Economics For Mains

DIGITAL PAYMENT / CASHLESS ECONOMY

 DIGITAL PAYMENT : use of electronic methods conducting financial transactions without using physical
currency, such as NEFT/RTGS/IMPS, UPI, Mobile Wallets, etc.
 CASHLESS ECONOMY : economic system where majority of transactions conducted through digital
payment methods instead of physical cash.
 The Indian economy come a long way from barter system and terracotta seals in ancient India to metallic
coins in medieval India, to currency notes and token coins after independence, to electronic transactions
in present decade, while RBI is gearing up for issuing Digital Rupee.
 NPCi : 10 billion transactions worth ₹15 trillion carried out through UPI in May 2023 alone. shows reduced influence
of cash in Indian economy.

Digital Payment: Charms & Challenges For Each Stakeholder

Stakeholder CHARMS CHALLENGES

Reserve Bank ⇒ Saves cost of printing new currency
Of India (Rs.27 billion a year)
⇒ Better efficacy of monetary policy
updates, NPA/fraud surveillance.
Govt - Better tax surveillance, checks on fake
counterfeit currency terror finance
- MDR, Interoperability, Financial Scams. - Know
your customer (KYC): Aadhar vs privacy debate
- Power, telecom infra not available everywhere.
- Government itself must become a role model
 - targeted delivery of agri-loans and first in handling tax, tender, tolls, procurements
subsidies/ DBT: Annually ₹ 1 lakh crore through digital payment
can saved incorruption/leakage. - Can - To encourage digital payment if subsidy, tax
save farmers from moneylenders, and breaks, lotteries given for perpetual time → fiscal
poor families from Ponzi schemes. deficit
- Post-Demonetization, digital transactions ↑ but
then again ↓ so, punitive measures.
Household Secure, difficult to steal, time - Digital divide, Low financial literacy
compared to cash-wallet, convenience - Cyberfrauds, Card cloning, service fees on card
subscription.
Businessman ⇒ Easy to maintain account books & ⇒ Reduced scope for tax evasion, discourage
calculate taxes etc. some unscrupulous businessman from going
⇒ Reduce scope for employee from 100% cashless.
stealing money from cash-counter. ⇒ Increased vulnerability to cyberfrauds.
⇒ More convenient for the customer in ⇒ Not suitable for village merchants. If there is
paying money = customer delight. problem in electricity and internet.
⇒ Need to spend more money in
internet/devices/anti-virus software etc.
⇒ MDR reducing profit margin.
Govt Measures To Promote Cashless Economy :
1. Govt had set up committees- Ratan Watal, Chandrababu Naidu etc. & implemented their reports.
2. Education ministry, NITI , MEITY launched awareness programmes on UPI/BHIM/Digital Payments etc.
3. Direct Benefit Transfer (DBT) in various schemes / payments.
4. NIC created portal to facilities Digital payments in competitive exam fees, Railway booking, RTI application
fees, passport fees; online contribution to NPS/EPFO, premium payment for Fasal Bima Yojana, various
Insurance pension schemes of government etc.
5. Budget 2022: RBI to launch Central Bank Digital Currency (CBDC)
6. Has started E-rupi digital voucher/coupons with help of NPCi.
7. Providing Merchant Discount Rate (MDR) subsidy on low value transactions done through UPI/Rupay
Debit cards.
8. Fastag system for online payment of toll on highways.

RBI measures to promote cashless economy:

1. 2019: Set up Nandan Nilekani committee and implemented its majority of its recommendations.
2. NEFT/RTGS available 24/7 @ ₹0 fees.
3. Imposed limits on merchant discount rate (MDR) charged by card companies.
4. setup Digital payment ombudsman.
5. 2021: RBI-Digital Payments Index to capture extent of digitisation of payments across country
6. Conducting experiments on central bank digital currency
7. Card Tokenisation system to decrease card frauds.conducting research on how to use Blockchain
technology in digital payment .
8. RBI’s Harbinger Hackathon competition for innovation in digital payment.
NPCi measures to promote cashless economy:

Cashless Economy : Challenges:

Access Points - lack of
RBI Financial inclusion index score is 56 (2022). So, RBI still has miles to go to improve access to
banking/loan/digital payments to villagers/remote areas.
While government transfers money thru DBT. But sometimes merchants in rural areas don’t accept digital
payments due to lack of electricity / internet, to hide black money/ avoid paying taxes / MDR.
Cyber frauds
Last Three Years Card/Internet Banking Frauds Increased From ₹120 Cr (2020) To Over ₹275cr (2022)- As Per RBI
Annual Report.
still a lack of digital awareness among older generation, and they often fall prey to cyber scammers.
Interoperability - lack of
Don’t Have Full Interoperability. Can’t Transfer Amazonpay Balance To Mobikwik Account. Etc.
WAY FORWARD:
1. Give companies and merchants more tax incentives for using digital payments.
2. Reduction in taxes on devices required for digital payments.
3. Setup Computer Emergency Response Team for finance (FIN- CERT).
4. Need to create and promote more companies like NPCi to foster innovation.
5. Improve connectivity to internet and electricity in remote areas.
6. Disaster preparedness / nuclear attack etc.
Conclusion: Less-Cash economy instead of Cashless economy
Digital payment is not a panacea, nor is cash all bad. For a developing country like India, “Less cash”
economy better than “Cashless” economy.

E-RUPI VOUCHER CODE INSTEAD OF DBT

E-rupi is an SMS /QR Code based Prepaid Cashless Electronic Voucher created by National Payment Corporation of India
(NPCI) using its UPI Platform. supported by finance ministries Department of Financial Services and Health ministry’s
National Health Authority (NHA).
E-RUPI Offers A Simple And Practical Way For Beneficiaries To Access Government Services.

1. Without a card, without installing a digital payment app, and even without having a bank account, you may use the
e-RUPI coupon.
2. The pre-allocated amount will be connected to the QR codes or SMS vouchers, which can only be used once by the
person in whose name they were issued.
3. Importantly, the beneficiary must first use the appropriate service or services before the payment may be finalized.
4. Even the private sector can leverage these digital vouchers as part of their employee welfare and Corporate Social
Responsibility (CSR) programs.

Services That e-RUPI Covers

 Fertilizer Subsidies.
 Nutritional assistance is provided through the Child and Mother Welfare Scheme.
 Programs for TB eradication.
 Ayushman Bharat Pradhan Mantri Jan Arogya Yojana Schemes for Diagnostics and Drugs.

How is e-RUPI Different From UPI?

1. Difference between two is that UPI transactions fully guaranteed by real money, whereas digital rupee is kind of
legal cash that is not backed by real money.
2. Bank intermediation is a part of every UPI transaction. Your bank account gets debited when you use UPI app, and
money is then transferred to recipient’s bank.
3. When using paper money, you may take out a set amount from the bank, save it in your wallet, and use it anyplace
without the bank knowing.
4. The digital money will be withheld in e-RUPI similarly, and you will store it in your mobile wallet.
5. The funds travel from your digital wallet to the recipient’s when you send a transfer to an organization or another
person. There is no intermediation by banks or routing.

Benefits of e-RUPI:

1. E-RUPI Transfer Does Not Need Use Of Money, Credit Or Debit Cards, Online Banking, Or Mobile App For
Making Payments.
2. Transfer Is Person- And Purpose-Specific. Unusual To Worry About Benefits Being Stolen.
3. Queues, Middlemen, And Touts Are Avoided.Intended Beneficiary Will Mostly Continue To Be In Control
Because An OTP Will Be Required To Advance With E-RUPI Payment At Moment Of Use.
4. Security Encryption Is Better Since Beneficiary Is Not Needed To Submit Any Personal Information.
5. Great Chance For Small Enterprises To Gain Directly From Different Government Programs.
6. Guarantee Public Services Are Delivered To Lists-Mile Customers Effectively, Openly, And Without Leakage.
7. E-RUPI System Is User-Friendly Addition To Being Secure.
Benefits for End-users
1. Contactless – Beneficiary need not carry a printout of the e-voucher.
2. Easy redemption – It is a 2-step redemption process.
3. Safe and Secure – Beneficiaries do not need to share personal details and hence their privacy is maintained.
4. Only mobile phone and e-voucher required – Users redeeming voucher need not have digital payment app or bank
account.
E-Rupi: potential applications in Future: Conclusion: Appreciable step by government to deliver
entitlements to poor families in targeted and leakproof manner. This will help in a long way in increasing
accountability, transparency and efficacy of Direct benefit transfer (DBT) programs .
MONEY THE ROOT CAUSE OF EVIL
Money is the unit measure of value in financial transactions. It is used as a medium of exchange during
buying and selling of goods and services.
 Instances where money appears to be the evil: Profiteering, Corruption, Ransom, Kidnapping, Poaching
etc.
 Counter-arguments: jealousy, lust, hatred can make a person commit evil deeds, even without monetary
greed. E.g. Hollywood film producer Harvey Weinstein whose sexual assaults resulted in #metoo
movement.
Even when money was not invented, still evil existed. E.g. 1) Barter system: Kings & nobles exploited peasants.
2) Slavery & Human Sacrifices in Aztec civilization (1300 to 1521 Mexico) .East India Company enslaved India
NOT FOR Money but GREED of resources.
BENEFITS OF MONEY
1. Barter System has the limitation of double coincidence of wants. Money overcomes it.
2. Promotes division of labour and entrepreneurship (through loans, banking Finance, IPO system).
SC/ST/Women entrepreneurs progress in life e.g. 2021: Falguni Nayar became India's richest self-made
female billionaire after IPO of her online cosmetics/fashion site Nykaa.
3. Money: Savings → Investors → Startup eco-system. Innovation, competition, better services.
Conclusion: Thus, money is not the root of all evil. Greed is probably the root of most evil. As
Gandhi-ji rightly stated, "Earth provides enough to satisfy every man's need, but not every
man's greed."
MONETARY POLICY
MONPOL’S ROLE IN HUMAN DEVELOPMENT: Human development is the multidimensional process of improving an
individual’s access to health, education and standard of living.
India ranked 132 out of 190+ nations in the Human Development Index (HDI) of United Nations Development
Programme (UNDP), published in 2022.
A good monetary policy can help improving the HDI in following manner:
1. Uncontrolled inflation harms poor families most.Therefore, RBI controlling inflation within 2-6% CPI Range is
required for nutrition and human development.
2. CRR-SLR to boost depositors’ confidence/ prevent bank run. helps poor families to save their money in banks.
Financial savings / financial inclusion is an important tool for poverty upliftment
3. PSL ( priority sector lending) norms provide easier access to loans for SC/ST/Women/Weaker section, small marginal
farmers, MSME, education loans, home loans etc- all play an important role in HDI improvement
4. MSME contribute over 40% exports, and many of them owned by SC/ST/OBC/Women. Cheap and affordable loans
to MSME has direct bearing to HDI
5. RBI transfers priority sector shortfall money to various funds for rural and urban development- which in turn helps in
human development.
Post-Corona Atma Nirbhar Bharat initiative – RBI did following: -
1. RBI opened special loan windows to help micro and small industries, unorganised sectors and healthcare industry.
2. RBI tweaked loan to value ratio. This helped lower middle-class and poor people in gold loans.
MonPol to human dev: not Panacea:
 ⇒ Cheap loan alone cannot improve entrepreneurship, If person does not have good health, education
and skill.
⇒ PSL quota alone cannot improve farmer’s life, if there are variety of challenges at APCM / supply chain
management preventing him from getting right value for his farm produce.
⇒ PSL quota women loans alone can’t improve gender development, without women safety, labour force
participation and political empowerment.
⇒ Atrocities against minorities/SC/ST deter them from pursuing their lifegoals.
⇒ Scams in PMC and other cooperative banks where poor people lost money and RBI couldn’t do much,
due to dual-supervision model on coop banks
⇒ if there are not adequate infrastructure facilities and ease of doing biz. Etc.
RBI does not have direct control over most of the aforementioned issues. Much depends on the actions of the
government.
Conclusion: Thus, Monetary policy plays an important role in price stability, economic growth, job
creation and social justice in any economy. But, its efficacy is low for Indian economy, because of the
aforementioned issues.
REAL MONITORY POLICY : GDP POST CORONA = HIT/FLOP?
2020-March: GOI initiated nationwide lockdown to prevent spread of Corona/COVID-19 pandemic.
lockdown affected income and livelihood of everyone from corporate companies to common citizens of
India. Therefore, to revive economy, PM launched Atma Nirbhar Bharat stimulus package in 2020-May.
Part of Atma Nirbhar, RBI initiated following for boosting GDP / economic growth:
1. During lockdown,demand come to a standstill. So to revive demand, RBI increased money supply and
decreased loan interest rates. So, RBI initiated following measures in 2020-21:
2. Reduced Cash Reserve Ratio (CRR) from 4% to 3%
3. Reduced repo rate from over 5% to 4%.
4. Opened new loan windows for clients namely LTRO,TLTRO, On-Tap Liquidity Windows for healthcare,
Contact-Intensive Sectors such as Hotels, Restaurants, Tour Operators etc.
5. Loaned large amount of money to All India Financial Institutions (AIFI) i.e., NABARD, NHB, SIDBI, etc.
6. Made certain changes in reverse repo rate,to discourage bankers from parking excess funds in RBI.
7. Changed loan to value ratio from 75% to 90% to help gold loan borrowers.
8. Loan/ EMI/ NPA relief / Moratorium.
Looking at above data, RBI has done satisfactory work in boosting the GDP growth and ensuring a V-shaped
recovery after Corona
REAL MONITORY POLICY:INFLATION CONTROL POST CORONA – HIT / FLOP?
To Combat inflation, central bank need to reduce money supply and increase loan interest rates. RBI has taken following
steps in this regard during 2021 to 23, when inflation tried to climbed out of statutory-limit of 2-6% CPI.
⇒ Increased CRR from 3% (2020) to 4.5% (2022)
⇒ Increased Repo Rate from 4% (2020) to 6.50% (2023-Feb).
⇒ Reduced / Halted the Open market operation → G-SAP program to purchase from secondary market.
⇒ 2022: Introduced standing deposit facility (SDF)- where Clients park/deposit their extra money in RBI. RBI pays them
interest. RBI doesn’t give any collateral (unlike in REVERSE REPO). RBI can suck extra money supply via SDF window to
combat inflation.
RBI inflation control- Evaluation hit/flop?
After RBI Act amendment in 2016, RBI is legally required to control inflation within 2-6% CPI (All India). If RBI
fails to inflation control in this range for three consecutive quarters, i.e. nine straight months - then legally it is
termed as failure under RBI Act.
From 2022 January to Sept, inflation has stayed above 6%. So, RBI has failed its legal mandate. However, the
blame does not lie entirely with RBI
Corona lockdown = supply chain disruption = inflation was rising, in such situation, making a loan is expensive,
will not fix the problem but rather aggravate the problem of economic slowdown.
Because, To combat inflation, if RBI suddenly hikes loan interest rates, it could result in hardlanding of the GDP
growth.
Even developed countries such as USA, UK, struggling to keep inflation under control. India’s rate of inflation is
lower than these nations.
Furthermore, Since 2022,
(i) Russia Ukraine war has hardened commodity, fertiliser, oil prices in global market.
(ii) USA Fed Tapering has weakened Indian rupee from ₹70 (2020) to ₹82 (2023-June) i.e . 17% change.
Resulted In Problem Of ‘Imported Inflation’
Conclusion: RBI Post Corona Hit/Flop? don’t judge harshly
Despite all these challenge RBI managed to keep Indian economy immune from types of economic problems
witnessed in Sri Lanka, Pakistan, UK, China, or USA after Corona.
FINANCIAL INTERMEDIARIES- ORIGIN, CLASSIFICATION

RBI AS A FINANCIAL REGULATOR- AN EVALUATION

RBI established under RBI Act of 1934 ,headquarters at Mumbai.
(Function) RBI -regulator of banks, All India Financial Institutions (AIFI) such NABARD, SIDBI etc; selected categories of
NBFCs (gold loan, microfinance etc.) and payment service providers (card gateway, foreign remittance, Mobile wallets
etc)
DATA: Financial Frauds in India: Source: RBI annual report 2022–23.

1. Total Banking Sector Frauds Significantly Decreased,Shows RBI Is Conducting Its Work In A Professional And
Strict Manner.
2. Majority Of Frauds Related To Loans.
3. Every Year Public Sector Banks Account For Majority Of Frauds - Pointing To Some Type Of Political
Pressure/Nexus, Some Type Of Nexus With The Businessman), Not Enough Technology / Specialised Officers To
Combat Cybercrimes.
4. Amount Of Card/Internet Frauds Increased- Hinting To More Digitisation Of Economy But Banks’ Cyber Security,
Public Awareness Against Cybercrime Is Not Keeping Up With Speed Of Digitisation.
RBI’s Role +ve
Controller Of ⇒ has managed to control inflation in statutory limit
Money Supply of 2–6% for majority of years since 2016.
and Inflation ⇒ Conducting experiments on CBDC/Blockchain.
⇒ New tools / innovations like Op.Twist & SDF when
traditional tools of monpol became less effective.
Controller of ⇒ has built adequate forex reserve to prevent any
Foreign BoP crisis. ($600 bn)
Exchange ⇒ unlike Pakistan or Sri Lanka. we have not seen
another balance of payment crisis after 1991- proving
RBI conducting work professionally.
Banker To managed to reduce the cost of borrowing for
Govt government through operation twist
Banker’s Bank Opened many new loan windows during Corona to
help bankers e.g. TLTRO, SLTRO. Provided new
investment opportunity through SDF window.
Regulator of ⇒ India has never witnessed complete failure of the
Banks banking system unlike in USA’s (i) Silicon Valley bank
crisis (2023)
⇒ RBI launched Utkarsh-2022 roadmap to improve its
adminprocess, Daksha-web system for online
surveillance.
Regulator of similar to above cell
Some NBFCs
AIFI (NABARD Opened new loan/refinance windows in Corona. RBI
SIDBI Etc) transfer PSL Shortfall money to them.
Financial ⇒ PSL norms, Initiatives with the help of NPCi (e.g.
Inclusion 123Pay on Basic phones),
⇒ Note-identification App for blind people,
⇒ providing PSL-shortfall funding to MUDRA,
NABARD etc.
Consumer ⇒ Has ombudsman for banks, NBFCs and digital
Protection payments.
⇒ Card Tokenization
⇒ Positive Pay mechanism against check frauds
International Has complied with agreements at BASEL/BIS, IMF,
Cooperation G20’s Financial Stability Board etc.
RBI power over the PSBs - some limitations:
RBI bank regulates banks using power of Banking Regulation Act, 1949. However, certain provisions of BR Act not
applicable on nationalised banks.
prevents RBI Governor from directly removing the MD / Board Members of PSBs, or force their mergers or cancelling
PSB license.
After the PNB -Nirav Modi scam, the then RBI Governor Urjit Patel complained about this weakness/ legal loophole.
⇒ However, critics argue that it does not matter where formal power resides. Much depends on the moral authority
/ moral suasion power of the Governor. ⇒ e.g. many years ago an RBI governor told the government that certain corrupt
-ve/challenges
⇒ struggling to control inflation below 6%,
due to Corona supplyside issues, Russia
Ukraine crisis etc since 2021–22.
⇒ China over 3 trillion forex reserve. ⇒
currency exchange became volatile in last two
years. Dollar strengthened from ₹70(2020) →
₹82(2023-June)
Demands for separate Public Debt
management Authority to avoid conflict of
interest in RBI’s role as banking regulator.
Failed to prevent NPA/Bad Loans, PMC Bank
scam, PNB-Nirav Modi, ICICI Videocon, etc.
mismanagement in RRB and Coop banks.
⇒ some of the payment banks had to shut
down/cancel license/facing problems = RBI
allowed them without foresight.
⇒ DHFL Home loan scam, ILFS.
⇒ 2010’s micro-finance crisis in Southern
States.
⇒ Heavy handed tactics by loan companies
If NABARD, NHB, etc., have not lived up to
their highest potential, then responsibility
belongs more to the ownership/leadership of
Govt.
⇒ RBI Financial inclusion index score is 56
(2022; 100 means complete financial
inclusion.), so, RBI still has miles to go to
improve access to banking/loan/digital
payments to villagers/remote areas.
⇒ Bank loan scams, Unauthorised loan apps,
cyberfrauds, Bitcoin scams, malpractices of
loan giving NBFC Companies, informal
moneylenders… More needs to be done
NOTHING
PSB MD should be removed, then government -as the owner of the PSB - removed that MD. ⇒ RBI governor can also
write to the Central vigilance Commissioner (CVC) to initiate inquiry.
some of the limitations also need to be fixed at the level of government such as –

WAY FORWARD
 Need for more manpower and technology for supervision.
 RBI delivers an average ₹50-80,000 crore dividend annually to govt. So RBI does not have shortage of money.
RBI shld invest more in technology upgradation and manpower recruitment and training, especially Specialist
officers, to address above issues.
RBI as regulator: conclusion / way forward
Thus, overall, RBI conducting its mandates in efficient and professional manner. ⇒ However, there is scope for
improvement, especially in NPA, cyberfraud prevention, and financial inclusion. ⇒ Lastly, some of lacunas of RBI also
need to be fixed via legislative reforms, e.g., more clarity over regulation of cooperative banks and PSBs and
administrative reforms in PSBs.

CONSTITUTIONAL STATUS TO RBI

Presently RBI is a statutory corporation setup under RBI Act 1934, with powers to regulate Banks, some NBFC,
AIFI and digital payment system providers.
Arguments in favour
⇒ Currently, RBI central board has power to remove governor and govt has 100% ownership of central board.
⇒ Section 7 of RBI Act allows govt to instruct RBI governor in public interest. However, sometimes interests of
govt do not align with priorities of governor, resulting in fallout such as resignation of Urjit Patel in 2018.
⇒ Currently, RBI does not have full control to regulate public sector banks or remove their MD
⇒ RBI does not have full authority over certain types of cooperative banks, and Shadow-banks like ILFS.
⇒ constitutional status will empower RBI governor to overcome above challenges.
Argument against
⇒No precedence in any mature economy / democracy to grant constitutional status to central bank.
⇒Inflation control, GDP growth, exchange rate stability, financial scam control require dynamic / rapid
changes required. But, after granting constitutional status = operational flexibility decreases. Because to
change anything, constitutional amendment may be required.
⇒ RBI Act, FRBM Act enough provisions to prevent any grave mischief by Govt in public debt management.
⇒ Scams happened because of legal loopholes, tech loopholes, human mischief.
⇒ Constitutional status is merited / required when basic structure need to be protected e.g. Democratic
election (ECI), Fiscal federalism (Finance commission, GST council) etc.
⇒ Whereas, work is done by RBI is important, but not essential to protect basic structure of constitution.
⇒ Yes, RBI has been facing challenges to control bad loans, crypto currencies, cooperative banking schemes
etc. But they can be fixed easily through amending suitable laws, instead of giving constitutional status.
Conclusion
Thus, after evaluating arguments in favour and against, there is no need for giving constitutional status to RBI.
SARKAARI BANKS - A PERFORMANCE REVIEW
Sarkaari banks: +ve impact
+ve -ve
• After nationalisation,number of Bank branches in • 2022: 70% of ₹30,000 cr bank frauds happened in PSBs
India, amount of loan given to farmers and alone.
villagers= has increased. • Compared to private sector banks, public sector banks
•helped in agriculture production and poverty have higher NPAs and lower profitability.
removal in rural areas. • Global top-100 banks: China (18 banks), USA (12
• PSBs account for 70% of banking business in Banks), Japan > France > …..India (only 2 bank: HDFC and
India. SBI). given India’s size of economy (in terms of GDP),
• SBI is among the top 100 banks of the world. India should have 6–8 banks in the global top 100.
Sarkaari Banks - Reasons Behind Inefficiency
1. Usually persons favored by present-day ruling party become Board of directors, irrespective of merit or
qualification. Thus, political considerations have significant control/influence over bank’s business
operations.
2. PSB staff’s salary does not depend on profitability of bank. Employee unions frequently engage in
strikes/hartals.
3. They’ve apathetic attitude towards marketing, and customer satisfaction- than pvt sector bankers.
4. PSBs subjected to Right to Information (RTI) act, Central Vigilance Commission (CVC), Comptroller
Auditor General (CAG), Central Bureau of Investigation (CBI), Courts & media in a more stringent
manner.
5. PSB officials fear harassment under veil of vigilance investigations & mediatrials. They prefer safety and
conservatism over risk-taking and innovation.
Sarkaari Banks: Governance Reforms Already Done
1. Psbs’ CMD Post Bifurcated Into 1) Separate Chairman And 2) Separate MD&CEO ,So That Banks Can
Function In More Professional And Accountable Manner.
2. Indradhanush Plan For Bank Recapitalization (₹ 70,000 Crores)
3. Finance Ministry Setting Up An Autonomous Body- Bank Board Bureau (BBB)- Later Replaced With
Financial Services Institutions Bureau (FSIB) For Selection Of Top Management Officials.
4. Enhanced Access And Service Excellence (EASE) Framework To Rank The PSB’s Performance On Six
Parameters. ⇒ Staff Accountability Framework For PSB.
SARKAARI BANKS – WHAT REFORMS SHOULD BE DONE?
OWNERSHIP REFORMS
⇒ Transfer ownership of govt to professional banking investment company (BIC) so as to reduce influence of
govt in appointment of board of directors – as recommend by P.J.Nayak committee.
⇒ Privatise loss making / scam-ridden public sector banks (PSB) e.g. UTI (Axis), IDBI.
⇒ Merge smaller PSBs into larger ones. e.g. Vijaya & Dena Bank to Bank of Baroda.
PERSONNEL REFORMS
⇒ Allow campus recruitment, lateral entry in higher management positions to recruit talented manpower.
⇒ Make employees ‘part owners’ through Employee Stock Ownership Plan (ESOP).
SURVEILLANCE
⇒ Use AI, Machine Learning (ML), Big Data Analytics, geotagging of mortgaged assets etc.
⇒ setup an organization PSBN Network to implement above ICT-solutions.
PSB Banking Personnel Reforms→ES20 suggestions
- PSBs should be allowed to do campus recruitment of atleast some
- PSBs should give Employee Stock Option Plan (ESOP) to their employees. ESOP is a type of benefit plan
wherein employees given some shares of company (Apart from their regular monthly salary).
CONCLUSION
Thus, after Independence,nationalized banks/public sector banks helped in financial inclusion and poverty
alleviation, but areas of bad loans, profitability, cyber-frauds, remain a concern.They need to be addressed
through adequate reforms in ownership, manpower/personnel reforms, surveillance, mergers, and
privatization.Then PSBs can play a more effective role as a catalyst to make India a developed nation by 2047.
PSB CONSOLIDATION = A) MERGER B) PRIVATIZATION

Before 2019: we had over 20 PSBs. By 2023 it is reduced to 12 PSBs (Total 13 if you count India post payment bank as
well).

Benefit?
- Geographical & technological synergies in ATM, Branches, Security Staff, Servers cost etc
- Presently only two Indian bank in the global top 100 i.e. HDFC and SBI. After consolidation, we will be left
with some bigger sized PSBs, who can get into global list.
- Then it will be easier for such globally recognized bank to open branches abroad, attract foreign clients, issue
FPOs/ADR/GDR in foreign nations to mobilize more capital.
- Then, easier to Government to capitalize such large sized PSB to comply with BASEL-III Norms.
Anti-Arguments against Merger and Privatization of PSBs
• Employees worried seniority, promotion, increments
• Financial burden of Voluntary Retirement Scheme
• Transfer and VRS of employees → Banks may lose regional identities & customer intelligence
• Big customers may shift to other banks for faster service and personalized privileges
• Private sector banks are no saints. There have been instances of private sector banks engaging in money
laundering activities (e.g. Cobrapost Sting), taking bribes to pass loans to unworthy borrowers (e.g. ICICI Loans
to Videocon).
Conclusion
While there are some concerns, but they are not strong enough to continue status quo. Therefore, in Budget-2021
speech, Finance Minister announced to reduce number (PSBs) from 12 to just 4-5 through a combination of mergers and
privatizations. This will help improving operational efficiency of PSBs in banking, credit, and financial inclusion to make
India a developed nation by 2047.

ULTIMATE CONCLUSION FOR BANKS

SHOULD ADANI/AMBANI HOUSES BE ALLOWED TO SET UP BANKS

2016: RBI issued guidelines for 'on-tap' Bank licence. On-Tap guideline: Company with minimum ₹500 cr
capital can apply. However, its technical rules about assets/ownership were such that Large NBFCs (ILFS, Bajaj
FinServ etc.) and industrial houses (Tata/Adani/Ambani etc) could not apply for it.

Mohanty committee recommended allowing large NBFCs/Corporate/Industrial Houses to apply for Bank licenses.

Arguments in Favour
 1. competition, better interest rates, customer services.
2. Existing banks' balance sheets deteriorated by scams & bad loans. So, they've become overcautious
and slow in lending to large business projects. Entry of fresh new banks to invigorate banking sector.
3. Chances of scams associated with Shadow Banks / NBFCs in futures - after ILFS & other big NBFCs
convert themselves into Banks → RBI can supervise them more effectively.
Arguments Against
1. Increased competition may lead to natural tendency of mis-selling the products and lending money to
more risky businesses as evident from 2008's American Subprime crisis.
2. PNB-Nirav Modi loan scam, Yes Bank-Rana Kapoor scam, ICICI-Vodafone loan scam = RBI has failed to
effectively supervise even existing banks
3. Already large NBFCs are involved in scams: ILFS scam, DHFL scam, Karvy Capital Scam- the critics are afraid
that allowing large NBFCs in the Banking sector = more such scams.
4. Corporate governance in large industrial houses is not inspiring confidence at present e.g. Ratan Tata vs
Cyrus Mistry, Infosys founder Narayan Murthy versus ex-CEO Vishal Sikka etc. Allowing them in the
banking sector is not advisable.
5. Large industrial houses like Tata, Ambani, Adani- may use depositors money mainly to finance their own
projects/ nepotism, even if such projects are not viable- There will be evergreening of loans for them
6. Could be misused for money laundering by big industrialists.
Conclusion
Anti: Considering aforementioned challenges, risks far outweigh benefits. RBI and govt shld focus on
improving administration & supervision of existing bank instead of allowing large industrial houses here.
Favor: Considering above benefits, Large NBFC and industrial houses may be given bank licences after due
diligence & effective supervision.
RRB PROBLEMS AND COOP BANK PROBLEMS
• RRB: capital starved, low deposit, NABARD dependent for funds.
• CooP: dual supervision problem until 2020 Amendment, political Nexus, casteism frauds.
NPA / BAD LOANS
If loan principal or interest is not paid for more than 90 days from its due date, then such loan account is
classified as Non-Performing Asset (NPA).
In any healthy economy, some of companies and individuals suffer financial issues in loan repayment so it is
normal that 1-2% of the loans become NPA However, this problem skyrocketed during 2013-2018 when over
10% of bank-loans became NPA.Economic Survey used term Twin balance sheet syndrome (TBS) to describe
this problem because balance-sheets of (1) some Large Corporates Companies & (2) Public Sector Banks (PSB)
became weak.
However, In recent years, with the combined efforts of the RBI, Government, IBBI & the bankers, the NPA
amount has decreased steadily.

Easy loans help in GDP Growth how? / why Banking reforms req?
 Bad Loan Fixing- RBI (2015-19): RBI “3R”
Rectification - 2015: RBI ordered Banks to conduct Asset Quality Review (AQR) and begin rectification of bad
loans i.e. Bank doesn’t change in loan interest, tenure or terms, but asks client to rectify his irregularity in
loan-repayment.
- In genuine case, additional loan may be given. Bank may also try to find a new partner / investor for reviving
project.
Restructuring = Changing the loan interest (%) or tenure or ownership.
Recovery: Bank liquidates loan-defaulter’s assets under either of the following acts:
1) SARFAESI Act 2002
2) Insolvency and Bankruptcy Code 2016
Following acts also help indirectly:
⇒ FUGITIVE ECONOMIC OFFENDERS ACT, 2018
⇒ Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961.
Bad loan fixing: RBI’s Prudential Framework (2019)
RBI released Prudential Framework for Resolution of Stressed Assets Directions:
1) It discontinued CDR, S4A, SDR, etc. Now IBC to be main tool for resolving business loans.
2) Lenders must upload data of ₹5 crore /> loans to RBI’s CRILC portal on weekly basis.
3) Forbids loan restructuring for borrowers who have committed frauds/willful default in past.
BAD LOANS:IBC CODE 2016
Until 2016, India had only 1 law to deal with bad loans i.e. SARFAESI Act, 2002. However, it had certain
limitations resulting in case pendency and suboptimal loan recovery, so government came up with one more
at law i.e. INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016 to permit arbitration / conciliation / mediation
with the between the lenders and borrowers.
IBC +ve Benefits
1. Better resolution than SARFAESI - Appreciated IBC proceedings take on average 340 days to complete,
unlike SARFAESI legal proceedings which take 4.3 years. Appreciated that IBC helps recovering more
amount of loan than SARFAESI in 2018-19.

2. With I&B Code and other measures by RBI=NPA % has decreased

3. I&B code's time-bound mechanisms have prompted 'behavioural changes' in corporate borrowers. Now
they fear losing control of the company. This has improved corporate governance, cash and financial
discipline.
4. By 2018: ₹ 50,000 crores worth NPAs have been upgraded to std assets.
IBC: -Ve / limitation / challenges
1. We need to increase number of NCLT benches, number of IP Professionals, use ICT technology for faster
case proceedings.
2. We should enact separate law on cross-border insolvency.
3. Group Insolvency: Big Industrialists usually operate through groups of companies, If one of these company
become insolvent, it creates negative ripples on entire group's financial health. Certain legal-technical
reforms are necessary to address such group-insolvency.
4. Public sector banker usually do not agree for loan restructuring during IBC proceedings, fearing media-
trials, CVC/CAG inquries.
5. Certain legal-technical reforms to address insolvency cases involving individual proprietors and partnership firms.
Conclusion- IBC
Thus, insolvency bankruptcy code is an experimentation in right direction to deal with mounting bad loans,
problem in India. However, it needs to be complemented with greater use of technical surveillance,
governance reforms in the public sector banks, legislative measures against willful defaulters, international
cooperation to deal with fugitive economic offenders - to thoroughly solve the existing bad loan problem
and to prevent it from recurring in future.
BAD Bank – NARCL / IDRCL-HANDOUT
NPA- SURVEILLANCE IMPROVEMENT

NPA Surveillance - ES20: Use AI-ML Technology

In PSBs, most of the loan-information processing (=Credit analytics) happens manually. This causes
inefficiency, frauds and loan default. Tools such as Artificial Intelligence (AI), Machine Learning (ML) can help
them in following ways:
⇒ Willful defaulters usually create fictitious companies to transfer their assets / shares / money just before
they stop paying loan installments.
⇒ Artificial Intelligence (AI) can alert the authorities through real time surveillance & data analytics of the
borrower’s NEFT/RTGS/DEMAT account transaction.
⇒ Geo-tagging of assets i.e. adding longitude and latitude data with the photos & videos of the Factory
building, machinery, vehicles, aeroplanes, helicopter etc.
Then,
→ Scamster can’t pledge fictitious assets as collaterals for loans ,Scamster can’t pledge same asset as
collateral to multiple banks.
⇒ Blockchain Technology can used for storing and verifying the authenticity of the data.
⇒ AI can monitor Social media activities.
NPA Surveillance- ES20: setup PSBN Network
⇒ Government should create a new organization named PSBN (Public Sector Bank Network), which will act as
a Financial Technology/Fintech Hub (FinTech).
⇒ Whenever a borrower applies for a loan to a public sector bank → Details will be sent to PSBN. → PSBN will
verify the creditworthiness and risk profile of applicant through:
 Artificial Intelligence (AI), machine learning (ML) and Big Data Analytics- as explained in the previous
section
 E-KYC (Know Your Customer): Aadhar verification → cross checking his Aadhar number against Financial
data from Corporate Affair Ministry, SEBI/share market, Income Tax Department, GST, etc.

SHADOW BANKS – SCAMS AND REFORMS

Shadow banking is a set of activities and institutions. They operate partially (or fully) outside traditional commercial
banking sector. They are not fully regulated by RBI.
They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds (Non-convertible debentures).
E.g. ILFS, DHFL- both of them suffered from scams, and faced difficulty in repaying the lenders/investors.
Authorities have initiated following reforms
RBI’s steps
- RBI has launched 1) TLTRO and 2) special liquidity window to give more funds towards NBFCs
- RBI tightened norms of Asset-Liability Management (ALM) norms for NBFCs.
- 2021: RBI proposes 4-tier structure for tighter regulation of NBFCs: NBFCs to be classified into four categories
BASE, MIDDLE, UPPER & TOP LAYER (most risky companies). Accordingly tighter regulation on them.
Govt’s steps
1. Partial Credit Guarantee Scheme (PCGS) 2.0 to cover upto 20% losses suffered by the public sector
banks in loans given to NBFCs.
2. MCA constituted statutory body National Financial Reporting Authority (NFRA) under Companies Act
2013 for stricter vigilance over Chartered accountants and auditors.
3. Corporate Affairs Ministry’s Serious Fraud Investigation Office (SFIO) investigating the IL&FS officials &
auditors.
4. -Govt increased RBI powers (under RBI Act) to regulate NBFCs in following ways: RBI can remove
NBFC’s board of directors, can inspect any NBFC or its associated group of companies, RBI can force
merger/splitting of non-viable NBFCs, higher fines/penalties for violation.
 5. Made certain changes in Companies act regarding the debenture (bond) issued by Companies/NBFCs.
Remedies by SEBI
⇒ SEBI tightened norms on Mutual Funds, regarding where/how they invest clients’ money.
Suggestions By Eco.Survey
1. create “Health Score for NBFCs” to monitors given NBFC company’s Asset Liability Management (ALM)
problems, balance sheet strength, etc. and gives them a score between -100 to +100.
2. Higher scores indicating higher financial stability of firm.Health score provide early warning signals to
Financial regulators → they can initiate appropriate measures before it's too late.
CONCLUSION:
Shadow banks have been prime culprits behind US Subprime Crisis (2007). If they are not kept under check,
then they could cause similar havoc in Indian economy as well. This will not only erode the savings of the small
investors but also harm our economic growth. So need of the hour is to ensure robust oversight, control and
regulation over such entities.

CAPITAL MARKET
CAPITAL MARKET : Long Term Financial Market Where Money Is Mobilized For A Tenure Of One Year Or More.
Depending On The Nature Of The Instrument, It Could Be Debt Finance Or Equity Finance.
DEEPENING OF THE CAPITAL MARKET means increasing the participation of the retail investors and small investors
in various instruments.
Total population 140 crores
Total Voters 94 crores
Total income Tax payers roughly 7% of voters
No. of DEMAT Accounts roughly 12% of voters
DEEPENING OF CAPITAL MARKET NECESSARY WHY / SIGNIFICANCE?
1. ⇒ ⬆participation of retail investors → companies can find fresh capital through shares/bonds/REITS/InvITS
→ helps in economic growth, job creation.
2. ⇒ Fresh capital → balance sheets will be de-stressed → easier to resolve NPA through I&B resolution.
3. ⇒ Bankers can easily comply with recapitalisation for Basel-3 norms (By issuing shares/bonds in capital
market).
4. ⇒ Providing Liquidity to Financial Assets.
5. ⇒ Facilitating Price Discovery of shares / bonds.
6. ⇒ Investor sells securities in secondary market→ ₹₹ could be re-invested to a new company’s IPO in
primary market → Contributes to Economic Growth.
STEPS TAKEN BY AUTHORITIES (RBI, SEBI,GOVT)
Steps taken by Government:
⇒ Abolished dividend distribution tax (DDT)
⇒ Merged forward markets commission with SEBI after NSEL scam
⇒ Setup Financial Stability & Development Council (FSDC) with FM as Chairman and Financial sector regulators
as members.
⇒ Minimum 25% public holding for shares of Govt owned companies.
⇒ Social Stock Exchange to help NGO/LGBTQ foundations to raise funds.
⇒ Corporate Affairs ministry’s Investor Education Protection Fund (IEPF).
Steps by RBI:
⇒ Allowed retail investors to directly investing G-Sec through Retail Direct Gilt (RDG) account.
⇒ Issued inflation indexed bonds, sovereign gold bonds to reduce retail investors’ craze for gold and real
estate.
Steps taken by SEBI:
⇒ Mutual fund Risk-o-meter to help investor make right decision.
⇒ Making rules to control nuisance of finfluencers, algo-trading and co-location.
⇒ Allowed new instruments like REITS and INVITS.
⇒ T+1 settlement
⇒ SEBI investors charter.

SEBI INVESTOR CHARTER

A citizens’ charter is a document of commitments made by a government agency to citizens in respect of services being
provided to them.
Charter Applies On Entities/Actors E.G. Investors, Mutual Funds, Stock Brokersetc.
Also Applies On Events E.G. Initial Public Offerings (IPO), FPO, Etc.
SEBI Charter → Investors’ rights
⇒ Investors entitled to fair treatment from SEBI & its regulated entities (E.g. Mutual fund, stock-brokers etc).
⇒ Investors expect complaint resolution from SEBI’s SCORES Portal in time bound manner
⇒ SEBI regulated entities required to display on website average time taken to solve complaints internally.
SEBI Charter → Investors’ responsibilities
1. Never share critical information like DEMAT passwords.
2. Understand offer documents of financial instruments before investing, including risks involved.
3. Be aware of transaction-related fees and service charges.
4. Keep track of DEMAT/Bank account statements and report any discrepancies promptly
5. Preserve all transaction documents for filing complaints and providing evidence.
6. Avoid cash payments beyond prescribed limits while investing. Use methods like cheques or NEFT.
SEBI’s Investor Charter: Criticism/limitation:
 Charter is a reference guide, lacks legal binding or investor rights.
 SEBI's failure to stop recent market scams (e.g., Franklin Templeton, Karvy Broker DEMAT, IL&FS crisis)
questions charter's ability to prevent future scams.
 Retail investors prone to weak company investments from social media, Telegram, YouTube tips.
Charter lacks proper resolution.

SEBI’s Investor Charter: Benefit/Conclusion

Appreciable step by SEBI:
1. This will help in a long way in... Ease of doing business & Ease of doing investment
2. More clarity over rights and responsibilities financial market participants [Individual Investor, Share Broker,
Stock Exchange, Depository, Underwriter, Companies etc]
3. Deepening of financial market, Mobilisation of savings to productive channels of economy.
CHALLENGES IN DEEPENING THE CAPITAL MARKET
1. Lack of financial inclusion/awareness,as seen in RBI's 2022 Index at 56%.
2. Insufficient surplus income/savings.
3. Slow action against financial market scams like Karvy Capital, NSE Co-location, etc
4. Resistance and fear after negative news of sharemarket scams/losses.
5. Telegram and YouTube influencers causing losses to investors, deterring others due to negative word-of-
mouth.
6.LIC IPO brought govt funds, but investors saw losses as share price dropped from issue price.
7. Current market gloom: i) IPOs struggle to get subscriptions, lack investor interest ii) existing investors
become dormant.

WAY FORWARD FOR DEEPENING OF CAPITAL MARKET

1. Spread financial literacy in rural/rurban areas, among female depositors, high school, and college
students.
2. Simplify Tax/TDS processes.
3. Enforce stricter control over social media/telegram influencers, algo-trading, and future-option
markets.
4. Prohibit retail investors from participating in volatile/complex instruments like intraday trading,
futures, options, and algo-trading.
5. Introduce a minimum holding period for Foreign Portfolio Investors to prevent sudden exits impacting
the market
6. Strengthen IPO evaluation process, avoiding cases like the PayTM fiasco.
7. Increase SEBI manpower for better oversight, considering the significant difference in staffing
compared to American regulators.
8. Prevent bank managers from mis-selling Mutual Fund and SIP products to meet sales targets.
9. Ensure swift and exemplary punishment for wrongdoers in major scams, with compensation to victims.
10.Establish an organization similar to DICGC for Mutual Fund investors, ensuring protection of
investments.
CONCLUSION
SEBI's admirable initiative streamlines business and investment processes, enhancing accessibility and clarity.
It drives financial market growth, channeling savings into productive sectors. These proactive steps create a
more transparent, efficient landscape, benefiting market participants and overall economic growth.

CORPORATE GOVERNANCE
Way Of Directing Company To Protect Interest Of All Stakeholders, And Ensure Three Types Of Compliance:

Legal-Regulatory:
1. Companies mandated to obtain Legal Entity Identifier (LEI) number by RBI.
2. Companies required to establish 'Internal Complaints Committee' under the Sexual Harassment of Women
at Workplace (Prevention, Prohibition, and Redressal) Act, 2013 ("POSH Act").
Technical:
1. Companies maintaining balance sheets according to Ind-AS accounting standards.
2. Automobile companies producing car engines compliant with BHARAT-Stage emission norms.
Moral-Ethical:
1. Gillette ending ad-contract with cricketer Hardik Pandya due to sexist remarks against women .
The absence of corporate governance leads to:
1.Mismanagement
2.Financial Irregularities
3.Conflict of Interest
4.Risk of Fraud
5.Lack of Accountability.
6.Loss of Investor Confidence
7.Undermined Stakeholder Trust
8.Decline in Performance
9. Legal and Regulatory Issues
10.Diminished Long-Term Viability
Examples of governance failures:
1. Satyam Scandal:Manipulation of account books by Chairman
Ramalinga Raju.
2. Tata Group Boardroom Battles:Cyrus Mistry vs Ratan Tata
dispute.
3. Infosys Turmoil:Narayana Murthy vs Vishal Sikka conflict.2019:
Whistleblower complaint about financial irregularities.
4. ICICI Loan Controversy:Chanda Kochhar granted ₹3000 crore
loan to Videocon without due-diligence, leading to NPA.

WEAK CORPORATE GOVERNANCE HARM EVERYONE- HOW?

1. When a banker commits fraud, it harms the depositors ultimately.

2. Company commits tax evasion, Government is the deprived of taxes.
3. Company shut down after scam → worker job is lost.
4. Toxic work culture to complete targets → Worker may vent his anger on family members, resulting into domestic
violence and emotional abuse of children.
5. Gender discrimination & sexual harassment prevent the female worker from achieving her truest potential. - Gullible
customers tricked into buying a substandard product.
6. Gullible voters tricked into voting bad candidate.
7. Environmental degradation.
CORPORATE GOVERNANCE VS GOOD GOVERNANCE
Term Good Governance Corporate Governance
Definition centred around Rule of Law, Transparency, ALREADY DONE
Accountability, Inclusiveness, & Efficiency to
protect interest of all citizens.
When Become Popular? 1990s by World Bank 1980–90s after some big scams involving
American MNC’s
Absence Causes.. Commonwealth Games (CWG) scam, Coal ALREADY DONE
Scam etc.
Fiscal Transparency CAG reports, RTI Act CA-Audit reports to Ministry of Corporate
Affairs & CBDT/CBIC.
Dictatorship Prevention Separation of PM vs President Post Separation of Chairman vs MD Post
Victim Protection National commission for Women, Human POSH committee for victims of sexual
rights /SC/ST/OBC harassment, whistleblower protection
mechanism.
Protection Of Minority National commission for minorities independent directors
Rights
Justice High Court, Supreme Court NCLT (National Company Law Tribunal)
Nationalism And Only Indian citizen can contest/vote in minimum x% directors must be Indian
Patriotism election Residents.
Inclusive Growth via welfare schemes for the weaker section via corporate social responsibility (CSR)
reservation for women in the board seats
CORPORATE GOVERNANCE IN INDIA - CHALLENGES / WEAKNESSES
1. Ordinary Indian shareholders prioritize dividends and returns over active participation in AGMs.
2. Independent directors often fail to fulfill their expected role, siding with founders or remaining silent.
3. Uday Kotak's recommendation of separating chairman and managing director roles faced resistance.
4. Family influence persists in many public listed companies, leading to nepotism in key appointments.
5. Female family members often fill mandated women director positions, impacting independence.
6. Auditors evade accountability through ignorance and legal loopholes, resisted by ICAI against NFRA.
7. CSR funds channeled to NGOs owned by founders' family members lack transparent auditing.
8. Weak whistleblower and sexual harassment protection mechanisms delay justice.
9. Civil and criminal case settlements post-scam exposure are often delayed.
10. Businessmen escaping to foreign countries after exposure, exemplified by cases like Mallya, Modi, Choksi,
bolster crony capitalism.

Steps taken for corporate governance in the Companies Act 2013:

1. Mandates term limits for directors.
2. Requires reservation for women on boards.
3. Enforces appointment of independent directors.
4. Limits the number of directorships one person can hold.
5. Restricts the number of audits one CA/auditor can undertake.
6. Mandates establishment of a whistle-blower protection mechanism.

Notable Committees for corporate governance ⇒ Notable committees for improving corporate
governance in India: Kumar Mangalam Birla (1999), Narayana Murthy (2003), Adi Godrej (2012), Uday Kotak (2017).

SEBI directives for Corporate governance

SEBI implemented Uday Kotak committee’s suggestions:

1. Split CEO/MD and Chairman roles.One person can't hold both positions in a company.
2. In Public Listed company needs to have min. 6 directors.
3. Atleast one independent woman director.
4. one person can serve as director in 7 companies.
CSR: Corporate Social Responsibility
1. ⇒ Mandated under Companies Act 2013: Last 3 years' avg. profit → spend 2% of that on CSR (education,
environment, public health, sanitation, disaster management etc.)
2. ⇒ Applicable on both public ltd and private ltd. with very huge profit / turnover / networth
3. ⇒ Ministry of Corporate Affairs (MCA) gives National CSR Awards to companies.
CONCLUSION: YES NEED TO STRENGTHEN CORPORATE GOVERNANCE
Enhancing corporate governance in India is crucial following recent major scams. Legal reforms, regulatory
changes, and strict penalties are necessary to protect investors and fortify the capital market. These actions
will promote transparency and accountability, ensuring a resilient and dependable business environment
through prompt measures.
INSURANCE – MEANING & SIGNIFICANCE
Insurance Policy Is A Debt Instrument / Legal Contract Against Eventualities Of Death Or Damage.
 In India, European-started insurance companies faced racism issues & fraud, leading to nationalization
post-independence. Privatization resumed after 1991 reforms and Malhotra Committee suggestions
(1993). Recent years saw more liberalization, with up to 74% FDI allowed via automatic route.
 Despite IRDAI reforms and government efforts, India's insurance penetration remains below 4% with
density under $80. This trails behind countries like China and Malaysia.
SCHEME STEPS BY GOVT/IRDAI CHALLENGES (FOR REMEDIES REPHRASE
LOGIC)
ESIC health During Corona taken certain reforms to ESIC's focus on debt instruments and fixed
insurance increasemnumber of eligible workers who can deposits led to inadequate profits for
join scheme. hospital costs. The shift to shares/equities in
2022 (15% allocation) seems belated to
address the issue effectively.
Life insurance Pradhan Mantri Jeevan Jyoti Bima Yojana Max compensation: ₹2 lakh. Insufficient for
for poor (PMJJB) and Pradhan Mantri Suraksha Bima education, food, rent, electricity. Private
Yojana with Annual subscription fees ranging insurers faced losses enrolling during COVID.
from Rs.12-330 per person.
Health IRDAI mandates affordable, clear standardized ⇒ Post-COVID, premiums rose due to losses.
Insurance for policies. Also, ordered coverage for PWDs, Job losses could impact policy renewals.
middle class HIV/AIDS, and mental illness. ⇒ Idea: Govt buying bulk insurance for
middle class at subsidized rates.
⇒ Challenge: Claims denied due to varying
medical costs, lacking standards.
Health PM-Jan Arogya Yojana (5 lakh health Aage alag se hai
insurance for insurance)
poor
Crop Insurance PM Fasal Bima Yojana, wherein both Union ⇒ Claim rejections, delays by private
and state governments contribute premium, insurers → Farmers skip policy renewal.
so farmer has to pay only 1.5 to 5% share only. ⇒ States like W.Bengal delay premium
payment, alter schemes, affecting
implementation.
Third Party statutorily / legally required under Motor ⇒ Premium amount is fixed by IRDAI. Private
Motor Vehicle Act sector Insurance companies want to get it
Insurance increased for healthy profit.
⇒ Need for de-tarrification i.e. IRDAI
shouldnot fix single premium. It should
depend on the driving habit and past
accident record of the driver.
⇒ Some drivers do not renew it out of
laziness/carelessness. Need for stricter
Vigilance via technology.

Title Insurance Builder legally required to take it under RERA N/A

Act
Fire insurance IRDAI ordered insurance companies to launch people avoid fire insurance due to laziness
standard products for fire insurance for home or to hide property value from tax
and factories. authorities and local influencers connected
to insurance agents.
HEALTH INSURANCE
Why public health insurance for poor?
 ⇒ Public goods (water, healthcare, education) crucial for poor, rich have alternatives.
 ⇒ Democracy's "Time Horizon Problem": Short-term gains over long-term needs.
 ⇒ Solution: Offer free health insurance to bridge healthcare gap for the poor.

Ayushman Bharat / PM Jan Aroyga Yojana (PMJAY)

Last decade: In-patient hospitalizations up 300%. 80% costs from out-of-pocket. Rural households use
savings/borrow, leading to poverty cycle. Ayushman Bharat initiated to address this, with following features:

1. ⇒ Ayushman Bharat: ₹5 lakh health insurance/year for 10 crore families identified under SECC-2011 families.
2. ⇒ No age/family size limits.
3. ⇒ Treatment: Public, empaneled private hospitals. Pradhan Mantri Aarogya Mitras assist patients, trained
by Skill Development Ministry.
PMJAY → Challenges
1. Cooperative federalism lacking:
- States need Union agreement to operate.
- W.Bengal's "Swasthyasathi" scheme similar, so left PM-JAY.
- Rajasthan's Right To Health Bill 2021 offers ₹5 lakh coverage:
- Free for workers, small-marginal farmers.
- ₹850/year for others (e.g. middle class).
2. Fiscal Challenges:
Budget not enough → borrowing → fiscal deficit.
Risk: Private hospitals overcharge for unnecessary treatments and medicines to gain more from govt.
3. Administrative Challenges
Beneficiary identification
Doctor to patient ratio
Physical and IT infrastructure, Transport, connectivity upto village level.
Medical privacy of Patient- data may be leaked to pharma companies for their clinical trials and commercial
motives.
ES21 on PM-JAY
ES21 studied health outcomes in West Bengal (no PM-JAY) vs. neighbouring states (PM-JAY) from 2015-2019.
W.Bengal lags in health indicators, incl. family planning and HIV/AIDS.
PMJAY raised awareness on Family planning, HIV/AIDS through hospital posters during patient visits.
Conclusion:
PM-JAY aligns with SDG#3 for healthy lives. Addressing challenges can make it a vital step. Disease burden
affects poor's income and savings. Solving challenges can aid poverty reduction and human development. By
enhancing health outcomes and productivity, PM-JAY could elevate GDP and quality of life.
Challenges to Insurance Industry:
1. Capital-intensive, low profits due to market returns, agent commissions, and ads.
2. COVID led to high compensation payouts, straining insurers.
3. Rising premiums due to COVID-related losses.
4. Agents need more skill, unlike bankers for loans.
5. Rural disinterest despite norms.
6. Fear of asset discovery hampers insurance uptake.
7. Healthcare's lack of regulation vs. insurance's heavy regulation.
8. Claim settlement delays deter repeat health insurance customers.
Private Sector entry in Insurance
steps have been taken by Government for enhancing participation of domestic and foreign players in
insurance sector of India.
⇒ Allowed private players post LPG reforms.
⇒ Initiated LIC disinvestment process.
⇒ Introduced bill for privatizing public sector general insurance companies.
⇒ Allowed foreign companies in reinsurance business.
⇒ Raised foreign investment limit for insurance companies and intermediaries.

FDI IN INSURANCE
Foreign Direct Investment (FDI) is the (more than 10% equity / share) investment made by a foreign entity into an Indian
company, with the objective to get involved in the management / production of that Indian company.
FDI Safeguards by Govt (Budget-2021):
⇒ Insurance Act, 1938 amended to raise FDI limit to 74%.
⇒ Safeguards include:
- Majority Directors and key management as Resident Indians.
- 50% Directors as Independent directors.
- % of profits retained as general reserve.
Should we increase FDI beyond 74% in insurance companies?
YES NO
Foreign investors' capital can alleviate challenges. Foreign investors' pressure could lead
⇒ Expansion abroad, investment in India from foreign funds. to:
⇒ IRDAI rules and ombudsman curb misconduct. ⇒ Investment in risky junk bonds →
⇒ Companies Act provisions ensure accountability. Collapse.
⇒ Budget-2021 outlines safeguards. ⇒ Rejecting claims to boost
⇒ Emulating China, Thailand, Indonesia in FDI limits makes sense. profitability for investor satisfaction.
Conclusion: Thus, after evaluating the pros and cons, there is a case in favor of increasing the foreign direct
investment limits in the Indian insurance sector to improve our insurance density and insurance penetration.

PENSION SECTOR
A pension is a regular income paid to a person after they retire from work. It can be paid by a government, an
employer, or a private pension plan. Pensions are designed to provide financial security in retirement.
Pension Challenges: Inflation impact.
⇒ Atal pension scheme: ₹5000 monthly,after crossing age-60.
⇒ Critics: After 40 years, ₹5000 could be ₹1000-2000 due to inflation.
⇒ Insufficient for basics like education, electricity, rent.
Pension Challenges: Impact of life expectancy
⇒ Between 1951 to 2011, the life expectancy of Indian male has increased from 37 years to 67 years. While,
for Japanese people, it is around 85 years.
⇒ If the person is allowed to retire at 60, and gets pension upto the age of 85, then it may cause
⇒ A) loss for the pension company / government (if government is contributing the pension)
⇒ B) loss of workers for the factory. (if enough number of young children not born)
⇒ So, in recent years, developed nations increasing the age of retirement before the pension starts.

Pension- Steps by Govt & Challenges

Scheme Steps by Govt
EPFO - Govt paid premiums for workers &
owners based on factory size in
'Atmanirbhar Bharat Rozgar Yojana'.
- Apps/portals for easier
premium/compliance payments.
- Startup self-certification to prevent
EPFO harassment.
NPS Originally launched for the government
employees and then expanded to all
citizens.
Challenges
- EPFO invests in G-sec, Bonds; lower returns for pensioners;
compulsory for lower-middle-class workers.
- EPFO not under PFRDA; investment board led by
ministers/unions, needs professional management.
- Informal worker contracts due to EPFO hassles; lacks social
security, loan, school admission proof.
- Gig-workers like Swiggy/Zomato drivers not covered.
- Pension tied to Sharemarket performance; preference for
old pension scheme (OPS).
- Some state govts (e.g., Rajasthan) returning to OPS,
straining federal relationships due to NPS/PFRDA rules.

Pension Atal Pension, Shram Yogi MaanDhan - Subscriber delays in premium payment due to financial
schemes etc. Monthly pension from 1,000 to constraints.
for 5000 depending on scheme and - Inadequate pension due to inflation.
lower premiummoney contributed. Govt co- - Pension starts at 60; longer life expectancy risks pension
middle contributes premium in some of these
fund losses.
class schemes e.g. Shram Yogi Maan-Dhan.
- Proposal raise retirement age (like France/Japan)face
backlash.
Penson NSOAP / National social assistance - Pension insufficient against current/future inflation.
for poor programme. - Errors: rich benefit, poor/migrants denied due to
corruption.
- Address with JAM-Trinity & portable pension schemes.
FINANCIAL INCLUSION

Financial inclusion: Offers citizens banking, investment, pension, insurance, and credit access. Enhances
security, social harmony, women's empowerment, and supports a "LESS CASH Economy."
Social Security : a system of payments / assistance by the government to citizens who are ill, handicapped, poor, aged or
unemployed.
The foundation of SS in our constitution @DPSP Article 41- State to provide public assistance to its citizens in case of
unemployment, old age, sickness and disablement
DPSP Article 42- The State shall make provision for securing just and humane conditions of work and for maternity
relief.
Social justice: Fairly distributing wealth, opportunities, privileges via job reservations, admissions, legal
safeguards for rights, preventing atrocities.
Collectively, these three (FI,SS,SJ) help in human development, inclusive economic growth and Sustainable
Development Goals (SDG).
 RBI's Financial Inclusion Index: Annual score ranges 0-100. 0 is no inclusion, 100 is full inclusion.
 While the score has steadily improved, but there is still miles to go before we achieve
100% financial inclusion.

FINANCIAL INCLUSION: BANKING: STEPS TAKEN

1. PM-JDY (2015): Bank accounts for poor, ₹10,000 overdraft, DBT, auto-debit for schemes, insurance,
pension.
2. Microfinance and Self Help Group
3. LEAD Bank scheme, State level Bankers committee, PSL quota
4. DICGC deposit insurance upto ₹5 lakh
5. Loans: Mudra for micro biz, PM-Svanidhi for vendors, Standup India for women-SC/ST startups. Govt offers
interest subsidies/credit guarantees for education, home loans.
6. Loans to MSME / stressed companies after Corona- Emergency Credit Line Guarantee Scheme (ECLGS) and
Subordinate Debt.
7. Loans: Farm loan subsidies / waiver
Challenges:
1. Post-demonetization, surge in deposits suggests poor used for money laundering.
2. Many accounts still zero balance, indicating financial challenges.
3. Need awareness on saving, financial planning; mass-weddings to save costs.
4. Penetration need to be improved for Naxal/LWE/NE areas.
5. Concerns over NPA / repayment Loans are not passed easily due to lack of property/ ownership/ income
documents.
6. Farm loan waivers making farmers careless and indisciplined in loan repayment.

FINANCIAL INCLUSION: BANKING: FARM LOAN WAIVERS(Covered in Agriculture)

FINANCIAL INCLUSION:INVESTMENT: STEPS TAKEN AND CHALLENGES

FINANCIAL INCLUSION:INSURANCE &PENSION: STEPS TAKEN AND CHALLENGES

Big list already given in earlier sections for pension and insurance -including their problems.
- Insurance: Postal Life, ESIC, PM Jeevan Jyoti & Surkasha Bima (₹2 lakh), PM-JAY (₹5 lakh annual health
insurance per family), PM-Fasal Bima (1.5-5% premium);
- Pension: EPFO, NPS, Atal Pension (1-5k), PM Shram Yogi Mandhan (3k), PM Vay-Vandana (@LIC but now
discontinued), Maan-Dhan Yojanas (3k/pm then spouse gets 1500 after death of husband/wife)
CONCLUSION
Financial inclusion in India is vital for equitable growth and empowerment. Access to banking, credit,
insurance, and investment can reduce poverty and foster an inclusive economy. Collaborative efforts of
government, institutions, and society are needed to enhance financial literacy and bridge gaps for holistic
upliftment.
BUDGET

FISCAL POLICY - ‘Fiscal’ is a word derived from Greek. Means ‘basket’ and symbolizes the public purse. Fiscal
Policy is the set of Govt. decisions regarding taxation, expenditure, subsidies and other financial operations.
BUDGET is an annual financial statement containing estimated revenues and expenditures for the next
financial year. Budget is the primary tool used by Govt to implement its fiscal policy
SIGNIFICANCE:Using fiscal policy, Govt influences the savings, investment and consumption in an economy, to
accomplish certain national goals such as income redistribution, socio-economic welfare, economic
development and inclusive growth.
BUDGET IS BIGGER THAN ECONOMIC HOROSCOPE OF A NATION
BUDGET IS MEDICAL REPORT FOR COUNTRY’S FINANCIAL HEALTH

Conclusion: Thus, just like a doctor can diagnose a patient’s health by looking at the medical report, an
economist can diagnose / predict a nation’s economic health, financial well-being, & human development
potential by looking at its budget

TAXES
TAX REFORMS IN RECENT YEARS
DELETED SOME TAXES - Dividend Distribution Tax (DDT) and Wealth Tax abolished.
ADDED SOME TAXES
1. GST, Angel Tax, and equalization levy (google tax) have been introduced.
2. Crypto currency - 30% Capital Gains Tax and 1% TDS. A variety of cess and surcharges introduced, namely
Health and Education cess, social welfare surcharge, Agriculture Infrastructure and Development Cess,
and Road & Infrastructure Cess.
REDUCED SOME TAXES
1. Corporation tax and income tax have been reduced.
2. A new income tax regime (NTR) introduced that allows tax saving without locking money in long-term
investments and keeps more disposable income in hands of people.
3. Stamp duty on shares and bonds has been rationalised.
BLACK MONEY Tax terrorism – DONE IN INTERNAL SECURITY
TAX EXPENDITURE / REVENUE FORGONE
Tax breaks, exemptions, and deductions by the government for economic stimulation or taxpayer relief result
in monetary loss known as tax expenditure/revenue forgone.
Some notable examples include:
– Tax holidays given in SEZ, GIFT City, to startup companies.
– Reduced capital gains tax if a person sells a home to buy a new home.
– Income tax benefits for loans taken for the purchase of a first home.

Income Tax Changes (2017):

- Lowest Slab: Before - 10%, After - 5%
Corporation Tax Changes (2019):
- Existing Indian Company: Before - 30%, After (2019-Reform) - 22%
- New Company setup on/after 1/Oct/2019: Before - 30%, After (2019-
Reform) - 15%
Impact of Corporation Tax Reduction (2019):
- ₹1.45 trillion revenue forgone in 2019–20.
Income Tax Reforms:
- 2020: Introduced New Tax Regime (NTR)
- 2023: Further Reforms in NTR
- NTR benefits some taxpayers, saving money compared to old regime.

Tax expenditure: how it helps the country?

1. Increased disposable income boosts demand, GDP, job creation.
2. Lower company tax supports business expansion, recruitment.
3. Tax breaks attract foreign firms to set up in India.
4. Female property ownership promoted via stamp duty reduction.
5. Electric vehicle purchase incentivized for pollution control.
6. Capital gains tax affects share market profit calculation.

Lower LTCG(long-term capital gains) tax encourages investors to hold shares longer, reducing unnecessary
selling within a year and curbing Sharemarket price volatility.
Tax expenditure: negative aspects
– Reduces the revenue collection & fiscal capacity of the union. Increases revenue deficit / fiscal deficit.
– Government will have to cover up deficit through other sources of income.
In conclusion, while tax expenditure entails government financial loss, it fosters economic growth, job
creation, infrastructure, and empowerment. Yet, excessive breaks must be avoided to preserve fiscal capacity.
Policymakers face the challenge of striking the right balance between these aspects.

GST
GST is a destination based indirect tax on consumption of goods and services.
 Implemented on July 1, 2017, post 101st constitutional amendment.
 Replaced previous indirect taxes like service tax, excise duty, entertainment tax, VAT.
 Significance: Offers input tax credit, reduces tax cascading and evasion scope.

GST: CHALLENGES
1. Singapore and Australia have lower GST rates (7% and 10%).
2. India has multiple slabs (5-12-18-28%) sparking calls to reduce complexity.
3. Critics want fewer GST slabs to simplify the system.
4. 18% GST on daily necessities criticized as regressive, affecting the poor's purchasing power.
5. Petrol, diesel, electricity excluded from GST, limiting input credit and impacting costs.
6. Govts increase excise/VAT on fuels despite lower crude prices, leading to inflation and business costs.

Frequent GST rate changes hinder long-term business strategies.

1. Companies struggle to plan due to unstable rates.
2. For instance, in 2019, caffeinated beverage GST increased from 18% to 28%, affecting sales.
3. Investments like factory expansion may suffer due to sudden rate shifts.
4. 15th Finance Commission Chairman NK Singh also criticized frequent GST rate changes.

Random Fall in collection

1. Pandemic impact.
2. Global protectionism increases duties on Indian exports → sales decrease.
3. Automotive, consumer durables, real estate face declines.
4. Circular trading leads to fake invoices and tax credit misuse.
5. States complain of delayed GST compensation, affecting welfare schemes.
6. Problem worsens during/after the pandemic.
INCONVENIENCE TO SMALL TRADERS

- Monthly GST deposits, online forms, e-way bills are inconvenient for non-tech-savvy traders.
- Counter: Similar online systems existed in VAT; Composition scheme and free software offer relief.

Server Crashes and Penalties:

- Frequent GSTN server crashes lead to late uploads, penalties.
- Counter: GST Council reduced late-fees, technical upgrades address glitches.

Harassment by Officers:
- GST officers harass traders for bribes, even for minor errors.
- Counter: Many non-compliances decriminalized; reduced officer nuisance power.

Comparative Scrapping of GST:

- Malaysia scrapped GST in 2018 due to public uproar.
- Counter: India's GST differs; daily necessities at lower rates; inflation managed; constitutional amendment
required for reversal.
CONCLUSION
Indeed, introduction of GST marks a significant shift for India towards "ONE NATION, ONE TAX, ONE
MARKET." This reform replaces convoluted multi-layered tax structure with a transparent, technology-driven
regime. By eliminating tax cascading, reducing operational costs, and enhancing ease of doing business, GST
stands as a game changer that accelerates India's economic growth.
FINANCE COMMISSION
Fiscal Federalism refers to division of responsibilities of i) taxation and ii) expenditure between different levels
of government.
 Finance Commission transfers Union revenue to states.
 Article 280 mandates a Finance Commission every 5 years.
 Commission comprises a chairman, 4 members, with re-appointment.
 Recommendations not binding but rarely rejected; 15th commission led by N K Singh.
15th Finance Commission -Theory about Tax Formula & Grants
 5th Finance Commission: Conclusion
Some states oppose performance benchmarks, claim constitutional right to funds.
Economic Survey 2016-17 highlighted aid-curse: funds didn't lead to progress due to poor governance.
15th FC links fund transfers to performance, accountability.
While states are uncertain, adopting this approach is necessary for India's development.
Avoid unnecessary suggestions like regional cooperation in family planning.
FC:GIVING PERMANENT STATUS
Shaktikanta Das, RBI Governor and 15th FC member, proposed granting permanent status to FC. This means
existing commission continue implementing and monitoring recommendations until next one becomes
operational.
Arguments Against Permanent Status for FC:
1. Existing mechanisms have worked for 70+ years; no need for new amendments.
2. NITI Aayog, GST Council already promote cooperative federalism.
3. CAG audits Union and State accounts; no need for duplication.
4. Permanent FC may lead to efforts duplication.
5. Allegations of injustice, opposition-led states may persist.
6. Union Finance Ministry's time spent on FC responses rather than policy.
Arguments in Favor of Permanent Status for FC:
1. Election Commission's permanent status sets a precedent.
2. Shaktikant Das's suggestion aligns with other permanent bodies' functioning.
3. FC recommendations valid for 5 years; crises can't alter them midway.
4. Permanent secretariat maintains records, ensures consistent recommendations.
5. Vigilance over Union and State finances promotes accountability.
6. Discontinuation of 5-year planning system warrants constant formula.
7. Resource persons assist new panels, enhancing consistency.
Conclusion: give permanent status to FC or not?
In-favor-Considering aforementioned benefits, FC should given permanent status for better monitoring,
accountability, grievance redressal in matters related to fiscal federalism.
Against-Considering aforementioned issues,present constitutional and institutional mechanisms are adequate
for fiscal federalism; they do not merit any changes for time being.
BLACK MONEY – DONE IN INTERNAL SECURITY
FACTORS CONTRIBUTING TO LOW TAX-TO-GDP RATIO IN INDIA:
1. Lack of Civic Sense: Public perception of tax payment as a duty is lacking.
2. Informal Sector: Cash-based economy enables income concealment.
3. Low Income & Poverty: Low per capita income and income inequality deter tax compliance.
4. Corruption & Black Money: Election funding and corruption foster black money.
5. Limited Tax Base: Political considerations restrict the imposition of constitutionally authorized taxes.
6. Tax Law Loopholes: Gaps in tax laws allow for tax avoidance.
7. Ineffective Direct Taxes: Wealth tax, gift tax, and estate duty suffered from evasion and were abolished.
ECONOMIC SURVEY ON TAXATION AND FISCAL CAPACITY
1. Democracy as a Contract: Taxation is the economic bond between government and citizens.
2. Quality of Public Services: Poor service delivery prompts affluent citizens to opt for private alternatives.
3. Moral Justification for Tax Avoidance: Those not benefiting from public services may evade taxes.
4. Low Taxpayer Percentage: Only 7% of Indian voters pay taxes, falling short of the desired 23%.
5. Vicious Cycle: Insufficient tax revenue leads to inadequate services, eroding government accountability.
MONEY LAUNDERING-DONE IN INTERNAL SECURITY
Tax Ombudsman: Indian Experience
Ombud Concept: Originating from Sweden, 'Ombud' represents a representative or spokesperson for
others.Established in 1809 in Sweden to address citizens' grievances.
 Direct Tax Ombudsman (2003): Introduced in India to address complaints related to direct taxes.
 Indirect Tax Ombudsman (2011): Established for resolving grievances concerning indirect taxes.
 Abolishment (2019): Both posts abolished due to limitations in their functioning and lack of independence.
Problems in Previous System (2003-2019):
1. Ombudsmen were tax officers without independence and separate empowering laws.
2. They could only provide advice and mediation, lacking the power to investigate or penalize.
3. Limited compensation offered up to ₹5,000, resulting in ineffectiveness.
4. Abolished in 2019 due to failure to deliver results.
Current Complaint Mechanisms:
 Physical Aaykar Sewa Kendras (Income Tax Department)
 Online e-nivaran portal (Income Tax Department)
 Online CPGRAMS Portals (Central Public Grievance Redress and Monitoring System)
Challenges:
 Impartiality issues within the Income Tax Department.
 Delays in resolution due to handling complaints against various ministries and departments.
Global Experience:
 Many countries have separate laws and mechanisms for an independent tax ombudsman.
 Ensures unbiased functioning without undue pressure or conflicts of interest.
Tax Ombudsman: Conclusion / Way Forward:
Non-resolution of tax grievances discourages honest taxpayers, leading to tax evasion and parallel economy.
International experience highlights the need for an empowered tax ombudsman to investigate, penalize, and
compensate, enforcing taxpayers' rights.

DEMONETIZATION
2016: ₹500 and ₹1000 notes demonetized. 2023: SC upheld the legality of this demonetization. 2023: ₹2000 notes
gradual withdrawal by September 30, 2023.
Demonetization – a failed experiment?
Govt estimated ₹3 lakh crores of black money stored in 500-1000 notes (2% of GDP). After demonetisation,
99% of these notes returned to the system, raising questions about the effectiveness of the move.

How did 99.30% SBN returned into banking system?

If mathematical modelling was correct, then only 80% of the SBN should have returned back, & 20% SBN
(presumed to be Black Money) should not have returned. But, Black money owners used following tricks to
deposit their SBN in bank accounts:
Black money holders used various tactics to deposit their demonetized notes:
1. Employing personal staff, relatives, and others to deposit money.
2. Distributing SBN as "loans" to the poor or advance salaries to workers.
3. Collaborating with corrupt bankers for exchange without proper verification.
4. Depositing in Cooperative Banks with outdated fixed deposits to manipulate records.
5. Depicting SBN deposits as income from fake agricultural or other sources to avoid taxation.
6. Depositing in shell companies and faking income through false sales.
7. Donating SBN to trusts, temples, and political parties with backdated receipts for tax benefits.
99.30% SBN returned, but Demonetization not failed experiment because:
Effects of demonetization:
- Unreturned SBN led to a loss of black money.
- Poor people acting as money mules benefited indirectly.
- Operation Clean Money targeted suspicious accounts, seized shell firms and benami properties.
- Project Insight and Op. Clean Money resulted in increased tax collection and asset seizures.
- PAN card registration, IT returns, and tax registrations surged post-demonetization.
- Tax collection doubled from ₹6 lakh crores (2013) to ₹12 lakh crores (2018).
BEHAVIOURAL ECONOMICS:IMPROVING TAX COLLECTION
⇒ behavioural economics is a field of study that combines economics and psychology.
⇒ It aims understand how and why people make decisions in the real world.

- Plato's quote highlights that honor influences behavior in a society.

- Indians join the military not just for pay but due to the honor associated with it.
- Behavioral Economics can enhance tax compliance by shifting the social norm.
- We need to change the perception from accepting tax evasion to considering honest payment honorable.
- Tax Morale refers to taxpayers' motivation to pay taxes.
- Low tax morale leads to increased motivation for tax evasion.
Fairness Vertical Fairness Horizontal Fairness
Tax Payer’s Taxes I pay align with the services I receive There should not be great difference in taxes
thought from the Government. paid by ‘similar’ sections of society
process →
His Tax morale He sees taxpayers' money wasted in public Despite both earning ₹8 lakhs annually, a salaried
is lowered expenditure (like Mayawati’s elephant statutes) employee ends up paying more taxes than a
when → instead of better quality of water, road, shopkeeper due to factors such as TDS on salary
education or electricity and underreported cash payments by the
shopkeeper, along with fictitious business
expenditures to show lower profits.

Solution(s) under-constructions projects should show SMS, billboards highlighting selfemployed

signboards “Your tax money at work” individuals who pay good amount of tax.
Reminding tax payers that public goods can only Public shaming of individuals who don’t pay taxes.
be provided in return for tax compliance. Most It’ll scare other tax-evaders that the probability of
people in your local community pay their taxes their detection has increased.
on time. Avoid Tax Amnesties. Give stringent punishment
to tax evaders.
ES19 suggested:
- Provide VIP treatment to the top 10 highest taxpayers in a district, including airport privileges and fast lanes
at immigration and toll booths.
- Recognize highest taxpayers over a decade by naming important places after them, such as roads, schools,
hospitals, etc.
- Highlight tax evasion as a violation of spiritual and religious norms across Hinduism, Islam, and Christianity in
advertisements.
- Introduce pre-populated, easy-to-understand Income Tax forms for all individuals, even those with zero tax
liability.
- Implement automated TDS and ensure timely release of tax refunds for greater ease in paying taxes.
Tax: GDP: 15th Finance Commission on how to improve it?
- Expand scope of TDS/TCS to cover more transactions and identify tax evaders.
- Address issue of people not paying income tax due to low income, hiding income, tax deductions, and
rebates.
- Amend Article 276 to allow states to demand higher professional tax than current limit of ₹2500 per year.
- Rationalize GST into three slabs: merit rate (5%), standard rate (merged 12-18%, possibly 15-17%), and
demerit rate (28-30%).
- Reduce overreliance on indirect taxes and increase coverage of direct taxes for both Union and State
governments.’

DISINVESTMENT

BSNL BAILOUT PACKAGE / WHY NOT PRIVATIZED

- Telecom is a strategic sector, and the government aims to have at least one government-owned company in
operation.
- BSNL is not privatized to maintain a government presence in the telecom sector.
- Private telecom companies are less interested in rural penetration due to low ARPU from rural customers.
- Lack of interest from private companies in purchasing rural-focused spectrum indicates their reluctance to
serve rural areas.
BSNL revival efforts
1. Merged BSNL + MTNL
2. 2022: Govt gave ₹ 1.60 lakh cr package.
3. To reduce salary burden, BSNL staff strength reduced from 1.65 lakh to 65000 (2021) via a) VRS & b) reduction in fresh
recruitment.
Privatisation →Increase Profitability
- UK's Margaret Thatcher initiated privatization of government companies like British Telecom and British
Airways in the 1980s, leading to increased profitability and wealth creation.
- Analysis of 11 Indian government companies privatized during Atal Bihari Vajpayee's tenure showed
improved sales and profitability due to technology upgrades and efficient private management.
- After Air India's privatization in 2023, Tata ordered 500 aircraft, reflecting optimistic future growth, which
would have been challenging under government control.
- Privatized PSUs contribute to economic growth and employment generation.
Privatisation ke liye → Adopt Singapore Model
- In 1974, Singapore established "Temasek Holdings Company" (THC) to privatize government-owned
companies.
- Transferred government-owned shares to THC, which sold them in the market to complete privatization.
- India has 264 CPSEs under various ministries, making individual privatization attempts suboptimal due to lack
of skills.
- Like Singapore, India could establish a Holding Company for strategic disinvestment, providing
professionalism and autonomy to the process.
- Benefits include expertise in selling shares at the highest price and overcoming internal resistance from
employee unions.
Conclusion – Disinvestment
After considering arguments for and against disinvestment, we should stick with government's current
approach of minimal government and maximum governance. i.e. government should still retain control over a
few companies in strategic sectors that are crucial for national development and security. But for non-
strategic sectors, government should let private sector to handle management.

DEFICIT
Fiscal Deficit is amount of money that Govt has to borrow, to fill up the gap /difference between total income
and total expenditure.
As per FRBM act, 2003, Union government is required to control fiscal deficit within 3% of GDP. However, Corona and
subsequent economic slowdown aggravated problem. Fiscal deficit remained in range of 6-9% between 2020 to 2023.
New target is to reduce fiscal deficit to less than 4.5% by 2025-26.

RESOURCE MOBILISATION CHALLENGES

In context of public finance, resource mobilization refers to the process of raising funds for government expenditure.
This can be done through a variety of means, including taxation, borrowing, disinvestment, privatization, auctioning of
natural resources, selling goods and services etc. But India faces following challenges:
PUBLIC BORROWING’S EFFECT ON ECONOMY
Whenever Receipt / Revenue Is Less Than Expenditure, Govt Has To Borrow Money. This Is Inevitable For India Because
Our Tax To Gdp Is Hardly 11%, Barely 7% Voters Are Income Tax Payers. Consequently, Our Fiscal Deficit In Range Of 6-
9% Of Gdp In Last 3 Years (2020, 2021, 2022).

Effect of public borrowing: positive and negative

Conclusion – public borrowing
India's large population and ambitious aspirations, coupled with low tax-to-GDP ratio, necessitate public
borrowing. It should be moderate and geared towards building lasting assets. Public borrowing is vital in
economic slowdowns, using a balanced counter-cyclical fiscal policy approach.

PUBLIC EXPENDITURE MANAGEMENT: CHALLENGES

Public expenditure management deals with allocation of Govt’s economic resources into three channels :
1) Public Administration 2) Economic Development 3) Welfare Schemes
1991: Liberalization, Privatization and Globalization reforms → then following challenges in management of
public expenditure:
Sector Pre-LPG Post-LPG-1991
Banking Nationalisation of banks, Basel Twin balance sheet syndrome, govt required to recapitalise
norms less stringent public sector banks because they cannot do it on their own →
Financial burden ⏫
Monetary Elevated fiscal deficit prompts - Rising private sector investment and consumer demand lead
Policy and reliance on RBI's policy, requiring RBI to reduce SLR, boosting available loanable funds.
Fiscal Policy high SLR to fund government - In response to a Balance of Payments crisis linked to high fiscal
borrowing through bank deposits, deficit, Govt enforces FRBM rules for deficit control.
using depositor funds. - RBI's inflation control obligation makes excessive borrowing
from RBI challenging for government.
Private sector Share of private sector in India's - Demand surged.
economic growth and employment - To maintain growth and jobs, private sector needs ₹20 lakh
generation was limited due to crores annually.
License Quota Inspector Raj. - Uncontrolled fiscal deficit risks crowding out private
investment, potentially reducing growth (recent ES21 differs).
PSU Loss making public sector - Difficult to sustain the Public Sector Undertakings against the
undertakings were supported by heavy competition of private sector be it Air India or BSNL.
 Government as white elephant. - Govt unable to pay salaries, even no buyers for their
privatization
Infrastructure Sparse population, limited access - Population grew.
to TV, appliances, mobiles, - Rising aspirations for better amenities: water, electricity, roads.
internet, and social media. - Substantial funds needed for infrastructure, e.g., ₹50 lakh crore
Consequently, low demand for for railways by 2030.
electricity. - Govt constrained to spend ≤ ₹1.6 lakh crore annually on this.
Welfare Right to education, right to food, - Rights turned into legal entitlements, demanding more funding.
right to work (MGNREGA) were not - Post-LPG, education, amenities, and per capita income grew,
yet ‘legal rights’. but tax-to-GDP lags (11% vs. >20% in comparable growth
nations).
Public Small size of Government staff Rising public aspirations, welfare programs, and security needs
Administration Their salary levels were also low. led to increased government workforce.
6th and 7th pay commissions boosted salaries.
Challenges
"Contracting out" jobs to limit revenue deficit.
Shift towards NPS places pension responsibility on employees.
Decreased vacancies in UPSC/SSC due to these factors.

FISCAL FEDERALISM
Division Of Fiscal Responsibilities And Financial Powers Between Different Levels Of Government Within A
Federal System. Following Are Problem Areas In Recent Years:
Following are the problem areas in fiscal relationship between Union-States.
Sp.Cat States → Economic Surveys criticized
Economic Survey 2016-17:
- Special category states received substantial funds but showed little progress in governance and poverty
reduction (Aid Curse).
- States with abundant mineral resources faced similar stagnation (Resource Curse).

Economic Survey 2017-18:

- Indian state governments and local bodies collect less tax compared to federal countries like Brazil and
Germany.
- Two reasons: Constitution limits their taxation power, and electoral politics discourage tax collection, even
when allowed (e.g., Agricultural Income Tax, Land Revenue, Property Tax).
Result? Poor quality of Public Schools, Public Transport, Police, Drinking Water and
Sanitation.
Fiscal federalism → Positive steps taken by Union
- Frontloading of tax devolution to States in 2022. E.g. tax devolution money given in advance even before
completion of financial year. - Backtoback loans for GST compensation.
- Relaxation in the fiscal deficit limits for State governments.
- Interest free loans for capital expenditure for 50 years. Refer to Prelims Handout.
- Large amount of grants given by Finance commission, and under various centrally sponsored schemes (CSS).
Conclusion- fiscal federalism
India's vast size and population require joint efforts between the union and states. The union provides
administration, while states need financial support. Economic growth and human development depend
on collaborative actions from both levels of government.

COUNTERCYCLICAL POLICY
Historically, Indian rulers built structures during famines for jobs. Similarly, during slowdowns, Govt should
spend for employment, though it raises fiscal deficit. Recent economic surveys support this:
1. "Counter-cyclical" spending vital in downturns.
2. Long-term gains offset short-term deficit increase.
3. Effective spending can spur economic revival.
Countercyclical: Conclusion/Way forward
- Post-COVID, pursue countercyclical fiscal policy, borrowing for infrastructure growth.
- Improve GDP → shift to fiscal consolidation.
- Reform education, skill development, and minimum wages.
- Higher income and savings, reducing negative fiscal deficit impacts.
FISCAL DEFICIT : NK SINGH’S 15TH FINANCE COMMISSION
⇒ If the state government is undertaking reforms in the power sector (e.g. stopping power theft) → Union
should allow it to borrow extra money.
⇒ Evaluation of government schemes → Focus on outcome of the scheme → Department should be asked to
justify why the scheme should be continued if annually it is unable to deliver "X" outcomes.
⇒ Union Government should set up a High-powered Inter-governmental Group/committee.
1. To Recommend Reforms In FRBM Acts Of Union And State Governments,
2. To Monitor The Implementation Of Reform The FRBM Act.
3. To Monitor The Implementation Of 15 Finance Commission Recommendations.Convert Them In Points.
⇒ State Govts should form Public Debt Management Cells to plan their borrowing programme efficiently.
⇒ Union and State governments should avoid any extra budgetary resources/off-budget borrowing.
⇒ If a state govt does not set up a State Finance Commission by March 2024 then the union government
should stop giving it grants afterwards.
⇒ Cess and surcharge amount to nearly 18% of the gross tax revenue of the union government. FC can't allot
cess-surcharge amount to State governments. Need to rationalize this.
PUBLIC DEBT MANAGEMENT AGENCY (PDMA)
 RBI decides repo rate & also undertakes open market operation for buying and selling of G-sec.
 Most of the G-sec are purchased by public sector banks, insurance and pension funds.
 Reserve Bank, as banking regulator, sets SLR: mandates banks to retain deposit portion as liquid assets -
cash, gold, G-sec, and approved securities.
 So, this creates a ‘conflict of interest’ for RBI in its role as (1) Banking regulator vs (2) Public Debt manager.
 Budget-2015 proposed creating an independence Public Debt Management Agency (PDMA) to takeover
these functions of RBI. But later plan was put on a back burner due to RBI’s objections.
FISCAL COUNCIL
BUDGETING REFORMS
Process Of Making A Budget, Is Called “Budgeting”. Following Reforms Have Been Taken:
1. 2005: Gender Budget document presented along with the budget.
2. 2017: Budget is tabled/presented on first working day February, to obviate the need of demanding Vote
on Account.
3. 2017: Rail budget and General budget has been merged - 2017: Plan versus non-plan expenditure
bifurcation has been abolished.
4. Majority of the schemes / subsidies come with sunset clause / expiry date.
5. Restructuring / reducing of the central sponsored schemes.
6. 2017: output outcome framework for schemes with help of NITI AAYOG.
7. 2023: Result Based Financing instead of input based financing.
BOP→CURRENT ACCOUNT DEFICIT
BoP is a systematic record of all economic transactions made between the residents and non-residents of a
country for a specific time period, usually a year.
CURRENT ACCOUNT DEFICIT
- Current Account Balance Components: Visible (Trade of Goods) and Invisible (Services, Transfers)
- Current Account Deficit: Outflow > Inflow, weakens local currency, balance of payment crisis
- Indian Economy: Average CAD - 2.5% of GDP (except 2020-21)
- Solution:
- Reduce Imports
- Increase Exports

CAD
→REDUCING IMPORTS – HOW TO?

CAD:IMPORT OF CRUDE OIL– NOTABLE POINTS FOR MAINS

- To boost domestic oil exploration, we have enacted HELP policy.
- To reduce the import of crude oil, government is promoting ethanol blending, electric vehicles, green
hydrogen.
- Imposed windfall tax on petrol/diesel/ATF fuel exporter to ensure adequate supply in local market.
- Created strategy oil reserves in rock caverns. Now plans for creating salt rock caverns.
- India rejected Western powers’ price cap on Russian oil.

CAD⬇→EXPORT PROMOTION
CAD: EXPORT DIVERSIFICATION

Challenges to Export Diversification:

1. Agri Sector:**
a. SPS Agreements: Compliance with sanitary and phytosanitary measures poses barriers.
b. Food Hygiene Bans: Restrictions imposed by USA/EU due to food safety standards.
 c. Food Processing: Need for advancements in food processing industry.
2. Textile/Shoes:**
a. Market Research: Understanding foreign consumer preferences is crucial.
b. Competition from LDCs: Least developed countries' duty-free access in developed markets.
c. Relief from Bangladesh's LDC Status Removal.
3. Manufacturing (Mfg):**
a. Transition Gap: Economy shifted from agriculture to services, lacking manufacturing focus.
b. Make in India (2014): Initiative to strengthen manufacturing sector.
4. Pharma:**
a. Jugaad Mentality: Relying on improvisation, hindering systematic development.
b. Research Investment: Inadequate spending on research and development.
5. IT/BPO/Services:**
a. Language Skills: Diversification requires employees fluent in languages beyond English.
b. Skill Development: Training centers must emphasize language proficiency.
6. Governance and Infrastructure:**
a. Regulatory Framework: Improvements needed for smoother export processes.
b. Infrastructure: Efficient transportation and logistics systems are essential.
7. Loans and Ease of Doing Business:**
a. Access to Finance: Challenges in securing loans for export-oriented ventures.
b. Ease of Doing Business: Simplifying bureaucracy for smoother operations.
8. Education and Skill Gap:**
a. Skill Mismatch: Addressing gaps in education to meet industry demands.
9. -Diversifying exports requires addressing these challenges across various sectors and aspects of the
economy.

EXPORT COMPETITIVENESS OF INDIA

Definition: ability of a country to export more than its rival/ competitor countries in same product category.
This is possible when our exported products are cheaper and or of better quality compare to our rival
competitor export countries. But, we face following problems:

1. Textile Competition:Bangladesh's duty-free access impacted Indian textile competitiveness in EU, but
Bangladesh is exiting LDC status.
2. Currency Undervaluation:China/S.Korea deliberately undervalue currency, making their products cheaper.
3. Prison Forced Labor:China's use of forced labor makes its products cheaper compared to India.
4. Quality Issues:Aging tea gardens in Darjeeling affect tea quality, unlike Kenya/Sri Lanka.
5. SPS Rejections:Contaminated prawns/fishes face rejection based on SPS criteria in USA/EU, leading to
legal challenges.
6. Dairy Disadvantage:India excels in liquid dairy but lacks solid dairy product mastery like New Zealand.
7. Jugaad Mindset:Insufficient investment in research & development in manufacturing/pharma.
8. Language Competency:Philippines/Indonesia call-center workers have better English fluency, affecting
India's IT/BPO export competitiveness.
CAD REDUCE: BUDGETARY MEASURES IN RECENT YEARS (2022-23)
IMPORT reduction EXPORT promotion
- Increase customs duties on daily use items: e.g., umbrellas, - Promotion of lab-grown
headphones, earphones, loudspeakers, imitation jewellery. diamonds.
- Reduced customs duty on
- Increase customs duty on imported gold. imports of components for
electric vehicle batteries, mobile
- Reduce tax benefits for businessmen buying imported capital phones, TV, lab-grown diamonds,
goods/machinery: encourage purchase of India-made machines. etc.
- Reduced customs duty on
- Ban import of drones, except for defense and research purposes. certain finished goods for export.

- Aim for 68% defense purchases from India-made products.

- Impose Rs. 2/litre excise duty on unblended fuel to promote bio-

ethanol blending and decrease crude oil imports.
Conclusion: Export diversification & competitiveness → increase jobs, GDP, economic growth, protect local
economy from external shocks. Need of the hour is to pursue it on war footing.

INFLATION CONTROL VS CURRENT ACCOUNT DEFICIT – WHEAT & RICE

Sometimes we have to take certain measures related to import export that are not primally driven by the
motive of reducing current account deficit but for combating inflation.
Example - 2022-23: food prices soared in the global market after the Russia Ukraine war. So, Indian Green
exporters started exporting more quantity of wheat and rice to make more profit. - Government feared this
will lead to shortage of grains in local market. So,
Wheat Banned export of wheat flour, maida, samolina (rava/sirgi) → to INCREASE supply in local market.
Rice Increased customs duty on exported rice to 20% → foreign customer will buy less →INCREASED
supply in local market
- Critics against restrictions:
 Australia and Argentina might dominate if restrictions imposed.
 Proactive approach: Export wheat to West Asia, Africa (e.g., Morocco, Tunisia, Egypt) due to Ukrainian
export gap.
 Past lesson: Ban on non-basmati rice export led to Thailand/Vietnam dominance, shouldn't repeat.
 Economic survey: Criticized random onion export bans with similar concerns.

Challenge
1. Diversify export basket: Include Wild Herbs, Medicinal Plants, Aromatic Oils, Frozen Vegetables, Processed
Food, Biscuits, Confectionery.
2. Explore new markets: Target destinations like Uganda, Nigeria, Kenya for products like Biscuits.
3. Enhance value-added exports: Promote products like cashew apple jams, flavored/roasted cashews
instead of raw cashew.
4. Support with SPS issues: Aid exporters via APEDA, FSSAI to prevent bans due to pesticide, pathogen, or
contamination concerns.
5. Branding and packaging: Focus on marketing Indian ethnic products globally, akin to Geographical
Indication (GI) products.
6. R&D for health-conscious consumers: Develop gluten-free, fiber-rich products for health-aware markets.
7. Facilitate private investments: Encourage export-oriented activities through ease of doing business,
startup funds for agriculture.
Conclusion? Thus, this policy will help integrating Indian agricultural products with the global value
chains and help doubling farmers’ income.
CAD⬇→EXPORT PROMOTION →SEZ
Special Economic Zones (SEZ) is a specifically demarcated area of India which is deemed as foreign territory for the
purpose of Tax laws and Trade laws.
India was one of the first in Asia to recognise the effectiveness of the Export Processing Zone (EPZ) model in promoting
exports. 1965: Asia’s first EPZ set up in Kandla, Gujarat.
SEZ: Challenges or criticism -
1. Bizman shifting factory elsewhere after tax holidays over.
2. Worker exploitation denial of EPFO, ESCI, social security and maternity benefitsetc.
 3. Agriculture and forest land diverted= pollution control and food security.
4. land acquisition problems→big size SEZ not developed, unlike China. Small-small sized SEZ = economies
of scale not possible.
5. Not generated enough export or jobs to their full potential.
6. economic / tax policy uncertainty when different parties are ruling at union and state.
SEZ →Baba Kalyani report on SEZ
1. SEZ employment ⏫, export growth ⏫ in the last decade.
2. Tailored tax benefits: Link SEZ benefits to job creation, FDI investment, exports.
3. Transform SEZs into Employment and Economic Enclaves (3Es) with strong infrastructure.
4. Promote MSMEs within 3Es for increased job opportunities.
5. Develop nearby infrastructure: High-speed rail, express roadways, airports, ports, warehouses.
6. Focus on domestic electronics production, encourage Swadeshi electronics firms in 3Es for import
substitution.
SEZ → DESH Bill ⇒
Budget-2022: Development Enterprise and Services Hub (DESH) Bill, 2022 to replace the existing SEZ law of
2005 with following features:
⇒ DESH hubs will focus to increase mfg & services for both domestic market and export market.
⇒ Single window clearance
⇒ Easy norms for voluntary liquidation / exit
⇒ Promote research & development
⇒ common infrastructure facilities
⇒ Input tax credit for indirect taxes – GST, Customs.

BOP→CAPITAL ACCOUNT: FDI AND FPI

FDI & FPI – Trend
⇒ 2020: Corona- America quantitative easing, boom in IT-Pharma, Startup bubble→⬆FPI and FDI.
⇒ 2022: USA Fed Tapering, Russia Ukraine war global uncertainty, Startup bubble burst→ FPI outflow.
Slowdown in FDI growth
FDI&FPI
FPI (upto 10% equity investment) FDI (>10% equity investment)
Meaning FPI is a foreign entity registered @SEBI, and FDI involves foreign entity investing more
who buys upto 10% in equity / shares of an than 10% equity or shares in an Indian
Indian Company. company with aim of participating in its
management or production.
For example, in 2018, Walmart from USA
 acquired a 77% stake in Flipkart for $16
billion.
Positive ⇒ primary market : IPO, Bonds, G-Sec -Increases capital inflow and is more stable
investment than FPI.
⇒ secondary market: provides liquidity to -Brings technological and managerial
existing investors. insights, benefiting sectors like e-commerce
⇒increased availability of capital → factory (e.g., Walmart), re-insurance (e.g., Warren
expansion, jobs, GDP. Buffet), and defense, leading to job
creation, GDP growth, and improved export
competitiveness.
-Contributes to the prosperity of countries
like UAE and Singapore.
-Boosts competition, leading to better
customer services, as seen in examples like
Vodafone vs. BSNL.
Negative - Frequent entry and exit due to USA ⇒Outflow in Current Account→
quantitative easing and Fed Taper cause dividend/profit.
volatility in the Indian financial market, ⇒Tax Avoidance e.g VodafoneHutch deal.
impacting domestic investors' savings. ⇒Tax evasion e.g. NDTV Round tripping.
- "Hot Money" flows during FPI exit can ⇒significant chunk of FDI to India comes
weaken the local currency. from Singapore & Mauritius. Hints to some
- FPI issuing participatory notes (P-Notes) Indians may be doing round-tripping /
can lead to increased concerns about money laundering / tax-evasion by misusing
money laundering and terror finance. DTAA.
- Attempts to increase surcharge on FPIs by ⇒loss of Indian ownership. Possible re-
the Finance Minister can trigger FPI exits, entry of modern day economic colonization
leading to a decline in the share market, / MNC who exploit resources- environment,
forcing the Finance Minister to reconsider. human. e.g. Gig workers.
- A "black swan event" refers to an ⇒e.g. Amazon accused of even restricting
unprecedented, unexpected extreme risk bathroom breaks of workers.
event, like the 2007 USA subprime crisis. An ⇒Facebook / Twitter: Data privacy,
RBI report suggests that in the next black influencing election outcomes.
swan event, there could be capital outflows ⇒Homework- Add: Mains Handout
of up to $100 billion (around Rs 7,80,000 Pillar1D- FDI in insurance sector ke Pros and
crore) from India by FPIs. Cons.
FDI MOUVS REALITY
- MOU stands for Memorandum of Understanding. It is a non-binding agreement between two or more
parties. An MOU is often used as an initial step in establishing a formal agreement or partnership,
- MOUs are commonly used in various contexts, including business and commercial partnerships, international
relations, government collaborations, research and development projects,
- MOUs aim to establish mutual understanding and cooperation between the involved parties while leaving
room for flexibility and avoid legal complications.
- However, in recent decades, some MOU did not materialize in actual investment for example
Case Study of Failed MoU: Vedanta-Foxconn Plant in Gujarat Let’s under stand with a real sample case
study
- 2022: Memorandum of understanding (MoU) signed between govt of Gujarat and Joint Venture (VEDANTA-
FOXCONN) promising an investment of over ₹ 1.50 lakh cr
- 2023: deal fell apart, after Foxconn and Vedanta ended their partnership.

Major reasons why MoU may not result in actual FDI:

 Global slowdown. Change in the demand of the product. (GM Cars)
 Issues in environment clearance & land acquisition (Odisha -POSCO / Vedanta mines)
 Inability to find right investors/partners for the project (Foxconn-Vedanta in Gujarat) No Ease of Doing biz /
Unfavourable terms and conditions in the FDI permission (e.g. multiband retail stores.)
 Political instability (Maharashtra CM post vs Foxconn deal) - Concerns over subsidy release, loan approval.

Conclusion MoU vs FDI reality

For India to be a global GDP player, it needs a strong export chain and competitive advantage. Relying on
domestic consumption and limited FDI isn't enough. Assess past failed MOUs, take precautions, and
ensure decisions support GDP growth.

FDI IN TVNEWS CHANNELS: IMPLICATIONS Though 100 percent FDI is already allowed in non-news media
e.g. general entertainment channel but in News TV channels FDI permitted upto 26% only. If we increase the FDI
limits in news TV channels, it will have following implications:

+ve : if we increase FDI in TV news channels

- Foreign Investment, Foreign Technology, - competition → better quality of reporting. Best practices in journalism
- Zee-news founder → NPA crisis. FDI could revive
- capital starved Indian news channel rely more on the paid-news / promotion of fake knee-cap massage oil etc.

-ve : if we increase FDI in TV news channels

 Foreign powers may control news in india through biased reporting, impacting democratic processes
and opinions, especially on sensitive issues like religion, kashmir, tibet, and sri lanka.
 Regional media houses struggle to survive as FDI players focus on national channels, limiting local
news coverage and potentially concealing political corruption, reducing democracy's transparency
and cultural diversity.
 In 2019, the govt investigated NDTV for money laundering through FDI, highlighting potential misuse
of increased FDI limits.

Conclusion: considering the aforementioned issues due care should be taken before increasing FDI limit in
news media further.
FDI IN DEFENSE : IMPLICATIONS
In 2020 government of India has liberalised FDI in defence sector- from upto 49% to upto 74% through automatic route.
It is going to have following implications for Indian economy and security:
Short term benefits of Defense FDI
Economy Defense
- India's ban on the import of 101 items has attracted foreign ⇒ DRDO and other Indian org. If alone started
investment in the defense sector for local manufacturing, boosting FDI. research = slow =many years.
- Local manufacturing of items like small arms, night vision goggles, and ⇒ Entry of foreign firms → bring readymade
bulletproof vests using raw materials/components from MSMEs tech → direct production stage.
creates jobs, stimulates economic revival, and contributes to GDP. ⇒ Less reliance on France, Israel, USA, Russia
- Decreased military spending on expensive imports allows more funds etc. + More from IR lecture.
to be allocated for welfare and economic revival activities.
Long term benefits of Defense FDI

Conclusion: FDI in Defense

X thing creating problem Increasing military power of China, Resurgence of Taliban, Political instability in Pakistan
creating fertile ground for terror groups
So Y thing important India’s national security and economic growth
Z1 reform appreciable Liberalization of FDI in Defense
Z2 thing should be done Ease of doing business, skill development of engineers to fulfill requirements defense and
on priority basis aviation electronics.
BOP→FULL CAPITAL ACCOUNT CONVERTIBILITY (CAC)
Full convertibility of rupee means India should permit unrestricted conversion of Indian ₹ to foreign currency
for both current account and capital account transactions. While Indian rupees fully convertible on the current
account transactions, but it is not fully convertible on the capital account transactions.
CURRENCY EXCHANGE: FALL OF ₹
Rupee weakens against dollar whenever the demand for Dollar outgrows the supply of dollars in the forex market of
India. Indian rupee has weakened from ₹70 (2020) to ₹82 (2023-June) i.e . 17% change. However,fall of Indian rupee is
not as steep compared to some other currency when we evaluate it on NEER-REER benchmarks.
Fall of Rupee: Reasons and Remedies?

INTERNATIONALISATION OF INDIAN RUPEE

Presently US dollar accounts for 88% in the forex reserves of various countries. Indian rupee not even 2% ⇒
(Definition) Internationalization means increasing the use of Rupee (or any local currency) for current & capital
transactions, and in forex reserve of other nations.

Timeline of the internationalisation of Yuan

Charms Challenges of Internationalization of Indian Rupee
Benefit:
1. Reduces dependence on dollars and currency exchange rate volatility.
2. Mitigates the risk of "imported inflation" due to an expensive dollar, which can affect petrol prices.
3. Decreases India's vulnerability to global shocks like US Fed Tapering or Taper Tantrum.
4. Facilitates trade with countries banned by the USA and Western powers or restricted by the SWIFT
messaging system, such as Russia and Iran.
5. Lowers the cost of doing business by eliminating forex agent fees and commissions.
6. Enables the use of the local currency for soft power expansion and conditional project loans to
impoverished countries.
7. Allows the acquisition of mining and agricultural assets in foreign nations, similar to China's investments in
lithium mines and plantations for biofuel projects.
Challenges:
1. India needs to diversify and enhance the quality of its export products to attract Russians, as the current offerings
may not be appealing post-Ukraine conflict.
2. If Russian exporters invest their rupee payments in the Indian stock market and suddenly sell these shares, it could
lead to a crash in the Indian stock market.
3. To safeguard the Indian stock market, India might have to implement stricter rules on foreign-held assets,
potentially discouraging Russians from accepting rupee payments.
4. This situation increases India's vulnerability to how foreign exporters and investors, such as Russians and Sri
Lankans, react to global events.
Conclusion: There are risks, but they are unavoidable if India wants to be an ‘Atma-Nirbhar’ economic superpower.
China has made a lot of headway in international internationalisation of Yuan. we should act fast before it is too late.
DE-DOLLARIZATION
- Foreign exchange reserves of 150 nations are composed of 55% US dollars, 30% euros, 2% Yuan (Renminbi),
and 13% other currencies.
- This majority preference for US dollars establishes it as the current "Global Reserve Currency."
- "De-dollarization" refers to efforts to reduce the dominance of the US dollar in forex reserves and
international transactions.
- For instance, in 2021, the Russian Central Bank reduced its dollar-denominated assets to 16% in its forex
reserve.
Can Indian rupee become global reserve currency?
In a very long future yes if, India adopts full capital account convertibility, keeps inflation, fiscal deficit, currency
exchange rates under control and becomes a sizeable exporter and global economic superpower.
- Forex reserve: A collection of foreign currencies and international financial assets held by a country's central
bank.
FOREX RESERVE – LARGE ACCUMULATION KE DISADVANTAGES
- Data: India has around $600 billion in forex reserves, but China holds over $3 trillion.
- Significance:
1. Forex reserves serve as a financial cushion against currency exchange rate fluctuations and overall economic
instability.
2. To maintain the exchange rate stability
3. To absorb external-shocks
Challenges
1. if large forex reserve is built through exchange rate manipulation / deliberate weakening of local currency e.g. China
= then weak currency → imported inflation in crude oil etc.
2. excess money thus locked into forex reserve → not available for other activities e.g. health, education, poverty
removal, infrastructure.
QUANTITATIVE EASING AND FEDERAL TAPERING- IMPACT ON INDIA(refer prelims)

INTL LOANS /DEBT TRAP DIPLOMACY

Debt trap diplomacy refers to the practice of lending money to a poor nation with unfavorable terms conditions that the
debtor nation become unable to repay the loans and then forced to give up control of strategic assets, such as ports or
infrastructure, mines, to the lender nation.
PAKISTAN AND SRI LANKA ECONOMIC CRISIS (2020-23)
(Conclusion) India and other nations should take a lesson to avoid high level of debt / freebie-revdi culture, LEST they
too will have to swallow bitter pill / painful economic surgeries of IMF.

WORLD TRADE ORGANIZATION

 WTO EPIC FAIL
⇒ (Origin) Since 2013- Bali Summit’s Trade facilitation agreement→ no new groundbreaking deals have
occurred.
⇒ 2017- WTO Buenos Aires summit ended even without any joint declaration.
⇒ among the many reasons, one is the obtuse nature of first world countries.
⇒ not willing to conclude the Doha development agenda
⇒ not willing to address the food subsidy peace clause related issues ⇒ they want a bulldozer their own e-
commerce priorities
⇒ protectionism was started by USA first.
⇒ USA engaging in de-judicialization of the Trade multilateralism i.e. creating obstacles in filling the judicial
vacancies in the dispute settlement body and appellate board.
⇒ in trade deals imposing their vision of labour laws and environment laws depending on how it suits their
domestic political narrative.
⇒ not willing to transfer the required funds and technology to 3rd world countries labour and environment of
regulations.
⇒ not want to acknowledge that they (1st world nations) have already progressed by leaving subsidies to local
industries and turning a blind eye to the pollution caused by local industry. and India China also have right to
progress by adopting the same path.
⇒ monetary policies of the first world countries also affect the currency exchange rates and thereby adverse
balance of trade. But neither the first world countries nor the WTO nor the IMF able to fix this.
⇒ Resisted / delayed Corona patent waiver for long time.
⇒ Fisheries Agreement – not willing to take more responsibility to cut down fisheries subsidies.
Conclusion: need to address these problems for sustainable development of all countries. Otherwise world
is again getting divided into multiple blocs.
WTO’S ITA AGREEMENT-INDIA’S STAND
- 1996: WTO’s Information Technology Agreement (ITA) to abolish taxes on import/export of 200 IT products.
- It is a plurilateral agreement means it is not signed by all the WTO members. Around 75 have signed.
- 1997: India signed but government’s stand is that we have not benefited from this China has benefited from this.
- After this agreement, China’s share in IT global trade increased from China 2% to 14% between 2000-2011.
- 2010 onwards - USA, Japan and a few other countries want the WTO to increase the number of tax exempt items in
this deal. But India is opposed.
What are the consequences if more items are added in this deal?
Challenges Opportunities
 India IT-hardware mfg sector = underdeveloped.  Exports, Jobs, GDP, Growth.
 We will not gain much on export.  Cheap computer goods → Digital divide
 India flooded with imported chinese goods. decrease.
 Adverse current account deficit, balance of payment  Empowerment of Poor, Women, Marginalised
weakening of rupee. Community.
 Chinese/Huawei gadgets: data storagesecurity, user-privacy  Increase E-commerce, E-learning, E-
violation. governance.
 But if direct finished goods can be sent @0%.  Competition → excellence in quality and
 then little incentive for Apple/LG/Samsung to setup Customer orientation. Repair warranty
factories/FDI in India, instead of China/Thailand. replacement of defective goods.
Conclusion: Short term challenges long term benefits. India needs to address the former, while leveraging
the latter.

WTOSUMMIT 2022 @GENEVA OUTCOMES

 Fish Subsidies: WTO's Agreement on Fisheries Subsidies (AFS) aims to curb harmful subsidies promoting overfishing,
supporting sustainable ocean resource use for economic growth. However, some members express discontent.
 E-commerce Moratorium: Since 1998, WTO members refrained from imposing customs duties on electronic
transmissions, impacting digital trade of movies, music, video games, and ebooks. India and Africa sought to end the
moratorium to boost tax collection, but it continues until March 31, 2024.
 Corona Vaccines/Medicines: Temporary waiver of IPR/patents for 5 years allows easier domestic production of
COVID-19 vaccines and medicines in third-world nations, promoting accessibility.
 Judge Vacancies: Resolving judicial vacancies and establishing a functional dispute settlement system by 2024
enhances WTO's efficacy.
 These outcomes link to global concerns like taxation, accessibility to medicines, and sustainable development goals
(SDGs), underlining the WTO's role in addressing multifaceted challenges.
Above is around 200 words note. Elaborate, give background, add linkages with taxation, food security, SDG
goals to drag it till 250 words.
WTO FISH SUBSIDIES
WTO’s Agreement on Fisheries Subsidies (AFS) signed in WTO Sumit/ Ministerial Conference 2022 at Geneva.
AFS prohibits three kinds of subsidies:
(1) illegal, unreported, or unregulated (IUU) fishing
(2) fishing of already over-exploited species/stocks
(3) fishing on unregulated high seas.
However, India wants special and differential treatment (S&DT).
⇒ India wants transition period for phasing out subsidies.
⇒ Foreign countries’ fish subsidies contribute to over-fishing. India wants stricter action on them. E.g.
⇒ Size of Fisheries subsidies 1) India $277 million in 2018 (2) Whereas China, EU, US, South Korea, and Japan’s
subsidies are more than $2000 million respectively. ⇒ So, India wants them to stop first.
Conclusion: While WTO's new fisheries subsidy agreement aligns with SDG Goal 14.6 to combat overfishing,
India's goal of exporting marine products worth $14 billion by 2025 may face challenges. Differential
treatment for developing countries is essential, with initial focus on those with significant overfishing
contributions.
TRADE AGREEMENTS
India's approach to Free Trade Agreements (FTAs) has both positive and negative aspects:
1. Successful Agreements: India signed FTAs with Australia and UAE in 2022, creating new trade opportunities.
2. Protectionist Mindset: India's reluctance to fully open its domestic market to protect farmers and MSMEs
hinders FTA effectiveness.
3. Inverted Duty Structure: Some FTAs result in partner countries benefiting more from imports than India
does.
4. Disagreements: Disputes over data localization norms, labor laws, and environmental regulations
complicate FTA negotiations.
5. Imbalanced FTAs: Critics argue that many of India's FTAs, like those with South Korea, Japan, and Sri Lanka,
lead to higher import growth compared to exports due to factors like skill shortages, infrastructure issues, and
high loan interest rates.
6. Regional Issues: Geopolitical tensions within South Asia hinder the full potential of SAFTA.
7. Post-BREXIT: Trade talks with the UK face uncertainty due to political turmoil.
8. India-Canada FTA: Vandalism by pro-Khalistani elements poses challenges to negotiations.
9. India-UK FTA: Frequent leadership changes and political stances on sensitive issues like terrorism
complicate negotiations.
10. Time and Factors: The benefits of FTAs take time to materialize and depend on various factors such as GDP
size, distance, exchange rates, customer income levels, tariff barriers, non-tariff barriers, infrastructure, and
skilled manpower.
Overall, India's FTA landscape presents a mix of opportunities and challenges, with varying outcomes in different
agreements.
MFG & SERVICES
SERVICES LED GROWTH- PROS AND CONS
Service Sector: More negative points
1. E-commerce Giants: Monopoly concerns and issues with Google Appstore, anti-trust, and data privacy.
2. Income Inequality: Service sector jobs contribute to higher income inequality, with a vast gap between a
maid and a startup CEO's earnings.
3. Informal Jobs: Gig workers and informal jobs lack social security and EPFO benefits compared to factory
workers.
4. Education Barrier: Many service sector roles require high levels of education, making inclusive growth
challenging for those without degrees, leading to student debt crises in some cases.
5. Urban Migration: Majority of service sector jobs are in urban areas, driving rural-to-urban migration and
posing urbanization and slum challenges.
6. Work-Life Balance: Service sector jobs in fields like finance, consultancy, IT-BPO, and media-entertainment
blur the line between work and personal life, leading to excessive stress and demotivation among
employees.
MFG led Growth- pros and cons

CHINA’S GROWTH- MORE NEGATIVE POINTS

− currency manipulation to boost mfg-exports.
− Use of forced prison labor and Labr exploitation to keep products cheap.
− disregard for environmental conservation while manufacturing.
MNC vs Indian Companies : points to reflect
MNC Entry impact +VE
on
Government Tax collection, FDI, employment improved
Economic growth More jobs, more Income, more demand, more
exports = helps GDP.
Workers - Service sector employment grew
significantly from 20% in 1991 to over 30% in
2010, driven by industries like IT, banking,
-VE
Tax avoidance cases by Vodafone, Cairn
Energy.
- 2022 Impact: The Russia-Ukraine crisis
and USA Fed Tapering had a more
significant impact on the Indian economy
than in the 1980s due to increased
integration with the global supply chain
and the global economy, driven by the
entry of MNCs.
- MNCs prioritize profits, leading to cost-
cutting and potential job loss to
automation.
 biotechnology, and more.
- MNCs provide employment opportunities,
especially in urban areas, encouraging skill
development through training.
- The services sector creates job prospects for
women in labor-intensive industries.
- Competition and foreign knowledge
enhance worker efficiency and skills.
Rival Indian ⇒ Competition brings excellence. Puts
Companies pressure on domestic companies to raise
productivity, improve product quality etc.
e.g. Affordable Jiophone, Nano car, etc.
⇒ inflow of foreign capital and technology in
electrical equipment, services and
telecommunication→ some of them resulted
into joint ventures with Indian companies →
quality of Indian products increased → our
exports increased.
⇒ Unable to compete against MNC due to
issues in research development, brain drain,
loan/IPO/capital availability.
⇒ To attract the foreign industries in India,
GoI started de-licensing, ease of doing Biz, PLI
subsidies → this helped local players as well.
Consumers - Fast food chains, shopping malls cropping
up at every nook and corner of the cities and
towns.
- Easier availability of the luxurious fashion /
car / phones/ laptops etc.
- Competition between Indian and foreign
companies = improved the customer service /
price.
- Weakened trade unions result in
reduced job security and lower pay.
- Gig work and casual employment rise
due to MNCs and globalization, leading
to layoffs and limited worker benefits.
- Indian private company is not invested
enough in R&D / have jugaad-mentality-
said ES. So, difficult to compete in every
sector.
- MNC advertisements → uncontrolled
growth of consumerism preference for
branded high-end products compared to
cheap Swadeshi products→ MSME can’t
compete.
- MNC enrty has exposed domestic firms
to risks such as fluctuations in prices,
instability of profits and uncertainties of
demand and supplydepending on the
pricing/marketing/biz-decisions of MNCs
- Excess marketing / showcasing of
luxury lifestyle by MNC with the help of
celebrities influenzers.
- Increased consumerism, EMI culture,
Piling of credit card debt.
- Environmental exploitation, E-waste
generation et cetera ultimately harming
the help of the customer.

CIRCULAR ECONOMY
A circular economy is an alternative to a traditional linear economy (make, use, dispose). In circular economy,
resources are kept in use for as long as possible,maximum value is extracted from them, and ultimately waste
is recovered and regenerated in end.

2019: NITI Aayog proposed ‘Circular Economy and resources efficiency in India’.

Circular Economy in EU is expected to create savings of €600 billion for EU businesses, creation of additional
580,000 jobs and reduction of carbon emissions by 450 million tonnes by 2030. In India it can generate 1.4
crore jobs in next 5-7 years.
MFG &SERVICES →MAKE IN INDIA: WHY? (2014)
Previous economic surveys observed that nations improve their GDP using three ways:
1. Geology
2. Geography
3. Jeans to Jets

 In advanced economies, a small percentage of the population is engaged in agriculture (e.g., USA 4%, UK
5%).
 In India, over 40% are in agriculture due to a lack of non-agricultural opportunities for the growing
population.
 India's demographic dividend is its potential for economic growth, with 65% of the population below 35.
 Industries and agriculture are complementary, with industrial jobs offering higher wages than farming.
 Industrialization is crucial to leverage India's demographic dividend and double farmers' income through
land consolidation and mechanization.
MAKE IN INDIA: HOW?
Nodal? Commerce ministry
Objective? Promote India as global hub for manufacturing goods & services, design and innovation in 25
sectors. Later it was expanded to total 27 sectors. Basically it focuses:
 FDI norms relaxed for facilitating investment
 fostering innovation, research development (R&D)
 building infrastructure
 making it easy to do business by relaxing the factory-labour-tax laws & administrative procedures
 enhancing skill development.
Challenge? Most of the jobs in 27 sectors are skill intensive while India is burdened with vast pool of
unskilled labour. So, govt has to pay more attention to education, skill development schemes incl. Skill
India (2015),
 MFG:ASSEMBLE IN INDIA

Network Products: Their production occurs across Global Value Chains (GVCs) operated by Multinational Companies
(MNCs) such as Apple, Samsung, Sony, Nike, Adidas etc. Product is designed by their Headquarter (HQ) located in a rich
country @US/EU/Japan. But Product assembly/manufacturing in done low wage countries.

Assemble in In India → Policy recommendations by Eco Survey?

- Aging population and rising wages in China have led companies to shift production away.
- US/EU protectionism results in higher duties on China-made products.
- India can attract MNCs through tax, FDI, and labor law reforms.
- Focus on skill training, infrastructure improvement, and monitoring potential disruptions.
- India can become a major player in mobile handset manufacturing.
- Balancing labor rights and foreign investment is crucial for India's growth.
Production Linked Incentive Scheme
- The scheme promotes manufacturing in sectors like automobiles, pharmaceuticals, mobiles, textiles, etc.
- It offers a conditional 4-6% subsidy on incremental sales compared to the base year (2019).
- An exception is made for the drone industry, which will receive a 20% subsidy on drone sales.
MFG &SERVICES →STARTUP INDIA (2016)

- The "Valuation game" involves startups enticing subscribers with cashback/discounts to boost their user
base.
- These startups showcase data to investors to secure more funding and eventually transition from private to
public limited companies through an IPO.
- Investors are attracted to IPOs with hopes of dividends, while promoters profit and company revenue drops
when discounts end.
- Example: Paytm IPO faced a significant decline, with shares dropping from ₹2150 to ₹1230 in Jan 2022,
resulting in over 50% loss.
- Economic Surveys emphasize the need for startups in sectors like Agriculture, Manufacturing, Healthcare,
and Education, rather than e-commerce aggregation.
- Dr. Raghuram Rajan raised concerns about the true cost of "free" products and cashbacks, suggesting they
may be subsidized by the government through tax breaks and subsidies.
- Encourage startup entrepreneurship but discourage tax evasion and avoidance by (fake) Angel investors.
STARTUP PROBLEMS AS PER ES23
⇒ 1) funding crisis after US Fed Tapering. 2) fall in demand/sales.
⇒ 3) problems in Tax / Regulatory structure → flipping by the founders.
Flipping
Flipping process of transferring entire ownership, IPR and DATA of an Indian company to an overseas entity.
This is done mainly for going to nations with lower tax/legal norms (e.g. UAE/Singapore), Easier to get funding
(e.g. USA) etc.
Flipping effectively transforms an Indian company into a 100 per cent subsidiary of a foreign entity. While
founders and investors continue to remain its owns (indirectly) thru foreign company.

How can India combat “flipping” / ensure “Reverse Flipping”?

1. Fix the loopholes in DTAA (Double Taxation Avoidance Agreement)
2. Simplify / reduces taxes in India and other Ease of Doing Business measures.
3. Make it easier for Indian companies to raise capital nationally and internationally e.g. more capital account
convertibility.
4. Funding for R&D etc.
Conclusion: Startups always been engine of progress. The mega corporations of today were startups of
yesterday. Startups can be effective instruments for reaping India’s demographic dividend, catalyze
employment generation and augment its economic growth. Aforementioned policies/ schemes/challanges are
significant in this regard// need to be addressed on war footing.

STARTUPS: WHY LESS REGISTRATION IN EASTERN INDIA?

- A 10% increase in firm registrations in a district leads to a 1.8% rise in Gross Domestic District Product
(GDDP), showing the impact of entrepreneurship on local wealth creation.
- Eastern India experiences slow growth in new firm registrations due to several factors:

 Lowest literacy rate in Eastern India (59.6% as per 2011 census), resulting in lower registration of new
firms. Privatization of education, like engineering colleges, could be explored to boost literacy and
entrepreneurship.
 States like W.Bengal, Assam, Jharkhand, Kerala, and Bihar have inflexible labor laws, hampering
entrepreneurial activity.
 Inadequate physical infrastructure, including roads, electricity, water/sanitation facilities, and telecom
services, also hinders business growth in the region.
CONCLUSION: - Startups can transform Indian youth into entrepreneurs, driving innovation and globally
relevant products.Protecting startup intellectual property rights (IPR) is crucial.Initiatives and challenges
discussed are essential and must be swiftly addressed to nurture the startup ecosystem.
MFG & SERVICES →IPR/PHARMACY/BIOTECH
IPR LAWS, POLICY, SCHEME, RANKING, PROBLEMS-COVERED IN AGRICULTURE

INDIA = PHARMACY OF THE WORLD

Indian pharmaceutical sector is a major player in the global market, and it is known for its low-cost generic
drugs and skilled manpower. However, to become “Pharmacy of the world”, India needs to overcome
following challenges:
⇒ between 2010 to 2019: India's Pharmaceutical exports have doubled (2x) ⇒ Top 3 Pharma exporters:
Germany, Switzerland and USA. India is 11th Rank.
 India's Strength Weakness
⇒ Availability raw ⇒ Indian pharmaceutical industry excessively dependent on China for sourcing Active
material from well- Pharmaceutical Ingredients (APIs). API is a chemical compound that is the most
developed important raw material to produce a finished medicine.e.g. Paracetamol is the API for
petrochemical Crocin tablets.
industry. ⇒ Private Sector expenditure R&D is very low.
⇒ skilled workforce ⇒ Corona pandemic exposed Indian Pharma sectors weakness in meeting the
domestic demand.
Pharma sector: Way forward
⇒ Focus research on gene therapy, Novel chemical entity (=Drug molecule that is never discovered previously
by others)
⇒ Focus on improving exports to Japan, China, Africa, Indonesia, Russia/CIS countries, Brazil and Latin
America.
⇒ Optimal utilisation of Production Linked Incentive (PLI) Scheme.
⇒ Then, In future, India has the potential to become the pharmacy of the world.
Conclusion: Thus, Indian pharma industry facing a number of challenges, but it is also an important sector
both for economic growth through exports, as well as for human development through affordable medicines.
Govt needs to take steps to address aforementioned challenges, to ensure success on both fronts.
IPR:JUGAAD MENTALITY
Suppose $100 is being spent on R&D → within that how much is contribution of govt sector and private
sector?

⇒ German govt gives no tax benefit yet their private sector spends a large amount of funds on the research
development.
⇒ While India Govt provides tax benefits to companies who invest more money in R&D yet companies are not
doing it enthusiastically.
⇒ such 'jugaad mentality' is not helping real professional Innovation, Which is required for success of make in
India and assemble in India
Gross domestic expenditure on Research & Development (GERD)
Contribution in R&D Funding % of GDP spent on R&D ES21 TARGET/suggestion
India 0.65%- 0.70% of GDP more than 2% of GDP
China 1.35% (in 2005), 2.5% (2020) N/A
Others in top 10 economies 1.5%-3% of GDP N/A

Conclusion: Considering the limited fiscal capacity of the government (10-11% Tax:GDP; hardly 7% voters pay Income
tax), versus multiple economic, social and defence obligations of the government – it is difficult for government to
increase the R&D spending. Need of the hour is for the private sector/entrepreneurs to pick up the pace in R&D. it is
need of the hour for achieving developed country status by 2047.

PRO-BUSINESS VS PRO-CRONY
Crony capitalism is an economic system in which businessmen thrive not by their hard work or risk taking
capacity, but through a nexus between a business class and the political class.
1. In India, road contractors linked to the ruling party received contracts for Pradhan Mantri Gram Sadak
Yojana (PMGSY), but a quarter of these roads only exist on paper.
2. In Brazil, public sector banks are more likely to approve loans for companies whose owners made election
donations to the ruling party.
3. In Eastern Europe, politically connected firms failing in business often receive government bailouts funded
by taxpayers.
4. Politically connected underwriters in China increase the chances of clients' IPO applications getting
approved by regulators.
- Globally, crony capitalist firms tend to pay lower taxes compared to their actual profits.
Cronyism: Economist David Ricardo & Rent Seeking
 Cronyism involves companies paying political bribes to secure government licenses, such as spectrum or
coal resources.
 These companies often recoup their costs, profits, and bribes by imposing high prices on consumers,
impacting the general public.
 Economist David Ricardo termed this behavior as "rent-seeking," as it doesn't contribute to new wealth
creation and extracts abnormal profits from citizens.
 Crony capitalists tend to prioritize personal indulgence and building political connections over investing in
research and innovation.
- Such rent-seeking behavior was more prevalent until 2011, according to ES20.
Pro-business vs Pro-Crony Policies
Pro-business policies Pro-crony Policy
Make it easy to start a business, Register property, When existing companies pay political bribes to restrict entry of
enforce contracts, ⬆competition new companies / import restrictions of rival brands.
Make it easy to obtain loans, resolve insolvency. →decrease competition →increase heavy profits, but at expense
This helps in biz expansion and wealth creation of customer.
Transparency in bidding for natural resources. ⇒ When political masters pressurize Public Sector Banks to lend
₹ to unviable biz.
When wilful defaulters not dealt strictly.
Thus, they’ve destroyed a total ₹1.4 lakh cr of loan assets.
Result? Competition, innovation, lower prices and Reverse will happen → Wealth is destroyed.
better service quality for citizens → demand ⬆ →
production ⬆ → GDP → (new) wealth created
Conclusion: Cronyism doesn’t foster competitive markets. It fosters inefficiencies & results in erosion of wealth. As Dr.
Raghuram Rajan said, ‘There is a need for saving capitalism from the crony capitalists”.

SECTORS: EASE OF DOING BUSINESS

Ease of doing business refers to set of reforms taken to help businessman set up and operate his business with
minimal obstacles and delays.
- World Bank once used the Ease of Doing Business (EoD) Index, which averaged 10 parameters like property
registration, obtaining electricity, and tax payments.
- The EoD Index was discontinued due to allegations of data manipulation.
Economic Survey 2019-20 observed:
 To open a shop, China & Singapore require only 4 licenses, but India requires >20.
 Hong Kong construction permits available within 2 months, India takes 4 months.
EASE OF DOING BIZ →JUDICIAL REFORMS:
⇒ Theory of Matsyanyaya: If no ruler / Government → big fish will eat little fish.
⇒ 3.5 crore cases pending in the judicial system. – as per ES19
⇒ Compared to many European countries we are 4-6 times slower in delivering court case verdict.
1. Increase Judge Recruitment - District and subordinate courts have about 18,000 judges, while sanctioned
strength is around 23,000. Vacant positions need faster recruitment.High Courts require approximately
360 additional judges to clear backlog cases in the next five years.
2. Establish Judicial Administrative Service- Create the Indian Courts & Tribunal Services (ICTS) to improve
administrative support, recruitment, and training for judicial staff.
3. Extend Court Working Days- Central government offices operate for 244 days a year, while High Courts
are open for 232 days and the Supreme Court for 190 days. Consider reducing vacations.
4. Embrace E-Governance and ICT- Implement E-governance and ICT solutions to enhance court efficiency
and utilize technology like Artificial Intelligence for resolving routine disputes.
5. Enforcing Contracts Portal (2021-June)- Department of Justice's portal offers information and statistics on
cases in Commercial/Civil Courts of Delhi, Mumbai, Bengaluru, and Kolkata.
6. International Arbitration Centre @GIFT City (Budget-2022)- Establish an International Arbitration Centre
in GIFT City to facilitate timely resolution of international disputes.
7. Budget-2022: - Allocate resources for the International Arbitration Centre at GIFT City.
8. E-Courts Mission Mode Project- Promote the implementation and connectivity of the National Judicial
Data Grid (NJDG) to track case status efficiently.
Conclusion on Judicial reforms: Thus, case pendency can be increase through recruitment of more judges,
creating separate cadre of Judicial Administrative Services, increasing in working days of court, and deploying ICT
technology.Preamble to Constitution of India defines that first role of State is to secure social, economic, and
political justice for all citizens.Therefore, need of the hour is to pursue judicial reforms on a war footing.

ES17&21:OVER REGULATION IN INDIA, TORA ACT

1. Government officials create numerous rules to avoid scrutiny from institutions like the Court, CAG, CVC,
CBI, and media.
2. An increase in rules doesn't reduce officer discretion; it often leads to more interpretation possibilities,
fostering corruption and nepotism.
3. Overregulation in the banking sector makes it overly cautious in lending, hampering business expansion.
4. Conversely, under-regulation in NBFCs/shadow banking has led to multiple financial scams.
5. Voluntary liquidation in India involves lengthy bureaucratic processes, requiring various no-objection
certificates (NOCs).
6. Despite no tax disputes or litigation, India's bureaucratic procedures result in significant delays.
7. World Bank's Ease of Doing Business report highlights that it takes 1445 days to resolve a commercial
contract in India, compared to just 120 days in Singapore.
8. Such overregulation causes undue delays, rent-seeking behavior, and non-transparent decision-making by
government officials.
Overregulation: Solution- TORA Act
1. ES17 proposed the Transparency of Rules Act (TORA), requiring organizations to publish rules and
regulations in a clear format on their websites in English, Hindi, and vernacular languages.
2. Rules not explicitly mentioned on the website would not apply to people.
3. TORA ensures transparency, reducing officer discretion and opportunities for bribery and harassment.
4. Example: If the Education Ministry's TORA page specifies the documents needed for a scholarship scheme,
officials cannot demand additional proofs beyond what's stated.
5. TORA aims to enhance accountability and fairness in rule implementation.
Overregulation Solution: ‘Minimum Government and Maximum Governance’
1. ES21 recommends reducing the number of government bodies for more effective governance.
2. Government has already closed several bodies such as All India Handloom Board, All India Handicrafts
Board, Cotton Advisory Board, and Jute Advisory Board.
3. The merger of Films Division, Directorate of Film Festivals, National Film Archives of India, and Children’s
Film Society into the National Film Development Corporation (NFDC) has been approved.
4. In 2021, through an ordinance, the government shut down numerous appellate bodies/tribunals under
various acts, including the Cinematograph Act, Customs Act, Patents Act, and others.
5. Example: The Film Certification Appellate Tribunal (FCAT) under the Cinematograph Act, which allowed
appeals against the censor board's decisions, has been eliminated. Filmmakers must now directly appeal to
the High Court.
Reasons for closing down tribunals?
 1. Public at large, is not the litigant. Very few cases come.
2. Yet too many officials' salary/bunglow/cars/peon/Personal-Assistant etc’s budget burden.
3. These tribunals have not reduced the workload of High Court in a significant manner.
EODB 2.0 IN BUDGET-2022
EODB 1.0 = So far, Govt removed nearly 1500 laws and 25,000 compliances
Budget-2022 announced Next phase of Ease of Doing Business (EODB 2.0). It’ll focus on → - idea of ‘trust-
based governance’.
- digitisation of manual processes
- integration of the central and state-level systems through IT bridges
- citizen-centric service
- removal of overlapping compliances.
- Crowdsourcing of suggestions
Conclusion: - World Bank research reveals a strong link between improved Ease of Doing Business (EoD) and
increased new business formation in a country. These new businesses generate employment opportunities,
contributing to poverty reduction and reduced inequality. Therefore, enhancing the ease of doing business for
corporations directly impacts the ease of living for impoverished individuals.mentioned schemes, policies,
acts, initiatives, and challenges are crucial and demand urgent attention to achieve this objective.
EASE OF DOING BIZ →LABOUR REFORMS :
- Laws like Minimum Wages Act, 1948, Payment of Wages Act, 1936, Payment of Bonus Act, 1965, and Equal
Remuneration Act, 1976, were initially meant to protect worker welfare.
- Over time, these laws became burdensome for entrepreneurs due to extensive legal compliance paperwork
and frequent government inspections, leading to potential harassment and bribery.
- In 2002, the Second National Labour Commission recommended simplifying and consolidating these laws.
- In 2017-18, the government announced plans to replace multiple central labor laws with four labor codes.
- In 2020, these labor codes were passed in both houses of the government.
4 labour codes: Challenges
- Passed in 2020, but not yet notified even as of 2023-July
- If minimum wages are updated as per the provisions of labour codes, it will increase the cost of production
for the industrialists so there is lobbying / resistance / apprehensions by the industrial groups.
- However, this (minimum wage increase fear) cannot be an excuse to deny the workers a right to a
respectable livelihood.
Conclusion: So need of hour is to notify the four labour codes at earliest, to achieve DPSP articles related to
Just and humane conditions of work and for maternity relief.Living wage and a decent standard of life for all
workers.Participation of workers in the management of industries.

MINIMUM WAGES
Minimum wage is the minimum amount of remuneration that an employer is legally required to pay to the worker. It’s
usually expressed in amount per day or per hour.
 Minimum wage concepts date back to ancient times, as seen in the Arthashastra from the 2nd Century
BCE.
 The British introduced the Payment of Wages Act, 1936, in India to ensure timely salary payments but
lacked provisions for minimum wage computation, enforcement, or gender pay equality.
 Post-independence, Directive Principles of State Policy mandated securing a living wage and decent living
standards for all workers (Article 43).
 The principles also aimed to provide equal pay for equal work and adequate livelihood means for all
citizens.
 Unionized workers typically secure better wages compared to unorganized workers due to representation
in advisory boards.

Minimum wages – significance / why required?

India has achieved 4-8% annual GDP growth, becoming a trillion-dollar economy.

1. However, more than 20% of the population lives below the poverty line, and over 75% have personal
wealth below $10,000.
2. The richest 10% own over 75% of national wealth, indicating growth is not inclusive.
3. Lack of minimum wages leads to youth exploitation and prevents investment in education and well-being.
4. Underpaid workers can't consume, reducing demand, tax collection, and government fiscal resources.
5. Initiatives like Make in India and job creation will fail without addressing minimum wages.
6. Insufficient minimum wages contribute to a preference for government jobs, wasting educated youth.
7. Underpaid workers may fall prey to scams, engage in criminal activities, or be vulnerable to extremist
ideologies, posing security risks.
8. Ensuring fair wages is essential for national unity, security, and the effective utilization of India's
demographic dividend.
9. Minimum wages should consider gender justice, with particular attention to roles predominantly filled by
women, such as domestic work.
10. Minimum wage laws do not cover a significant portion of gig workers and new-age employees, leaving one
in three workers without such protection.
CONCLUSION: Without minimum wages, Indian youth may face exploitation, depression, and engage in
anti-social and anti-national activities. Achieving SDG Goal 5 (Gender Equality) and SDG Goal 10 (Reducing
Inequality) is also challenging without minimum wages. The government's new code on wages should be
implemented promptly to address these issues.
MINIMUM WAGES : ECONOMIC SURVEY’S SUGGESTIONS
Simplification and Rationalisation:- Currently, around 2000 minimum wages exist for different job categories. Simplify
them into four categories: UNSKILLED, SEMI-SKILLED, SKILLED, and HIGHLY SKILLED. Apply Wage Code to all jobs,
workers, and sectors, including organized and unorganized sectors.

Use ICT to enforce Minimum Wage:Disseminate MW information through digital platforms, mobile phones, rural
markets, TV, and radio for effective worker-employer bargaining.Establish a digital dashboard for updated minimum
wage rates.Provide an easily memorable helpline/complaint number for workers.Announce the punishment of violators
by the Labor Ministry to deter other employers from violating minimum wages.

Conclusion: Indeed minimum wage enforcement is important

“although for complying with the DPSP we have enacted multiple laws but successive Committees and
economic surveys observed these laws have failed to bring about the change in letter and spirit so
aforementioned reforms are necessary.”

SECTORS OF ECONOMY →MFG →TEXTILE & MSME

After agriculture, Textile industry is one of the second largest sources of employment generation in India, with an
estimated 4.5 crore people directly engaged in this sector.
- India's textile sector has a competitive advantage over China due to significantly lower wage costs in most
Indian states.
- Encourage textile and leather industries to relocate to smaller towns to tap into the available female
workforce.
- To boost export earnings, focus on manufacturing readymade garments and conduct research on foreign
fashion, style, and size preferences.
- Invest in R&D for non-leather shoes as they are becoming more popular among foreign consumers due to
affordability, comfort, and fashion trends.
CHALLENGES?
(1) Getting quality cattle hides becoming difficult due to present socio-political atmosphere so leather industry
facing problems
(2) Bangladesh & Ethiopia emerging as textile/leather hubs and they get duty free access to USA/EU for being
L.D.C. (Although now Bangaldesh exiting LDC so some relief for India). ButIndia textile industry facing steep
competition, need to sign FTAs with likeminded nations.
CONCLUSION
The textile and leather industries have substantial job creation potential, particularly for Indian women, and
can boost export income. They align with SDG goals #1, #5, #8, and #10. These policies and initiatives are
critical and require immediate attention.

MFG &SERVICES → MSME →MINISTRY

MSME: What has been done to help them?
1. Loans upto 1 crore within 59 minutes through an online portal
2. Interest subvention of 2% for all GST registered MSMEs loans.
3. MSME / Corporates can borrow money from banks/NBFCs under Bill of exchange / Factoring / Trade Receivables
Discounting System (TReDS). Technical norms are further tweaked to help them
4. All govt organizations to compulsorily procure 25% from MSMEs, out of that 25% → 3% from women owned MSME.
(previously women didnot have internal quota)
5. All Central Govt Companies must compulsorily procure through GeM portal.
6. Simplified forms for MSME owners to comply with labour laws.
7. Factory / labour Inspector will inspect MSME unit via computerised random allotment- to prevent any nepotism /
collusion.
8. Self-declaration for air and water pollution laws.
9. Only 10% MSME units to be inspected to checked.
10. For minor violations under the Companies Act, entrepreneurs no longer have to approach NCLT, but file penalties
online using simple forms.

ES19: MSME DWARFISM SHD BE DISCOURAGED

If a firm becomes larger in size, then, it has to comply with many legal regulations:
 Meanwhil,e small firms get benefit of
− Priority Sector Lending, Public Procurement Quota.
− Benefits in Government tendering such as no need to pay fees / security deposits. Some tender/contracts are
exclusively reserved for MSME.
− GST Composition scheme: where they have to submit the collected GST to Government on a quarterly basis
instead of monthly basis, if turnover less than “X” crores.
MSME ‘Dwarfism’ is caused by Govt schemes
− If the firms grow beyond these worker / turnover → unable to obtain the above benefits.
− So, entrepreneurs find it optimal to start a new firm to continue availing these benefits. But then firm
doesn’t benefit from economies of scale → they can’t create large number of jobs.
− Thus infant firms → giant companies...nope; but infant firms → ‘dwarfs’. Such drawf firm contribute
neither to productivity or jobs.
− 40-year old firm in Mexico generates 40% more jobs than an 40-year old Indian firm.
− Productivity level for 40-year old enterprises in the U.S. was more than 4x of a newly setup firm. This is
not true in India.
MSME ‘Dwarfism’: Suggested Reforms by ES19
- Modify Priority Sector Lending (PSL) norms to prioritize loans for startups and infant firms.
- Implement a sunset clause for MSME incentives, limiting benefits after 5-7 years.
- Concentrate on high employment sectors like rubber, plastics, electronics, machinery, textiles, and leather.
- Focus on service sectors with spillover effects, like tourism, to create jobs and reduce rural migration.
Conclusion-Template for MSME
They provide employment & entrepreneurship opportunities to weaker sections of the society. Thus they play a pivotal
role for both industrial development and human development of India. Aforementioned Policy / Scheme / Act / Bill /
Reform is important to catalyse that role played by MSMEs.

SERVICE SECTOR AND SDG

 Services sector’s accounts for more than 50% of GDP and 80% of total FDI inflows.
⇒ High FDI attracting sectors are Computer Software & Hardware, ‘e-Retail Trading’, ‘Education', pharma-
research service, etc.
Service sector domination positive on SDG
⇒ many service sector jobs provide work from home opportunity / even in the office the work is less
physically demanding= which is a boon for women, mothers, elderly and physically handicapped.
⇒ work from home jobs = decrease travel, communication, office electricity air conditioner requirement =
environment conservation, Global warming controlled.
⇒ Service sector requires less quantity of physical inputs → environment exploitation decrease
⇒ Service sector is less vulnerable to external shocks compared to manufacturing / agriculture e.g. Ukraine
war → expensive fertiliser, Corona: car-microchip crisis.
Service sector domination negative / limitations on SDG
1. Limited Quality Jobs: Many jobs in the service sector are low-paying and offer limited job security, leading
to issues of underemployment and job dissatisfaction.
2. Skill Mismatch: There is often a disconnect between the skills possessed by the workforce and the skills
demanded by the service industry, leading to high levels of unemployment among educated youth.
3. Informal Sector Dominance: A significant portion of the service sector in India operates in the informal
economy, lacking formal regulations and job benefits, making it vulnerable to exploitation.
4. Inadequate Infrastructure: Insufficient infrastructure, especially in rural areas, hampers the growth of the service
sector, limiting its reach and effectiveness.
5. Regulatory Challenges: Excessive regulations and bureaucratic red tape can hinder business operations
and investment in the service sector.
6. Low Productivity: Low productivity levels in some service industries, such as retail and hospitality, can
affect competitiveness and hinder growth.
7. Dependency on Global Markets: Some service industries, like IT and business process outsourcing (BPO),
are highly dependent on global markets, making them vulnerable to economic downturns .
8. Lack of Innovation
9. Gender Disparities

The problem of job creation in India can be summarized as follows:

1. Jobless Growth: Economic growth is not translating into sufficient job opportunities.
2. Causes of Jobless Growth:
a. Unskilled job-seekers
b. Insufficient investment
 c. Difficulty of doing business
d. Inadequate or inappropriate social security systems
3. Limited Employment Growth in Services Sector:
a. Despite the expansion of services, the share of employment in this sector remains relatively low.
b. Minimal growth in employment within modern services like finance, real estate, and business activities.
4. Inflexible Labor Laws: Strict labor laws make it difficult for companies to hire and fire employees, leading to a
preference for automation over hiring.
5. Automation Trend: Automation is on the rise, not only in manufacturing but also in service sectors like IT, reducing
job opportunities.
6. Slow Growth in Skilled Jobs: The growth in skilled jobs is not keeping pace with the increasing literate population.
These factors collectively contribute to the challenge of job creation in India.
SERVICE SECTOR→E-COMMERCE= prelims handout
ONDC- A GAME CHANGER FOR BOTH BUYERS AND SELLERS
(Define) Open Network for Digital Commerce (ONDC): is a digital platform to connect buyers and sellers.
It is operated by a not-for-profit company of commerce ministry’s DPIIT department, founded in 2022.
Similar to UPI, it is free/ low cost, open source technology.
Reduces transaction costs, making it more affordable for buyers and sellers to conduct business online
compared to traditional online platforms, such as Amazon, Swiggy Zomato Flipkart Ola Uber.
 Aims to create a more inclusive, accessible e-Commerce landscape for all consumers and sellers.
 it will help ending the duopoly of Amazon-Flipkart; Ola-Uber; Swiggy-Zomato.
 ONDC is product agnostic (i.e. anything can be bought and sold. Presently Amazon App itself can’t book restaurant-
food or taxi, u need to install another App Swiggy/Ola.)
 Particularly beneficial for small businesses, giving them more freedom in making business decisions (compared to
certain ruthless terms & conditions imposed by e-commerce giants on small.)
 Gives consumers more freedom of choice by letting them use any compatible application or platform to discover
products
 currently being tested in Bengaluru so more operation details are to be revealed. following is a comparison:

 It is evident that seller (McDonald) increases the price while selling on swiggy/Zomato, To keep the profit margin
same .
 Ultimately, customer has to pay more on Swiggy/Zomato.
 Then due to expensive price, some customer may not even place the order OR place lowquantity order → then even
the seller will suffer.

Conclusion: Thus, ONGC will help in a long way in democratising the e-commerce sector in India and a win-
win for both small traders and ordinary consumers.
ECONOMIC PLANNING & ECONOMIC SYSTEMS

MIXED ECONOMY MODEL

MIXED ADOPTED WHY?

A mixed economic model refers to an economic system that incorporates elements of both capitalism (private sector-
driven) and socialism (government intervention).

India adopted a mixed economic model in 1948, combining public and private ownership and central planning.
It shifted from socialist-leaning policies in the Nehruvian era to a more capitalist approach after the 1991 LPG
(Liberalization, Privatization, Globalization) Reforms.

Why did India adopt a mixed economic model?

CAPITALISM NOT GOOD FOR INCLUSIVE GROWTH?
INTRO FEATURES CHARMS
ECONOMIC PLANNING:
PLANNING TYPES-
1. BY DIRECTION/IMPERATIVE-MY WORD IS COMMAND
2. BY INDUCEMENT/INDICATIVE-Ambani/Adani plz do this we will give you subsidy
3. FINANCIAL-Rs for man,material,machinery
4. PHYSICAL-No. Of man,material,Machinery
Definition:Process through which Govt. prepares a list of socio-economic problems e.g. mass poverty, inequality, low
productivity in agriculture, lack of industrial and infrastructural development etc.; and then Govt. sets goals / targets /
plans to fix these problems.

PLANNING- GANDHI VS NEHRU

For present India, a balanced approach is necessary. Combining Gandhian values of reducing needs and
inequality with the need for economic growth, as Nehru's vision is currently unsuitable due to inefficiencies
and centralization.

PLANNING:NEHRU VS MODI – SELF-RELIANCE VS ATMA-NIRBHAR

After independence, Prime Minister Nehru had advocated ‘self-reliance’ to prevent the recolonisation by
foreign companies. Whereas, Prime Minister Modi launched Atma-Nirbhar initiative to revive Indian economy
after Corona (2020). Their ideas were similar and different in following ways:
Ideas of PM Nehru Modi
Self-reliance through Yes No. His plan is to privatize most of the CPSEs.
Central Public Sector
Enterprises (CPSEs).
Self-Reliance No.controlled through Yes, Capitalism, PPP is embraced with open arms. Focus on Ease of
through helping the License Quota Inspector doing business.
private sector: raj.
Self-reliance through Yes, ban/high taxes on Limited extend.
protectionism imported goods
Self-reliance Yes. Focus on SHGs. More Emphasize credit guarantee and loans for MSMEs and individual
through village- ‘collective’ in nature. entrepreneurs, while also creating job opportunities for
cottage industries MGNREGA workers. Modi's vision is more individualistic, with
less focus on SHGs in the ATMANIRBHAR (self-reliant) context.
Conclusion: Self Reliance: Nehru vs Modi ⇒ Both PMs ideas on self-reliance were shaped by the needs and aspirations of
their respective era. ⇒ Unlike Nehru, Modi can’t be expected to be more ‘protectionist’ due to WTO & global pressure.
⇒ Unlike Modi, Nehru could be expected to be more Pro-business/Pro-Capitalist, due to immediate negative experience
of British Imperialism & East India Company. ⇒ Nonetheless, both PMs played instrumental roles in shaping the
economic vision of India during.

GOVERNANCE UNITS: STATES AND DISTRICTS

ADMIN UNITS:NEW STATES AND ECONOMIC GROWTH
From 2000 onwards, following states have been created in India:

So looking at above issues, it is difficult to imagine that newly formed states have given their best possible
contribution to GDP and job creation and export of India, yet.
Major problem of the newly formed states:
1. Political Instability: Frequent changes in state governments lead to instability and result in politicians
offering freebies to win elections.
2. Administrative Challenges: Shortage of senior IAS/IPS officers leads to inefficiency and corruption in
administration.
3. Economic Costs: Establishing new infrastructure and institutions strains both the national and state
budgets, potentially delaying economic development.

Conclusion: Public administration thinkers advocate for smaller states for good governance and economic
development. However, looking at the majority of the newly formed states, this vision is yet to be realised. Need of the
hour is to address the administrative and economic challenges to overcome this.

ASPIRATIONAL DISTRICTS
2018: Launched by NITI Aayog. Aspirational Districts Programme (ADP) aims to transform 100+ most under-developed
districts across the country. Its core strategy includes competition, collaboration and convergence in following manner:
Competition :
1. District Rankings: Based on 49 Key Performance Indicators (KPIs) across socio-economic themes.
2. Harvard Business School Involvement: Collaboration with Harvard Business School for rankings.
3. Motivating Excellence: District collectors receive appreciation for good work and alerts for lack of progress,
fostering competition.

Convergence thru Officers :

1. Uniting Elements: Different elements converge at a common point for efficient governance.
2. Examples: Utilizing MGNREGA workers for various projects, ensuring electrification for education and
healthcare, holistic housing schemes.
3. Micro Enterprise Support: Offering PM Mudra loans to trained beneficiaries, promoting insurance and pension
schemes.
4. Synergies: Soil health cards for PM-KISAN beneficiaries, promoting multiple government schemes.

Collaboration :
1. Stakeholder Engagement: Regular review meetings and workshops involving stakeholders.
2. Cross-District Learning: Officials visit other districts to exchange ideas.
3. Best Practice Sharing: NITI Aayog publishes best practices for aspirational districts, enabling replication by other
DMs/Collectors.

Copying of Best Practices

DISTRICT BEST PRACTICE
NADURBAR centralised kitchen to provide hot nutritious hygienic meals to school (instead of setting up
kitchen in every school)
KANDHAMAL Bike Ambulance to quickly transport either the doctor for the patient depending on the case.

KORAPUT IN ODISHA bell ringing and night petroling ensure that villagers use mosquito nets while sleeping to
Combat malaria.
SITAMARHI IN BIHAR Library in every school where adults can come for reading after school hours.
Conclusion - Aspirational Districts:
- Tangible Improvements: 117 districts improved in health, education, agriculture, finance, and infrastructure
indicators (2018–22).
- Surpassing Averages: Some outperformed state and non-aspirational districts.
- Potential Realized: Demonstrates the transformational power of dedicated government action and
community participation.
GSM2- POLICY DESIGN / STAKEHOLDER / AWARENESS
Neoliberalism
"Neoliberalism" is an economic and political ideology. It is rooted in the older classical liberal economic ideas
but with a modern twist / faster pace, particularly in its focus on market-driven solutions to societal/welfare
issues.

Neoliberal perspective of development focuses on

 Individual Liberty, Market driven economy
 State minimalism- in welfare schemes with greater focus on fiscal deficit control
 Greater involvement of the private sector, including in providing basic infrastructure services and public amenities.
 Multi level planning by engaging all the decision makers at all levels of governance.

Neoliberalism- Origin in India

 Post-independence: Adopted Soviet-style Five Year Plans for economic growth and poverty reduction.
 Trickle-down expectation: Hoped benefits would reach the bottom of society.
 Challenges: USSR collapse, balance of payment crisis, rising inflation, and unemployment exposed flaws.
 Emergence of Neoliberalism: Early 80s, United Kingdom and United States.
 India's Shift: LPG Reforms in 1991 introduced liberalism, with subsequent movement towards neo-
liberalism, notably under PM Vajpayee and PM Modi.
MLP Challenges: Combative federalism

MLP: case of skill development

SERVICE SECTOR COOPERATION FOR DEVELOPMENT
Introduction - Service Sector in India:
- Post-1991 LPG Reforms, the service sector plays a vital role in India's economic growth and exports.
- Key drivers include ICT-communication, trade, tourism, hotels, transport, and finance.
- Collaboration with these sub-sectors can significantly boost India's development process,in following ways:
**Service Sector Partnerships - Achievements:**
- NPCi created Aadhaar-enabled payment systems, IMPS, UPI, BHIM, aiding cashless transactions and
government benefit transfers.
- Infosys developed the GSTN portal for GST collection and refunds.
- L&T's big data analytics tools assist the Income Tax Department in tackling tax evasion.
- GeM portal, Bharatkosh, and E-NAM support public procurement and agri-trading but can benefit from
collaboration with the private IT sector for improved logistics and supply chain management.
**Service Sector Partnership: Finance & Education Potential:**

- Low insurance-density and penetration in India compared to peers.

- Suggestion: Government partnering with mobile companies for insurance and pension schemes.
- Swayam online learning platform underutilized compared to popular platforms like YouTube, jioTV, TikTok,
Hotstar.
- Recommendation: Government collaboration with popular platforms to enhance education and skill program
reach.
**Future Service Sector Partnership - Health:**
- Enroll more hospitals in PM-JAY health insurance scheme for increased impact.
- Leverage 5G for Telemedicine, robotic surgery, and defense, with greater public-private collaboration.
- Explore Medical tourism potential with accreditation, visa ease, and improved transport-communication,
requiring collaboration between public administration and the private sector.
Conclusion: yes it can help - Thus, the collaboration with the service sector can improve our efforts in financial
inclusion, health, education, skilling, job creation, agriculture growth and export earnings. - All this can collectively can
augment our development process/efforts & bring Indian economy to $5 trillion dollar target and developed nation
status by 2047.
PEOPLE PARTICIPATION IN WELFARE SCHEME
**Introduction to Welfare Schemes:**
- Government obligated to provide education, work, health, and social security under Directive Principles.
- Union and State governments have run welfare schemes since independence.
- India ranks above 100+ in Human Development Index and Global Hunger Index.
- Lack of awareness and involvement of vulnerable populations in schemes is a key challenge.
**PPL Awareness - Generic Medicine Scheme Case Study:**
- 2015: PM Jan Aushadhi Scheme (JAS) for affordable generic medicines.
- Doctors prefer patented drugs (commission-driven).
- Lack of awareness among the poor about generic medicines.
- Patients follow doctor's prescriptions without seeking cheaper alternatives.
- Limited availability of Jan Aushadhi stores in India.
- Scheme's potential not fully realized due to generic medicine awareness gaps.
PPL-Awareness- immunisation programs
- 2014: Health ministry launched mission indradhanush to provide 100% immunization coverage against 7 diseases.
- In 2023 we are still far away from the target achievement. This is not only because of the lack of awareness but also
because of the misinformation prevailing among some people
- Religious opposition to polio vaccination - fake news connecting random child death with vaccination, esp. in Measles-
rubella.
PPL Involvement
- Micro-irrigation sprinklers - PM Krishi Sinchai Yojana: subsidy given to buy micro irrigation systems, drip irrigation,
sprinklers etc.
- Yet, not adopted by all farmers, because damage by wild animals’ trampling not covered,
- repairmen not easily available.
- Shows, farmers input / participation not taken in designing the scheme.
LPG Scheme:**
- Petroleum ministry launched PMUY for Free LPG connections to BPL women.
- Reason: Subsidized cylinders still unaffordable; complex refill loan process.

Challenges: Remote locations, migrant workers hinder access despite updated norms.

**PPL Participation - Subsidized Meal for Workers:**

 Gujarat's Shramik Annapurna Yojna offered subsidized meals at ₹10 for construction workers.
 Scheme faltered due to:
 Thin and small rotis unsuitable for some workers.
 Insufficient rice quantity for others.
 Lack of desired spiciness in the taste.
 Lack of worker consultation in menu design led to the scheme's failure.
PPL Participation - Additional Points:
- Shift to demand-driven schemes like MGNREGA and Mudra loans.
- Some schemes rely on proactive demand by beneficiaries (e.g., MGNREGA, subsidized food, reservations,
housing, toilets).
- Funds often underutilized in scholarship, skill development, and loan schemes for minorities, ST, and PH due
to beneficiary unawareness or unsuitable entitlements.

Conclusion:
- Achieving SDGs like 0 poverty, zero hunger, health, gender equality, and economic growth by 2030 requires
active consultation and awareness among vulnerable populations.
- Neglecting them not only hinders human development but also fuels alienation, separatism, terrorism, and
recruitment.We must prioritize people's awareness and involvement in schemes to leave no stone unturned in
achieving these goals.

PARTICIPATION:DONOR AGENCIES NEED TO CONSULT WITH LOCAL PUBLIC

Conclusion: Donor agencies need to consult with local public
GDP GROWTH HARMED DURING ECONOMIC POLICY UNCERTAINTY
**Global Economic Policy Uncertainty Index (GEPU):**
- Introduced in 2016 by US economists Baker, Bloom, and Davis.
- Measures economic policy uncertainty based on newspaper headlines.
- In 2011-12, India had high uncertainty due to scandals and global crises.
- Government hesitant on reforms during this period.
- 2016-17 saw moderate uncertainty, mainly due to Demonetization and GST.
- Since 2014, India's EPU has fluctuated but decreased overall.
- Global EPU influenced by Trump, BREXIT, Iran, N. Korea, OPEC, and US-China trade war.
- High EPU leads to domestic investors favoring gold and real estate, affecting CAD and FPI.
- FDI growth less affected by exchange rate volatility; long-term investors consider various factors.
- Low FPI and FDI growth hinder capital influx, impacting factory expansion, job creation, and GDP.
**Reducing Economic Policy Uncertainty:**
1. Make Policies Predictable:
- Clearly communicate effective dates of policy changes.
- Avoid frequent reversals due to protests or backlash.
2. Keep Consistency in Promises:
- Maintain policy consistency and forward guidance.
- Avoid sudden changes in monetary and fiscal policies.
3. Policy Implementation Monitoring:
- Regularly monitor performance in the Economic Policy Uncertainty Index.
- Train staff and ensure certified implementation processes.
4. Respect Boundaries:
- Ensure the separation of powers among judiciary, legislature, and executive.
- Avoid creating policy vacuums that lead to judicial overreach.
Consistency and transparency in policy-making are essential for reducing economic policy uncertainty.
Conclusion - Policy Uncertainty:
- India faces uncertainties beyond its control like poor monsoons, BREXIT, OPEC cuts, and geopolitics.
- While we can't control these, we can reduce economic policy uncertainty.
- Greater private investment is crucial for India's economic growth.
- EPU can deter investors, so the government must ensure 100% policy certainty for a favorable investment
climate.
UNEMPLOYMENT
⇒ Slow Economic Growth vs Rapid Population Growth.
⇒ Defective Educational System, Lack of skill / employability.
⇒ Lack of Banking/Transport/Communication Infrastructure in some areas → people unable to pursue educational and
economic goals .
⇒ Social Factors- discrimination against SC/ST/Women/PH.
WHY FEMALE LFPR DECLINED BETWEEN 2004 TO 2018?

From 2004 to 2017, LFPR (Female: rural+urban) steadily declined from 45% to 17%) because-

Solution to improve LFPR?

 Government schemes for skill development and entrepreneurship among women
 Government should invest in child care / day care facilities, paid parental leave, family-friendly work
environment, and elderly care facilities, Equal pay and career progression for women, medical and social
security benefits for female workers.
 If these things are not available then there will be more family pressure on the women not to do the job
and take care of the house.

GIG ECONOMY IMPACT ON WOMEN WORKERS

Definition: Gig workers are temporary workers who are engaged in livelihoods outside the traditional
employer-employee arrangement. Delivery boys, app-based taxi drivers, service providers such as cleaners
and technicians, and freelance workers are all part of the gig economy.
DATA: 7.5 million+ workers were engaged in the gig economy in 2020-21, and this number could grow to more than 20
million in the next 8 year.
Notable gig-works examples-
- Cab/Tax drivers, delivery agent (food, e-commerce) .
- Virtual assistants, helpline operators.
- Freelance content writers, Graphic & ads designers, Social media managers.
- Tutors / educators, on demand at home beauticians, AC-repairman .
- Pet sitters, Baby-sitters, caretaker for elderly.
- Women gig-workers play a vital role in the evolving workforce landscape.
- Empowering and supporting these workers is essential for gender equality and economic growth.
- Policies and platforms that address their unique challenges can lead to a more inclusive and prosperous
future.
NITI Report on Gig Workers NITI Report-
“India’s Booming Gig and Platform Economy”: following recommendations →
⇒ Social security measures such as income support, paid sick leave, insurance, and pensions
⇒ Women are more likely to take up platform jobs after education and marriage. So, Government should give tax and
subsidy benefit to companies if they're hiring more women / PH.
LABOUR MIGRATION TREND
Labour Migration Outside India:
- 1980s-2000s: Gulf and Southeast Asia.
- 2000s-Present: North America, Europe, Southeast Asia, and Australia for jobs, education, and skilled labor
demand.
- 2007-08 and 2020-onwards: Some reverse brain drain due to economic crises abroad, better job prospects,
and family appeal in India.
Labour migration within India

Challenges faced by migrant workers in India

1. some state governments imposing domicile requirement for the jobs even in private sector e.g. Haryana
2. challenges in portability of ration card, LPG cylinder, electricity connection, EPFO/ESIC (although, Nowadays
government has come up with initiatives to fix e.g. one nation one ration card, online portal for EPFO etc.)
 3. lack of adequate social protection and maternity benefit for informal /casual / unorganised sector workers.
4. challenges in finding affordable rental accommodation, School admission for the child etc.
Conclusion: migration inevitable, so, ensure worker well-being “An ideal society should be mobile, should be
full of channels for conveying a change from one part to other parts.” - Dr. B.R. Ambedkar

GDP
⇒ Gross Domestic Product= is the market value of all the goods and services produced within the domestic
territory of a country during a specified time period, usually one year.
⇒ Here, domestic territory = political frontiers of the country including its territorial waters, ships, aircrafts,
fishing vessels operated by the normal residents of the country; AND its embassies, consulates located abroad.
(as per NIOS textbook)
⇒ GDP potential= is the Highest or maximum output that a country can produce using the available labour and
capital (at a constant inflation rate).
⇒ GDP gap = difference between potential GDP and real GDP.
2ND GEN ECONOMIC REFORMS
Reforms Roadblocks and delayed/lagged result -ES23
ES22: SUPPLY-SIDE REFORMS TO INCREASE GDP

GLOBAL RISK REPORT 2023

Published by the world economic forum, 2023’s report identified following risk for India:

1. Digital inequality
2. Geopolitical contestation of resources
3. Cost-of-living crisis
4. Debt crises - Natural disasters and extreme weather events

− Failure of technology Governance → Data privacy violation, cyber crimes

− Digital inequality among rich vs poor, urban vs rural → in e-learning, jobs, etc.
GDP→ $5 TRILLION →HOW TO ACHIEVE?

 Pre-Subprime crisis, above indicators were >30% of GDP. But then DECREASE then struggling to recover.
 Pre-subprime crisis our growth rate was in peak 9%, presently struggling in ~7% range (before Corona).
Some countries take as much as 17 years to come out of such crisis.
GDP→ ATMA-NIRBHAR BHARAT
2020 Lockdown and Atma Nirbhar Bharat:
- March 2020: Nationwide lockdown due to COVID-19.
- Impact: Affected income and livelihoods.
- May 2020: PM launched Atma Nirbhar Bharat stimulus package to revive the economy.
⇒ It’s centred on five pillars of – Economy, Infrastructure, System, Demand and Vibrant Demography
ATMA-NIRBHAR: CRITICISM
Counter argument: Fiscal deficit will become unsustainable, govt floods money from the treasury just to pacify
the critics. Besides excess level of fiscal stimulus can result into overheating of the economy- as evident in USA
Criticism: Failed to Revive Demand:
- Despite DBT/Subsidies/MGNREGA wages, beneficiaries are saving rather than spending due to recession
fears.
- RBI observed the stimulus package didn't reignite economic enthusiasm; GST collections rise during festivals
due to pent-up demand.

Criticism: States Lacking GST Compensation:

 States facing GST compensation issues post-COVID.
 Telangana CM proposed exceeding FRBM limit and 'Helicopter money.'
 Delhi Govt struggling to pay employee salaries, seeks ₹5000 cr from the Union.
 Bihar unable to fund central schemes (CSS) like MGNREGA, PM Awas Yojana, PM-JAY, mid-day meals,
and demands full Union funding, threatening implementation halt
Criticism: Regional Imbalance:
- ATMANIRBHAR focuses on MSME/industries, favoring southern and western states with more registered
firms.
- Eastern India and Hindi belt states with unorganized sectors may not benefit significantly.
- Mining sector reforms may primarily benefit industrialists, not mine workers, unless minimum wages are
raised and enforced.
Alternate Suggestions to Revive Economy:
 Mobilize funds through Consol Bonds.
 Provide Universal Basic Income of ₹15,000 to the bottom 80% of households.
 Universalize the public distribution system for free/subsidized essentials.
 Expand MGNREGA to urban areas, increase guaranteed employment days to 200.
 Strengthen the digital payment ecosystem in rural areas.
 Raise minimum support prices for farmers and minimum wages for workers.
 Consider reducing taxes on fuels for economic revival.
 Implement supply-side reforms recommended by the Economic Survey 2022.
Conclusion: IF above suggestions are implemented, they’ll greatly help in catalysing / augmenting the ATMANI
in further revival of Indian economy[Conclusion: ATMANIRBHAR (Appreciative Tone)]
INDIA: A DEVELOPED COUNTRY?

 ⇒ 15th August 2022: PM Modi Speech - Goal to become a developed country by 2047 when we celebrates 100 years
of independence.
 ⇒ While there is no unanimous commonly accepted definition of developed country.
 ⇒ United Nations, World Bank,World Trade Organization, and World Economic Forum use their indicators to club
developed and developing countries. but some features of a developed nation are:
 ⇒ GDP is very high. Per capita gross national income (GNI) very high.
 ⇒ Standard of living and Human Development Index (HDI) very high. Now what should India do, to become a
developed country? Ans. recycle the points that we have learnt / will learn across the six pillars.
INCLUSIVE GROWTH
 OECD defines Inclusive growth as the economic growth that is distributed fairly across society and creates
opportunities for all.
 UN Brundtland Report defined Sustainable development as the development that meets the needs of the
present without compromising the ability of future generations to meet their own needs.

INCLUSIVE GROWTH : CHALLENGES

INCLUSIVE GROWTH HAS TO BE SUSTAINABLE
Strategies for Sustainable and Inclusive Growth:
- Promote renewable energy and electric vehicles for job opportunities and sustainability.
- Embrace circular economy principles for efficient resource use and job creation.
- Develop sustainable tourism to create local jobs and preserve culture.
- Focus on high-value and labor-intensive sectors.
- Eradicate child labor and ensure social protection for informal, casual, and gig workers.
- Prioritize sustainable consumption and production, including waste reduction and food waste reduction.

REGIONAL IMBALANCE IN GROWTH

Intro Define: Regional disparity / inequality = a situation GSDP, per capita income, economic opportunities,
infrastructure availability are not similar among regions/States.
⇒ Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, Punjab and Tamil Nadu same to
perform well on above indicators compare to other regions. Due to following reasons:
⇒ Coastal States = the British developed railway line, ports, highways, banking network, import export
opportunities. ⇒ Punjab- Haryana = benefited greatly from the Green Revolution.
⇒ Eastern states, Sp. Cat States, NE = infra problems, inflexible labour laws,
⇒ good governance harmed by aid-curse, resource curse.

INFLATION
 Inflation is the rise in the general level of prices of goods and services in an economy over a period of time.
 Deflation is inverse of above definition. Deflation occurs when the inflation rate falls below 0%.
 DATA :Indian economy experienced over 6% CPI inflation for over nine months in 2022, posing risks to
the economy and consumers.

INFLATION - MAJOR REASONS IN INDIA

1. Agriculture: El-Nino, climate change, disasters, pests, APMC bottlenecks, middlemen, cold storage
shortage, MSP policies, and climate change hamper agricultural growth.
2. Corrupt use of black money inflates property prices.
3. Government revenue deficit from subsidies raises demand without increasing supply.
4. External factors like supply chain disruptions, lockdown effects, and geopolitical tensions impact inflation.
5. High taxes on petrol and diesel increase transportation costs.
6. Neglect of manufacturing leads to import reliance and trade imbalances.
7. Rent-seeking behavior in private schools, colleges, and hospitals.
8. During COVID-19, home sales decreased, but prices remained stable.
9. Post-COVID-19, lower home loan rates, subsidies, and reduced stamp duty increased housing demand and
prices.
LOW INFLATION = ECONOMY IN GOOD SHAPE?
PUBLIC DATA (ECONOMIC SURVEY 2019)
INFRA →GSM3:INVESTMENT MODELS
Origin: Infrastructure projects require large amount
of investment. Govt alone can’t finance it due to
fiscal deficit targets. - Such projects also require the
level of technical expertise, management skills and
professionalism that may not be available in the
traditional bureaucratic apparatus.

- Therefore, Infrastructure investment /

development has to be done through:
1. PPP: BoT, BOOT
2. Non-PPP: such as EPC, Outsourcing (Contracting-Out)
3. Or a mixture of both using Hybrid Annuity Model
INFRA.DEV.→NON-PPP→GOCOFOR INDIAN ARMY
Army’s Central Ordnance Depot (COD) & Army Base Workshops (ABWs) are responsible for mfg &
warehousing, maintenance, repair and overhaul
⇒ Weapons, Ammunition, Tanks, Trucks, Radars, Air defense system etc. ⇒ Clothing, footwear, headgear, tent
& camping gears, kitchen equipment etc. But,
⇒ 2015: CAG audit found them to be overstaffed, inefficient and slow.
⇒ 2016: Defence Ministry’s Lt. Gen. DB Shekatkar (Retd.) committee to “enhance combat capability and re-
balancing defence expenditure.” → recommended GOCO Model.

Benefits
⇒ decrese salary bill for Govt
⇒ Private operators can easily go into partnership
with Original Equipment Manufacturer (OEM) for
service, repair and spare parts.
⇒ Private firms will not have to invest in land,
infrastructure, machinery. Because Government
already built that.
NON-PPP: TOTEX MODEL FOR INSTALLING SMART ELECTRICITY METERS
Challenges
⇒ Private operators may not have the expertise to deal with
military equipment; ⇒ Private companies interested in bidding
mostly for workshops/Depots that handle Combat Tanks because
they can easily charge Rs 8-9 crore for tanks’
repair/services/spareparts every time. Whereas not much profit in
clothing/kitchen utensils like work.
⇒ Strategic / Security challenges: what if pvt player sells the
tank/radar blueprints to Pakistan/China?

HYBRID ANNUITY MODEL (HAM) = MIX OF PPP +NON PPP

INFRA FINANCE →NIF,NIP, PM GATI SHAKTI – PREPARE IT
PPP CHALLENGES
1. Environmental protests and legal hurdles impede land acquisition.
2. Reduced demand post-subprime crisis led to toll collection disputes and delayed projects due to policy
paralysis.
3. Scandals in infrastructure finance companies like IL&FS.
4. PPP projects may exclude the poor due to high user fees.
5. Private firms sometimes compromise quality to maximize profit, requiring performance audits.
6. PPP may not be suitable for small projects like schools.
7. PPP focus in India mainly on airports and highways, missing opportunities for synergy in other sectors.
8. Allegations of political influence and crony capitalism in awarding infrastructure projects.
PPP CHALLENGES:UPSTREAM ISSUES
1. Inadequate rail infrastructure affects port success, with unattractive cargo fares and poor punctuality.
2. Thermal power plants face coal availability issues due to labor strikes, cyclones, and outdated machinery.
3. The food processing industry struggles without 24x7 electricity for cold storage.
4. Challenges in federalism hinder the resolution of coal and electricity issues.
PPP CHALLENGES: EXPERTISE/EXPERIENCE

1. PPP Contracts should not be given to overleveraged companies. (i.e. Pvt companies already having too
much debt in their balance sheet)
2. Some companies have expertise in construction of airports whereas some certain companies have
expertise in “operating an airport”.
3. Accordingly there should be selection of players/division of work, and not merely based on who is willing
to work at the cheapest rates.
4. Crony Capitalism- contracts given to businessmen, not for his skill/XP, but his connections/nepotism

PPP CHALLENGES: ECONOMIC POLICY UNCERTAINTY

- Land Acquisition, Environment Clearance, People Protest, Media Campaign, Judicial Activism - government gets cold
feet and private player suffers

PPP CHALLENGES: PROFITABILITY

PPP CHALLENGES: FLEXIBILITY/EXIT

 External factors like environmental activism and globalization can lead to project failures.
 Private players may seek concessions, extra working capital, or project exit.
 Government officials may be reluctant to change terms due to fear of media, CAG, CVC, and courts.
 PPP contracts should include provisions and safeguards for addressing these challenges and protecting
honest officers.
PPP CHALLENGES: CITIZEN CHARTER /QUALITY STANDARDS

- Similar in shipping port, airports, hospitals etc

- Citizen charter / dedicated complaint portal / random supervision by third-party auditors /Grievance
redressal officer to put this into effect.

PUBLIC PRIVATE PARTNERSHIP IN HEALTHCARE

Areas where public private partnership possible
- Treating Ayushman Bharat (₹5 lakh health insurance walle) beneficiaries in private hospitals e.g. Apollo, Fortis etc.
- Setting up blood banks, testing laboratories etc.
- Setting up manufacturing facilities for active pharmaceutical ingredients, research development, et cetera
Challenges in PPPs in the Health Sector in India:
1. Unequal Access:PPPs may prioritize urban and affluent areas, leaving rural and underserved populations
with limited access to healthcare services.
2. Quality Assurance: Ensuring quality healthcare delivery in PPPs can be challenging, leading to concerns
about substandard services.
3. Cost Control: Balancing the need for affordable healthcare with the profit motives of private partners can
be difficult.
4. Regulation and Oversight: Effective regulation of private healthcare providers under PPPs is essential to
prevent overcharging, fraud, and unethical practices.
5. Sustainability: Long-term sustainability and financial viability of PPP healthcare projects can be uncertain.
6. Equity:PPPs may exacerbate health inequalities by focusing on profitable services, neglecting essential but
unprofitable ones.
7. Capacity Building:Building and retaining skilled healthcare personnel in the public sector to manage PPPs is
a challenge.
8. Data Sharing: Public-private partnerships require data sharing, which can raise privacy and security
concerns.
9. Community Engagement:Engaging communities in decision-making and ensuring their healthcare needs
are met can be a challenge.
10. Political and Policy Stability:Changes in political leadership and policies can disrupt ongoing PPPs in the
health sector.

Conclusion: Thus, private sector is required to complement the public sector for providing universal health
coverage. At the same time need of the hour is to promote and improve legal and administrative framework
to (1) protect the patients from any malpractices and profiteering. (2) balancing the dual objectives of public
welfare and profitability in the PPP models.

GENDER BUDGET- BENEFITS

Origin) Gender budget not required in Constitution / any law. But within general budget, this data presented
since 2005.

BENEFITS OF GENDER BUDGETING – ACCOUNTABILITY

 **DPSP Article 46 Justification:** Separate presentation of tribal and Scheduled Caste sub-plans (SCSP) in
the budget aligns with Article 46, promoting the interests of weaker sections, including women.
 **Local Accountability:** Gender budget documents empower women leaders in PRI/ULBs to hold
government officials accountable for allocated funds.
 **Ruling Party's Image:** Helps the ruling party counter opposition claims of insensitivity to women's
development.
 **Enhanced Accountability:** Encourages scrutiny by opposition, media, and voters, especially if
allocations decrease in subsequent years.
 **Citizen Engagement:** Enables voters and beneficiaries to question district officials about fund
utilization for women's hostels and school toilets.