCs), increasing employment
creation, and therefore maintaining a
virtuous economic cycle.
● By integrating into the global economy, countries like Japan, China, and Vietnam have been able to maintain faster
economic growth.
DIFFICULTIES IN PROMOTING EXPORTS

● Low Market Penetration in High-Income Countries: India's exports shifted disproportionately from traditional
rich-country markets to new destinations, such as Africa.
● Specialisation vs. Diversification: Indian exports are characterised by a high degree of diversification and a low level
of specialisation.
● Protectionism: Rising Protectionist Policies in importing countries.
● Regional Disparities: As 70% of India’s exports are dominated by five states - Maharashtra, Gujarat, Karnataka,
Tamil Nadu, and Telangana.
● Various Factors: Apart from these factors, Higher Logistics Cost, Poor Innovation, Dominance of Dwarf Firms
in MSME Sector and Lack of Market Intelligence hindering the growth of export in India. Various factors such
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as poor infrastructure, complicated land and labour markets have made it difficult for Indian businesses to
compete in global markets.
ROAD AHEAD
● Competitiveness: Improve Trade Competitiveness through improving infrastructure, Reorient SEZs and diversifying
the products basket.
o The Government had launched the Remission of Duties and Taxes on Export Product (RoDTEP) scheme on 1st
Jan 2021 to replace the Merchandise Exports from India Scheme (MEIS).
o The exporters are provided with reimbursement of taxes/duties/levies imposed at the central, state and local level.
● Domestic Market: Protect the domestic Market from the import of cheap foreign goods.
● Policy Stability to Benefit from China+1 Strategy: In the post-Covid world, international corporations want to
diversify their supply chains away from China in order to avoid supply chain disruptions.
● Increase Access to Official Finance: In India, only around 4% of small businesses have access to formal financing.
o Exim Bank plans to raise around $3 billion in 2022-23 (FY23) via overseas bonds to support fresh lending and
refinance a portion of the old debt.
o IndiaXports Initiative to increase MSME exports by 50% in 2022 by using an Info Portal as a knowledge base
for exports by Indian MSMEs on export potential, potential markets etc.
● Global Value Chains (GVCs) Integration: large anchor corporations in key products are invited to establish
operations in India.
● Strengthening India’s Intellectual Property Rights Regime:
o National Intellectual Property Awareness Mission (NIPAM), a flagship program to impart IP awareness and
basic training is being implemented by the Ministry of Commerce and Industry.
India’s Foreign Trade Policy (FTP) 2023

Objective: It is expected to boost exports amid slowing global trade.
Duration: 2023-2028
Vision: To take India's goods and services exports to $2 trillion by 2030.
Highlights: Based on 4 Pillars:
● Incentive to Remission,
● Export promotion through collaboration - Exporters, States, Districts, Indian Missions,
● Ease of doing business, reduction in transaction cost and e-initiatives and
● Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining SCOMET policy.
Key Provisions:
● Process Re-Engineering and Automation: It codifies implementation mechanisms in a paperless, online
environment, building on earlier 'Ease of Doing Business' initiatives.
● Towns of Export Excellence: Four new towns, namely Faridabad, Mirzapur, Moradabad, and Varanasi, have been
designated as Towns of Export Excellence (TEE) in addition to the existing 39 towns.
● Recognition of Exporters: Exporter firms recognized with 'status' based on export performance will now be
partners in capacity-building initiatives on a best-endeavour basis.
● Promoting Export from the Districts: Building partnerships with State governments and taking forward the
Districts as Export Hubs (DEH) initiative to promote exports at the district level and accelerate the development
of a grassroots trade ecosystem.
● Streamlining SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technology) Policy: It
has been made more robust to implement international treaties and agreements entered into by India.
● Facilitating E-Commerce Exports: FTP 2023 outlines the intent and roadmap for establishing e-commerce hubs
and related elements such as payment reconciliation, book-keeping, returns policy, and export entitlements.
● Facilitation under Export Promotion of Capital Goods (EPCG) Scheme: The EPCG Scheme, which allows
import of capital goods at zero Customs duty for export production, is being further rationalised.
● Amnesty Scheme: In line with "Vivaad se Vishwaas" initiative, which sought to settle tax disputes amicably, the
government is introducing a special one-time Amnesty Scheme under the FTP 2023 to address default on Export
Obligations.
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FREE TRADE AGREEMENTS (FTAS)

● A Free Trade Agreement is a pact between two or more nations/groups of nations to reduce barriers to imports
and exports among them.
● It is opposite to trade protectionism or economic isolationism.
● Experts say the government's reassessment of FTAs is a positive step that would assure India's inclusion into the global
economy and provide Atma-Nirbhar Bharat a boost.
NEED FOR FTAS

● Integration with Global Value Chain: Countries such as Japan, South Korea, Singapore etc. have been able to sustain
higher economic growth by integrating with the global economy.
● Shift from consumption-led to investment and export driven model.
● Boost "Make in India" and "Assemble in India": By incorporating "Assemble in India for the World" into
"Make in India," India may increase its export market share to 3.5 percent by 2025 and 6% by 2030.
● Domestic industries would be forced to innovate and adapt as a result of the FTAs.
● FTAs aid in the lowering of tariffs with a specific trading partner in a controlled way, with tariff reductions spaced
out over time.
ISSUES WITH FTAS

● Imports and exports have grown as a result of FTAs. Imports, on the other hand, far outnumber exports.
● In India, the use of FTAs by exporters is extremely low (between 5 and 25 percent).
● FTAs with nations like Japan have resulted in an inverted tariff system, which has harmed domestic industry.
● Apart from the rising trade imbalance, the quality of trade has decreased since FTAs were signed.
ROAD AHEAD
● Existing FTAs should be renegotiated to ensure that India's interests and concerns are effectively addressed.
● Improve access to manufacturing factors to boost trade competitiveness.
● Adopting recommendations of the Baba Kalyani Committee: SEZs should be called 3 E's, which stands for
Employment and Economic Enclaves. The focus should not just be on increasing exports, but also on increasing
employment and the pace of GDP growth.
FOREIGN EXCHANGE/FOREX RESERVES

● Forex is an important component of the Balance of Payment and an essential element in the analysis of an
economy’s external position.
● In News: RBI data showed that the country's foreign exchange reserves currently stand at US$ 588.58 billion in the
month of April 2023, which had reached an all-time high of $645 billion in October 2021.
Facts and Data
● RBI Act, 1934 and the Foreign Exchange Management Act, 1999 set the legal provisions for governing
the foreign exchange reserves.
● Majority of Reserve: As much as 76% of the foreign currency reserves is held in securities like Treasury
bills of foreign countries, mainly the USA, 23 percent is deposited in foreign central banks.
● Gold Reserves: India held 794.64 metric tonnes of gold (including 56.32 metric tonnes of gold
deposits) as of March 2023, with 437.22 metric tonnes being held overseas in safe custody with the Bank
of England and the Bank for International Settlements.
IMPORTANCE AND FUNCTIONS OF FOREX RESERVES

● Cushion against Forex Market Volatility: According to a report by Goldman Sachs, stronger foreign currency
reserves will allow developing market central banks to “buffer their currencies against sharp declines by supplying
dollars to the market” at times of volatility.
● Comfort for RBI: The government is in a comfortable position if there are rising forex reserves and the RBI in
managing India’s external and internal financial issues at a time of major contraction in economic growth.
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● Fulfilling External Obligations: It assists the government in meeting its foreign exchange needs and external debt
obligations.
● Appreciation in Rupee: The rising foreign exchange reserves has helped the rupee to strengthen against the dollar.
● Crisis Management: Rising Forex Reserve serves as a cushion in the event of a Balance of Payment crisis on the
economic front if it is enough to cover the import bill of the country for a year.
● Confidence in the Market: Forex Reserves will provide a level of confidence to markets and investors that a country
can meet its external obligations.
● Keeps Fixed Rate: Countries with a floating exchange rate system use forex reserve to keep the value of their currency
lower than the US Dollar.
● Maintains Liquidity: To maintain liquidity in case of an economic crisis.
● Keeps the Market Steady: The central bank (RBI) supplies foreign currency to keep markets steady.
DEPRECIATION OF RUPEE
● Depreciation of Rupee means the fall in the value of rupees in comparison to the US Dollar. It means that the demand
for Rupee has decreased in the international market.
● Rupee depreciated by around 10% against US dollar and was the worst-performing Asian currency in 2022.
REASONS FOR DEPRECIATION OF RUPEE

● Crude Oil Prices: The crude oil prices have increased in the recent past due to geopolitical reasons such as Russia-
Ukraine war and has impacted Indian rupee negatively as India imports around 85% of its crude oil demand.
● Monetary Policy Tightening: After easing liquidity post COVID-19, the central banks, especially US Federal
Reserves, around the world are going for tight monetary policy which is increasing demand for dollars.
● Capital Outflows: The increasing interest rates in the developed countries has led to outflow of FPIs (Rs. 1.34 lakh
crores in 2022). This increased the supply of rupees.
● Domestic Factors in the Economy: The Indian economy has been suffering from high inflation (above 6% for three
quarters), widening current account deficit due to rising trade deficit.
POSITIVE IMPACT OF RUPEE DEPRECIATION

● Boost to Exports: Theoretically, a weaker rupee gives a boost to India’s exports by making it cheaper for foreign
buyers. This can boost domestic production as well.
● Gain for IT Sector: Indian IT Sector is based on export of services and therefore depreciating rupees has increased
the revenues of the IT sector.
● Boost to Tourism: A depreciating rupee makes travel to India cheaper and therefore has a potential to increase
domestic footfall of tourists.
● Real Estate Sector: Depreciating rupee makes the cost of buying property by foreign investors and NRIs cheaper
especially in the luxury properties.
● Improved Metal Stocks: India is one of the top producers of crude steel in the world with high export-orientation
and depreciating rupees has led to increased revenue for the sector.
● Greater Remittances: Depreciating rupees improves gain for those remitting money to India.
NEGATIVE IMPACT OF RUPEE DEPRECIATION

● Current Account Deficit: Depreciating rupees widens the Current Account Deficit (CAD) for the economy as
India is a net importer. E.g. CAD was 2.2% of the GDP in the last quarter of 2022-23.
● Import Bill: Depreciating rupee increases the import bill for raw materials, fertiliser, equipment or other supplies.
● Higher Inflation: It leads to higher inflation due rise in crude oil prices, edible oil etc. and their multiplier effects.
● Decline in Import Cover: Because of rise in import prices, e.g. India’s import cover is 9.4 months in Feb 2023,
which was over 15 months in September 2021.
● Decline in Forex: Depreciating rupees lead to pressure on the forex reserves of the country, e.g. India’s forex reserves
were $645 billion in October 2021, which has decreased to $588 billion in April 2023.
● Discouraging Foreign Investors: A continuous decline in rupee value discourages foreign investors from making
fresh investment which further depreciates rupees. E.g. pulling out of FPIs.
82
● Expensive Royalties: Businesses that hold franchises of international companies like Jubilant foods (popular brand
Dominos India) have to pay their royalties in US dollars which becomes costlier for them.
● Impact on Middle Class: The high inflation impacts the salaried class by effectively reducing their disposable
income.
SAFEGUARD MECHANISMS
● Import Substitution: There is a need to reduce the import of crude oil with promotion of renewable energy for
Energy Security.
● Managing Depreciation: RBI can manage depreciation of rupees with market intervention such as selling off some
Forex Reserves.
● Boosting Confidence: The confidence of FPIs in the Indian economy should be increased by arresting continuous
slide in exchange rate through inflation control and enhancing the government revenues.
● Internationalisation of Rupees: The Indian rupee can be used for payment settlement with countries like Russia,
UAE etc. to promote demand for the rupee.
● Increasing Indian Equities: Big companies can be encouraged to become part of major global indices such as Morgan
Stanley Capital International which would increase the weight of Indian equities in these indices and compensate for
FPIs outflow.
INTERNATIONALISATION OF RUPEE
In News: The government through Foreign Trade Policy, 2023 has aimed to push towards internationalising rupees in
foreign trades.
MEANING OF INTERNATIONALISATION OF RUPEE

● It is a process in which there is increasing use of the Indian rupee for cross-border transactions.
● It involves promotion of rupee in trade for import and export and then in current and capital account transactions
through following activities:
o Increased use for invoicing and settlement of cross-border transactions
o Freedom for non-residents to hold financial assets/liabilities in rupee
o Freedom for non-residents to tradable balances in rupee at offshore locations.
BENEFITS OF INTERNATIONALISATION OF RUPEE

● Reduced Forex Requirements: It will reduce forex requirement for balance of payment stability due to reduced
dependence on foreign currency for trade and also reduce the imposed cost of forex on the economy by Interest Rate
Differential.
● Reduced Vulnerability: It will also reduce vulnerability of the economy to external shocks.
● India’s Global Stature: It will increase India’s global stature and respect something akin to China’s global stature
with internationalisation of Renminbi post-2008 recession.
● Boost to Trade and Investment: It can promote trade and investment by easing foreign trade and increased capital
flows.
● Lower Transaction Costs: It can reduce the need for currency conversion, thereby lowering the transaction costs for
businesses and individuals in international trade.
● Competitive Exports: Lower transaction costs make India more attractive for foreign investors to do business in India
thereby increasing the competitiveness of India’s exports.
● Quicker Settlement Time: Internationalisation of rupee can facilitate faster and more efficient settlement times for
international transactions.
● Mitigate Currency Risks: It eliminates the foreign exchange fluctuations for Indian enterprises.
● Diversification of Reserves: Internationalisation would diversify India’s forex reserves away from US dollars and
reduce risks associated with holding a single currency.
83
● Trade with Sanctioned Countries: It would ease trade (especially oil trade) with sanctioned countries such as Iran,
Russia and Venezuela and also African countries that do not have sufficient forex reserves in foreign currencies.
CHALLENGES ASSOCIATED WITH INTERNATIONALISATION OF RUPEE

● Capital Control Measures: India does not allow complete capital account convertibility, which makes it difficult for
rupees to be used widely in the international market.
● Regulatory Challenges: Internationalisation requires a supportive regulatory environment balancing free capital
movement, exchange rate stability, independent monetary policy and regulatory oversight, which is difficult to achieve
in complex global financial markets.
● Exchange Rate Volatility: The rupee has a history of volatility which makes it unattractive to be used as an
international currency.
● Lower Demand of Indian Products: There is lower demand of Indian products which makes it unattractive for other
nations. E.g. slower progress in India-Russia talks on trade through rupees.
● Monetary Policy: Internationalisation of rupees would limit the effectiveness of the RBI in managing the monetary
policy in the economy.
● Limited Liquidity: The rupee is still not widely traded in global markets which makes it difficult for investors to buy
and sell rupee-denominated assets and limits its attractiveness.
● Underdeveloped Financial Markets: India’s financial market is still developing with a limited range of products and
services available for international investors.
● Geopolitical Factors: Geopolitical factors such as political instability, wars, sanctions etc. can have significant impact
on internationalisation of rupees.
● Increased Responsibility: With internationalisation there would be an increased burden on India to play the role of
‘Lender of Last Resort’ in order to maintain international financial and monetary system order.
● Limited Acceptance with Neighbours: India’s trade with the neighbouring countries is also conducted in US dollars,
e.g., out of around $13 billion imported by Bangladesh from India, only $2 billion is settled in rupees.
MEASURES UNDERTAKEN TO PROMOTE INTERNATIONALISATION OF RUPEE

● Foreign Exchange Management Act, 1999: It replaced Foreign Exchange Regulation Act, 1973 which has shifted
the approach towards management of foreign exchange and helped in growth of India’s exports and capital flows.
● Liberalisation of Capital Account: RBI has progressively relaxed the restrictions on capital flows to and from India,
enabling greater cross-border investment and trade.
● Offshore Rupee Markets: RBI has allowed Indian banks to participate in the offshore non-deliverable market for
rupee derivatives, which has facilitated the development of offshore rupee markets.
● Currency Swap Agreements: RBI has signed around 23 currency swap agreements since 2018 with countries
including UAE, Japan etc in a bid to allow exchange of rupee and foreign currency and promote internationalisation
of rupees.
● Rupee-Denominated Bonds: The government has allowed Indian companies to issue rupee-denominated bonds, i.e.
Masala bonds in international markets to increase demand for the rupee.
● Bilateral Trade Agreements: The government has signed several bilateral trade agreements with other countries (e.g.
Malaysia) to facilitate greater cross-border trade and investment.
● Special Rupee Vostro Account System: During the India-Russia Business Dialogue, discussions were held for
International Trade Settlement in Indian Rupees through the Special Rupee Vostro Account System.
o A Vostro Account is a bank account held by a domestic bank for a foreign bank, denominated in the domestic
currency of the former. The Rupee Vostro Account specifically holds the foreign entity's deposits in Indian rupees
at the Indian bank.
o This type of banking is an essential part of correspondent banking, which involves a bank or an intermediary
carrying out wire transfers, business transactions, depositing funds, and collecting documents on behalf of another
bank.
o It enables domestic banks to access foreign financial markets and serve international clients without having to
establish a physical presence abroad.
84
OTHER REFORMS NEEDED TO PROMOTE INTERNATIONALISATION OF RUPEE
Key Terms
5 Trillion Dollar Economy, Protectionist Policies, Export-Led Growth, Global Value Chains, Virtuous Economic
Cycle, Diversification of Exports, China+1 Strategy, Foreign Financial Markets, Import Substitution, Atma-Nirbhar
Bharat, Export Excellence
PYQs Year
1. How would the recent phenomena of protectionism and currency manipulations in world trade affect 2018
macroeconomic stability of India?
2. Justify the need for FDI for the development of the Indian economy. Why is there a gap between MoUs 2016
signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India.
3. There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial 2015
development, manufacturing and exports. Recognising this potential, the whole instrumentality of
SEZs require augmentation. Discuss the issues plaguing the success of SEZs with respect to taxation,
governing laws and administration.
4. Craze for gold in Indians has led to a surge in import of gold in recent years and put pressure on balance 2015
of payments and external value of rupee. In view of this, examine the merits of the Gold Monetization
Scheme.
5. Foreign Direct Investment (FDI) in the defence sector is now set to be liberalized. What influence is 2014
this expected to have on Indian defence and economy in the short and long run?
6. (a) Discuss the impact of FDI entry into the Multi-trade retail sector on supply chain management in 2013
commodity trade patterns of the economy.
(b) Though India allowed Foreign Direct Investment (FDI) in what is called multi-brand retail through
the joint venture route in September 2012, the FDI, even after a year, has not picked up. Discuss the
reasons.
85

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PRAHAAR ReDEFINED 3.

CHAPTER 6 MONETARY POLICY AND TARGETING OF INFLATION ........................................................... 54

FEATURES OF INDIAN ECONOMY

INDIAN ECONOMY - GENERAL ISSUES

SLOWDOWN IN INDIAN ECONOMY

REASONS FOR SLOWDOWN

STEPS NEEDED TO BUILD A RESILIENT ECONOMY

IMPACT OF COVID-19 ON INDIAN ECONOMY

V-SHAPED ECONOMIC RECOVERY

CHAPTER 2 GROWTH & DEVELOPMENT

Economic Growth Economic Development

HOW ECONOMIC GROWTH LEADS TO ECONOMIC DEVELOPMENT?

DIMENSIONS OF GROWTH AND DEVELOPMENT

IMPORTANCE OF ECONOMIC GROWTH

LIMITATIONS OF ECONOMIC GROWTH

MEASUREMENT AND INDI CATORS OF ECONOMIC G ROWTH AND DEVELOPMENT:

The Difference Between GDP and GVA:

GDP CALCULATION IN INDIA

ALTERNATIVES TO GDP CALCULATION:

ELEMENTS OF INCLUSIVE GROWTH:

NEED FOR INCLUSIVE GROWTH IN INDIA:

MEASURE TAKEN TO ENSURE INCLUSIVE GROWTH:

SCHEMES TO ENSURE INCLUSIVE GROWTH:

CHALLENGES IN ACHIEVING INCLUSIVE GROWTH:

ENVIRONMENT AND DEVELOPMENT LINKAGE:

EVOLUTION OF THE IDE A OF PLANNING IN IND IA:

THE GOALS OF THE FIVE YEAR PLANS

ACHIEVEMENTS OF PLANNING IN INDIA

FAILURES AND SHORTCOMINGS OF INDIAN PLAN NING

Nature of the Indian Economy

Nature of Economy before 1991:

Nature of Economy after 1991

THE NEW ECONOMIC POLICY OF 1991

POSITIVE OUTCOMES OF THE LPG REFORMS

ISSUES RELATED TO LPG REFORMS

KEY FUNCTIONS OF NITI AAYOG

NITI AAYOG VS PLANNING COMMISSION

Parameters NITI Aayog Planning Commission

CRITICISMS OF NITI AAYOG

CHAPTER 4 BUDGET AND MOBILISATION OF

NEED OF GOVERNMENT BUDGETING

COMPONENTS OF THE BUDGET

GOVERNMENT DEFICIT AND ITS MEASUREMENT

Primary Deficit = Fiscal Deficit – Interest Payment

Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipt

ERD = Revenue Deficit – Grants for Creation of Capital Assets (GoCA)

IMPORTANCE OF FISCAL POLICY IN INDIA

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT, 2003

RECENT AMENDMENTS TO THE ACT:

N.K. SINGH COMMITTEE:

DIFFERENT TYPES OF B UDGETS

MOBILISATION OF RESO URCES

INSTRUMENTS OF FINANCIAL RESOURCE MOBILIZATION

ROLE OF FISCAL POLICY IN RESOURCE MOBILIZATION

ISSUES AND CHALLENGES IN MOBILISING RESOURCES:

STEPS TAKEN FOR EFFECTIVE UTILISATION OF RESOURCES

RECOMMENDATIONS FOR EFFECTIVE UTILISATION OF RESOURCES

REASONS FOR DISINVESTMENT OF INDIAN PSUS:

Provisions of Budget 2023-24

● Budget 2023-2024 has adopted the Saptarishi priorities to

Previous Year Questions Year

CLASSIFICATION OF TAXES BASED ON NATURE

CLASSIFICATION OF TAXES BASED ON INCIDENCE

TAXATION SCENARIO IN INDIA