GENERAL STUDIES - Amazon Web Services...GS Paper 3_1 Answer Key GENERAL STUDIES PAPER – 3_1 INDIAN...

1 GS Paper 3_1 Answer Key

GENERAL STUDIES

PAPER – 3_1

INDIAN ECONOMY AND DEVELOPMENT

Q1. What is the advanced pricing agreement? How will it bring down Tax

litigations?

(150 words, 10 marks)

Approach:

Briefly Explain what is APAs.

Then highlight in short how Transfer pricing issues results in litigations.

Discuss how APAs have been successful in bringing down

litigations.

Advance Pricing Agreement (APA)

Advance Pricing Agreement (APA) is an

agreement, in which the taxpayer enters into

an upfront agreement with the tax

administration regarding the arm’s length

price of its international transactions with related parties. The international transactions

are complex and involve more than one

country. The sole objective of the APA is to

bring tax certainty in international

transactions and overcome the issues due to transfer pricing between related parties.By

related parties, we mean to say that one party

is a holding, subsidiary or an associate

company of another party.

Transfer Pricing and Litigations The Indian tax administration has been

proactive in the past few years in its attempts

at reducing tax litigation. The major source of

disputes in direct taxes is transfer-pricing

(TP). Transfer-pricing litigation clogs up appellate channels and takes much more

time to resolve since, in many cases, the

appellate tax tribunals restore the disputed

issue back to the transfer pricing officer as a

number of facts and nitty-gritty need further

re-examination. This starts another chain of appeals, further delaying an already fraught

process. This leads to wastage of resources

and time.

APAs and Reduction in Litigations Transfer-pricing disputes need a targeted

approach in order to reduce the onerous

litigations which impact the ease of doing

business in India. The Government has

introduced the Advance Pricing Agreement

(APA) Scheme in 2012. The introduction and efficient implementation of the scheme has

been a successful initiative in preempting transfer-pricing litigation. The tax

administration has entered into several

bilateral APAs since then, of which the bulk

(70) have been signed last year and in the

current year.

Provides Certainty: The efficient implementation of the APA programme

in recent years has helped corporates

attain certainty regarding their

related-party transactions for up to

five years in the future with an option to roll it back to cover four earlier

years.

Adjudication Bases on agreed principles: Tax tribunals have also

started adjudicating taxpayers’

pending transfer-pricing litigation

based on the agreed principles embodied in the APA even though the

APA may not cover the period in

question.

Saves Resources: Every APA agreement represents tax certainty for

a taxpayer and avoidance of resources spent on litigation by both the

taxpayer and the tax administration.

These resources can be further used

to enhance/improve the tax structure.

Gains from the Negotiation process: The learning’s from the APA

negotiation exercises can be used to preempt disputes in other cases also.

While the individual details of an APA

remain confidential, guidance from

the tax administration by using the

principles and methodology from APAs

signed with taxpayers can be a quick and efficient way to preempt litigation

on major transfer-pricing issues.

Transfer-pricing is a fact-intensive exercise

and guidance issued by the tax administration can help nip many potential

disputes in the bud. APAs lowers complaints

and litigation costs. APAs gives certainty to

taxpayers, reduce disputes, enhance tax

revenues and make the country an attractive

destination for foreign investments.

Q2. Ujjwala Yojana is not just an energy

achievement but also social and economic

achievement.” Discuss.



Approach:

Write one or two lines about the scheme.

There are three keywords in the question ‘Energy achievement’, ‘Social achievement’ and ‘Economic

achievement’. So try to link all three

with the scheme.

In conclusion, try to summarize your answer or give the way forward or

suggestions to further improve the

scheme.

Pradhan Mantri Ujjwala Yojana (PMUY) aims

to safeguard the health of women & children

by providing them with a clean cooking fuel –

LPG so that they don’t have to compromise

their health in smoky kitchens or wander in unsafe areas collecting firewood.

Ujjwala Yojana and Energy Achievement

Before the launch of Ujjwala Yojana, India

was home to more than 24 Crore households out of which about 10 Crore households were

deprived of LPG as cooking fuel and have to

rely on firewood, coal, dung – cakes etc. as

the primary source of cooking. But since the

launch of the scheme almost more than 7

crore LPG connections have been distributed. PMUY has played a significant role in the

increase, of LPG penetration in rural areas. It

has provided them with a cheap and reliable

source of energy which was earlier not

available.

Ujjwala Yojana and Social Achievement

The smoke from burning such fuels causes

alarming household pollution and adversely

affects the health of Women & children

causing several respiratory diseases/ disorders. As per a WHO report, smoke

inhaled by women from unclean fuel is

equivalent to burning 400 cigarettes in an

hour. In addition, women and children have

to go through the drudgery of collecting firewood. So LPG is helping to provide a clean

environment to women of rural areas by

providing them with a clean source of energy.

Ujjwala Yojana and Economic Achievement

PMUY is likely to result in an additional employment of around 1 Lakh and provide

the business opportunity of at least Rs.

10,000 Cr. over the next 3 Years to the Indian

Industry. Launch of this scheme will also

provide a great boost to the ‘Make in India’ campaign as all the manufacturers of

cylinders, gas stoves, regulators, and gas

hose are domestic. Also in rural areas, the time taken to collect the firewood is saved

and hence women can utilize that time to

more productive work.

Till now the scheme has been able to achieve its target but we should also keep in mind

that its objectives are also met. For this, a

number of initiatives can be taken like the

government can subsidize the gas cylinders of

households taking benefit under the scheme,

also proper awareness should be spread about using the benefits of using LPG gas etc.

Q3. Given the challenging phase in

infrastructure financing in the country

today, infrastructure Investment Trusts (InvITs) are supposed to provide a suitable

structure for financing and refinancing of

infrastructure projects in the country.

Substantiate.


Approach:

Give a brief introduction about infrastructure Investment Trusts

(InvITs).

What are the important Types of InviTs

Write how How InvITs can facilitate investment in the infrastructure sector.

Infrastructure Investment Trusts (InvITs) are

mutual fund like institutions that enable

investments into the infrastructure sector by pooling small sums of money from a

multitude of individual investors for directly

investing in infrastructure so as to return a

portion of the income (after deducting

expenditures) to unitholders of InvITs, who

pooled in money.

InvITs can invest in infrastructure projects,

either directly or through a special purpose

vehicle (SPV).

InvITs are regulated by the securities market regulator in India- Securities and Exchange

Board of India (SEBI).

The objective of InvIT is to facilitate

investment in the infrastructure sector in

India.

Types of InviTs

Two types of InvITs have been allowed, one

which is allowed to invest mainly in completed and revenue-generating

infrastructure projects and other which has


the flexibility to invest in completed/under-construction projects. While the former has to

undertake a public offer of its units, the latter

has to opt for a private placement of its units.

Both the structures are required to be listed.

How InvITs can facilitate investment in

the infrastructure sector:

Several existing infrastructure projects which

are under development in India are delayed

and ‘stressed’ on account of varied reasons including increasing debt finance costs, lack

of/locked up equity of private investors in

projects which precludes them from

undertaking new projects, lack of

international finance flowing to Indian infrastructure projects, project

implementation delays caused by various

factors like global economic slowdown, cost

overruns, inability of concessionaire to meet

funding requirements on time, etc.

InvITs, as an investment vehicle, may aid:

Providing wider and long-term refinance for existing infrastructure

projects.

Freeing up of current developer’s capital for reinvestment into new

infrastructure projects.

refinancing/takeout of existing high-cost debt with long-term low-cost capital and help banks free up/reduce

loan exposure, and thereby help them

create headroom for new funding

requirements.

There are several infrastructure companies

whose funds are locked up in

completed/substantially completed

infrastructure projects which can otherwise

be used for furthering infrastructure

development in the country.

InvITs may be an enabling vehicle for

refinancing stressed assets as well as creating

an investment option which may otherwise

not be possible for smaller investors.

InvITs may help in attracting international

finance into Indian infrastructure sector.

InvITs will enable the investors to hold a

diversified portfolio of infrastructure assets.

InvITs are also proposed to bring higher

standards of governance into infrastructure

development and management and

distribution of income from assets so as to attract investor interest.

Given the challenging phase of infrastructure in the country today, InvITs are proposed to

provide a suitable structure for financing and

refinancing of infrastructure projects in the

country.

Q4. The projected population and age-

structure over the next 2 decades has

several implications for policy. Discuss.


Approach:

Start by giving facts related to India’s projected population and age

structure over the next few years. If

you don’t know any fact, Highlight in

general about India’s demography.

Address the main question; highlight various implications for policy due to

this projections. Explain them.

Your conclusion should include the way forward like how we can deal with

the changing situation effectively.

Make sure your conclusion is positive.

India is set to witness a sharp slowdown in

population growth in the next two decades.

Although the country as a whole will enjoy

the “demographic dividend” phase, some

states will start transitioning to an ageing

society by the 2030s. It will surprise many readers to learn that population in the 0-19

age bracket has already peaked due to sharp

declines in total fertility rates (TFR) across the

country. As a result, the national TFR is

expected to be below replacement level by 2021 (adjusted for the skewed gender ratio, it

may already be there).

The projected population and age-structure

over the next two decades has several

implications for policy, inter-alia for the (i) provision of health care, (ii) provision of old-

age care, (iii) provision of school facilities, (iv)

access to retirement related financial

services, (v) public pension funding, (vi)

income tax revenues, (vii) labour force and labour participation rates, and (viii)

retirement age.

Implications for Working-Age Population

Changes in the size of working-age population plays a key role in determining the size of

labour force and direction of inter-state

labour migration. The evolution of working-

age population, moreover, will vary across

states. The size of working-age population will start to decline in 11 out of the 22 major

states during 2031-41, including in the


southern states, Punjab, Maharashtra, West Bengal and Himachal Pradesh. On the other

hand, working-age population will continue to

rise through 2041 in states lagging behind in

the demographic transition, particularly

Bihar, Uttar Pradesh, Madhya Pradesh and Rajasthan. In principle, the latter states with

rising working-age population could meet the

labour deficit in many of the former ageing

states.

POLICY IMPLICATIONS OF AGEING

Elementary Schools

Overall, the number of school-going children

in India will decline by 18.4 per cent between 2021 and 2041. This will have very important

social and economic consequences.In light of

the projected decline in elementary school-

going children, the number of schools per

capita will rise significantly in India. The time

may soon come in many states to consolidate/merge elementary schools in

order to keep them viable. Note that this is

not about reducing investment in elementary

education, but an argument for shifting policy

emphasis from quantity towards quality and efficiency of education.

Health Care Facilities

Even at current levels, rising population over

the next two decades (even with slowing

population growth rates) will sharply reduce the per capita availability of hospital beds in

India across all major states. Hence, there is

a straightforward case for expanding medical

facilities in the states. For states in the

advanced stage of demographic transition, however, will have to adapt towards greater

provision of geriatric care. A major problem

with planning for the provision of medical

facilities is the paucity of specific data,

especially on private hospitals.

Retirement Age

Given that life expectancy for both males and

females in India is likely to continue rising,

increasing the retirement age for both men

and women going forward could be considered in line with the experience of other

countries. This will be key to the viability of

pension systems and would also help

increase female labour force participation in

the older age-groups.

India has entered the next stage of

demographic transition with population

growth set to slow markedly in the next two

decades along with a significant increase in

the share of working age population (the so-

called “demographic dividend” phase). In light of continued urbanization, improvements in

health care, increase in female education,

and other socio-economic drivers of

demographic change, policy makers need to

prepare for ageing from today itself. This will need investments in health care as well as a

plan for increasing the retirement age in a

phased manner.

Q5. What is a Circular Economy? Highlight

the Need for Circular Economy. (150 words, 10 marks)

Approach:

Give a brief introduction Circular Economy Write about the need for a Circular Economy

Provide Conclusion

The circular economy is an economic system,

which involves sharing, leasing, reusing,

repairing, refurbishing and recycling existing materials and products as long as possible. In

this way, the life cycle of products is

extended.

Looking beyond the current take-make-waste extractive industrial model, a circular

economy aims to redefine growth, focusing on

positive society-wide benefits

It draws its inspiration from the bio-

geophysical world, where the nutrients that are metabolized by life processes are

generated from other living systems after

their death and ensures that the earth

remains a stable, self-contained ecosystem.

It is based on three principles:

Design out waste and pollution

Keep products and materials in use

Regenerate natural systems

Need for a Circular Economy

Rise in Population: Higher demand for goods and services to leading to

depletion of reserves

The supply of crucial raw materials is limited.

The robust economic growth coupled with rising household incomes, rising consumerism causing increased

pressure on natural resources such as

land, forests, air, water, and

ecosystems.

India’s Import dependence: Our country’s dependence on imports for accessing critical resources like rare

earth minerals etc. due to shrinking

reserves, technical constraints etc.


Managing of waste: The traditional linear economy approach results in massive waste generation at all stages

of a product life cycle right from

resource extraction, processing, value

addition, consumption to end of life

stage.

Extracting and using raw materials has a major impact on the

environment. It also increases energy

consumption and CO2 emissions.

However, a smarter use of raw

materials can lower CO2 emissions.

Benefits of a Circular Economy

Increased Potential for Economic Growth: The United Nations

Conference for Trade and

Development (UNCTAD) says that

India could create as much as $200+

billion in additional economic value by 2030, rising to $600+ billion by 2050,

by adopting circular principles across

only three areas: cities and

construction, food and agriculture,

and mobility and vehicle manufacturing.

It will increase productivity.

Employment Growth: Circular economy has the potential to generate

1.4 crore jobs in the next 5-7 years &

create lakhs of new entrepreneurs-

NITI Aayog CEO

optimal resource use, energy savings and low GHGs emissions

Reduced Negative Externalities

Consumers will also be provided with more durable and innovative products

that will increase the quality of life

and save them money in the long

term.

Therefore, an urgent need for gradually decoupling economic activity from the

consumption of finite resources, and

designing waste out of the system.

Underpinned by a transition to renewable

energy sources, the circular model builds economic, natural, and social capital.

Resource circularity is the need of the hour to

implement the circular economy.

Q6. For robust economic growth

infrastructure sector growth through Public Private Partnership (PPP) is

necessary. In this context, write the

challenges faced by PPP projects and

recommendations on revisiting &

revitalising the PPP Model of

Infrastructure. (150 words, 10 marks)

Approach:

In introduction write about Public Private Partnership

Write risk is inherent in all PPP projects.

Write recommendations on revisiting & revitalising the PPP Model of

Infrastructure

Provide conclusion Public Private Partnerships (PPPs) in

infrastructure refers to the provision of a

public asset and service by a private partner

who has been conceded the right (the

“Concession”) for the purpose, for a specified period of time, on the basis of market

determined revenue streams that allow for

commercial return on investment.

PPPs in infrastructure represent a valuable

instrument to speed up infrastructure development in India. This speeding up is

urgently required for India to grow rapidly

and generate a demographic dividend for

itself and also to tap into the large pool of

pension and institutional funds from ageing populations in the developed countries.

India offers today the world’s largest market

for PPPs. It has accumulated a wealth of

experience in getting to this premiere

position. As the PPP market in infrastructure matures in India, new challenges and

opportunities have emerged and will continue

to emerge.

Periodic review of PPPs, as in the present Committee's remit, are a must to help

address issues before they become endemic

and to mainstream innovations and foster

new ones that improve the successful delivery

of PPP projects.

India’s success in deploying PPPs as an

important instrument for creating

infrastructure in India will depend on a

change in attitude and in the mind-set of all

authorities dealing with PPPs, including public agencies partnering with the private

sector, government departments supervising

PPPs, and auditing and legislative institutions

providing oversight of PPP’s.

Risk is inherent in all PPP projects as in any other infrastructure projects. The main types

of risks include:

Construction risk (mainly delays in construction)

Technology risk (arises when the technology is not a proven one)


Environmental risk

Commercial risk (lower than expected demand for services produced by the project)

Operating risk (inefficiency in operation leading to higher operating

cost)

Legal risk (change in law)

Regulatory risk (change in regulatory regimes)

Political risk (change in government policy)

Force majeure (risks due to unpredictable natural and man-made events such as earthquakes, floods,

civil war, etc.)

Dr.Kelkar committee recommendations on

revisiting & revitalising the PPP Model of

Infrastructure:

Contracts need to focus more on service delivery instead of fiscal

benefits

Better identification and allocation of risks between stakeholders

Prudent utilization of viability gap funds where user charges cannot

guarantee a robust revenue stream.

Improved fiscal reporting practices and careful monitoring of performance

An Infrastructure PPP Project Review Committee (“IPRC”) may be

constituted to evaluate and send its

recommendations in a time-bound

manner upon a reference being made

of “Actionable Stress” in any

Infrastructure Project developed in PPP mode beyond a notified threshold

value.

An Infrastructure PPP Adjudication Tribunal (“IPAT”) chaired by a Judicial

Member (former Judge SC/Chief

Justice HC) with a Technical and/or a Financial member, where benches will

be constituted by the Chairperson as

per the needs of the matter in

question

Unsolicited Proposals (“Swiss Challenge”) to be discouraged to avoid

information asymmetries and lack of transparency.

Amend the Prevention of Corruption Act, 1988 to distinguish between

genuine errors in decision-making and

acts of corruption

Build up capacity in all stakeholders, including regulators, authorities,

consultants, financing agencies, developer.

Set up an institution for invigorating private investments in infrastructure, providing guidance for a national PPP

policy and developments in PPP,

developing a mechanism to capture

and collate data for decision making,

undertaking capacity building activities.

An institutionalized mechanism like the National Facilitation Committee

(NFC) to ensure time bound resolution

of issues including getting timely

clearances/approvals during the

implementation of projects for the smooth running of such projects.

Restrict the number of banks in a consortium and banks to build up

their own risk assessment/appraisal

capabilities

Checklist of items listed as a guide for lenders. RBI may provide guidelines to

lenders on encashment of bank guarantees.

The monetisation of viable projects that have stable revenue flows after

Engineering, Procurement and

Construction (EPC) delivery should be

considered

Ministry of Finance to allow banks

and financial institutions to issue Zero Coupon Bonds which will also help to

achieve a soft landing for user charges

in the infrastructure sector

Improved fiscal reporting practices and careful monitoring of

performance.

Independent sector regulator.

Given the need for robust economic growth

and the experience India has already

gathered in managing PPPs, the government

must move the PPP model to the next level of

maturity and sophistication. PPPs have the potential to deliver infrastructure projects

both faster and better. Building on India’s

years of experience with PPPs, there is a need

to iron out the difficulties in the performance

of PPP at every stage of the contract. A successful and growing stream of PPPs in

infrastructure will go a long way in

accelerating the country’s development

process.

Q7. Employment elasticity represents a convenient way of summarising the

employment intensity of growth or

sensitivity of employment to output

growth. Elaborate.



Approach:

Write definition of Employment elasticity.

Write its significance in understanding employment scenarios in an economy

or sector.

Employment elasticity is a measure of the percentage change in employment associated

with a 1 % point change in economic growth.

The employment elasticity indicates the

ability of an economy to generate employment

opportunities for its population as per cent of its growth (development) process.

An employment elasticity of 1 denotes that

employment grows at the same rate as

economic growth. Elasticity of 0 denotes that employment does not grow at all, regardless

of economic growth. Negative employment

elasticity denotes that employment shrinks as

the economy grows.

This is crucial as it is commonly believed that economic growth alone will increase

employment.

Employment elasticity measurement

generally faces two sets of criticisms:

(1) the relationship between employment and

output need not be unidirectional and

(2) the notion of employment elasticity is valid

for a given state of technology, wage rate and

policies.

The negative employment elasticity in

agriculture indicates movement of people out

of agriculture to other sectors where wage

rates are higher. This migration of surplus

workers to other sectors for productive and gainful employment is necessary for inclusive

growth. However, the negative employment

elasticity in manufacturing sector was a

cause of concern particularly when the sector

has shown positive growth in output.

Employment elasticity represents a

convenient way of summarising the

employment intensity of growth or sensitivity

of employment to output growth. It is also

commonly used to track sectoral potential for generating employment and in forecasting

future growth in employment.

Q8. Discuss how the proposed

amendments to the Securities and Exchange Board of India Act, 1992 will

affect its autonomy.

(150 Words, 10 marks)

Approach:

Give a brief introduction about the recently proposed amendments to the

SEBI act

Write about Concerns related to the recent move and whether they affect

the autonomy of SEBI

Provide a conclusion based on the

arguments provided.

The Securities and Exchange Board of India

was established on April 12, 1992, in

accordance with the provisions of the

Securities and Exchange Board of India Act, 1992.

It protects the interests of investors in

securities and to promote the development of,

and to regulate the securities market and for

matters connected therewith or incidental thereto.

Their activities are overseen by the

government, though they are supposed to be

autonomous - meaning the government will not interfere in their daily functioning or in

the rules and guidelines they formulate for

market participants. But there is a regular

interface between the government and the

regulators over several issues.

Recently, As part of the Finance Bill

introduced in Parliament, the Centre had

proposed amendments to the Securities and

Exchange Board of India Act, 1992 that were

seen as affecting SEBI’s financial autonomy. To be specific, the amendments required that

after 25% of its surplus cash in any year is

transferred to its reserve fund, SEBI will have

to transfer the remaining 75% to the

government.

The proposal is not something not practised globally. “The Securities Exchange

Commission, the capital market regulator of

the US, also transfers its surplus to the

government.

But the capital markets regulator feels that

the proposal would result in compromising its

“autonomy and its ability to function

effectively” towards the progress and

development of the Indian securities market.

Concerns related with the recent move:

The quantum of funds that the government is likely to receive from

SEBI will make much of a difference

to the government’s overall fiscal

situation. So it alleged that the amendment to the SEBI Act seems to


be clearly motivated by the desire to increase control over the regulator

rather than by financial

considerations.

Also, the recent amendments require SEBI to seek approval from the

government to go ahead with its capital expenditure plans.

A regulatory agency that is at the government’s mercy to run its

financial and administrative

operations cannot be expected to be

independent.

Lack of financial autonomy can affect SEBI’s plans to improve the quality of its operations by investing in new

technologies and other requirements

to upgrade market infrastructure.

This can affect the health of India’s

financial markets in the long run.

The employees’ association of the SEBI criticised proposal as “regressive” especially since the SEBI

did not have any mandate to raise

revenue for the government.

Since inception, SEBI is also subjected to CAG audit and so far, not

a single instance of financial imprudence has been observed by

CAG. Accordingly, the involvement of

the government in capital expenditure

approval, in addition to the process of

board approval, will not add any

benefit to institutional efficiency, but rather slow down decision-making

and would be contrary to the principle

of minimum government and

maximum governance”.

In the larger picture, this is not the first time

that the government at the Centre has gone

after independent agencies. The Reserve Bank

of India and the National Sample Survey

Office have come under pressure in recent

months, and the latest move on SEBI adds to this worrisome trend of independent agencies

being subordinated by the government. The

Centre perhaps believes it can do a better job

of regulating the economy by consolidating all

existing powers under the Finance Ministry.

But such centralisation of powers will be risky. Regulatory agencies such as SEBI need

to be given full powers over their assets and

be made accountable to Parliament. Stripping

them of their powers by subsuming them

under the wings of the government will affect their credibility.

Q9. In the spirit of the Constitution of India, data should be “of the people, by the

people, for the people.” Discuss.


Approach:

Try to define what is data and what is meant

by data “of the people, by the people, for the

people.” in very short.

Then go in detail and explain each of the key word and link it with data.

Data as a general concept refers to the fact

that some existing information or knowledge

is represented or coded in some form suitable for better usage or processing. Recent

Economic Survey, that ‘data’ should be made

a ‘public good’ as data is of the people,

created by the people and should be utilized

for the people.

Data: Of the People

As people shift their day-to-day activities

online, they leave digital footprints of these

activities. Put differently, people produce data about themselves and store this data on

public and private servers, every day, of their

own accord. As people increasingly use

digital services, data is being generated at an

unprecedented scale. Concurrent with this

data explosion, the marginal cost of data has declined exponentially and the marginal

benefit to society of using this data is higher

than ever.

Data: By The People

It basically involves the ‘consent clause’ and

the ‘privacy clause’. The data system should

involve predominantly data that people share

with Government bodies (or private bodies)

with fully informed consent or is data that is legally sanctioned to be collected by the

state/private bodies for an explicit purpose

such as tax collection, or delivering welfare or

better customer experience. Also people

should always have the option to opt-out of divulging data to the government, where

possible and in case of the private body

whenever they want to.

Data: For The People

Being able to retrieve authentic data and documents instantly, governments can

improve targeting in welfare schemes and

subsidies by reducing both inclusion and

exclusion errors. Governments already hold a

rich repository of data about citizens.


Utilising the information embedded in these distinct datasets would inter alia enable the

government to enhance ease of living for

citizens, enable the truly evidence-based

policy, improve targeting in welfare schemes,

uncover unmet needs, integrate fragmented markets, bring greater accountability in

public services, generate greater citizen

participation in governance, etc. For example,

cross-verification of the income tax return

with the GST return can highlight possible

tax evasion.

Going forward, the data and information

highway must be viewed as equally important

infrastructure as the physical highways.

Such a stance can help India leapfrog to utilise the benefits of technological advances

for the welfare of its people. In the spirit of

the Constitution of India, data “of the people,

by the people, for the people” must, therefore,

become the mantra for the government.

Q10. Economic policy certainty is critical

because both domestic and foreign

investment is strongly deterred by

increases in domestic economic policy

uncertainty. In this context, suggest some steps to reduce domestic economic policy

uncertainty.


Approach:

Try to start by highlighting why policy certainty is important for an economy.

Address the main question; suggest some measures which can improve

Economic policy certainty.

Economic Certainty is crucial for both

domestic and foreign investment. While economic uncertainty stemming from

uncontrollable factors remains beyond the

control of policymakers, they can control

economic policy uncertainty.

Following are the measures that can promote

Economic policy certainty:

Make it Predictable: top-level policymakers must ensure that their

policy actions are predictable, provide

forward guidance on the stance of policy, maintain broad consistency in

actual policy with the forward

guidance, and reduce

ambiguity/arbitrariness in policy

implementation. To ensure predictability, the horizon over which

policies will not be changed must be

mandatorily specified so that investor can be provided the assurance about

future policy certainty. While this will

generate some constraints in policy

making, such voluntary tying of

policymakers’ hands is undertaken in several cases including the Fiscal

Responsibility and Budget

Management Act, the Monetary Policy

Framework of the Reserve Bank of

India. A similar constraint placed on

ensuring no changes in policy for a specified horizon would go a long way

to ensuring policy certainty.

Track the trends effectively: Following the adage that “what gets measured

gets acted upon”, economic policy

uncertainty index must become an important index that policymakers at

the highest level monitor on a

quarterly basis. Government must

encourage construction of economic

policy uncertainty sub-indices to

capture economic policy uncertainty stemming from fiscal policy, tax

policy, monetary policy, trade policy,

and banking policy. Tracking these

sub-indices would enable monitoring

and control over economic policy uncertainty.

Quality assurance of processes in policymaking: It reflects the adage of

“Document what you do, but more

critically do what you document!”

must be implemented in the

government. The actual implementation of policy occurs at the

lower levels, where ambiguity gets

created and exacerbates economic

policy uncertainty. As organizations in

the private sector compete and seek

the highest level of quality certifications, Government

departments must be mandated to

similarly seek quality certifications.

This process of certification will

require training of personnel in following quality assurance processes

and will significantly reduce economic

policy uncertainty.

Include Stakeholders: Before deciding the policy, the government should talk

to each and every stakeholder and

listen to their concerns and suggestions. The government should

try to formulate the policy keeping the

feedbacks of the stakeholders in mind.

As it will help in avoiding conflicts

later.


India has secularly decreased domestic economic policy uncertainty since 2012 and

has been exceptional in reducing this

uncertainty since 2015 amidst a global

environment of increases in the same.

However, policymakers still need to double down on reducing domestic economic policy

uncertainty.

Q11. Logistics costs have been one of the

biggest stumbling blocks for the Indian

economy. In this context, how draft national logistics policy 2018 and

implementation of GST will help in

reducing logistics costs and provide

stimulus to the growth of the logistics

sector. (250 words, 15 marks)

Approach:

Give a brief introduction about the Logistics Sector.

Write about challenges in the Logistics sector

Write how logistics policy and GST will help in this regard

Provide Conclusion based on arguments provided.

The presence of a robust logistics-related

infrastructure and an effective logistics

management system facilitates seamless movement of goods from the point of origin to

that of consumption, and aids an economy’s

movement to prosperity.

Logistics Sector at a Glance:

The Indian logistics sector is on a big growth

tide.

According to the domestic rating agency ICRA, the Indian logistics

sector is expected to grow at a rate of

8-10% over the medium term.

The logistics industry of India is currently estimated to be around

US$215 billion.

The last few years have seen significant development for this

industry which is reflected in the

global rankings. According to the

Global Ranking of the World Bank’s 2016 Logistics Performance Index,

India jumped to 35th rank in 2016

from 54th rank in 2014 in terms of

overall logistics performance. In 2018,

India stood at 44th rank.

In 2017, the logistics sector absorbed

22 million people. Employment is

expected to surge to 40 million by 2020.

Experts predict that the logistics sector can be the largest job creator

by 2022.

Some key challenges:

The Indian logistics industry is highly fragmented and unorganized, with the

organized players accounting for

approximately 10% of the total market

share.

The high cost of logistics – impacting competitiveness in domestic & global

market

Unfavourable modal mix (Roadways 60%, Railways 30%) and inefficient

fleet mix.

Under-developed material handling infrastructure and fragmented

warehousing.

High dwell time and lack of seamless movement of goods across modes.

The most serious challenge faced by the logistics industry today is insufficient integration of transport

networks, information technology, and

warehousing and distribution

facilities.

Regulations exist at a number of different tiers, is imposed by national,

regional and local authorities. The regulations differ from city to city,

hindering the creation of national

networks.

Some of the key objectives Draft National Logistics the policy:

The aim is to reduce the logistics cost from the present 14% of GDP to less

than 10% by 2022.

A National Logistics Portal is being developed which will be a single-

window online marketplace for trade and will connect business, create

opportunities and bring together

various ministries, departments and

the private sector. Stakeholders like

traders, manufacturers, logistics

service providers, infrastructure providers, financial services,

Government departments and groups

and associations will all be on one

platform.

A data and analytics centre for monitoring key logistics metrics

A centre of excellence to drive

innovation


An Integrated National Logistics Action Plan for all logistics related development.

Further, the policy envisages to create employment opportunities for 10

Million -15 Million people and also

focus on enhancing skills in the

sector, while trying to improve India’s ranking in the Logistics Performance

Index to between 25 to 30.

It also aims to promote inter-regional trade on e-commerce platforms.

GST a game-changer reform for logistics

sector:

GST has replaced at least 7 indirect tax heads and has eliminated the need

for warehouse hubs across States.

The GST regime is certain to expedite faster conversion of informal logistics

setups to formal ones.

Speed up freight movement at interstate borders due to dismantling of check posts and the reduction in

truck turnaround time following GST

is a major stimulus to logistics

growth, leading to at least 12-15%

reduction in the turnaround time of

trucks.

Pre-GST, the Indian logistics sector was struggling to add value to

customers, compared to global peers.

Indian firms were seen as labour

contractors or mere transporters,

which denied them the benefits of being a part of the supply chain. But

the equation has changed now.

Post GST, there is a marked improvement in the use of technology

and digitisation by logistics players,

third party logistics(3PL) players can

become real ‘differentiators’ as they embrace technology to enhance

visibility of load carried, turn-around

time, vehicle utilisation, improvement

in loading/unloading time by

removing congestion at the docks, and the like.

Other initiatives taken by the government:

A new Logistics Division has been set up in the Department of Commerce to

coordinate integrated development of

the sector by way of policy changes, improvement in existing procedures,

identification of bottlenecks and gaps,

and the introduction of technology-

based interventions.

Multi-Modal Logistics Parks Policy (MMLPs) are a key policy initiative of

the Government of India to improve the country’s logistics sector. This

initiative will lower freight costs,

reduce vehicular pollution and

congestion and cut warehouse costs to

promote domestic and global trade.

Logistics Portal: A National Logistics Portal is being developed in phases to

serve as a transactional e-marketplace

by connecting buyers, logistics service

providers and relevant government

agencies. This portal will be the single

window marketplace to link all stakeholders.

Logistics Data Bank: As a part of the India-Japan bilateral cooperation, a

Logistics Data Bank Project has been

commissioned to track containers on

a ‘near-real-time’ basis. RFID tags are placed on every container coming out

of the ports to track the container’s

movement.

The Government has launched many flagship programmes like the

Bharatmala Yojana, the Sagarmala

Yojana and the Dedicated Freight Corridors. The objective of these

programmes is to develop

infrastructure to meet the growing

demand for logistics in the country

and to make a modal shift on more

cost-effective modes of transport.

111 waterways have been identified for development.

Infrastructure status has been given to select logistics activities like

warehousing, cold chains, Multimodal

logistics parks and slurry pipelines.

A subsidy is provided to develop cold chains and packhouses.

The commitment of GoI (Government of India)

towards an integrated development of the

logistics sector through policy amendments,

infrastructural development, tax reforms and

technology adoption will certainly deliver desirable results. It will enhance our trade

competitiveness, create jobs, shoot up

country’s performance in global rankings and

pave the way for India to become a logistics

hub. Such measures will also contribute to

the creation of a New India by 2022.

Q12. The solution to the problem of

Unemployment in India lies in the careful

development of the MSME sector. Suggest

some long-term solutions for the economic and financial sustainability of the MSME

sector.



Approach:

How the development of MSME will lead to employment generation.

Identify the problems in the MSME sector and also highlight the solution

(long term as asked in the question).

Try to highlight the recent initiatives taken by the government.

Medium, Small and Micro Enterprises:

Manufacturing Sector

Enterprises Investment in plant

& machinery

Micro Enterprises Does not exceed

twenty-five lakh

rupees

Small Enterprises More than twenty-five lakh rupees but does

not exceed five crore

rupees

Medium Enterprises More than five crore

rupees but does not

exceed ten crore rupees

Service Sector

Enterprises Investment in

equipment

Micro Enterprises Does not exceed ten

lakh rupees:

Small Enterprises More than ten lakh

rupees but does not exceed two crore

rupees

Medium Enterprises More than two crore

rupees but does not

exceed five crore

rupees

(Note: Also recently The Union Cabinet has approved change in the basis of classifying

Micro, Small and Medium enterprises from

‘investment in plant & machinery/equipment’

to ‘annual turnover’)

MSME AND EMPLOYMENT

MSME sector contributes significantly in the economic and social

development of the country by

fostering entrepreneurship and

generating largest employment

opportunities at comparatively lower capital cost, next only to agriculture.

As per the National Sample Survey (NSS) 73rd round conducted during

the period 2015-16, MSME sector has

been creating 11.10 crore jobs (360.41

lakh in Manufacturing, 387.18 lakh in Trade and 362.82 lakh in Other

Services and 0.07 lakh in Non-captive

Electricity Generation and

Transmission) in the rural and urban

areas across the country.

KEY ISSUES OF MSME SECTOR

Most of the problems are controllable while

rests are uncontrollable. The MSME`S

problems are as follows:-

1. Lack of credit from banks

2. Competition from multinational companies

3. Poor infrastructure

4. Unavailability of raw material and other inputs

5. Lack of advanced technology

6. Lack of distribution of marketing channels

7. Lack of training and skill development

program

8. Complex labour laws and red-tape 9. Government Policies

SUGGESTIONS FOR IMPROVEMENT

According to our study and the annual

reports of MSME’S, we strongly recommend the following suggestions for

the growth and development of the

MSMEs in India:

1. Mutual Supply of Technologies: While each

MSME has its areas of strengths and weaknesses, therefore, it would be mutually

valuable if already developed technologies

made available to each other. A

comprehensive list of all sorts of technologies

should be prepared and made available accordingly to the MSMEs requiring it.

2. Constitution of a Panel of Consultants: For

the purpose of technological advancement

and guidance a panel of experts and

consultants should be prepared, who can help the region for effectively transfer the

available technologies.

3. Determination of Technological Needs:

There should be a detailed survey to assess the technical and financial needs of the

MSME. So, the proper arrangement could be

made to the needs of the MSME’S. Recently

Government announced that 20 technology

centres, along with extension centres across

the country will be developed by The Ministry of Micro, Small and Medium Enterprises

(MSME) in another 3-5 years.

4. Training and development, awareness

programs: The currently running programs


are not so sufficient. One of the important reasons for slow intake in the utilization of

schemes is the lack of knowledge about

schemes and their likely benefits. There is a

need to develop a better communication

strategy and use age media tools.

5. Sufficient availability of credit: there must

be the availability of credit according to the

requirement at a cheaper rate.

6. Relaxation in labour laws and red tape: There should be relaxation in complex labor

laws to avoid the inconvenience in

compliance. There should not be uniform

labour laws for each MSME. Every effort must

do to avoid unnecessary red tape.

7. Proper research and development: There

should proper research and development in

respect of the innovative method of

production and service rendering. The

innovative products will provide cheaper products and the MSME’S will be able to cope

up with the situation.

CONCLUSION

MSME’s provide job and employment and ultimately self-dependency. In a country like

India, only self-dependence is the way, which

can be a cure for the devaluation of Indian

Rupees. Therefore, MSME’s can be a boon

and a hope for the Indian economy in the

near future. The MSME’s are very helpful to remove the regional imbalances if it is

established in the underdeveloped areas.

The future of the MSME sector in India is

bright and it will grow the economy.

Q13. Until the IL&FS crisis, NBFCs had

proved to be a strong base for the

provision of credit for industry in India. In

light of this statement, Discuss the role of

NBFCs in India.


Approach:

Define NBFC.

Highlight the significance of NBFCs in Indian economy.

Also highlight the various issues involved.

Conclude by providing some suggestion in short.

NBFCs

A Non-Banking Financial Company (NBFC) is

a company registered under the Companies

Act, 1956 engaged in the business of loans and advances, acquisition of

shares/stocks/bonds/debentures/securities issued by Government or local authority or

other marketable securities of a like nature,

leasing, hire-purchase, insurance business,

chit business but does not include any

institution whose principal business is that of agriculture activity, industrial activity,

purchase or sale of any goods (other than

securities) or providing any services and

sale/purchase/construction of immovable

property. A non-banking institution which is

a company and has principal business of receiving deposits under any scheme or

arrangement in one lump sum or in

instalments by way of contributions or in any

other manner is also a non-banking financial

company (Residuary Non-banking Company).

Role of NBFCs in India

NBFCs are known as India’s shadow banking

sector, a big source of credit to the country’s

small and medium enterprises, realtors, homebuyers and consumers. NBFCs (Non

Banking Financial Companies) play an

important role in promoting inclusive growth

in the country, by catering to the diverse

financial needs of bank excluded customers.

1. Greater Employment Opportunities and

Standard of Living

NBFCs help in creating more jobs in the

country by promoting SMEs and private

industries through lending them loans. This increase in new businesses consequently

raises the demand for manpower and creates

employment. Furthermore, the Purchasing

Power Parity (PPP) of people rises and so does

their standard of living. Retail and MSME segments have been key growth areas for

NBFCs, with total credit outstanding of INR

7.5 trillion as on FY18.

2. Strengthening of Financial Market

The financial market relies heavily on Non-banking financial institutions for raising

capital. The start-ups and small-sized

businesses are dependent on funds offered by

NBFCs and also in order to maintain

liquidity. For effective functioning and balance in the financial market, NBFCs play a

significant role.

3. Supplying long-term credits

Unlike the regular banks, NBFCs extend

long-term credits to infrastructure, commerce and trade companies. They also allow

industries to participate in equity. NBFCs

have seen a significant increase in their share

of total new disbursals at the cost of public

sector banks. This is witnessed in the form of


their share in the total credit market going up from 13% in 2015 to 16% in 2017.

4. Mobilisation of Funds

Non-banking financial companies help in

rotation of resources, asset distribution and regulation of income to shape the economic

development. They enable converting saving

into investments and thus helps in the

mobilisation of funds/resources in the

economy.

5. Growth of National Income

As NBFCs aim to build capital for several

industries – private and otherwise – they aid

in accumulating a capital stock for the

country. This directly adds on to the national income and results in the progression of

Gross Domestic Product (GDP).

However, despite making rapid progress and

capturing market share from commercial

banks, their growing size and interconnectedness also raise concerns on

financial stability especially after the IL&FS

crisis. The emergence of new-age digital

lenders has further intensified the

competition for NBFCs in the market. There are various issues involved with the NBFCs,

the key issue being taking up of significant

credit risk and lack of effective monitoring

and management of portfolio performance.

Gaps in the underwriting model: The decline in asset quality for select NBFCs has stemmed from cases

where underwriters are inexperienced,

or with limited understanding of the

local situation and dynamics that

drive the demand for credit.

Misalignment in product offerings

with customer needs: Small NBFCs, in an effort to capture share, have

expanded into new geographic

locations and diversified their product

portfolio. This has resulted in

aggressive investment, increased cost of acquisition and operations.

Asset-liability mismatch: Several NBFCs recently faced with a liquidity

crunch, liabilities maturing and

coming up for payment faster than

loans in the same tenure. With

dynamic short-term rates, such lenders risk resorting to the increased

cost of funds to meet the shortfall,

denting profitability. Additionally, this

has also made it difficult for these

NBFCs to raise capital for expansion in the market.

The default of a systemically important NBFC, has thrust corporate governance for

the sector into the spotlight. The Government

and regulators should take major steps to

improve accountability and liquidity of the

NBFC sector as the role of NBFCs is critical and their presence in a country would only

boost the economy in the right direction.

Q14. What principles should guide

governments taxation policy?. Suggest

some measures to improve India’s tax-GDP ratio.


Approach:

In introduction write about principles that should guide governments

taxation policy

Write reasons and Measures to improve India’s tax-GDP ratio

Provide a conclusion based on the arguments provided.

Three broad principles that should guide tax policy:

First, it should be such that it raises the requisite revenue while minimizing

evasion and distortion in the

economy, thereby eliminating the

generation of black expanding the tax base and supporting investments

through predictable and stable tax

policy.

Second, it should exhibit horizontal equity in the sense that individuals

with equal income are taxed equally.

Finally, it should exhibit progressivity

in the sense that those with higher incomes are taxed at higher rates.

The tax-to-GDP ratio has not been impressive

for India. Ideally, with an increase in GDP,

the tax collection should also increase. If the economy is growing and business is doing

well, naturally, profits will be better and

therefore taxes should also be higher.

In India’s case while the overall tax-to-GDP

(Centre and State) increased from 17.45 per cent in FY08 to 17.82 per cent in FY17, the

GDP and per capita income has doubled

during this period. Interestingly, India’s rate

of growth of tax revenues was not in sync

with its GDP growth in the post-reforms period.

South Africa’s tax-GDP figures are much

better despite its lower GDP per capita and

GDP in absolute terms compared with India


since 1991. However, the overall tax-to-GDP as it stands for India it is 17.82 per cent and

South Africa it is 27.11 per cent.

India must aim to double its tax-to-GDP ratio

to achieve the OECD average of about 34 per cent. The tax-to-GDP for some of the other

emerging market economies like Namibia,

Mozambique, and Chile are higher than India

. In fact the tax-to-GDP of neighbouring Nepal

is also an impressive 21.3 per cent.

Measures to improve India’s tax-GDP ratio:

Direct tax:

Corporate tax. The corporate tax regime requires

rationalisation and simplification. Although

the statutory rate of corporate tax is high, the

collection rate is low because of an array of

tax exemptions.

The high marginal tax rate in India, hurts equity investment.

The exemptions are not given based on

predetermined rules. This creates uncertainty

for investors and also creates opportunities

for corruption, rent seeking and tax evasion. Significant sectoral differences: The tax

system is not equitable horizontally since the

differential in effective tax rate across sectors

is very high.

In the next three years, we should eliminate

various corporate tax exemptions. This should be accompanied by a reduction in the

corporate tax rate from 34% to 25%

(including surcharges and cesses) for all

companies..

Personal income taxes.

A key limitation of personal income tax

regime is the small tax base. It is also not

desirable in terms of developing a healthy

economy since tax payment is an essential

aspect of the relationship between the government and its citizens. Therefore, we

should endeavour to bring a large number of

citizens into the direct tax net even if their tax

liabilities are minimal.

The following reforms address the current

situation:

The tax slabs corresponding to the lowest tax rate should be expanded to

ensure that the tax liability of lower

income individuals does not increase

suddenly with the growth in their nominal incomes.

We should aggressively move the economy towards greater

formalisation, which will lead to

greater number of individuals filing tax returns.

This includes moving towards digital payments and away from cash.

Arresting tax evasion when non-agricultural income is declared as

agricultural income. All agricultural

income is exempted from income tax. While the provision is meant to protect

farmers, non-agricultural entities

sometimes use it to evade taxes by

declaring agriculture as the source of

their income. In order to mitigate the

generation of black money, the loopholes need to be plugged.

Indirect Taxes

Goods and Services Tax. The GST is a substantial reform of the

existing indirect tax regime. The steps needed

(i) A well-functioning GST council.

(ii) Advocacy and outreach programme to help

the stakeholders (especially new taxpayers)

adjust to the new system; (iii) A robust tax administration system by the

Union and the state governments; and

(iv) A well-functioning GSTN system.

(v). we should move gradually towards fewer

number and lower level of rates. Since the

GST system will expand the tax base, we should be able to lower the tax rates without

loss of revenue.

Custom duty

Rationalise custom duties and tariffs. We need to improve procedures for custom

clearances. This will reduce transaction costs

and improve the ease of doing business.

Duty exemption should be given to exporter

upon declaration with enforcement done

through ex post random checks. Under the current system, delays in drawbacks are

endemic and administrative procedures so

burdensome that many exporters simply

forgo the exemption.

Stamp duty on property registrations

State governments levy stamp duties and fees

on property registrations at the time of

purchase. A high rate creates the incentives

for the buyer of property to declare a lower

value and pay a part of the payment in black. Black money thus flows massively into real

estate. Therefore, the states may consider

reducing the stamp duty inclusive of property

registration fee.

Improving the Tax Administration System

and Minimizing Tax Litigation


Pending tax litigations cost the taxpayers and the government in terms of resources

including delays in the collection of revenue.

The following steps should be taken

Reduce the scope for interpretation of tax

laws. In this regard, the Easwar Committee has offered detailed recommendations, which

should be implemented.

Dispute resolution strategy, as recommended

by the Tax Administration Reform

Commission (TARC), need to create a

separate disputes management vertical, which is separate from the tax collection

functions.

The dispute resolution mechanisms need to

be modernised through alternative dispute

resolution mechanisms, including arbitration and conciliation.

Performance assessment of tax officials.

We need to enhance the tax boards

capabilities to utilise the available

information and modern ICT tools to ensure

tax compliance. A low tax-to-GDP ratio is detrimental to

effective governance and delivery of public

services. A larger tax base, achieved through

tax reforms, can also allow reduced across-

the-board tax rates, thereby supporting investment, expanding output and enhancing

economic growth.

Q15. Recently we have seen a decrease in

the level of NPAs. What are the various

steps taken by the Government and Central Bank to address the issue which

led to the decrease in NPAs?


Approach:

Define what is NPA and mention one or two fact related to the first

statement of the question if you know.

Highlight the various steps taken by the Government and Central Bank

during previous few years and in

present.

In conclusion, try to give the way forward.

Non-performing asset (NPA) is a loan or

advance for which the principal or interest

payment remained overdue for a period of 90

days or more. In case of Agriculture/Farm Loans, the NPA varies for short duration crop

(interest not paid for 2 crop seasons) and long

duration crops (interest not paid for 1 Crop

season).

According to Economic survey 2018-19, the

performance of the banking sector (domestic

operations), and Public Sector Banks in particular, improved in 2018-19.

The Gross NonPerforming Advances (GNPA)

ratio of Scheduled Commercial Banks (SCBs)

decreased from 11.5 % to 10.1 % between March 2018 and December 2018 while for

PSBs it declined from 15.5 % to 13.9 %.

Steps Taken By The Government And

Central Bank

The measures taken to resolve and prevent

NPAs can broadly be classified into two kinds

– first, regulatory means of resolving NPAs

per various laws (like the Insolvency and

Bankruptcy Code), and second, remedial measures for banks prescribed and regulated

by the RBI for internal restructuring of

stressed assets. To resolve the problem of

NPAs Government followed the strategy of

4Rs (as mentioned in 2016 economic survey):

1. The first R, Recognition: through Asset

Quality Reviews and Joint Lenders’ Forum

banks have recognised a growing number of

loans as non-performing.

Banks are now required to acquire Legal Entity Identifier (LEI) number from the

borrower and report it to Central Repository

of Information on Large Credit.

2. The second R, Reform: Reforms in banks

and financial ecosystem to ensure a responsible and clean system. Various steps

were taken to reform banks like:

Mission Indradhanush, 2015: It provided for Comprehensive

framework for transforming the PSBs.

Under the PSB Reforms Agenda, PSBs have created Stressed Asset

Management Verticals to focus

attention on recovery and entrusted

monitoring of loan accounts of above

Rs. 250 crore to specialised

monitoring agencies.

Fugitive Economic Offenders Act, 2018: It has been enacted to deter

economic offenders from evading the

process of Indian law by remaining

outside the jurisdiction of Indian

courts.

Prompt Corrective Action (PCA): is a framework under which banks with weak financial metrics are put under

watch by the RBI. The PCA framework

deems banks as risky if they slip

below certain norms on three

parameters — capital ratios, asset quality and profitability.


The consolidation of Banks is also seen as a way out of the NPA issue through the “strong” banks absorbing

the strain on the books of weaker

banks. Eg: Merger of Dena and Vijay

Bank with Bank of Baroda.

3. The third R, recapitalised: Government of

India announced recapitalization of PSBs to

the tune of Rs. 2.11 lakh crore in October

2017, through infusion of capital by the

Government and raising of capital by banks

from the markets

4. The fourth R, Resolution: The Insolvency

and Bankruptcy Code (IBC) was enacted in

May 2016 to provide a time-bound 180-day

recovery process for insolvent accounts (where the borrowers are unable to pay their

dues).

In line with the enactment of the IBC, the

RBI, substituted all the specific pre-existing

guidelines with a simplified, generic, time-bound framework for the resolution of

stressed assets.In the revised framework, the

RBI put in place a strict deadline of 180 days

during which a resolution plan must be

implemented, failing which stressed assets must be referred to the NCLT under IBC

within 15 days. The framework also

introduced a provision for monitoring of one-

day defaults, where incipient stress is

identified and flagged immediately when

repayments are overdue by a day.

( Also recently, The Supreme Court quashed

the stringent RBI circular which mandated

banks to recognise even one-day defaults and

finding a resolution within 180 days failing which the account in question has to be sent

to bankruptcy courts if it is Rs 2,000 crore

and above.)

The RBI guidelines from time to time have

laid a firm pathway for improving overall robustness to manage NPAs. Banks would

need to adopt and implement the measures in

true spirit and substance and not just in

“form” to further improve the situation

otherwise the problem will keep on coming back.

Q16. Credit Rating Agencies has come

under criticism after the IL&FS crisis as it

is believed that they failed to pick up the

signals of a liquidity crunch. In light of IL&FS crisis, Highlight the various issues

involved with Credit Rating Framework in

India.


Approach:

Highlight what are CRAs and why they are in news.

Highlight various issues involved with them.

Conclude by giving a way forward as how we can strengthen CRAs.

As per the Regulations, CRA is defined as “a

body corporate which is engaged in, or

proposes to be engaged in the business of

rating of securities offered by way of public or

rights issue”. All the credit agencies need to be registered with SEBI in order to operate in

India. SEBI (Credit Rating Agencies)

Regulations, 1999 provide for a disclosure-

based regulatory regime, where the agencies

are required to disclose their rating criteria,

methodology, default recognition policy, and guidelines on dealing with conflict of interest.

Rating agencies have come under pressure

after they failed to raise timely red flags

ahead of debt defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS)

until after a subsidiary defaulted on some of

its debt last year. Following are the issues

involved with Credit Rating Framework in

India:

Conflict of interest: CRAs follow the 'issuer pays model', under which the

entity issuing the financial instrument

pays the agency upfront to rate the

underlying securities. However, such

payment arrangement may lead to a 'conflict of interest' and could result in

compromising the quality of

analysis.Another example of conflict of

interest is non-rating services such as

risk consulting, funds research and

advisory services given to issuers for which ratings have been provided.

Rating shopping: It is the practice of an issuer choosing the rating agency

that will either assign the highest

rating or that has the most lax criteria

for achieving a desired rating. Hence,

the system does not permit publishing a rating without the issuer’s consent.

Less competition: Credit-rating market in India is oligopolistic, with high

barriers to entry. Lack of competition

in the market enables CRAs to have

longer, well- established relationships with the issuers which can hamper

their independence.

Poor Rating Quality: Often ratings are provided on limited information. For


e.g. If the issuer decides not to answer some determinant questions, the

rating may be principally based on

public information. Many rating

agencies don’t have enough manpower

which often leads to poor quality.

Multiple Regulators: Other than SEBI, there are certain other regulatory

agencies, such as the Reserve Bank of

India (RBI), Insurance Regulatory and

Development Authority, and Pension

Fund Regulatory and Development

Authority, which also regulate certain aspects of credit rating agencies under

their respective sectoral jurisdiction.

The role of CRAs in an economy like India

can’t be neglected as they help investors, customers etc. to get an overall idea of the

strength and stability of an organization and

enable them to make informed decisions. To

Strengthen the Credit Rating Framework in

India, Government and SEBI should ensure

more accountability of the CRAs and should review the regulations and suitably modify

them to ensure greater objectivity,

transparency and credibility in the whole

credit rating framework.

Q17. The global economic environment is

muddled by increasing trade protectionism

and slowing down of global output. It poses

both challenges and opportunities for the

Indian economy. Comment.


Approach:

Give a brief introduction about protectionism and slowing down of

global output

Write about both challenges and opportunities for the Indian economy

Provide Conclusion based on arguments provided.

In the context of world trade, protectionism is

the economic policy of restraining trade

between countries through methods such as tariffs and not-tariff barriers, restrictive

quotas, and a variety of other government

regulations. WTO rules allow countries to use

methods of protectionism but in a limited

manner and in specific cases. In recent times,

there is a rising tide of protectionism across the world, with possibilities of even a trade

war. The protectionist measures are

indicative of a slide form globalisation and

free trade. Protectionism is now going to be a

major threat facing the world trade and

development, especially for emerging economies.

Increasing Trade Protectionism and

Slowing down of Global Output:

The World Economic Outlook (WEO) in its

April 2019 issue has projected growth in

world output at 3.3 % in 2019, down from 3.6

% in 2018. Due to:

i. Heightened US-China trade tensions

ii. Advanced countries persist with their accommodative monetary policy stance

leading to escalated portfolio investment into

emerging market economies making their

currencies stronger and imports cheaper.

iii. Crude oil prices increase

The World Trade Organisation(WTO) -World

trade growth has slowed down to 3 per cent

in 2018, much below the growth rate of 4.6

per cent in 2017, following the introduction of

new and retaliatory tariff measures, heightened US-China trade tensions weaker

global economic growth and volatility in

financial markets.

Challenges for the Indian economy

Stressful trade relations- a shift to protectionism would further

strengthen trade imbalances

especially for developing and

underdeveloped countries.

The dispute has upset global financial markets including stocks, currencies and the global trade of commodities.

In the long term, this can lead to

financial market instability leading to

corporate vulnerability as global trade

and growth decline. For India, already

burdened with the twin balance sheet problem, this will add to its woes.

Protectionism measure can impact India’s export growth momentum and

lead to an increased trade deficit.

India’s exports shrank for the first

time in nine months in June as global trade tension hit shipments and the

country braced for the impact of the

US withdrawing some benefits.

One major concern is the risk that trade tensions could spiral into

currency wars, making the dollar-

denominated debt more difficult to service.

The curbs on H1B visa and scrapping of the Australian "457" programme

will adversely affect the Indian IT

sector, which sends thousands of


working professionals to these nations.

The US has withdrawn trade benefits for India under its Generalized System

of Preferences; imposed tariffs on steel

and aluminium and filed several cases

against India at the World Trade Organization (WTO)

Protectionist policies lead to a slow erosion of the global rules-based

trading system which requires signing

bilateral FTAs with individual

countries/trade blocs.

Opportunities for the Indian economy

The United Nations said in a report that India is among the few economies

that stand to benefit from the trade

tensions between the world's top two

economies i.e. USA and China.

The US manufacturers are setting up their bases in India, in addition to

already existent bases in China. This

will provide them with an alternative

source for export of their products to

deal with such trade wars like situations. For India, this will be

beneficial as it would create more jobs

for us.

With this increased tariffs on Chinese products by the US, the Indian

producers will get an opportunity to

fill this generated gap and penetrate into the US market. This will increase

their trade and profit.

With both US and China embroiled in a trade war and uncertainty regarding

Brexit, India becomes the sole major

emerging market economy which has

skilled cheap labour, required infrastructure and positive

demographic dividend for attracting

investment which is fleeing these

markets due to lack of market-

stability.

Opportunities to increase exports of textile, agriculture, leather products

and also diversify market reach

focusing on African countries.

Developing nations can be induced to form multilateral associations among

themselves, India can take lead in this

regard.

The head of the WTO has said that global free

trade is facing its worst crisis due to the

protectionist nature of this US-China trade

war. For India, to take advantage of this

Global Trade War, we need structural and economic reforms focusing on improving ease

of doing business, skill development, improving supply chains, lower logistics costs

and trade facilitation, diversify export basket,

the comprehensive overlook at import tariffs,

investment policy.

Q18. In India, the existing yield levels of a

majority of crops remain much lower than

the world average. In this context, how

modernizing agriculture can increase

productivity and thereby help in achieving

the goal of doubling farmer’s income by 2022.


Approach:

In introduction write about existing yield levels and agricultural

productivity

Write Reasons for low productivity

Write how agriculture modernisation can be achieved.

Provide an optimistic conclusion about agriculture future based on

arguments provided.

Agricultural productivity is measured as the

ratio of agricultural outputs to agricultural

inputs. Major indicator of productivity is

output per hectare which remains much

lower than the world average.

Crop production in the country is dominated

by cultivation of paddy in Kharif and wheat in

Rabi seasons. If we compare yields of rice,

wheat and horticultural crops with other

countries- I. India exhibits low yields in rice when

compared to other countries but not in

wheat. Rice yield in India is just 55% of rice

yield in China. The average yield of rice in

India is much lower than other major rice-

producing countries like Bangladesh, Indonesia and Vietnam.

Ii. It may seem surprising but India edges out

the United States in yield per hectare in

wheat. China is the major producer of wheat

that has far higher productivity than India. France, Germany and the United Kingdom

exhibit super-high productivity in wheat but

their contributions to the world output are

significantly smaller than those of India and

China.

Iii. India is fairly placed in terms of contribution to global production of potato

and banana but there also the level of

productivity is less as compared to many

countries. In the potato productivity in India

is less than half of the productivity of the USA, Germany and the Netherlands while the


yield of banana in Indonesia is 1.5 times higher than that of India.

Iv. The same goes for other crops including

oilseeds, fruits and vegetables as well as

activities such as animal husbandry, fisheries

and poultry.

The second broad productivity concern

relates to regional variation. It is also evident

that while Punjab and Haryana exhibit high

productivity nationally, states such as

Madhya Pradesh, Rajasthan, Maharashtra, Chhattisgarh, Odisha, and Karnataka suffer

from quite low yields per hectare. The scope

for improved productivity in these latter

regions is substantial

Reasons for low productivity:

Include low and faulty input uses

The predominant causes are low irrigation: Close to 53% of the cropped

area is water-stressed. Rainwater

management practices and services are resource-starved. This limits a

farmer’s capacity to undertake

multiple cropping and leads to

inefficient utilization of land

resources. The dominance of inefficient

production practices, such as flood

irrigation, at the farm level.

Use of low-quality seeds

Low and inefficient fertilizer usage and also quality concerns of fertilizers,

higher dependence on imports.

Electricity supply issues On average, farmers do not realize

remunerative prices due to the limited reach

of the minimum support prices (MSP) and an

agricultural marketing system that delivers

only a small fraction of the final price to the

actual farmers. Both production and marketing suffer due to the absence of

adequate capital.

Structural issues: The farm size of the

majority of the household has declined to

unviable levels. Small and marginal farmers with less than two hectares of land account

for 86.2% of all farmers in India. Given the

predominance of small and marginal farmers

in Indian agriculture, affordability becomes a

significant constraint on technology adoption

by farmers. Relief measures in the event of natural

disasters are inadequate and suffer from

procedural inefficiencies and delays. Also, low

crop insurance penetration is the reason for

concern.

Poor access to modern technology and no real technological breakthrough in recent times.

Low adoption of improved technology, and

knowledge deficit about improved agricultural

practices.

Inefficient extension delivery systems have led

to the presence of large yield gaps

A huge gap exists between the demand for

and supply of skills in agriculture, hindering

diversification, adoption of precision agriculture and on-farm post-harvest value

addition.

Agricultural research in the country is

constrained by resource inadequacy, regulations and intellectual property rights

(IPR).

Modernising Agriculture:

Productivity and efficiency

Increase area under irrigation: Irrigation coverage, focus should be on

increasing coverage through micro-

irrigation. Investment subsidies for

micro-irrigation: Rather than power

and water subsidies, investment subsidies for micro-irrigation can be

provided through the DBT model.

“Per drop more crop” initiative under

which drip/sprinkler irrigation is

being encouraged for optimal

utilization of water.

Increase the adoption of hybrid and improved seeds:

o Dynamic seed development

plans are required. These may

be based on the crop-wise area

(each season separately), seed

rate per hectare used, desired/targeted seed

replacement rate and crop-

wise seed requirement. Crop

wise requirement should be

worked out based on historical trends, the introduction of new

varieties and replacement of

poor yielding varieties.

o States should aim to increase

the seed replacement rate

(SRR) to 33 per cent for self-pollinated crops and 50 per

cent for cross-pollinated crops

in alternating years.

o Strengthen seed testing

facilities o Uniform national procedure for

seed licensing


Efficient fertilizer usage: Strengthen the Soil Health Card scheme

o Reorient fertilizer subsidy

policy: The current lopsided

fertilizer subsidy policy needs

to bring secondary and

micronutrients on the same nutrient-based subsidy (NBS)

platform as phosphorus (P)

and potash (K).

Regulate pesticide use

Strengthening extension systems:

The synergy between Agriculture Technology Management Agency

(ATMA) and Krishi Vigyan Kendras

(KVKs):

o The ATMA programme needs to

be reoriented to include

bottom-up planning at the district and block levels to

develop Strategic Research

Extension Plans (SREP).

Subject matter specialists at

KVKs should orient their research to the block action

plans developed by ATMA.

o Public Private Partnership in

KVKs: The guiding principles

of ATMA provide for the

promotion of PPP in extension delivery. With each KVK in

possession of approximately 50

acres of land, KVKs should

incubate private sector

initiatives in extension delivery.

Market-led extension: Give priority to extension services that disseminate

information to farmers regarding (i)

crop selection (ii) demand for and

supply of crop production, (iii)

expected price of the commodity and (iv) availability of infrastructure

facilities for storage, transport and

marketing of produce. Value-added

extension: Prioritise value-added

extension services to enable a reduction in postharvest losses by

converting raw agricultural produce to

processed products. This allows for

increased price realization and

contributes towards increasing

farmers’ income.

Diversification: promotion of high-value

crops (HVCs) and livestock

Establish regional production belts

Use of hybrid technology in vegetables: Shift to using hybrid varieties for vegetables. At present,

10% of the cropped area under

vegetables is under hybrids. Shifting

to hybrids has the potential to

increase yields by 1.5 to 3 times and provide a significant increase in

income.

Rootstocks for production of fruits: Rootstock technology has shown the

capacity to double production and be

resilient to climate stress. Measures

should be taken to standardize and promote the usage of rootstocks to

produce fruits.

Smart horticulture: There have been pockets of success spread throughout

the country, using techniques such as

high-density plantation, protected

cultivation and organic production

Strengthen the market for organic products, spices, exotic crops.

Breed indigenous cattle with exotic breeds

Promote and develop bull mother farms: Employing multiple ovulation

and embryo transfer technologies,

these farms can significantly enhance

milk productivity through the supply of cattle with enhanced milk potential

to farmers. Village level procurement

systems: Installing of bulk milk

chillers and facilities for high-value

conversion of milk are needed to promote dairy in states.

The convergence of schemes in the fisheries sector: Integrate the Blue

Revolution scheme with MGNREGA

Marketing and Postharvest mechanism

Launch of eNAM initiative to provide farmers with an electronic online

trading platform.

Cold storage and warehousing on scientific line

Improved supply chains and logistics in agriculture to avoid wastages

A buoyant agricultural ecosystem where any surplus which cannot be

absorbed by the domestic market must be of such quality and variety

that it may be channelled through

exports. Agricultural trade may indeed

play a key role in this direction.

While measures that have been outlined are

essential to increase productivity, for

rejuvenation of agriculture as well as


achieving the goal of doubling farmers income by 2022.

Q19. India’s sovereign external debt to

GDP (gross domestic product) is among the

lowest globally at less than 5 per cent. Discuss in this context, whether India’s

sovereign bond announcement in Budget

2019 a boon or bane?


Approach:

Mention in brief, what is sovereign bond?

To answer whether it is a boon or bane, try to bring in notice various

pros and cons of sovereign bond.

Make sure you deal with them in India’s perspective.

Since no one is sure whether they will be successful or not, try to keep your

conclusion balanced.

Sovereign bonds are fixed debt instruments

issued by the government ,either in domestic or foreign currencies, which is like raising a

loan in the international market. Sovereign

Bonds have an interest outlay in the form of

coupon payments where the principle amount

is paid at maturity.

In India, the government has only issued

sovereign bonds in local currency in the

domestic market. Foreign portfolio investors

have evinced interest in Indian government

bonds traded locally in recent years, as the real interest rate on Indian bonds is attractive

compared to other developed countries. But

currency stability is vital for such investors,

as they take the currency risk investing in

rupee-denominated government bonds. This

is where a foreign sovereign bond makes a big difference. A government bond issued in

foreign currency (mostly in US dollars) shifts

the currency risk from investor to issuer (in

this case, the government).

Sovereign Bonds: A Boon?

Higher foreign inflows: The issue of international sovereign bonds will

have several long-term implications. It

may facilitate the inclusion of India’s

government bonds in the global debt indices. India’s representation in

global debt market indices is small

compared to other emerging markets.

This may lead to higher foreign inflows

into India.

Free up domestic savings: They free up domestic savings to be channelled into productive private investments.

They establish a benchmark that

helps price discovery for other

corporates tapping overseas credit

markets.

Rate of interest is low outside: India is among the few major countries

globally to have never issued a

sovereign bond. These sovereign

issuances should be useful. They

draw in foreign savings at a good rate

for the country. With an advantage of lower interest rates abroad, the

domestic market can be left for the

private issuers.

Discipline the government: foreign markets will discipline the government

with integration in the global bonds

market when Fiscal Responsibility and Budget Management (FRBM) rules are

in place.

Inclusion in global benchmarks would also improve the attractiveness of

rupee-denominated sovereign bonds.

Sovereign Bonds: A Bane?

Expose the economy to risks: Dollar-denominated bonds are more sensitive

to global interest rates. Global shocks,

as seen in the 2013 taper tantrums,

can lead to heightened selling pressure on Indian bonds. Also

Borrowing in foreign currencies may

expose the economy to risks as the

rupee's depreciation or current

account deficit cannot be contained in the long run.

Rising fiscal costs: The idea right now is being pushed to make up for tax

revenue shortfalls but the intention of

a long term borrowing is associated

with growth led by investment and not

short term needs. Therefore, a long time horizon cannot ensure or hedge

against exchange rate risks, which

increase the burden in repayment at

the time of maturity.

The impact of forex: Borrowing in international markets can reduce

interest rates, but any change in foreign exchange (forex) can turn

expensive. Countries like Mexico,

Indonesia, Brazil and Russia have

experienced massive pressure from

international investors to repay debt.

Original sin: It means a country

cannot raise funds in its own currency in a foreign market, but has to borrow


in dollars or euros. Moreover, as the US dollar is the resolve currency, it

affects the market with greater

implications.

Although the step would integrate the Indian economy in global markets, it is debated that

there is high risk involved. While the move is

expected to ease the burden on Indian

institutions, there are economies that have

seen a bitter past in the global bond market.

It remains to be seen whether history will be created or repeated in future.

Q20. With increasing incomes and

changing food preferences, food processing

industry is going to be one of the main industries of the country in the future.

Comment.


Approach:

Give a brief introduction about the food processing industry and write

current status and future prospects of

Industry.

Write about the demand & Supply dynamics and how it can be one of the

main industries of the country in the

future.

Provide an optimistic conclusion about the industry's future.

With a population of nearly 1.3 Billion and a

rapidly growing middle class spending a high

proportion of their disposable income on food, the Indian food and retail sectors are poised

to witness tremendous growth in the coming

years.

Current status:

Food Processing Sector has also emerged as an important segment of the Indian economy

in terms of its contribution to GDP,

employment and investment. The sector

constitutes as much as 8.71 % and 10.04 %

of GVAin Manufacturing and Agriculture sector respectively in 2015-16 at 2011-12

prices.

Future prospects:

Increasing per capita income, growing urbanization, changing lifestyles, rising

participation of women in the workforce, and

above all, rapid globalisation has provided a

fillip to the growth of this sector.

As per a recent projection, total consumption of the food and beverage segment in India is

expected to increase to US$1.14 trillion by 2025.

This sector is highly labour intensive per unit

of capital (Annual Report of Ministry of Food

processing Industry). So provide employment form millions in upcoming years.

Demand & Supply Dynamics:

The composition of food production and demand is undergoing change.

Increasing awareness about nutrition,

affluence of working population and access to information have led to an

increase in the use of health

supplements, nutraceuticals, organic

food as well as other high value

products.

All these factors have led to a paradigm shift in the demand for

processed foods and composition of

food processing sector. This will

impact not only food processing

industry but also other related

segments such as machinery manufacturers, cold chain, logistics

operators, retailers and, most

importantly, the farmers.

India’s geographical location gives it a unique advantage, having convenient

connectivity to Europe, the Middle East and Africa (amongst others) from

the western coast and Japan,

Singapore, Thailand, Malaysia, Korea,

Australia and New Zealand (amongst

others) from the eastern coast.

On the supply side,the agro climatic advantage and diversity of climatic zones makes India a home to a variety

of fruits and vegetables, spices,


cereals, marine produce, plantation crops and ingredients which are

relished all over the world.

Challenges:

The production advantages are huge, however, the level of processing for perishables continues to be very

minuscule at around 10 per cent and

even lower for fruits and vegetables

(~2 %).

On the other hand, the level of wastage of Agriculture produce is very

high and is estimated at over US$ 15 Bn annually.

Infrastructure and supply chain constraints

These three factors pose both challenges and

opportunities. Challenge to the Government

in terms of creating an ecosystem and

enabling environment for investors to invest

in food processing sector; and, on the other hand, an opportunity for investors to benefit

from what the sector has to offer.

Steps taken by Government;

FDI up to 100%, under the automatic route is allowed in food processing

industries. Further, 100% FDI under

Government route for retail trading,

including through e-commerce, is

permitted in respect of food products

manufactured and/or produced in India.

Investors’ Portal - Nivesh Bandhu which brings together all relevant

information related to food processing,

thus enabling investors to take

informed decisions.

Lower GST for the raw and processed product; around 80% of food products are covered in lower tax slab of 0%,

5% and 12%.

Provision of profit linked tax holiday under section 80 IB and investment-

linked deduction under Section 35 AD

of Income Tax Act, 1961.

Classifying loan to food & agro-based

processing units and Cold Chain under agriculture activities for Priority

Sector Lending.

Cold Chain and Food Parks covered under Harmonised Master List of

Infrastructure Sub-sector

Setting up of a Special Fund of Rs. 2000 crore in National Bank for Agriculture and Rural Development

(NABARD) to provide affordable credit

for designated Food Parks and agro-

processing units.

Creating modern infrastructure for supporting the growth of the food

processing sector through the implementation of the Schemes of

Mega Food Parks, Integrated Cold

Chain and Value Addition

Infrastructure, and Setting up /

Modernization of Abattoirs

Another important initiative has been the introduction of one umbrella scheme – the Pradhan Mantri Kisan

SAMPADA Yojana (PMKSY) PMKSY is

a comprehensive package of support

which will result in creation of modern

infrastructure with efficient supply chain management from farm gate to

retail outlet. It will not only provide a

big boost to the growth of food

processing sector in the country but

also help in providing better returns to

farmers and is a big step towards increasing farmers income, creating

huge employment opportunities

especially in the rural areas, reducing

wastage of agricultural produce,

increasing the processing level and enhancing the export of processed

foods.

Sustainable growth of food processing sector

would require full participation of all

stakeholders and equitable distribution of the benefits accruing to the sector. Among all the

stakeholders, the farmers remain the key but

most vulnerable participants. It is declared

policy of the government to double farmers’

income by 2022. Strengthen farmer-industry connect is the key to achieve both the

objectives. Given the huge production base of

agri-produces, incentives offered by the


government to promote food processing sector and its unique locational advantage, India

has all the potential to become the food

factory of the world.

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