Economy 323ec-pt_365 PDF

 ECONOMY Table of Contents 1. GROWTH, DEVELOPMENT AND POVERTY 3.4. Key Concepts on Banking and Monetary ALLEVIATION ________________________ 5...

 ECONOMY Table of Contents 1. GROWTH, DEVELOPMENT AND POVERTY 3.4. Key Concepts on Banking and Monetary ALLEVIATION ________________________ 5 Policy _______________________________ 32 1.1. Growth and Development ___________ 5 4. PAYMENT SYSTEMS AND FINANCIAL 1.1.1. GDP-GVA GAP ______________________ 5 MARKETS __________________________ 36 1.1.2. Human Development Report (HDR) _____ 6 4.1. Payment Systems _________________ 36 1.2. Poverty Alleviation _________________ 7 4.1.1. Indian Payment System ______________ 36 1.2.1. Poverty Estimates ___________________ 7 4.1.2. Other developments in Payment Systems 36 1.2.2. Developments on financial inclusion ____ 9 4.2. FinTech __________________________ 37 1.3. Key Concepts and Information on Growth, 4.2.1. Central Bank Digital Currency _________ 38 Development and Poverty Alleviation _____ 9 4.2.2. Tokenisation _______________________ 39 4.2.3. Unified Payments Interface (UPI) ______ 40 2. FISCAL POLICY ____________________ 11 4.2.4. Digital Banking Units (DBUs) __________ 40 2.1. Status of Government Finances ______ 11 4.2.5. Digital Lending _____________________ 41 2.1.1. Current Account Deficit (CAD) ________ 11 4.3. Financial Markets _________________ 43 2.1.2. Strengthening State Finances _________ 12 4.3.1. Credit Rating_______________________ 43 2.1.2.1. State’s Fiscal Responsibility and Budget 4.3.2. Social Stock Exchange (SSE) ___________ 44 Management (FRBM) __________________ 13 4.3.3. Sovereign Green Bonds (SGrB) ________ 44 2.1.2.2. Municipal Financing _____________ 13 4.3.4. Institutions and systems in the Financial 2.2. Taxation _________________________ 14 Sector _________________________________ 46 2.2.1. Goods and Services Tax (GST) _________ 14 4.3.5. Other concepts in the Financial Sector __ 47 2.2.2. Digital Tax ________________________ 15 4.4. Insurance Sector __________________ 48 2.2.3. Taxation of Virtual Digital Assets (VDAs) 16 4.4.1. New Insurance Rules ________________ 48 2.3. Non-Tax Revenues_________________ 18 4.5. Pension Sector ____________________ 50 2.4. Key Concepts and Information on Fiscal 4.5.1. Pension System in India ______________ 50 Policy_______________________________ 18 5. EXTERNAL SECTOR_________________ 51 3. BANKING, ASSET QUALITY, 5.1. Trade ___________________________ 51 RESTRUCTURING AND MONETARY POLICY 21 5.1.1. Internationalization of Rupee _________ 51 5.1.2. World Trade Organization (WTO) ______ 52 3.1. Banking _________________________ 21 5.1.3. Marine Products Export Development 3.1.1. Urban Co-operative Banks (UCBs) _____ 21 Authority (MPEDA) _______________________ 53 3.1.2. Regional Rural Banks (RRB) ___________ 23 3.1.3. Non-Banking Financial Companies (NBFCs) 5.2. Investment _______________________ 54 ______________________________________ 24 5.2.1. Foreign Direct Investments (FDI) _______ 54 3.1.4. Amendment to Nidhi Rules, 2014 _____ 24 5.2.2. Other Developments Related to Foreign 3.1.5. Financial Services Institution Bureau (FSIB) Investment _____________________________ 55 ______________________________________ 25 3.1.6. Banking System Liquidity ____________ 26 5.3. Exchange Rate Dynamics____________ 55 5.3.1. Indian Rupee (INR) Depreciation _______ 55 3.2. Asset Quality and Restructuring ______ 26 5.3.2. India’s Forex Dynamics ______________ 56 3.2.1. Non-Performing Assets (NPAs) ________ 26 3.2.2. Recovery and Restructuring Measures _ 27 5.4. Global Institutions _________________ 57 3.2.2.1. Debts Recovery Tribunals (DRTs) __ 27 5.4.1. International Monetary Fund (IMF) ____ 57 3.2.2.2. Asset Reconstruction Companies 5.4.2. World Bank Group __________________ 58 (ARCs)_______________________________ 28 5.5. Key Concepts and Information on External 3.3. Monetary Policy __________________ 28 Sector ______________________________ 58 3.3.1. Inflation in India ___________________ 29 6. INNOVATION, SKILL DEVELOPMENT and 3.3.2. Inflation Targeting __________________ 30 3.3.3. Price Monitoring Centres (PMC) _______ 31 ENtrepreneurship ___________________ 61 3.3.4. Standing Deposit Facility (SDF) ________ 31 6.1. Innovation _______________________ 61 1 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  6.1.1. Global Innovation Index (GII) _________ 61 8.5. Technical textiles (TT) ______________ 89 6.1.2. Intellectual Property Rights (IPR) Regime in India __________________________________ 62 8.6. Pharmaceutical Industry and Medical 6.1.3. National Intellectual Property Awareness Devices _____________________________ 90 Mission (NIPAM) ________________________ 64 8.6.1. Medical Devices Industry in India ______ 90 8.6.2. Bulk Drug Park (BDP) ________________ 91 6.2. Skill Development _________________ 65 6.2.1. National Initiative for Promotion of 8.7. Toy Sector in India _________________ 91 Upskilling of Nirman workers (NIPUN) _____ 66 8.8. Other Developments in the Industrial 6.3. Entrepreneurship _________________ 66 Sector ______________________________ 92 6.3.1. Unicorns in India ___________________ 66 8.8.1. Ease of Doing Business (EoDB) ________ 92 6.3.2. Government e-Marketplace (GeM) portal 67 8.8.2. Competition Law and Big Technology Companies _____________________________ 92 6.4. Key Concepts and Information on Innovation, Skill development and 8.9. Key Concepts and Information on Industry Entrepreneurship _____________________ 68 ____________________________________ 94 7. AGRICULTURE ____________________ 70 9. SERVICES SECTOR _________________ 95 7.1. Agricultural Inputs_________________ 70 9.1. Tourism Sector in India _____________ 95 7.1.1. Minimum Support Price (MSP) ________ 70 9.1.1. National Strategy for Sustainable Tourism 7.1.2. Nano-Urea ________________________ 71 ______________________________________ 95 9.1.2. Other developments in the tourism sector 7.2. Crop Cultiation ___________________ 71 ______________________________________ 95 7.2.1. International Year of Millets (IYM) 2023 71 7.2.2. Rice/Paddy Acreage ________________ 72 9.2. E-Commerce______________________ 96 7.2.3. Sugarcane Production in India ________ 73 9.2.1. Promotion and Regulation of E-Commerce 7.2.4. Cotton Cultivation __________________ 74 ______________________________________ 96 7.2.5. Jute Cultivation ____________________ 75 9.2.2. Open Network for Digital Commerce (ONDC) 7.2.6. Draft Coffee (Promotion and Development) ______________________________________ 96 Bill, 2022 ______________________________ 76 9.3. Telecom Sector ___________________ 98 7.2.7. Tobacco Cultivation _________________ 77 9.3.1. GatiShakti Sanchar Portal ____________ 98 7.3. Allied Sector _____________________ 78 9.4. Other Services Sector Developments __ 99 7.3.1. India’s Dairy Sector _________________ 78 9.4.1. Software as a service (SaaS) __________ 99 7.4. Food Processing___________________ 80 10. INFRASTRUCTURE SECTOR ________ 100 7.4.1. Food Processing Sector in India _______ 80 10.1. Logistics Sector _________________ 100 7.5. Agricultural Marketing and 10.1.1. National Logistics Policy (NLP) _______ 100 Entrepreneurship _____________________ 80 10.1.2. PM Gati Shakti ___________________ 101 7.5.1. Asian Palm Oil Alliance (APOA) ________ 80 10.1.3. Logistics Ease Across Different States 7.5.2. Primary Agricultural Credit Societies (PACS) (LEADS) 2022 Report ____________________ 102 ______________________________________ 81 10.1.4. Multi Modal Logistics Park__________ 102 7.5.3. Codex Alimentarius Commission (CAC) _ 81 10.2. Railways _______________________ 103 7.6. Key Concepts and Information on 10.2.1. Innovation in Railways _____________ 103 Agriculture __________________________ 81 10.2.2. Aluminium Wagons _______________ 104 8. INDUSTRY AND ASSOCIATED 10.2.3. Other developments in Railways _____ 104 DEVELOPMENTS ____________________ 83 10.3. Civil Aviation Sector _____________ 105 10.3.1. National Air Sports Policy (NASP) 2022 105 8.1. Mining __________________________ 84 10.3.2. Other Developments in the Civil Aviation 8.1.1. District Mineral Foundation (DMF) ____ 84 Sector ________________________________ 106 8.1.2. Gold Mining in India ________________ 84 10.4. Roadways ______________________ 106 8.2. Steel Industry in India ______________ 86 10.4.1. Private Investment Models in Road 8.3. Micro, Small and Medium Enterprises Infrastructure __________________________ 107 (MSMEs) ____________________________ 87 10.4.2. Other developments in the Roadways Sector ________________________________ 108 8.4. Semiconductor Industry in India _____ 88 10.5. Indian Shipping Industry __________ 108 2 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  10.5.1. Landlord Port Model ______________ 108 11.2.2. Hydrocarbon Exploration and Licensing 10.5.2. National Centre of Excellence for Green Policy (HELP) ___________________________ 115 Port & Shipping (NCoEGPS) _______________ 109 11.2.3. Natural Gas Pipeline Tariff, Authorisation 10.5.3. Other developments in the Shipping and Capacity Regulations ________________ 115 Industry ______________________________ 109 11.2.4. Other Developments in Gas Sector ___ 116 11.2.5. Developments in the Oil sector ______ 116 10.6. Key Concepts and Information on Infrastructure _______________________ 109 11.3. Key Concepts and Information on Energy Sector _____________________________ 117 11. ENERGY SECTOR_________________ 111 12. MISCELLANEOUS ________________ 118 11.1. Power Sector ___________________ 111 11.1.1. Green Energy Open Access Rules ____ 111 12.1. Nobel Prize for Economics 2022 ____ 118 11.1.2. Electricity Amendment Bill 2022 ____ 112 11.1.3. Other developments in the Power Sector 12.2. Standards National Action Plan (SNAP) _____________________________________ 112 2022_______________________________ 119 11.2. Coal, Oil, Gas and Others _________ 113 12.3. Corporate Social Responsibility ____ 119 11.2.1. Coal Bearing Areas (Acquisition & Development) Act ______________________ 115 3 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  4 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  1. GROWTH, DEVELOPMENT AND POVERTY ALLEVIATION 1.1. GROWTH AND DEVELOPMENT 1.1.1. GDP-GVA GAP Why in News? Recently, the gap between Gross Domestic Product (GDP) and Gross Value Added (GVA) of India increased. GVA in India GVA at basic prices (base year 2011- 12) became the primary measure of output (in 2015) across the economy’s various sectors in India. o It was done to conform to the UN System of National Accounts (SNA), 2008. o SNA is the latest version of the international statistical standard for the national accounts adopted by United Nation Statistical Commission (UNSC). The quarterly and annual estimates of GVA are given by National Statistical Office (NSO) under eight broad sectors- covering goods and services in India (see image). Reasons behind GDP-GVA Gap Basic difference: GDP is calculated at market prices while GVA is calculated at basic prices. Other Reason: GDP growth lags GVA growth when subsidies are high and taxes are low. Similarly, when tax collection is high and subsidies are low, GDP growth is higher than GVA. 5 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  Utility of GDP and GVA under different circumstances GDP GVA Identify Health of an Economy, i.e., growing or Get real picture on State of Economic Activity, i.e., amount it is experiencing recession. of goods and services produced as GDP growth can happen Identify standard of living of people via because of better tax compliance as well. income and private consumption data. Sector-wise and region-wise breakdown of value added to Make cross-country analysis on various identify sectors requiring incentives or stimulus. parameters like investments, government Identify productivity of a sector based on global data spending and net exports. standards, helping investors in investment decisions. Related News Green GDP As per a recent RBI paper, India’s Green GDP is growing faster than traditional GDP, after an opposite trend for past three decades. Green GDP: First proposed by UN in 1993, Green GDP is calculated by taking into account the estimates of environmental degradation, depletion of natural resources, and savings of resources and environment into the national income accounts. India’s attempts to measure Green GDP Ministry of Statistics and Programme Implementation initiated compilation of environmental accounting under Natural Capital Accounting and Valuation of Ecosystem Services (NCAVES). o NCAVES project was launched in 2017 by UN and European Union to enhance knowledge and accounting process for ecosystem accounting. Green Accounting for Indian States & Union Territories Project (GAISP) to build a framework for environmentally adjusted national income accounts. 1st state in India to measure Gross Environment Product: Uttarakhand. Related information: Environmental Kuznets Curve (EKC) EKC argues that in initial phases of economic development, there seems to be a positive relationship between pollution level and per capita income. 1.1.2. HUMAN DEVELOPMENT REPORT (HDR) Why in news? United Nations Development Programme (UNDP) released the 2021/22 HDR report - ‘Uncertain times, unsettled lives: Shaping our Future in a Transforming World ’. More on news Human development is defined as the process of enlarging people’s freedoms and opportunities and improving their well-being. HDR report, first released in 1990, measure achievements in three key dimensions of human development: o Long and healthy life (Life expectancy), o Access to knowledge (expected and mean years of schooling), and o Decent standard of living (GNI per capita). Key Findings of the 2021/22 report Decline in global HDI for two consecutive years in a row (2020 and 2021, reversing 5 years of progress). India is ranked 132 out of 191 countries, in comparison to Sri Lanka (73), China (79), Bangladesh (129) and Bhutan (127) fared better than India. o India is bridging human development gap between men and women faster than the world. 6 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  Reasons behind HDI Decline Global: A combination of the COVID-19 pandemic, Russia’s invasion of Ukraine and climate crises dragged down the human development score. o Globally, life expectancy dipped to in 2021 from 2019. Domestic: India’s human development value fell in 2021-22 from 2020, placing the country in medium human development category, due to the following reasons: o Life expectancy drop. o Expected years of schooling at 11.9 years, and the mean years of schooling are at 6.7 years. o India’s per capita income in terms of purchasing power parity has gone down by 5% during 2019 and 2021-22. 1.2. POVERTY ALLEVIATION 1.2.1. POVERTY ESTIMATES Why in News? The authors affiliated with the International Monetary Fund (IMF) and World Bank (WB) published two different estimates of poverty and inequality in India (see image). More on News Economic Advisory Council to Prime Minister (EAC-PM) has also released the State of Inequality in India report. Different Poverty Measures Poverty is usually measured as either absolute or relative poverty, based on a poverty threshold or poverty line, with people falling under this threshold/line being considered poor. o Absolute poverty, or extreme poverty, represents the lack of sufficient resources to secure basic life necessities, such as safe drinking water, food, or sanitation. 7 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  ▪ E.g., People earning less than $1.9 on purchasing power parity (PPP) basis a day are considered extremely poor by the World Bank. o Relative Poverty represents the worse income and resource status of a person or a household than what is thought to be adequate or socially acceptable in the society in which they live. But poverty has many faces, changing with time and place, leading to different poverty measures like: Poverty Estimation in India Tendulkar Methodology: Based on Monthly Per Capita Consumption Expenditure (MPCE) computed Committee, 2009 on the basis of data from the National Sample Survey Organisation (NSSO). Findings: 21.9% of total population was below poverty line in 2011-12. Rangarajan Methodology: Based on an independent large survey of households by Center for Committee, 2014 Monitoring Indian Economy (CMIE). Findings: 29.5% of total population was below poverty line in 2011-12. NITI Aayog’s It is developed by NITI Aayog in collaboration with UNDP and Oxford Poverty and Human National MPI: Development Initiative (OPHI) Baseline Report o It is based on 12 parameters (10 indicators of MPI and two new indicators antenatal care and bank account under Health and Standard of Living. Findings: 25.01% of India's population as multidimensionally poor. Other committees Alagh Committee (1979), Lakdawala Committee (1993) Other inequality measurements for India ‘Poverty and Shared Prosperity 2022: Correcting Courses’ Commitment to Reducing Inequality (CRI) Index It is a biennial report from World Bank (WB) on India Ranked at 123 for reducing inequality, improving global estimates and trends in poverty and shared by 6 places from previous ranking. prosperity. The 2022 CRI Index looks at government policies and It has raised the extreme poverty line of $1.90 to $2.15 actions in 161 countries to fight inequality during the per person per day, based on 2017 purchasing power first two years of the COVID-19 pandemic. parities (PPPs). Index is prepared by Oxfam International and o The poverty line is of living on less than $6.85 per Development Finance. person per day. 8 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  1.2.2. DEVELOPMENTS ON FINANCIAL INCLUSION Global Findex World Bank has released ‘Global Findex Database 2021: Financial Inclusion, Digital Database 2021 Payments, and Resilience in the Age of COVID-19’, surveying how people in 123 economies use formal and informal financial services. According to it, India is among seven countries home to half the world’s 1.4 billion adults without access to formal banking. Fincluvation Launched by India Post Payments Bank (IPPB), it is a joint initiative to collaborate with Fintech Startup community to co-create and innovate solutions for financial inclusion. o It will be a permanent platform of IPPB to co-create financial solutions with start-ups. IPPB (launched in 2018) was established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. Financial inclusion It is released by RBI to capture the extent of financial inclusion across India by covering index (FI-Index) details of banking, investments, insurance, postal as well as the pension sector. o It comprises of 3 parameters (access, usage and quality) with 97 indicators. o Index has been constructed without any base year and reflects cumulative efforts of all stakeholders over the years towards financial inclusion. The index for the FY 21-22 improved to 56.4 from 53.9 in 2020-2021, with growth seen across all its sub-indices. 1.3. KEY CONCEPTS AND INFORMATION ON GROWTH, DEVELOPMENT AND POVERTY ALLEVIATION Glass cliff It refers to a situation in which women are promoted to higher positions during times of crisis, or during a recession when the chance of failure is more likely. Promoting women to leadership position gives companies someone to blame if she fails to pull the company out of its downward spiral. This phenomenon reinforces stereotypes about women not being ideal in leadership positions. The term also applies to the challenges faced by minorities/marginalized groups when promoted to leadership roles. Technical A technical recession is a term used to describe two consecutive quarters of decline in Recession output. o Representing back-to-back contractions in real GDP of a nation’s economy, it is most often caused by a one-off event (say COVID-19 pandemic and lockdowns imposed) and is generally shorter in duration. It is mainly used to capture trend in GDP while a ‘recession’ encompasses more broad-based decline in economic activity that covers several economic variables including employment, household, and corporate incomes etc. Doom Loop According to economists, Europe is headed for doom loop. Doom loop is the circle of vulnerability where a country’s banking system can be severely hurt by volatility in the price of the sovereign bonds, they hold for reserves resulting in a contraction in lending provided by the banks. It is a phenomenon whereby a shock to one part of its economic system is amplified by its effect on another. Creative As per UN Commission on Trade and Development (UNCTD), CE is an emerging concept Economy (CE) dealing with interface between creativity, culture, economics and technology in a contemporary world dominated by images, sounds, texts and symbols. UN marks 2021 as International Year of Creative Economy for Sustainable Development. Creative economy comprising the arts and crafts, audio and video arts and design, among others, accounted for exports of goods and services worth $121 billion in 2019 in India. Twin City Prime Minister lays foundation stone for multiple projects including Twin City Development. Development TCD involves transforming existing cities and developing new genre of satellite/ theme (TCD) townships which are safe, efficient, clean and green and offer high quality of life. Under this, Cities are in close proximity and are interdependent on economic, functional, and urban infrastructure needs. Urban-20 (U20) U20 provides a platform for G20 countries cities to discuss on various important issues of urban development including climate change, social inclusion etc. and propose collective solutions. It facilitates a productive dialogue between the national and local governments and helps promote the importance of urban development issues in the G20 agenda. 9 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  Twin Transition A twin transition approach recognizes that there is a huge and largely untapped opportunity for technology and data to drive sustainability goals. o Need for Twin transition arises in the backdrop of Fourth Industrial Revolution or Industry 4.0 Rather than treating digital and sustainability in isolation, it combines them to unlock huge benefits in terms of efficiency and productivity. o By adopting this approach, leaders can bring the digital and sustainability agendas together to future-proof their organizations. Cost of living Worldwide Cost of Living Index, 2022 released by Economist Intelligence Unit (EIU). index, 2022 o It compares the prices of more than 200 goods and services in 172 cities worldwide. o New York (USA) topped the list followed by Singapore as the most expensive cities in world. EIU are research and analysis division of The Economist Group, sister company to The Economist newspaper. It was created in 1946. Developed On Independence Day, Prime Country through Minister asked Indians to embrace PanchPran “PanchPran” for India to become a developed country in next 25 years. UN classifies countries into three broad categories: developed economies, economies in transition, and developing economies. India is currently in ‘Lower Middle Income’ category with respect to Gross National Income (GNI) per capita. o India’s current Human Development Index score (0.64) is much lower. o On absolute level of gross domestic product and purchasing power parity (PPP), India is one of biggest economies of world. Financial A new FIF for pandemic prevention, preparedness, and response (PPR) has been established Intermediary internationally, with financial commitments from multiple countries including India. Fund (FIF) Hosted by World Bank and with technical support from WHO, FIF will: o Provide long-term financing to strengthen PPR capabilities in low- and middle-income countries. o Address critical gaps at national, regional, and global levels. FIF will help in strengthening PPR capacity in areas such as zoonotic disease surveillance, laboratories, emergency communication, critical health workforce capacities etc. 10 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  2. FISCAL POLICY 2.1. STATUS OF GOVERNMENT FINANCES 2.1.1. CURRENT ACCOUNT DEFICIT (CAD) 11 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  2.1.2. STRENGTHENING STATE FINANCES Why in News? The Central government has raised alarm on the mounting debt burden and the deteriorating fiscal situation in some States due to excessive doling out of freebies. State Finances State finances include states own tax and non-tax revenues as well as the Tax Devolution and grants from Centre (see image), provided by the Constitution of India: Post Devolution Revenue Deficit from union government to states under Article 275 to meet the gap in Revenue Accounts of the States post devolution. Discretionary Grants under Article 282. Net divisible pool distribution based on the Finance Commission recommendations (Article 280) etc. Initiatives taken to Support State Finance Reduced Borrowing Limits for states from 5% of gross state domestic product (GSDP) during Covid-19 to 3.5% for FY 2022-23. Inclusion of Off-Budget Borrowings as borrowings made by the State itself. Lowering of Ways and Means Advances (WMA) limit for States and Union Territories by RBI. Maximum number of Overdraft (OD) Facility days for State Governments/Union Territories (UTs) is reverted to 36 days in a quarter from 50 days by RBI. Scheme for “Special Assistance to states for Capital Investment”, providing ₹1,00,000 crore interest free loan for 50-years. Reform-linked additional borrowing space to state government, allowing additional borrowing of 1% of their GSDP to implement four critical reforms, i.e. Implementation of One Nation One Ration Card System; Ease of doing business reform; Urban Local body/ utility reforms; and Power Sector reforms. About Ways and Means Advances (WMAs) Introduced in 1997, WMAs are temporary advances given by RBI (under the RBI Act 1934) to Centre and States to tide over any mismatch in receipts and payments. o Such advances are repayable within three months from the date of making that advance. Interest is charged at existing repo rate (rate at which RBI ends short-term money to banks). WMA is not part of the Fiscal Responsibility and Budget Management Act (FRBM) because they get paid within the year itself. Two types of WMA –special and normal o Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. o The interest rate for SDF is one percentage point less than the repo rate. There is a State-wise limit for the funds that can be availed via WMA. Decided by the government and RBI mutually, these limits depend on factors such as total expenditure, revenue deficit and fiscal position of the State. 12 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  2.1.2.1. STATE’S FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) Why in news? Ministry of Finance informed the states that borrowing by state-owned companies, special purpose vehicles or agencies borrow from the markets, will be considered under the states’ FRBM limit. More on news As this borrowing has an impact on Revenue deficit and Fiscal Deficit of these borrowing needs the consent of the Union Government under Article 293(3) of the Constitution. o Revenue deficit occurs when the actual amount of revenue and/or the actual amount of expenditures do not correspond with budgeted revenue and expenditures. Article 293(3) provides state may not, without the consent of the Government of India, raise any loan if there is still an outstanding part of a loan. All States have enacted their FRBM Act as per the 12th Finance Commission (FC) recommendation and its’ compliance is monitored by the respective State Legislatures. o The normal Net Borrowing Ceiling (NBC) of each State is fixed by the Union Government in the beginning of each financial year. o NBC of the state FY 2022-23 has been determined at 3.5% of Gross State Domestic Product (GSDP) based 15th FC recommendation. 2.1.2.2. MUNICIPAL FINANCING Why in news? RBI released a first ever comprehensive analysis of Municipal finances and covers 201 municipal corporations (MCs) across all States. About Finance of Municipalities The 74th Amendment Act 1992, through the 12th Schedule institutionalized the urban local bodies (ULBs) as the third tier of the government to promote grassroots level democracy (refer to the infographics). However, it doesn’t provide for a corresponding ‘municipal finance list’ in the Constitution and it has been completely left to the discretion of the State Governments. 13 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  2.2. TAXATION 2.2.1. GOODS AND SERVICES TAX (GST) 14 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  Other key terms in context of GST Sin goods Circular Trading Input tax credit Sin goods are the goods on which Circular trading refers to Input tax credit means that at the time of the government imposes sin tax- a fraudulently availing input tax paying tax on output, one can reduce tax special tax placed on goods and credit (ITC) by traders by issuing of that has already been paid on inputs and services that are seen to be invoices without availing any real pay balance amount. ITC can be claimed socially detrimental. goods or service. only for business purposes. GST compensation Cess As per Goods and Services Tax (Period of Levy and Collection of Cess) Rules, 2022, compensation cess will continue to be levied from July 1, 2022, to March 31, 2026. o Levy of cess was to end on June 30, 2022, but GST Council (chaired by Union Finance Minister) decided to extend it to repay borrowings that were done earlier to compensate States for GST revenue loss. o However, whether States would be compensated till that period is not decided yet. GST Compensation Cess is collected on supply of select goods or services or both. o This includes luxury, demerit and sin goods. E.g., pan Masala, various tobacco products etc. It is used to compensate states for loss of any revenue arising on account of implementation of GST as per provisions of GST (Compensation to States) Act, 2017 for a period of five years. o It was paid bi-monthly. GST Applicability on Pre-Packaged and Labelled Goods Under GST, single packages of food items like cereals, pulses and flour weighing up to 25 kg will be considered as 'pre-packaged and labelled', liable to 5% GST. However, sales to customers by retail shopkeeper in loose quantity from the item bought from a manufacturer/ distributor in a 25-kg pack, will not attract GST. Anti-profiteering Recently, the Central Board of Indirect Taxes and Customs empowered Competition Commission of India to decide on anti-profiteering issues. Under Section 171 of the Central Goods and Services Act, 2017, Profiteering is defined as the willful action of goods and services suppliers to not pass the benefit of any tax rate reduction or the input tax credit to the recipients. NAA is a statutory mechanism under GST law to check these unfair profiteering activities by the registered suppliers. Under the sunset clause, the tenure of NAA was 2 years, but the GST Council can extend it. 2.2.2. DIGITAL TAX Why in news? OCED’s Inclusive framework on BEPS Recently, the G24 grouping objected Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational enterprises (MNEs) that exploit to the proposal of making sovereign gaps and mismatches in tax rules to avoid paying tax. commitments to not introduce any To address tax avoidance, the OCED’s framework is based on two future digital services tax like pillars: equalization levy, potentially delaying o Pillar One i.e., Reallocation of taxing rights: Applied to about 100 implementation of the global tax deal. biggest MNEs with global turnover above 20 billion euros and More on News profitability above 10%. o Pillar Two i.e., Global anti-base erosion mechanism: Setting Digital Services tax is part of the ‘global minimum corporation tax’ of 15% from 2023 to large OECD’s two-pillar plan of 2021 MNEs with revenues above EUR 750 million globally. agreed by 138 countries (as of 16 Global Minimum Tax, also known as Global Minimum Corporate Tax December 2022), including India, Rate (GMCTR), is a part of the inclusive framework on BEPS) to: to o Prevent multinationals from paying low taxes (or no tax) by o Reform global taxation rules. booking their profits in tax havens, and o Address the tax challenges o Make them pay taxes wherever they operate/conduct business in, even if they do not have physical presence in the country. arising from digitalization of the economy (Refer box). About Digital Tax in India Digital Tax is tax levied on digital goods/services/digital business activities. It is a form of Direct tax. India introduced 6% equalization levy (a Digital tax on non-resident digital companies like Google). It was limited to online advertisement services. o In 2020, the Indian Income-tax Act expanded the scope of Equalisation Levy (commonly referred to as ‘Equalisation Levy 2.0 or EL 2.0’) as part of the Finance Act 2020. 15 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  o EL 2.0 was made effective on April 1, 2020. ✓ It is set to stay beyond 2023, as a global tax deal which was to replace such levies by individual nations by then faces implementation challenges. o The new levy now includes 2 percent Digital Service Tax (DST) or EL on trade and services of foreign e-commerce companies such as Amazon and Walmart-owned Flipkart and others having an annual turnover of ₹2 crore or more. DST is aimed at ensuring that non- resident, digital service providers pay their fair share of tax on revenues generated in the Indian digital market. Implementation challenges: Divergent interests: European countries had prioritized the question of digital taxation, while US had prioritized the global minimum rate. Legislators in both U.S. and Europe are now struggling to pass the laws needed to implement the deal. E.g., Hungary has recently withdrawn support for minimum corporate tax in EU. 2.2.3. TAXATION OF VIRTUAL DIGITAL ASSETS (VDAS) Why in News? Central Board of Direct Taxes (CBDT) has amended income tax rules to specify ways to comply with the new TDS provision on virtual digital assets (VDAs). 16 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  More on News Under the rules: o TDS of 1% will be levied on payments towards VDAs or cryptocurrencies beyond ₹10,000 in a year. o The threshold limit for TDS would be ₹50,000 a year for specified persons, which include individuals/HUFs who are required to get their accounts audited under the I-T Act. About VDAs Concerns over VDA Highly risky assets and largely unregulated; leaving no Finance Bill 2022 defined VDAs under regulatory recourse for any loss from such transactions. IT Act, 1961 as ‘any information or Threat to the financial system stability and risk of code or number or token generated dollarization of a part of the Indian economy; going against through cryptographic means or the country's sovereign interest and undermining RBI otherwise and which can be Monetary policy influence. transferred, stored or traded o Dollarization means use of the US Dollar in addition to or electronically’. instead of the domestic currency of the country. o It includes the non-fungible Risk of anonymous use for making it liable to be misused for tokens (NFTs), cryptos etc. terror financing, money laundering and drug trafficking. It is a digital representation of value that is exchanged with or without consideration. It includes cryptocurrencies, NFTs, Dematerialized Shares, Promotional currencies, E-books etc. o RBI highlighted cryptocurrencies risk like dollarization of the economy and would be against India's sovereign interest. o Promoted as decentralized international virtual currency, they are allowed as legal tender or made official currency by some nations like El Salvador and the Central African Republic. Taxation of VDAs Income from the transfer of VDAs will be taxable at a flat rate of 30%, without the ability to offset it against any other losses. o No deductions will be allowed and only the cost of acquisition will be allowed as deduction while computing income. o A gift of VDAs will be taxable at the hands of the recipient. Regulation of VDA Advertising By Consumer Protection Act 2019: It lays down penalties for endorsers in case of misleading advertisement and if they have done no due diligence. By Advertising Standards Council of India (ASCI): ASCI issued guidelines for the promotion and advertisement of crypto, and NFTs; mandating all VDA products and services to carry the disclaimer regarding Crypto products and NFTs. o ASCI is a voluntary self-regulatory organization, established in 1985, to protect Indian consumers’ interests through self-regulation in advertising. o It issues non-legally binding advertisement codes and guidelines. o Cable Television Networks (Amendment) Rules, 2006 make it mandatory for all advertisements carried by cable services to be compliant with the ASCI code. 17 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  2.3. NON-TAX REVENUES 2.4. KEY CONCEPTS AND INFORMATION ON FISCAL POLICY Twin Deficit Ministry of Finance in its Monthly problem Economic Review cautioned the re- emergence of the twin deficit problem in the economy, with higher commodity prices and rising subsidy burden. Twin deficit refers to a nation’s current account deficit and a simultaneous fiscal deficit. o Fiscal Deficit is the shortfall between total revenue and total expenditure of government in a given financial year. 18 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  Single Nodal Ministry of Finance launched the Single Nodal Agency (SNA) dashboard of the Public Financial Agency (SNA) Management System (PFMS) to ensure effective leveraging of technology in public finance. dashboard The initiative is a part of forms part of PFMS reform that was initiated in 2021 with regards to how funds for Centrally Sponsored Schemes (CSS) are released, disbursed, and monitored. o PFMS is a web-based online software application developed and implemented by the Office of Controller General of Accounts to facilitate a sound public financial management system for the government. SNA model: The SNA model requires the states to notify an SNA for each CSS which will open a unique bank account at a commercial bank responsible for all transactions related to the implementation of the particular CSS. Status Report Released by the Department of Economic Affairs; the report on India’s highlights 8.2% rise in India's external debt to stand at $620.7 External Debt billion on March 31, 2022. 2021-22 External debt refers to ‘money borrowed from outside the country and has to be paid back in currency in which it is borrowed’. o U.S. dollar-denominated debt remained the largest component of India’s external debt. Tobin Tax Tobin tax is a tax levied on spot currency conversions, with the intention of disincentivizing short-term currency speculation. It generates a revenue stream for countries that see great deal of currency movement. Windfall Tax Centre has cut windfall tax on crude producers, scraps petrol exports levy. Windfall tax is a one-off tax imposed by a government on a company. o It is levied on an unforeseen or unexpectedly large profit, especially unfairly obtained. o It is only levied in public interest. o It was announced to control rising domestic oil price and to meet domestic need for petrol. GAAR (General GAAR is an anti-abuse provision invoked by tax authorities to strike down unacceptable tax Anti-Avoidance avoidance practices. Used by most of the mature economies, in India it was first introduced in Rule) 2012. o Under Income Tax Act, 1961 it came into effect on 1st April, 2017 and its effective implementation started this year. It is a provision of last resort and used to strike down those lawful practices which undermine intention of tax laws, i.e. misuse or abuse of law. o Before introduction of GAAR in India, such transactions were dealt with by the implementation of judicial decisions and Specific Anti-Avoidance Rules (SAAR), including Transfer Pricing regulations. Central Board The guidelines are related to applicability of Direct Taxes of new tax deducted at source (TDS) (CBDT) provision regarding benefits received in a guidelines on business or profession. TDS Budget 2022-23 had brought a new section in the Income Tax Act i.e., 194R which requires deduction of TDS at the rate of 10% by any person providing any benefit or perquisite, exceeding ₹20,000 in a year to a resident. o CBDT clarified that section 194R would apply on distribution of free samples to the hospital for doctors receiving free samples of medicines while employed in a hospital. Double Income Tax Appellate Authority (ITAT) ruled that Google India’s payment to Ireland unit was not Taxation royalty; therefore, it is not subject to withholding tax. Avoidance o Royalty refers to payment that is made to the owner of an asset or property for usage. Agreement o Income earned from royalties is subject to tax in India. (DTAA) o Withholding tax (also known as Retention tax) is the taxpayer's obligation to withhold tax when paying rent, commission, or payment for professional services. o As per Income Tax (IT) Act, it is obligatory for person responsible to make a payment to deduct tax while making payment in Non-Resident Individual account. 19 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  o Rate of tax applicable to such payments is determined by Double Taxation Avoidance Agreement (DTAA). DTAA is a tax treaty signed between India and another country so that taxpayers can avoid paying double taxes on their income earned from source as well as residence country. India has DTAA with more than 80 countries and it covers withholding tax on payments such as Dividend, Interest, Royalty etc. RNOR It is a class of residential status under the Income-tax law. RNOR represents a person who does (Resident but not qualify as an ordinary resident. Not Ordinarily It includes person who- Resident) o Spends over 120 but less than 182 days, and o Earns ₹15 lakh or more from assets in India. o EPCG authorization holder can export either directly or through third party. Automatic As per annual data from Switzerland's central bank, funds parked by Indian individuals and firms exchange of in Swiss banks jumped to a 14-year-high in 2021. information o To fight tax fraud and evasion, an automatic exchange of information (AEOI) in tax matters (AEOI) between Switzerland and India has been in force since 2018. AEOI provides for the automatic exchange of a predefined set of information between tax authorities. o Under this framework, detailed financial information on all Indian residents having accounts with Swiss financial institutions is provided every year. 20 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  3. BANKING, ASSET QUALITY, RESTRUCTURING AND MONETARY POLICY 3.1. BANKING 3.1.1. URBAN CO-OPERATIVE BANKS (UCBS) Why in News? RBI has revised the UCBs regulatory framework based on the recommendations of Expert Committee on Urban Co-operative Banks (N S Vishwanathan panel) for strengthening the financial soundness of the UCBs. Key highlights of revised norms Replaces current two-tier regulatory framework by a Four-tiered regulatory framework with differentiated regulatory prescriptions to strengthen the financial soundness of the existing UCBs (see image). Minimum net worth of₹2 crore for Tier 1 UCBs and ₹5 crore for others to strengthen the financial resilience of the banks. o UCBs which don’t meet the minimum net worth requirement, shall achieve it in a phased manner. Capital to Risk Weighted Assets Ratio (CRAR): o Tier 1 UCBs shall maintain, as hitherto, a minimum CRAR of 9 percent of Risk Weighted Assets (RWAs) on an ongoing basis. o Tier 2 to 4 UCBs shall maintain a minimum CRAR of 12 percent of RWAs on an ongoing basis. o UCBs in Tier 2 to 4, which don’t meet the revised CRAR, shall achieve the same in a phased manner. Financially Sound and Well Managed (FSWM): The revised criteria for determining the FSWM status is: o Net NPA of not more than 3%. o No default in the maintenance of CRR / SLR during the preceding financial year. o Sound internal control system with at least two professional directors on the Board. o Core Banking Solution (CBS) fully implemented. Applicability: Framework is applicable to all Primary (Urban) Co-operative Banks. About Cooperative Banks Co-operative banks are financial entities established on a co- operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners. Registration: UCBs are primarily registered as cooperative societies under the provisions of either the State Cooperative Societies Act of the State concerned or the Multi State Cooperative Societies Act, 2002 if the area of operation extends beyond one state boundary. 21 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  Regulation of UCBs: It is split between RBI and Centre/State Governments, while that of smaller co- operative banks is divided between NABARD and State governments. o They come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949 and the Banking Laws (Co-operative Societies) Act, 1955. o Urban and Multi State Cooperative Banks are under the direct supervision of RBI. But, Regulatory Frameworks for UCBs, Universal Banks (UNBs), Small Finance Banks (SFBs) and Regional Rural Banks (RRBs) varies. 22 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  3.1.2. REGIONAL RURAL BANKS (RRB) Why in News? The Union Government had asked Indian Banks Association (IBA) to assist in the sustainability push to RRBs. More on News For RRBs financially sustainable, government will infuse record ₹10,890 crore into RRBs during FY22 and FY23. o ₹5,445 crore will come from Centre while the remaining shareholders, i.e., states and sponsor banks. About Regional Rural Banks (RRBs) RRBs were set up on the recommendations of the Narasimha Working Group (1975), under the provisions of the Ordinance promulgated in 1975 and Regional Rural Banks Act, 1976. Objectives of RRBs: To provide sufficient banking and credit facilities in rural and semi –urban areas. They also provide- o Para-banking facilities like locker facilities, debit and credit cards, mobile and internet banking, etc. o Carry out government operations like disbursement of MGNREGA wages, distribution of pension etc. Features: They are region-based and rural-oriented with features of a cooperative bank in customer experience and of commercial banks in mobilization of financial resources. Significance of RRBs Priority Sector Lending (PSL) With over 81% of loans to the priority sector (against The advances made to sectors which are considered important for the development of benchmark of 75%) and nearly 60% as agriculture advances the basic needs of the country and are to be out of total advances, their role becomes significant in: given priority over other sectors. Extending institutional credit to the weaker section, especially small and marginal farmers. Financial Inclusion by providing basic banking services in the rural areas. Increase trust of rural population in banking services. Provide easy and direct finance to co-operative societies and Self-Help Groups (SHGs). Create Employment in rural India. Problems faced by RRBs Financial Viability due to high operational cost and poor Return on Assets (RoA). o ROA is a financial ratio that indicates how profitable a company is in relation to its total assets. (Calculated by Return on Assets = Total Assets/Net Income). Non-fulfillment of 13% Capital Adequacy Ratio (CAR), also known as Capital to Risk (Weighted) Assets Ratio (CRAR). 23 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  o CAR is a measurement of a bank's available capital expressed as a percentage of a bank's risk- weighted credit exposures. Regulatory discrepancies as they are supervised by NABARD while their annual plans and financials are monitored by both the RBI and NABARD. o The Central Government and the sponsoring bank also have their own control. 3.1.3. NON-BANKING FINANCIAL COMPANIES (NBFCS) Why in News? Recently, the SC held that state enactments will have no application to NBFCs and RBI Act, 1934 supersedes State enactments. About NBFCs NBFCs are registered entities under the Companies Act providing bank-like financial services such as loans and advances, acquisition of shares, bonds etc. with no banking licence. Also, there are few differences between banks and NBFCs. E.g., NBFCs- o Cannot accept demand deposits. o Do not form part of payment and settlement system and cannot issue cheques drawn on itself. o No deposit insurance facility is available to depositors of NBFCs. Primarily, NBFCs are regulated and governed by RBI. o Some NBFCs are regulated by SEBI, IRDAI, National Housing Bank etc. Recently, RBI tightened NBFCs lending and disclosure guidelines through a scale- based regulations whereby NBFCs are graded into 3 layers (see diagram). Key highlights of Guidelines Aggregate exposure of an upper layer NBFC to any entity must not be higher than 20% of its capital base (board can approve an additional 5%). o For infrastructure finance companies, it is30% to a single entity. To a group of connected entities, aggregate exposure will be limited to 25% of the capital base for all upper layer NBFCs (35% for infrastructure finance companies). Unless sanctioned by the board, mid-layer and upper layer NBFCs shall not lend more than ₹5 crore to directors, CEO or relatives of directors. Loans to real estate sector can be provided after prior permission to borrowers from the government or other statutory authorities for the project. 3.1.4. AMENDMENT TO NIDHI RULES, 2014 Why in News? The Central Government has amended Nidhi Rules, 2014 in the light of sharp rise in number of ‘Nidhi’ companies. Key amendments Aimed at improving their governance and safeguarding public interest, under amended rules: 24 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  A public company set up as a Nidhi with share capital of ₹10 lakhs needs to first get itself declared as a Nidhi from Union government. o Earlier, there was no such need for a company to get declaration. Promoters and Directors of company have to meet the criteria laid down in rules. About Nidhi company Nidhi company (similar to an NBFC) is formed to borrow and lend money to its members. It inculcates saving habits among its members and works on the principle of mutual benefit. They don’t need RBI license but need approval under the Companies Act. The Ministry of Corporate Affairs regulates its operational matters and RBI has the power to issue directions for its deposit-taking activities. Can’t deal with chit funds, hire-purchase finance, leasing finance, insurance, or securities business. It is strictly prohibited from accepting deposits from or lending funds to, any other person except members. Only individual members are allowed in Nidhi companies. 3.1.5. FINANCIAL SERVICES INSTITUTION BUREAU (FSIB) Why in News? Appointments Committee of the Cabinet (ACC) has approved a government resolution for establishing the Financial Services Institutions Bureau (FSIB) in place of the Banks Board Bureau (BBB). About Financial Services Institutions Bureau (FSIB) It is set up under the Department of Financial Services (DFS), Ministry of Finance, to: o Recommend persons for appointment as whole-time directors and non-executive chairpersons on the Boards of financial services institutions (including public sector banks (PSBs), public sector insurers (PSIs) and financial institutions (FIs)). o Advise on certain other matters relating to personnel management in these institutions. o Promote excellence in Corporate Governance in Public Sector Financial Institutions. Other major functions of FSIB include: o To advise the Government on matters relating to appointments, transfer or extension of term of office and termination of services of the said directors. o To advise the Government on the desired management structure at the Board level for PSBs, FIs and PSIs. o To build a databank containing data related to the performance of PSBs, FIs and PSIs. o To advise the Government on formulation and enforcement of a code of conduct and ethics for whole-time directors in PSBs, FIs and PSIs. o To help PSBs, Fls and PSIs in terms of developing business strategies and capital raising plan etc. Composition of FSIB Chairperson of FSIB, to be nominated by Central Government who shall be: o a retired official from the banking sector or a regulatory institution, or o a businessperson of repute with sufficient knowledge of the financial sector, or o a person with at least 25 years of experience in public administration with experience in banking and the financial sector. Ex officio members: Secretary in charge of DFS, Department of Public Enterprises, Chairperson of the Insurance Regulatory and Development Authority of India (IRDAI), Deputy Governor of RBI. 3 persons with subject matter knowledge relating to PSBs and FIs and 3 persons with subject matter knowledge relating to PSIs (to be nominated by the Central Government) as part time members. 25 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  3.1.6. BANKING SYSTEM LIQUIDITY Why in News? After remaining in surplus mode since May 2019, the Indian banking system liquidity turned into a deficit mode in September 2022. About Banking System Liquidity and its Significance Meaning: It is understood through Liquidity Adjustment Facility (LAF), the primary instrument of the RBI’s operations to inject or absorb liquidity into the banking system. Surplus vs. Deficit: On any given day, if the banking system is a net borrower from the RBI under LAF, the system liquidity can be said to be in deficit and if it is a net lender to the RBI, the system liquidity is in surplus. Impact of Liquidity Deficit Increase in Deposit rates or Special Deposit Schemes from banks to get money. Increased cost of borrowed funds due to rise in Money Market Rates. E.g., Yields on Treasury bills or T-bills spiked recently due to tighter liquidity conditions. Potential Repo rate change from RBI which will increase banks repo-linked lending rates and the marginal cost of funds-based lending rate (MCLR), resulting in higher loan interest rates for consumers. Reduced Demand which can further lead to contraction of economic activities. Increased RBI Difficulties in maintaining low borrowing costs for growth while continuing with its monetary tightening cycle. 3.2. ASSET QUALITY AND RESTRUCTURING 3.2.1. NON-PERFORMING ASSETS (NPAS) Why in News? RBI’s recent ‘Report on Trend and Progress of Banking in India 2021-2022’ highlights the banking Gross NPAs (GNPAs) declining to 5% from a peak of 9% in 2017-18. About NPAs Primary assets of banks, a loan or advance is classified as NPA for which the principal or interest payment is overdue for a period of 90 days (one quarter). It is further categorized under different heads (see image). o For Agricultural loans, the overdue for NPA is two crop seasons for short duration crops and one crop season for long duration crops. 26 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  Related News EASE Reforms Launched in 2018 (EASE 1.0), EASE reforms are overseen by Indian Banks' Association (IBA). Latest EASE reforms, EaseNext consist of two key initiatives: o EASE 5.0 for a common PSB reforms agenda of continued investment in new-age capabilities and respond to evolving customer needs, changing competition, and adoption of newer technologies. o Bank specific three-year strategic roadmap, based on bank’s business priorities, going beyond EASE 5.0, including business growth, profitability, risk, customer service, operations, and capability development. Inter-operable Regulatory Sandbox (IoRS) RBI has announced SOP (Standard Operating Procedure) for IoRS. SOPs are prepared by the inter-regulatory technical group (IRTG) on fintech, chaired by RBI’s fintech department and representatives of SEBI, IRDAI, IFSCA, PFRDA and central government. o It provides a framework to regulate newer fintech products and services falling in the ambit of more than one financial regulator. IoRS is ‘a mechanism to facilitate testing of innovative hybrid financial products / services falling within the regulatory ambit of more than one regulator’. Key highlights of the framework o Dominant feature of the product to determine influence of the regulator and regulator under whose jurisdiction such feature will be principal regulator (PR) and others will be associate regulators (AR). o The dominant position will be decided in two ways: ▪ Type of enhancement to the existing products like loans, deposits, etc., ▪ Number of relaxations sought by the entity for undertaking the test under IoRS. o International Financial Services Centres Authority will be PR for Indian FinTechs having global ambition and foreign FinTechs seeking entry to India. o IRTG on FinTech will resolve any coordination issue between PR and AR etc. 3.2.2. RECOVERY AND RESTRUCTURING MEASURES 3.2.2.1. DEBTS RECOVERY TRIBUNALS (DRTS) Why in News? Government has created exclusive benches at 3 debts recovery tribunals (DRTs) at DRTs in Chennai, Mumbai and Delhi to resolve cases above ₹100 crore. About DRTs The Recovery of Debts and Bankruptcy Act (RDB Act), 1993 provides for establishment of DRTs with original jurisdiction and Debts Recovery Appellate Tribunals (DRATs) with appellate jurisdiction. Objective of these tribunals is to provide expeditious adjudication and recovery of debts due to Banks and Financial Institutions. It also hears cases filed under The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. o SARFESI Act guards financial institutions from loan defaulters by allowing them to take control of securities pledged against the loan, manage or sell them to recover dues without court intervention. 27 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  o It is applicable throughout the country and covers all assets, movable or immovable, promised as security. o It comes into play if a borrower defaults on his or her payments for more than six months At present, 39 DRTs and 5 DRATs are functioning across the country. 3.2.2.2. ASSET RECONSTRUCTION COMPANIES (ARCS) Why in News? RBI has amended regulatory framework for ARCs based on the Sudarshan Sen Committee recommendations. About ARC ARC is a company which is set up to provide a focused approach to Non-Performing Assets resolution on recommendations of Narasimham Committee- II. It is a company registered under Section 3 of SARFAESI Act, 2002. It is regulated by RBI as a Non-Banking Financial Company. Key guidelines are: Eligible ARCs: With a minimum net owned fund of ₹1000 crore to act as resolution applicants under the Insolvency and Bankruptcy Code (IBC) 2016. o Earlier, SARFAESI Act prohibited ARCs from doing other activities than that of securitization or asset reconstruction, without RBI's permission. o IBC provides for a time-bound process for resolving insolvency in companies and among individuals. Raised minimum capital requirement for setting up an ARC to ₹300 crore from the existing ₹100 crore in a phased manner. Changes in corporate governance norms, like to constitute an Audit Committee, which shall comprise of non-executive directors only. Related News National Asset Reconstruction Co Ltd (NARCL) and India Debt Resolution Co. Ltd (IDRCL) Bad Bank or National Asset Reconstruction Co Ltd (NARCL)is a corporate structure (announced in 2021 Budget) that isolates risky assets held by banks in a separate entity. Under the approved structure, bad bank will consist: o NARCL: To acquire and aggregate NPA/ bad loan accounts, ✓ Majority stake in NARCL: Public Sector Banks (with Canara Bank as Sponsor). o IDRCL: For management and value addition and will handle the debt resolution process, ✓ Majority stake in IDRCL: Private sector banks. 28 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  3.3. MONETARY POLICY 3.3.1. INFLATION IN INDIA 29 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  3.3.2. INFLATION TARGETING Why in News? The average headline consumer price index inflation (CPI-Inflation) in India stayed above 6% for three continuous quarters due to supply shocks such as pandemic lockdowns, supply chain disruptions, elevated commodity prices and Ukraine war. About Inflation Targeting Framework Price stability is a necessary precondition for macroeconomic and financial stability, making it the dominant objective of the monetary policy. Under Inflation Targeting Framework, the central bank specifies an inflation rate as a goal and adjusts its monetary policy to achieve the specified annual inflation rate. Flexible Inflation Targeting Framework in India Based on the Urjit Patel committee recommendation (2014), Government of India and RBI also signed the Monetary Policy Framework Agreement in 2015. The RBI Act, 1934 was amended in 2016 to: o Make inflation targeting the nominal anchor of RBI’s monetary policy (Section 45ZA of RBI Act), o Have a statutory and institutionalized framework for Monetary Policy Committee (MPC) (Section 45ZB). MPC is a six-member body to set the policy rate (repo rate) to achieve the inflation target while keeping in mind growth objectives. o The Inflation target is set by the Government of India, in consultation with RBI, once in every five years. o Currently, it is 4% CPI inflation target with +/- 2% as upper and lower tolerance limit. If average inflation remains above upper tolerance or lower tolerance level for any three consecutive quarters, RBI shall set out in a report to the Central Government. o Reasons for failure to achieve inflation target. o Remedial actions proposed by RBI. o Estimated time-period within which the inflation target shall be achieved pursuant to timely implementation of proposed remedial actions. Different Types of Policy Stances Accommodative Stance When the central bank is prepared to expand the money supply to boost economic growth, i.e. willingness to cut policy rate. Neutral Stance When the central bank can either cut rate or increase policy rate. It is usually adopted when policy priority is equal to inflation and growth. Hawkish Stance When the central bank is prepared to curb the money supply to keep the inflation low, i.e., willingness to increase policy rate. Calibrated Tightening Another term to represent the rate hike in a calibrated manner, i.e., tilt towards rate hike but no necessary policy rate hike at every policy meeting. 30 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  3.3.3. PRICE MONITORING CENTRES (PMC) Why in News? The Ministry of Consumer Affairs, Food & Public Distribution suggested having price monitoring centres for critical goods in all districts of India. More about news Centre intends to have 750 price monitoring centres by March 31st 2023. As per current status, 50% will be funded by State government and 50% will be funded by Central Government for infrastructure. Current setup for Price Monitoring Price Monitoring Division (PMD) in the Department of Consumer Affairs is responsible for monitoring prices of selected essential commodities. o It monitors the retail and wholesale prices, and spot and future prices of selected essential commodities on a daily basis. o State Civil Supplies Departments of the respective State Governments report Benefits of PMC Control Inflation as essential commodities prices will be the price on the PMS App daily about 22 monitored through PMC and controlled by centre. essential food products. Protect Consumer interests in terms of quality, quantity, 22 essential food commodities monitored standards, testing and benchmarks through BIS, NTH, based on data collected from 340 market Legal Metrology and National Consumer Helpline. centres spread across the country. Use of e daakhil portal for online filing of consumer To cross-check accuracy of prices reported complaints as PMC will be able to take action fast. by centres from States/UTs, services of FCI Market intervention through regular retail price reviews. and NAFED are utilised. 3.3.4. STANDING DEPOSIT FACILITY (SDF) Why in News? In its first bi-monthly policy review (FY23), the Monetary Policy Committee (MPC) has introduced Standing Deposit Facility (SDF) as the floor in the Liquidity Adjustment Facility (LAF) corridor. Standing Deposit Facility (SDF) SDF is a liquidity management instrument to absorb liquidity (deposit) from Scheduled Commercial banks (SCBs) without any collateral/government securities in return. o It was first recommended by the Urjit Patel Committee in 2014 as a tool to manage liquidity. In 2018, Section 17 of the RBI Act, 1934 was amended to empower the RBI to introduce SDF as an additional tool for absorbing liquidity without any collateral. SDF will replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor. Deposits under the SDF won’t be eligible for the Cash Reserve Ratio (CRR) maintenance under Section 42 of the RBI Act, 1934, but they will be an eligible asset for maintenance of the Statutory Liquidity Ratio (SLR) under Section 24 of the Banking Regulation Act, 1949. Need for SDF: To manage surplus liquidity due to Covid-19. Other Liquidity Management Instruments: Targeted Long-Term Repo Operations (TLTROs), Open Market Operations (OMOs) etc. 31 DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL © Vision IAS  Related News Regulations Review Authority (RRA 2.0) Set up in 2021 by RBI, the RRA 2.0 submitted its report with final set of recommendations. o RRA 1.0 was set up in 1999 to streamline RBI procedures and simplify regulatory prescriptions. Objective of RRA 2.0: Reduce the compliance burden on Regulated Entities (REs) like SCBs/ RRBs/ UCBs /NBFCs, etc. by streamlining the regulatory instructions and rationalizing reporting requirements. REs are the entities regulated by RBI under the RBI Act (1934), The Banking Regulation Act (1949) The Payment & Settlement Systems Act (2007) etc. 3.4. KEY CONCEPTS ON BANKING AND MONETARY POLICY Counter- Following Basel-III norms, central banks specify certain capital adequacy norms for banks in a Cyclical Capital country. CCCB is a part of such norms and is calculated as a fixed percentage of a bank’s risk- Buffer (CCCB) weighted loan book. o In India, framework on CCCB was put in place by RBI in 2015. Aim of CCCB regime is two-fold: o It requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times. o It restricts banks from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk. Bancassurance Bancassurance is an arrangement between a bank and an insurance company allowing the insurance company to sell its products to the bank's client base. Banks earn additional revenue by selling insurance products, and insurance companies expand their customer bases without increasing their sales force. Credit-Deposit CD ratio tells how much of money banks have raised in form of deposits has been deployed as (CD) Ratio loans. A low CD ratio suggests relatively poor credit growth compared with deposit growth indicating banks are not making full use of their resources. A high CD ratio means strong demand for credit with relatively slower deposit growth. If ratio is above a certain level, it indicates pressure on resources. 32 © Vision IAS DELHI | JAIPUR | PUNE | HYDERABAD | AHMEDABAD | LUCKNOW | CHANDIGARH | GUWAHATI | RANCHI | ALLAHABAD | BHOPAL  Prompt The PCA framework is imposed when a bank breaches certain regulatory thresholds on capital Corrective to risk weighted assets ratio (CRAR), net NPAs and return on assets (RoA). Action (PCA) Various action under PCAs include Framework o Restriction on dividend distribution/remittance of profits. o Restriction on branch expansion; domestic and/or overseas. Loan waive-off A loan waive-off is a complete cancellation of a loan account. This means that the borrower is free from that particular debt. E.g. o Loan waive-off provided by the government to farmers at times of natural calamities. Loan write-off It is the movement of defaulted loan/NPA from assets side and reports it as a loss by lender. Bank’s writes off a loan after the borrower has defaulted on the loan repayment and there is a very low chance of recovery; reducing bank NPAs. o It does not take away the bank's right of recovery from the borrower through legal means. In the last five years, the banks write-offs is around ₹10 lakh crore, out of which banks were able to recover ₹1,32,036 crore. Marginal Cost Instituted by RBI in 2016, it is the lowest interest rate that a bank or lender can offer, except in of Funds Based some cases allowed by the RBI. Landing Rate o Thus, it is an internal benchmark or reference rate for the bank. (MCLR) It is calculated on the basis of four components: marginal cost of funds, negative carry-on account of cash reserve ratio, operating costs and tenor premium. o Tenor means that the amount of time left for the repayment of a bank loan. Benefits: Transparency in financial institutions while determining their interest rates. o According to RBI, it is more effective than the erstwhile Base rate method. Financial FSR is a bi-annual report from RBI that reflects risks to financial stability and the resilience of Stability Report Indian financial system (Global FSR is released by IMF). (FSR) Latest FSR highlighted improved ability of banking system to absorb macro shocks without further capital infusion due to: o Improved Capital to risk weighted assets ratio (CRAR) of scheduled commercial banks (SCBs). o Declining Gross non-performing asset (GNPA) and Net NPA (NNPA). o Improved Provisioning Coverage Ratio (PCR). Reserve bank- The Scheme integrates the existing three Ombudsman schemes of RBI namely, Integrated o The Banking Ombudsman Scheme, 2006 ombudsman o The Ombudsman Scheme for Non-Banking Financial Companies, 2018; and Scheme o The Ombudsman Scheme for Digital Transactions, 2019. It provides for a single window for resolution of complaints not resolved within 30 days or not resolved satisfactorily by banks/NBFCs/system participants regulated by RBI. Aimed to improve the grievance redress mechanism, it defines ‘deficiency in service’ as the ground for filing a complaint, with a specified list of exclusions. o A Centralized Receipt and Processing Centre has been set up at RBI, Chandigarh for receipt and initial processing of physical and email complaints in any language. DAKSH DAKSH is a web-based end-to-end workflow application, launched by RBI, which will monitor compliance requirements in a more focused manner. Objective: Further improve the compliance culture in Supervised Entities (SEs) like Banks, NBFCs, etc. The application will also enable seamless communication, inspection planning, execution, cyber incident reporting, and analysis, which enables anytime-anywhere secure access. Small Finance SFBs are registered as a public limited company under the Companies Act, 2013 and are licensed Banks (SFBs) under Section 22 of the Banking Regulation Act, 1949. o Announced during Union Budget 2014-15, RBI issued the guidelines in November 2014. The prime objective for setting up SFBs was furthering financial inclusion by serving primarily to unserved and underserved sections of the population. They are required to extend 75% of credit to the sectors eligible for classification as PSL. Minimum paid-up equity capital for small finance banks is ₹200 crore. Listing is mandatory for SFBs within three years of their net worth reaching ₹500 crore. Challenges: High cost of borrowing, sharp deceleration in loan growth since the pandemic struck last year, etc. Account Unveiled in 2021, AA system is a type of RBI regulated entity (with an NBFC-AA license) that Aggregator helps an individual securely and digitally access and share information from one financial (AA) System