Economics

ECONOMIC GROWTH
Introduction
> IIP highlighted 18 of the 23 industry in manufacturing negative growth
Reasons for slow economic growth Measures
> Weakness in NBFCs > Monetary Policy Measures
> Lesser consumption demand -- Repo rate cut
> Regulatory uncertainty -- Monetary Policy Transmission
> Implementation issues e.g GST
> Covid > Measures to boost exports
-- Remission of Duties & Taxes on Export Product replaced MEIS
-- Export Credit Guarantee Corporation
-- FTAs

> Measures to boost manufacturing sector

-- option to pay income tax at the rate of 22%
-- Make in India
Way Forward:
> Policy measures recommended by IMF
-- Resolution of balance sheet issues
> PRO-BUSINESS VS PRO-CRONY policies -survey
> SPECIALIZING TO EXPORTS IN NETWORK PRODUCTS -survey
INEQUALITIES and INCLUSIVE GROWTH
Intro
>Oxfam report
-- Income Inequality, India’s top 10% of the population hold 75% wealth
-- India's richest 1% hold 43% wealth
-- Wealth Inequality Gini wealth coefficient
-- Social Inequality , gender and caste
Consequences of these Inequalities Initiative
> Low social mobility > Financial inclusion
> Inequality in opportunities -- Prime Mantri Jan Dhan Yojana
> Vicious cycle of poverty (28% of world poor)
> Social unrest > Providing institutional support for entrepreneurship
> Less capacity to adapt to climate change -- MUDRA
> Translated into political inequality and power asymmetries -- National Hub for SC/ST entrepreneurs

> Expanding the social security net

-- PM Suraksha Bima Yojana
-- Atal Pension Yojana
Way forward
> SDG 10
> Expanding the social security net
> Financial inclusion
INCLUSIVE GROWTH
Definition Intro
> A concept that advances > Entered into the domain of planning with the Eleventh Plan
-- equitable opportunities for economic participants during growth
-- with benefits incurred by every section of society.
Dimensions of Inclusive Growth Initiative
> Social > Financial inclusion
> Economical -- Prime Mantri Jan Dhan Yojana
> Political
> Environmental > Providing institutional support for entrepreneurship
> Stakeholders (Govt, provate, NGO, Media) -- MUDRA
-- National Hub for SC/ST entrepreneurs

> Expanding the social security net

-- PM Suraksha Bima Yojana
-- Atal Pension Yojana
Way Forward
> Economic Survey says
-- priority to social infrastructure like education, health and social protection
POVERTY ALLEVIATION
Introduction Other Facts
> Fifth FYP "Garibi Hatao" > Largest reduction in multidimensional poverty was in India
-- Between 2005–2015 halved its MDP value
> UN report says India has 81 crore poor people (< $3.2 a day)
> "To fight poverty, one needs to know where poor people live
> GOI data says -- as they are not evenly spread across a country,
-- 6.7% below extreme poverty line -- not even within a household.”- MDPI report OXFAM
-- 38 crore under multidimensional poverty (2018)
> Abhijit Banerjee won Nobel
-- for their experimental approach to alleviating global poverty
Reforms Introduced During Covid
> MGNREGA > States like Kerala , Haryana during Covid
> PMAY -- home delivery of mid-day meals
> -- free ration to BPL
Initiatives and Issues
AFFORDABLE HOUSING MGNREGA

Need for Affordable Housing in Urban Areas > REFORMS IN MGNREGA

> Rapid urbanization, by 2030 40% -- linking wages to CPI (rural)
> Health and well-being due to slums -- 100% of geo-tagging of assets (GeoMGNREGA)
> Urban congestion -- AADHAAR linking of Bank Accounts
> Reverse migration -- 60:40 at the District level rather than at Panchayat level
-- Barefoot Technicians programme
Measures taken -- NREGAsoft
> Affordable rental housing complexes (ARHCs)
> Pradhan Mantri Awas Yojana > Challenges with MGNREGA
> Draft National Urban Rental Housing Policy (NURHP) -- Low Wages (Rs. 180)
> Affordable housing has been accorded the infrastructure status -- Wage Disparity between states
> Affordable Housing Fund (AHF) -- average days of employment per household -46
> Real Estate Regulatory Authority (RERA) -- Too much centralization

Challenges
> Lack of clear definition
> Access to organized finance
> Liquidity crunch in Non-Banking Financial Companies
> High land cost
> Regulatory Cholesterol
> Low Profitability
FINANCIAL INCLUSION
Meaning Current status
> It implies > 80 percent of adults had a bank account - World Bank
-- universal access to bank accounts,
-- easy access to insurance and social security services and
-- better access to credit at a reasonable cost, for those presently excluded
National Strategy for Financial Inclusion by RBI Steps
> Universal Access > National Strategy for Financial Inclusion for India 2019-2024 (RBI)
> Providing Basic Bouquet of Financial Services > National Strategy for Financial Education (NSFE): 2020-2025
> New entrant to financial system > Jan Dhan Yojana
-- given information about livelihood programmes > Jeevan Jyoti Bima Yojana
> Customer Protection and Grievance Redressal > Suraksha Bima Yojana
> Atal Pension Yojana
DIGITAL FINANCIAL INCLUSION
> Economist Intelligence Unit says India's DFI improved

Reasons for growth

> Mobile phone and smartphone penetration
> Digital India initiative
> Direct Benefit Transfers (DBT)
> Limitations of traditional banking systems
> Fintech revolution - payment banks, small finance banks, UPIs
Financial Literacy
> It is a combination of Way forward: Vision provided by NSFE 2020-2025
-- financial awareness, knowledge, skills, attitude and behavior > Adoption of a ‘5 C’ approach
-- necessary to make sound financial decisions -- Content
-- Capacity of intermediaries
> NCFE survey found -- Community led approaches
-- 75% don't adequately understand basic financial concepts -- Communication: Use technology
-- Collaboration - content in school curriculum
Why Necessary
> To eradicate poverty, improve livelihood
> Make financial inclusion more meaningful
> Shrinking public support system
> availability of large number of financial products
FISCAL POLICY
Center
Facts Steps toward Debt management
> Public Debt (on CFI) = 40% of GDP (Internal-37, External -3) > Public Debt Management Agency (PDMA) -Dedicated agency
> Other Liabilities = 6% > Public Finance Management System
> Government Debt (Debt: GDP ratio) = 46% (sld be 40 NK Singh) -- Fund Tracking system, just in time approach
> Central Project Monitoring Unit - Register implementing Units
> Medium-Term Debt Management Strategy (2019-2022)
Significance of managing Government debt Way Forward
> Investor confidence:- sovereign credit ratings > Use Article 150 for better accounting and fiscal reporting
> Fiscal capabilities of the government > N.K Singh Committee recommendations
> Exchange rate risk -- Explore possibility of National Small Saving Fund to raise resource
> Volatile international capital markets -- Minimise interest payments on Tax refunds
State
Facts Off-budget financing by states
> 14 states over 3% limit > N K Singh committee observed
> Market borrowings major source of funds (70%) - crowding out > Not reflect in the budget
> Debt: GDP ratio = 25% (sld be 20 NK Singh) > Not gets included in state's debt and fiscal deficit
> 85% spent on revenue expenditure > States to honour if government bodies default e.g UDAY
Issues with State Finances Way Forward
> Decrease in grant in aids and CSS spending post 14th FC > Application of user charges power & irrigation
> Limits on borrowings due to FRBM > Replace Farm Loan waivers with Income Support Schemes
> Revenue shortfall due to GST
> Farm Loan waiver
> UDAY (extra budgetary expenditure ka nuksan)
> Populism
> Draughts
> Increased in Market borrowings
> Invest their cash surplus in treasury bills of centre
Taxation
Status Steps taken to improve direct tax ecosystem
> income tax return ~5% of population > Abolition of Dividend Distribution Tax
> ~1.15% of the population actually paid taxes > Document Identification Number (DIN)
> Tax-to-GDP ratio 17%, OECD average ~34% > Exemptions from Angel-tax for Start-Ups
> Raising of monetary limit for filing of appeal (1 crore)
> DIRECT TAX VIVAD SE VISHWAS ACT, 2020
> HONOURING THE HONEST' PLATFORM
> Expanded equalization levy to all overseas e-commerce transactions
Way Forward
> Akhilesh Ranjan Committee Recommends
-- creation of five slabs versus current three
-- adoption of territorial system of taxation
-- amendments in DTAA
> Decrease Tax Expenditure or Revenue Foregone
Cess and Surcharge
Intro Issues
> 35 cesses/levies in FY19. > CAG says
> 17.8% of the gross tax revenue -15th FC -- 40% of cess receipts parked in CFI instead of relevant reserve funds
> GST aimed to subsume majority of cesses and surcharges
> Share of states in the Centre’s Gross Tax Revenue has declined
> affects the Federal character
> terms surcharge and cess used interchangeably
Way Forward by 15th FC
For Cesses
> not levy cesses for purposes that are contained in the State List
> purpose for its imposition must be clearly and specifically stated
> spell out the amount that the Union Government aims to collect

For Surcharge
> Rationalising the income tax rates instead of imposing a surcharge
> Sunset clauses can also be included
NON-TAX SOURCES
Monetize the deficit
Intro Arguments in favor
> Suggested by C. Rangarajan > Sovereign ratings BBB-
> Form of non-debt financing, was in practice in India till 1997 -- further downgrade may lead to flight of foreign capita
> Two modalities: > Prevents crowding out effect
-- Direct Monetization > Similar expansion in Money supply -Ricardian Equivalence
-- Indirect monetization > Less risk of inflation in immediate term - low velocity of money
> FRBM Act, 2003, RBI was completely banned
> FRBM Act, 2017 contained an escape clause permitted monetization
Concerns raised Conclusion
> Rise in inflation in the long-term > Demand and inflation are already low and unemployment is high,
> Devaluation of rupee -- monetization is not likely to create negative effects,
> Possibility of Inefficient Spending: -- possibility to set off virtuous cycle
STRATEGIC SALE OF PSUS
Intro Rationale
> 50% or higher, along with transfer of management control > Government has no business being in business, role is to facilitate
> Recent approval for 5 PSUs including BPCL > Source of income, disinvestment target of 1 lakh crore
> Better management
-- e.g Hindustan Zinc financial performance 150 times in 15 years
> Transferring of public debt to private sector
Issues Way Forward
> Rangarajan Committee 1993 > Monetization of PSU assets rather than outright privatisation
-- Mere change of ownership does not guarantee the efficiency > Domestic and foreign buyers should be allowed to bid
> Unemployment
> Undervaluation - surplus land, facilities and intangibles
> Well performing PSUs (e.g. NavRatna company like BPCL
> National Investment Fund now used for any purpose
BANKING
GOLDEN JUBLEE OF BANK NATIONALIZATION
Benefits of Nationalization Facts
> Number of rural Bank branches increased 10 times > 97 % of the MFI borrowers were women
> Credit to rural areas increased 20 times.
> Credit to agriculture expanded 40 times
PSBs
Issues with PSBs Solutions
> Small when compared to size of economy > Use of Financial Technology
> Credit growth has declined -- creating a PSB Network on lines of GSTN.
> PSBs share in national banking market reduced from 91% to 70% -- PSBN completes the KYC process and generates a credit profile
> PSBs reported gross NPAs of Rs. 7.4 lakh crore (80% of total) -- Based on this profile ,PSB decide on amount and rate of loan
> PSBs account for 93% of the cases of fraud
> Employees Stakes in PSBs:
-- Employee Stock Option Plans

> Lateral entry and recruitment of professionally trained talent a

CONSOLIDATION OF PUBLIC SECTOR BANKS
Intro
> Government approved amalgamation of ten PSBs
Benefits Issues
> Economies of scale > Too big to fall
> Operation and Lending cost decrease -- global financial crisis, small banks have survived
> Risk Diversification > Impact recovery of loans as recovery process
> Wider talent pool, and a larger database -- differ from one bank to another
> Improve Monitoring and control > Cultural and managerial alterations
> Past experience too has been mixed so far e.g SB of Saurashtra
Way Forward
> Narasimham Committee recommended merger
STRESSED ASSETS
Intro Reasons
> It includes > Borrower’s side
-- SMAs, NPAs, Restructured loans and Written off assets -- economic slowdown, willful default
> Bank’s side
-- Poor lending practices
-- No capacity to evaluate projects
> Other
-- natural calamities
-- ineffective recovery tribunals
-- frequent change in government policies
Issues Steps 4 R’s strategy
> Twin balance sheet problem > Recognising
> Interest coverage ratio <1 -- Joint Lenders’ Forum
> UDAY, PMJDY , Demonetisation extra pressure -- Central Repository of Information
-- Prompt corrective action Framework by RBI
-- Advisory Board on Bank Frauds by CVC

> Resolving
-- Insolvency and Bankruptcy Code, 2016 - Chakravyuh Problem
-- SARFAESI Amendment Act,
-- Bad Bank - can help overcome twin balance sheet problem

> Reforms
-- Mission Indradhanush-- Bank Board Bureau
-- Fugitive Economic Offenders Act, 2018

> Recapitalizing
URBAN COOPERATIVE BANKS
Intro Significance of UCB
> Punjab and Maharashtra Cooperative (PMC) Bank > Financial inclusion
> Financial robustness of UCBs assessed through CAMELS ratings > Catering urban class
-- capital adequacy; asset quality; management; earnings; liquidity; and > Attractive interest rates
systems and control > Cater Local needs better by tailored products
Issues Steps
> Management issues: > BANKING REGULATION (AMENDMENT) BILL, 2020
-- political interests - favoritism in appointments -- to protect depositors of cooperative banks
-- fraudulent loans -- Permission of RBI for appointment of key positions
-- RBI can supersede the Board of Directors
> Regulatory issues
-- Dual regulation, by RBI and Registrar of Cooperative Societies > SC recently held that cooperative banks can use SARFAESI Act

> Structural issues:

-- Small scale operation, very vulnerable
-- collapse of one UCB can actually destabilise others Way forward
> Y H Malegam Committee- doing away with dual regulation
> Operational issues > R Gandhi Committee -- Independent auditing
-- stiff competition
-- Lack of professionalism
PRIORITY SECTOR LENDING
Intro Other facts
> Focuses on the idea of increasing the lending of banks towards > Shortfall on PSL targets goes toward RIDF by NABARD
-- few specified sectors and activities in the economy > Excess PSL can issue Priority Sector Lending Certificates (PLSCs)
> Target of 40%
Revised PSL guidelines
> Fresh categories included
-- start-ups
-- loans to farmers for installation of solar and biogas plants
NBFCs
Issue Steps
> Need for refinancing the debt at short frequencies --> Rollover Risk > Aatma Nirbhar Bharat Abhiyaan,
-- Special Liquidity Scheme for NBFCs/HFCs
> Risks from Asset-Liability Mismatch

> Risks from Interconnectedness with MF

-- as depend mainly on Mutual Funds

> Default by a major shadow lender IL&FS

-- liquidity crunch --> reduce lending to MSMEs --> spillover effects

> Crisis accentuated by pandemic

> Multiple regulatory bodies- RBI,SEBI,IRDAI
> Many infrastructure projects financed by NBFCs are stalled
 DIGITAL FINANCE
Status Steps
> 72% transactions take place in cash (China-36%) > Introduced UPI
-- which acts as a single interoperable interface to bank accounts
> Rollout of Aadhar Card --> led to PMJDY
> Payment Infrastructure Development Fund by RBI
> National Payments Corporation of India
> Acceptance Development Fund
Way Forward
> Nandan NIlekani committee on Digital Payments
-- Removal of import duties from point-of-sale (POS)
-- Government payments must be done through digital means