This post is a part of our current affairs series for the UPSC IAS Prelims 2022. In this post, we have covered all of the Indian Economy Current Affairs from Nov. 2021 to March 2022. In the 2nd part, we will cover the rest of the current affairs of the period July 2021 to 31st April 2022.
List of Contents
- Fiscal policy
- International Trade
- Monetary policies
- Money and Banking
- Financial Market
- IC15 – India’s first crypto exchange
- AT1 Bonds
- Market Infrastructure Institutions (MIIs)
- Surety bonds
- Fair Value Through Profit and Loss (FVTPL) Account: new investment category
- Retail Direct Scheme and Integrated Ombudsman Scheme
- Network for Greening the Financial System
- Prompt Corrective Action (PCA) framework for large non-banking financial companies (NBFCs)
- North Eastern Development Finance Corporation Ltd. (NEDFI)
- Electronic Gold Receipts (EGRs)
- InFinity Forum
- National Bank for Financial Infrastructure and Development (NaBFID)
- Industries and Services
- e-Bill System
To Read Other Current Affairs Compilations for UPSC Prelims 2022– Click here
Public debt to GDP ratio
News: Covid-19 pandemic has created a wider fiscal deficit and a higher public debt-to-GDP (gross domestic product) ratio. The Centre’s debt-to-GDP ratio for FY22 was 59.9%, while budget estimates for FY23 have pegged it at 60.2%.
About public debt- to-GDP ratio
The Debt-to-GDP ratio is the ratio between a country’s government debt and its Gross Domestic Product (GDP). It measures the financial leverage of an economy and is used to gauge a country’s ability to repay its debt.
Public debt consists of external debt (which has been borrowed from foreign lenders) and internal debt (like government securities, treasury bills, and short-term borrowings).
Impacts of public debt- to-GDP ratio
A high debt-to-GDP ratio is undesirable for a country, as a higher ratio indicates a higher risk of default. In such scenarios, creditors seek higher interest rates during lending. A very high debt-to-GDP ratio may deter creditors from lending money altogether. It,
a) Deprives the government of its ability to undertake development and welfare measures, b) impacts the outlook of rating agencies for the country, c) Widens fiscal deficit and creates pressure on the market interest rate. This impacts private firms, thereby increasing per unit cost that is passed on to consumers. It results in cost-push inflation.
What debt- to-GDP ratio is considered stable?
A country able to continue paying interest on its debt-without refinancing, and without hampering economic growth, is generally considered to be stable. A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient to pay back debts without incurring further debt.
According to the recommendations of the N.K. Singh Committee (2016), Debt-to-GDP ratio should have been 38.7% for the Centre and 20% for states by 2022-23 (FY23).
Capital gains tax
News: The Revenue Secretary has said that the capital gains tax structure in India is complicated, and it is time for a relook.
About Capital Gains Tax
Definition: Capital Gains Tax is levied on the profits that is received through the sale of a capital asset. It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
Types: It is divided into long-term capital gains tax(LTCG) and short-term capital gains tax (STCG) depending on how long one has held the investment in question.
Why is Capital Gains Tax so complicated?
Capital gains tax is complicated for a few primary reasons.
First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
Second, the holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
Third, exemptions are available under complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought within two years or built-in three years of the sale.
How is Capital Gains Tax different from Income Tax?
Unlike income tax, the percentage of Capital Gains Tax does not change on the basis of the overall tax slab. For example, the LTCG tax excluding surcharge on equity is the same for gains of ₹10 lakh or ₹10 crores.
Moreover, there is also a separate set of deductions that apply to LTCG which do not apply to ordinary income.
Certificate of Origin (CoO)
News: The Ministry of Commerce had launched an online portal to issue Certificate of Origin (CoO) to the exporters from November 1,2021. The portal was launched to facilitate exporters through a secure, electronic, paperless CoO issuance process.
About the Certificate of Origin (CoO)
A certificate of origin (CoO) is a document issued by the exporters. It is the authentication declaring in which country a commodity or good was manufactured.
The certificate of origin contains information regarding the product, its destination, and the country of export. For example, a good may be marked “Made in the USA” or “Made in China”.
Why is CoO mandated?
The CoO is often mandated by importing countries because it can help determine whether certain goods are eligible for import and to what extent they are subject to duties.
Special and differential treatment (S&DT) under WTO
News: India’s Commerce and Industry Minister has said that developed countries linking World Trade Organisation (WTO) reforms with special and differential treatment (S&DT) being provided to poor and developing nations is “unfair”.
About the Special and differential treatment (S&DT) under WTO
WTO agreements contain special provisions which give developing countries special rights and allow other members to treat them more favorably. These are called “special and differential treatment provisions” (abbreviated as S&D or SDT). These special provisions include:
- Longer time periods for implementing agreements and commitments
- Measures to increase trading opportunities for these countries
- Provisions requiring all WTO members to safeguard the trade interests of developing countries
- Support to help developing countries build the infrastructure to undertake WTO work, handle disputes and implement technical standards.
- Provisions related to Least-Developed Country (LDC) members
About the problem with S&DT under WTO
Currently, any WTO member can designate itself as a developing country and avail S&DT benefits.
As a result of the self-selection process, there is competition among members to get the developing country status. Several advanced countries have also taken developing country status.
Hence, the US had submitted its suggestions to the WTO that self-declaration puts the WTO on a path to failed negotiations, and it is also a path to institutional irrelevance.
National Export Insurance Account (NEIA) Trust
News: The Ministry of Commerce and Industry has informed the Lok Sabha about the National Export Insurance Account (NEIA) Trust.
About the National Export Insurance Account (NEIA) Trust
NEIA Trust was set up in 2006 by the Ministry of Commerce and Industry.
Aim: To promote Medium and Long Term (MLT) /project exports from India that are of strategic and national importance. It provides additional support to the insurance cover provided by ECGC for project exports.
It will support the projects that are desirable from the point of view of national interest but which Export Credit Guarantee Corporation of India (ECGC) is unable to underwrite due to capacity constraints or unfavorable terms.
News: India has initiated an anti-dumping probe against imports of Vinyl Tiles from China, Taiwan, and Vietnam.
Note: Vinyl Tile is a type of tile used for covering the floors in residential and commercial buildings.
About dumping: Dumping is said to occur when the goods are exported by a country to another country at a price, which is lower than the price it normally charges in its own home market. This is an unfair trade practice that can have a distortive effect on international trade.
GATT (Article 6) allows countries to take action against dumping. Countries start anti-dumping probes to determine whether their domestic industries are negatively affected because of a surge in cheap imports.
If it is established that the dumping has caused material injury to the domestic players, the country would impose anti-dumping duty on these imports.
The use of anti-dumping duties is permitted under the multilateral regime of the World Trade Organization (WTO).
India’s Annual Merchandise (Goods) Exports
News: India’s Annual Merchandise (Goods) Exports have crossed the $400-billion mark for the first time ever. This is 37% higher than the previous financial year when India exported goods worth $291 billion.
During the same time period, imports grew 51% on year to $589 billion, resulting in a trade deficit of $189 billion. The trade deficit was $114 billion in FY21.
About India’s Merchandise Trade
Engineering goods, and petroleum products were the top goods exported from India. Engineering goods exports have gone up by nearly 50% vis-à-vis last year. Higher engineering exports indicate that the misconception of India being a major exporter of primary commodities is gradually changing.
The agriculture sector too had recorded its highest-ever export during 2021-22 with the help of export of rice, marine products, wheat, spices and sugar.
About the reason behind the rise in exports
The major reasons for the jump in exports are 1) Rise in demand, which had fallen due to the Covid pandemic, and 2) boost in domestic manufacturing due to production-linked incentive (PLI) schemes and the implementation of some interim trade pacts.
US Federal Reserve interest hike
News: The US Federal Reserve has announced that it would end its pandemic-era bond purchases and raise interest rates subsequently. Both these measures are aimed at taming inflation, currently at a four-decade high of around 7%.
This is likely to impact emerging market economies such as India.
How do US Fed actions impact India?
Outflow of Foreign Capital: When interest rates rise in the US, Foreign Institutional Investors (FII) start pulling out investments (also called portfolio flows) from India. This means foreign capital outflows can happen not only from equity but also from debt.
Impact on Rupee: FPIs pulling money out of the equity and bond markets could weaken the rupee even as the dollar gets stronger with the rate hikes.
Highest Cost of Fund Mobilization from Overseas Markets: The rise in rates also means a higher cost of funds, and fund mobilization in overseas markets will be costly. The increase in the cost of funds may not only increase the cost of capital expenditure for India but will also strain the profit margins of companies.
Currency Swap Agreement
News: India has confirmed a $400 million currency swap with Sri Lanka while deferring another $500 million due for settlement to the Asian Clearing Union (ACU).
About Currency Swap
The term Swap means exchange. Under this agreement, a country provides a loan in dollars to a foreign country. The foreign country agree to repay the loan with interest in its own local currency at a specified exchange rate. Therefore, it provides security to the foreign country from exchange-rate risk.
In the present scenario, a currency swap is effectively a loan that India will give to Sri Lanka in dollars. This loan will be repaid by Sri Lanka with interest in Sri Lankan rupees at a specified date in the future and at a specified exchange rate.
Benefits of Currency swap
These swap operations carry no exchange rate or other market risks as transaction terms are set in advance.
Hence, it provides benefit to the country which is getting dollars to use reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
News: Reserve Bank of India (RBI) has increased the e-Rupi voucher limit to Rs 1 Lakh from Rs 10,000. RBI has also allowed one e-Rupi voucher to be used multiple times until it has been fully redeemed.
About e-Rupi Voucher
Thus e-RUPI is a one-time contactless, cashless voucher-based mode of payment. It helps users redeem the voucher without a card, digital payments app, or internet banking access.
For example, if the Government wants to cover a particular treatment of an employee in a specified hospital, it can issue an e-RUPI voucher to that employee. The employee will receive an SMS or a QR Code on his feature phone / smart phone. He/she can go to the specified hospital, avail of the services and pay through the e-RUPI voucher received on his phone.
Purpose: It is designed to be a person and purpose-specific digital payment solution. It seeks to ensure that government schemes reach intended beneficiaries in a targeted and leak-proof manner, with limited touchpoints between the government and the beneficiary.
Developed by: National Payments Corporation of India (NPCI) in collaboration with the Department of Financial Services (DFS), the Union Health Ministry, and the National Health Authority (NHA).
What is the significance of e-Rupi?
Unlike other digital payment formats, e-Rupi does not require beneficiaries to have a bank account.
e-Rupi works on basic phones also and hence it can be used by people who do not own smartphones or in places that lack an internet connection, thereby promoting offline payments.
It will ensure leak-proof delivery of welfare services. It can be used for delivering services under schemes, meant for providing drugs and nutritional support like Ayushman Bharat fertilizer subsidies, etc.
The private sector can leverage these digital vouchers as part of its employee welfare and corporate social responsibility programs.
News: Companies are resorting to the strategy of Shrinkflation to reduce the impact of rising input costs.
Shrinkflation is a combination of two words, “shrink” and “inflation”.
It is the practice of reducing the size of a product while maintaining its sticker price. Shrinkflation is basically a form of hidden inflation.
Examples of Shrinkflation: Shrinkflation is done most commonly in the food and beverage sector, though it may occur in any industry:
- The size of a chocolate bar is reduced from 60 grams to 55 grams, with no resultant decrease in price.
- The pages of a notebook are changed from 1000 to 800 and the price remains unaltered.
- The size of the cold drink bottle is dropped to 750ml from 800ml and no change in price is done.
Causes of Shrinkflation
The main reasons for shrinkflation are:
Increase Production Costs: Due to the increase in the various elements of production costs such as raw materials, labour, power cost, and so on, the manufacturers are compelled to follow shrinkflation as the increasing costs eat up their profit margins.
Strong level of Competition: Another main reason that leads to shrinkflation is high competition in the industry. To attract customers by maintaining the prices, the producers can maintain their profit margins by adopting this strategy.
Implications of Shrinkflation
Shrinkflation runs the risk of turning customers away from a product or brand if they notice they are getting less for the same price.
Shrinkflation makes it harder to accurately measure price changes or inflation. The price point becomes misleading since the product size cannot always be considered in terms of measuring the basket of goods.
Money and Banking
News: According to the Reserve Bank of India (RBI) working group report, over 6% of all loans given by commercial banks in April-December 2020 were digital.
About digital lending: Digital lending refers to the online disbursal of loans where all processes, including loan approval and recovery, take place remotely, typically through mobile apps.
It is a borrower-friendly approach, which reduces paperwork. Further, easy availability and economic hardships of the covid pandemic are the reasons for the increased surge in digital lending.
Concerns associated with Digital Lending
As per the RBI Working Group report, there were around 600 illegal lending apps that usually charge high-interest rates, adopt unacceptable and high-handed recovery methods and operate in an opaque manner.
The number of these lending apps will increase further. These apps could also collect the user’s personally identifiable information (PII), financial data, and other sensitive details which can then be used to compromise the user’s accounts, carry out phishing attacks, and identity theft.
Suggestions of the RBI working group on Digital Lending
The RBI is likely to come out with a comprehensive regulatory framework for digital lending soon. The working group set up by the RBI has proposed stringent norms for digital lenders. These norms include:
- Separate legislation should be enacted to oversee Digital Lending.
- Digital lending apps should be subjected to a verification process by a nodal agency to be set up in consultation with stakeholders.
UPI123Pay and Digisaathi
News: Reserve Bank of India has launched a new UPI service for feature phones called UPI123Pay. It has also launched a 24×7 helpline for digital payments called ‘Digisaathi’.
About the UPI123Pay
UPI 123PAY is a three-step offline method to initiate and execute transactions that will work on simple feature phones that do not have internet connectivity.
It will allow users to use feature phones for almost all transactions except scan and pay.
For transactions, users just need to link their bank accounts with their phones to use the service.
How can transactions be done without the internet?
UPI123Pay offers users four options to make payments without internet connectivity:
Interactive Voice Response (IVR): Users would be required to initiate a secured call from their feature phones to a predetermined IVR number and complete UPI on-boarding formalities to start making financial transactions like money transfer, mobile recharge, EMI repayment, balance check, among others.
App-based functionality: One could install an app on feature phones through which several UPI functions, available on smartphones, will be available on their feature phone, except the scan and pay feature which is currently not available.
Missed call facility: The missed call facility will allow users to access their bank account and perform routine transactions such as receiving, and transferring funds by giving a missed call on the number displayed at the merchant outlet. The customer will receive an incoming call to authenticate the transaction by entering UPI PIN.
Proximity sound-based payments: One could utilize the proximity sound-based payments option, which uses sound waves to enable contactless, offline, and proximity data communication on any device.
About Digisaathi: DigiSaathi has been set up by the National Payments Corporation of India (NPCI). It is a 24 x 7 Helpline for providing information on digital payment products and services.
It will use AI technology to answer any questions related to all types of digital transactions. Currently, it is available in English and Hindi language.
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
News: amid the Ukraine issue, experts have said that the United States could as a last resort exclude Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
If a country is excluded from SWIFT, its foreign funding would take a hit, making it entirely reliant on domestic investors. This is particularly troublesome when institutional investors are constantly seeking new markets in newer territories.
SWIFT is a messaging network used by banks and financial institutions globally to quickly, accurately, and securely send and receive information, such as money transfer instructions. SWIFT carries an average of approximately 26 million financial messages each day.
Established in: 1973
Overseen by: G-10 central banks (Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden) as well as the European Central Bank (ECB)
Governance: SWIFT is owned and controlled by its shareholders (financial institutions) representing approximately 3,500 firms from across the world. The shareholders elect a Board of 25 independent Directors representing banks across the world, which governs the Company and oversees the management of the Company.
Note: SWIFT does not hold or transfer assets or money; neither is it a financial institution itself. Rather, it just facilitates secure, efficient communication between member institutions.
News: Reserve Bank of India (RBI) had issued new tokenization rules prohibiting the storage of customer card numbers by online merchants and payment aggregators. Rules are introducing the concept of Tokenization, which is expected to come into effect by 1st July 2022.
About card tokenisation
Tokenization is a process of replacing actual card details with a unique alternate code called the ‘token’. Sensitive customer data such as card numbers and CVV (card verification value) are replaced with an algorithmically generated encrypted token.
Advantages of Tokenization
Transactions can be done using the tokens without disclosing any sensitive customer details. The actual card data will, therefore, no longer be stored with either the merchant or the payment aggregator.
Tokens, if breached, will have little value for hackers since these are randomly generated numbers. The card tokenization will become mandatory as soon as rules come into effect from 1 January, 2022.
Challenges in Tokenization
First, when cards migrate to tokenization, the credit card EMIs, instant pay-outs, and instant cashbacks may take a major hit.
Second, Tokenization has cost implications, too. Earlier, a simple card transaction used to cost a few paisa, divided among all ecosystem players. The cost for per saved tokenized card will shoot up to ₹6-7. These costs, ultimately, would be passed onto the merchants.
Third, no bank is ready with tokenization. That leaves everyone in the ecosystem to depend on the network providers—Visa, Mastercard, Amex, Diners, and the National Payments Corporation of India (NPCI).
Neo Banks vs Traditional Banking
News: Neo-Banks bridge the gap between the services that traditional banks offer and the evolving expectations of customers in the digital age. They are changing the face of fintech and could one day eclipse traditional banks.
About Neo Banks: Neo-banks are online-only financial technology (fintech) Institutions. These banks operate solely digitally or via mobile apps. Simply put, neo-banks are digital banks without any physical branches.
Difference between Neo Banks and traditional Banks
Firstly, in India, Neobanks can’t have a bank licence of their own, they rely on bank partners to offer licensed services. That’s because the Reserve Bank of India (RBI) doesn’t allow banks to be 100% digital yet (though some foreign banks offer digital-only products through their local units).
Secondly, Neo-banks leverage technology and artificial intelligence (AI) to offer a range of personalized services to customers. On the other hand, traditional banks follow an omni-channel approach i.e. having both physical (through branches and ATMs) and digital banking presence to offer a multitude of products and services.
Third, Neo-banks offer only a small range of products and services as compared to a whole gamut of services that traditional banks offer.
IC15 – India’s first crypto exchange
News: Superapp CryptoWire recently launched India’s first cryptocurrency index, IC15.
About IC15: It will measure the performance of the 15 most widely traded cryptocurrencies listed on leading crypto exchanges by market capitalization.
Aim: a) To increase awareness and knowledge of the cryptocurrency and blockchain ecosystem and b) To help investors understand how virtual coin trading works.
As of January 1, 2022, Bitcoin, Ethereum, Binance Coin, and Solana are sitting on the top four positions on the IC15 index.
Eligibility conditions: The eligible cryptocurrency:
– should have traded on at least 90% of the days during the review period and
– Should be among the 100 most liquid cryptocurrencies in terms of trading value.
– Should be in the top 50 in terms of the circulating market capitalization.
The committee will then select the top 15 cryptocurrencies. The index will be reviewed quarterly.
News: SEBI has launched an investigation into Nippon Life‘s investment of Rs. 2,500 crore in Yes Bank’s AT1 bonds.
About AT1 Bonds
AT1 Bonds stand for additional tier-1 bonds. These are unsecured bonds that have perpetual tenure. In other words, the bonds have no maturity date. These bonds have a call option, which can be used by the banks to buy these bonds back from investors, especially when interest rates are falling.
Regulated by: Reserve Bank of India (RBI)
Purpose: These bonds are typically used by banks to bolster their core or tier-1 capital. These bonds were introduced by the Basel accord after the global financial crisis.
Returns and Risk: These bonds offer higher returns to investors but compared with other debt products, these instruments carry a higher risk as well.
Investors cannot return these bonds to the issuing bank and get the money. This means there is no put option available to its holders.
AT1 bonds are subordinate to all other debt and only senior to common equity. Mutual funds (MFs) are among the largest investors in AT1 Bonds.
Banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bond’s face value, provided their capital ratios fall below certain threshold levels.
If the RBI feels that a bank is on the brink of collapse and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors.
Market Infrastructure Institutions (MIIs)
News: Recently, the Securities and Exchange Board of India (SEBI) noted that the NSE was a systemically important market infrastructure institution (MII).
About Market Infrastructure Institutions (MIIs)
Market Infrastructure Institutions (MIIs) include Stock exchanges, depositories, and clearing houses. MIIs constitute a key part of the nation’s vital economic infrastructure.
According to the Bimal Jalan Committee (2010), MIIs are systemically important for India as these institutions have seen phenomenal growth in terms of the market capitalization of listed companies, capital raised and the number of investor accounts with brokers and depositories, and the value of assets held in the depositories account.
Which institutions in India qualify as MIIs?
Stock Exchanges (SEs): SEBI lists seven SEs including BSE, NSE, Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India as MIIs.
Depositories: They are charged with the safekeeping of securities and enabling their trading and transfer. Central Depository Services Ltd. and the National Securities Depository Ltd have been listed as MIIs.
Clearing houses: They help validate and finalise securities trades and ensure that both buyers and sellers honour their obligations. SEBI lists seven clearing houses including the Multi Commodity Exchange Clearing Corporation as MIIs.
Why are governance norms critical in the regulation of MIIs?
Any failure of such an MII could lead to a domino effect covering the whole economy leading to an overall economic downfall that could potentially extend beyond the boundaries of the securities market. Hence, the governance and oversight of MIIs are absolutely critical, and they need to be of the highest standards.
News: In Budget 2022-23, the government has allowed the use of surety insurance bonds as a substitute for bank guarantees in case of government procurement and also for gold imports.
About Surety Bonds: A surety bond is a legally binding contract entered into by three parties—the principal, the obligee, and the surety.
By surety bond, one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).
For example: Surety bonds that are written for construction projects are called contract surety bonds. In this arrangement, the project owner (the obligee) seeks a contractor (the principal) to fulfill a contract. The contractor, through a surety bond producer, obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner(the obligee) for the financial loss incurred.
Aim: Mainly aimed at infrastructure development particularly to reduce indirect costs for suppliers and work contractors, thereby diversifying their options and acting as a substitute for bank guarantees.
Provided by: Insurance Company on behalf of the contractor to the entity which is awarding the project.
Significance: When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses. Hence, it can effectively replace the system of bank guarantees issued by banks for projects and help reduce risks due to cost overruns, project delays, and poor contract performance.
Challenges associated with Surety Bonds
1) Surety bond is a risky concept and insurance companies in India are yet to achieve expertise in risk assessment in such business, 2) There’s no clarity on surety bonds pricing, the recourse available against defaulting contractors, and reinsurance options. These are critical and may impede the creation of surety-related expertise.
Fair Value Through Profit and Loss (FVTPL) Account: new investment category
News: The Reserve Bank of India proposed a new investment category for banks—Fair Value Through Profit and Loss (FVTPL) Account. This is a part of its initiatives to align lenders investment portfolio regulations with the global accounting standards.
Current Investment Portfolio of Banks
Currently, the Investment Portfolios of Banks at present are classified under three categories: Held To Maturity (HTM), Held For Trading (HFT), and Available For Sale (AFS).
Changes proposed by RBI in these categories
New Category (FVTPL Account): RBI has proposed a new investment category for banks—Fair Value Through Profit and Loss (FVTPL) account. The existing held-for-trading (HFT) category will now come under the FVTPL category.
Note: HFT category was for debt securities purchased by banks with the intent of selling them within a short period of time.
FVTPL will be the residual category where all investments that do not qualify for inclusion in HTM or AFS shall be categorized. This category can have investments such as securitization receipts (SRs), mutual funds, alternate investment funds, equity shares, and derivatives (including those undertaken for hedging), among others.
Definition of Held To Maturity (HTM): RBI said debt instruments with fixed or determinable payments and fixed maturity, with the intent of holding till maturity, shall now be classified as HTM. Corporate bonds have also been allowed to be held under HTM, which was not the case earlier.
Definition of AFS: Debt instruments held by a bank till maturity or sold before maturity would be eligible for AFS. Equity instruments will also be classified under AFS.
Retail Direct Scheme and Integrated Ombudsman Scheme
News: Prime Minister has launched two innovative customer-centric initiatives of RBI, viz. Retail Direct Scheme and the Reserve Bank – Integrated Ombudsman Scheme.
About Retail Direct Scheme
The Retail Direct Scheme allows retail investors to invest in government securities (G-Sec) by opening a gilt security account with the RBI. The account opened will be called Retail Direct Gilt (RDG) Account.
From this RDG account, retail investors can buy bonds sold by the central government, state development loans, bonds issued by state governments, and sovereign gold bonds, whose price is linked to gold.
However, the participation and allotment of securities will be as per the non-competitive scheme, which means investors can submit bids without specifying a price. The bonds get allotted to the investors at a price established by competitive bidding among financial institutions.
About Reserve Bank – Integrated Ombudsman Scheme
The scheme is aimed at further improving the grievance redress mechanism for resolving customer complaints against entities regulated by the RBI.
Network for Greening the Financial System
News: Reserve Bank of India (RBI) has published its Statement of Commitment to Support NGFS [Network for Greening the Financial System] declaration. The declaration aims to contribute to the global response required to meet the climate goals.
About Network for Greening the Financial System
NGFS was launched at the Paris One Planet Summit on December 12, 2017.
Purpose: It is a group of central banks and supervisors willing to share best practices and contribute to the development of environment and climate risk management in the financial sector.
It also seeks to mobilise mainstream finance to support the transition towards a sustainable economy.
Members: It includes central banks and financial supervisors.
Secretariat: It is hosted by the Banque de France.
RBI and NGFS
Reserve Bank of India (RBI) joined the Network for Greening the Financial System (NGFS) as a Member in April 2021.
RBI expects to benefit from the membership of NGFS by learning from and contributing to global efforts on Green Finance which have assumed significance in the context of climate change.
Prompt Corrective Action (PCA) framework for large non-banking financial companies (NBFCs)
News: Reserve Bank of India (RBI) has introduced a Prompt Corrective Action (PCA) framework for large non-banking financial companies (NBFCs).
The need for PCA Framework for NBFCs
The PCA Framework for NBFCs has been brought after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs. 1 lakh crore to investors.
PCA Framework for NBFCs
Objective of the framework: To enable supervisory intervention at the appropriate time by mandating the supervised entity to initiate and implement remedial measures in a timely manner.
Applies on: The framework will be applicable to all deposit-taking non-banking financial companies (NBFCs), all non-deposit-taking NBFCs in the middle, upper, and top layers including investment and credit companies, core investment companies, infrastructure debt funds, infrastructure finance companies, and microfinance institutions.
Exclusions: It has excluded NBFCs not accepting/not intending to accept public funds, primary dealers, and housing finance companies along with government-owned ones.
What are the indicators based on which PCA will be invoked for NBFC?
The central bank will track three indicators:
- Capital to risk-weighted assets ratio (CRAR),
- Tier I capital ratio
- Net non-performing assets (NNPAs) including non-performing investments (NPIs).
In the case of core investment companies (CICs), the RBI will track adjusted net worth/aggregate risk-weighted assets, leverage ratio, and NNPAs, including NPIs.
A breach in any of the three risk thresholds under the above-mentioned indicators could result in the invocation of PCA.
What will happen once the PCA is invoked for an NBFC?
Based on the risk threshold, the RBI may prescribe mandatory corrective actions such as restrictions on dividend distribution/remittance of profits, requiring promoters /shareholders to infuse equity, and reducing leverage.
The RBI can also restrict the issuance of guarantees or take other contingent liabilities on behalf of group companies (only for CICs).
Further, the central bank may also restrict branch expansion, impose curbs on capital expenditure other than for technological up-gradation within board-approved limits, and restrict/ directly reduce variable operating costs.
North Eastern Development Finance Corporation Ltd. (NEDFI)
About NEDFI: It is notified as a Public Financial Institution under Companies Act, 1956 and was registered as an NBFC in 2002 with RBI. The shareholders of the Corporation are IDBI, SBI, LICI, SIDBI, ICICI, IFCI, SUUTI, GIC and its subsidiaries.
Nodal Ministry: Ministry of Development of North Eastern Region (DoNER)
Headquarters: Guwahati, Assam
Purpose: To provide financial assistance to micro, small, medium and large enterprises for setting up industrial, infrastructure and agri-allied projects in the North Eastern Region of India and also Microfinance through MFI/NGOs.
Besides financing, the Corporation offers Consultancy & Advisory services to the state Governments, private sectors and other agencies.
The corporation is also the designated nodal agency for disbursal of Govt. of India incentives to the industries in North-East India under North–East Industrial and Investment Promotion Policy 2007(NEIIPP 2007).
News: The Prime Minister has inaugurated InFinity Forum, a thought leadership Forum on FinTech.
About Fintech: Fintech (finance and technology) refers to any business that uses technology to enhance or automate financial services and processes.
Pillars of Fintech
India’s financial inclusion efforts were the driver of the ‘fintech revolution’. Fintech is resting on four pillars – income, investments, insurance, and institutional credit.
When income grows, investment becomes possible; insurance covers enable greater risk-taking ability and investments, and institutional credit brings means for advancement. Hence, when all those factors come together, one will suddenly find a large number of people embracing fintech innovation.
India’s Financial Inclusion Initiatives with the help of Fintechs
- Mobile payments in India exceeded ATM cash withdrawals for the first time last year.
- The government has universalized bank accounts with 430 million Jan Dhan accounts in the last seven years from less than 50% of Indians having bank accounts in 2014.
- UPI is processing around 4.2 billion transactions in just last month
- PM Svanidhi enabled access to credit for small vendors across the country
- e-RUPI enabled targeted delivery of specified services without leakages.
Electronic Gold Receipts (EGRs)
News: The government of India has notified the Securities and Exchange Board of India (Vault Managers) Regulations, 2021 to create Electronic Gold Receipts (EGRs).
About Electronic Gold Receipts (EGRs): These are electronic receipts issued on the basis of a deposit of underlying physical gold. This would pave the way for the operationalization of a gold exchange in India.
About Gold Exchange
Gold Exchange would be a national platform for buying and selling EGRs issued against physical gold. Investors can trade in EGRs on stock exchanges and the proposed gold exchange.
The transaction in a gold exchange has been divided into three parts—conversion of physical gold into EGR, trading of EGR on a stock exchange and conversion of EGR into physical gold.
Regulated by: SEBI would regulate the entire ecosystem of the proposed gold exchange. It would be the sole regulator for the exchange, including vaulting, assaying gold quality, and fixing delivery standards.
Salient features of Gold Exchange
1) Stock exchanges can launch contracts of different denominations for trading and conversion of EGR into gold. 2) SEBI has brought in fungibility and interoperability between vault managers for the ease of investors. 3) An EGR will not be linked with a unique bar reference number of the physical gold. 4) Allows inter-operability i.e., the physical gold deposited at one location of a vault manager, can be withdrawn from different locations of the same or different vault manager.
What are the benefits of the Gold Exchange?
Gold exchange is expected to offer a host of benefits for the value chain participants as well as for the entire gold market ecosystem such as efficient and transparent price discovery, investment liquidity, and assurance in the quality of gold among others.
News: The Prime Minister has inaugurated InFinity Forum, a thought leadership Forum on FinTech.
About the InFinity Forum
Hosted by: International Financial Services Centres Authority (IFSCA) under the aegis of the Government of India (GoI) in collaboration with GIFT City and Bloomberg.
Indonesia, South Africa, and the U.K. are partner countries in the first edition of the Forum.
InFinity Forum is IFSCA’s flagship financial technology and global thought leadership event. The forum will focus on how technology and innovation can be leveraged by the FinTech industry.
In this forum pressing problems, progressive ideas, and innovative technologies from across the world gets Discovered, Discussed, and Developed into Solutions.
The leading minds in policy, business, and technology discuss and come up with actionable insight into how technology and innovation can be leveraged by the FinTech industry for inclusive growth.
The Forum will bring together all key stakeholders of the global FinTech Industry to explore the limitless future of the industry in the spirit of mutual cooperation.
Agenda of the InFinity Forum
The Forum will focus on the theme of ‘Beyond’; with various sub-themes such as
- FinTech beyond boundaries: It will focus beyond the geographical boundaries in the development of a global stack to promote financial inclusiveness,
- FinTech beyond Finance: Focus on the convergence with emerging areas such as SpaceTech, GreenTech and AgriTech to drive sustainable development,
- FinTech Beyond Next: It will focus on how Quantum Computing could impact the nature of Fintech industry in the future and promote new opportunities.
National Bank for Financial Infrastructure and Development (NaBFID)
News: Government has set a target of about Rs 1 trillion for the National Bank for Financial Infrastructure and Development (NaBFID) for sanctioning loans to the infrastructure sector in the next financial year.
About the NaBFID
NaBFID has been set up as a Development Financial Institution (DFI) to support the development of long-term infrastructure projects. It will be a corporate body with authorized share capital of one lakh crore rupees
NaBFID shall be regulated and supervised as an All India Financial Institution (AIFI) by the Reserve Bank of India under the Reserve Bank of India Act, 1934.
It shall be the fifth AIFI after EXIM Bank, NABARD, NHB, and SIDBI.
How will NaBFID fund projects?
It will invest in infrastructure projects in India and outside. It will focus on prioritizing systemic risk mitigation and credit enhancement. It will provide funding in the public sector as well as the private sector.
It will get a 10-year tax concession so that it can provide long-term funds at an affordable cost to the infrastructure sector.
It can also issue debt securities and promote securitization of the loan portfolios of companies engaged in the development and financing of infrastructure.
Moreover, it can also get government guarantees at a concessional rate of up to 0.1% for borrowing from multilateral institutions, sovereign wealth funds, and other such foreign institutions.
Industries and Services
About Rural Tourism: Any form of tourism that showcases the rural life, art, culture, and heritage at rural locations, thereby benefiting the local community economically and socially.
It also enables interaction between the tourists and the locals for a more enriching tourism experience.
Strengths of Rural Tourism in India: a) Indian villages have unparalleled culture, craft, music, dance, and heritage to offer to the visitors b) Expansion of road infrastructure has made most of the rural areas accessible c) Well-developed agriculture and farms provide stay facilities and d) Beautiful climate conditions and Biodiversity among others.
Weaknesses of Rural Tourism in India: 1) Lack of prioritization for rural tourism at the State and National level 2) Poor profiling of rural product offerings 3) Poor tourism supporting infrastructure including ICT in rural areas 4) Lack of tourism awareness and skills in rural areas and 5) Poor resource allocation.
News: The Union Minister of Electronics and IT has inaugurated North India’s maiden Centre of Entrepreneurship – “MedTech” at the Sanjay Gandhi Postgraduate Institute of Medical Sciences (SGPI), Lucknow (UP)
About MedTech Sector
MedTech (or Medical Technology) is a segment under the larger umbrella of healthcare systems. The segment focuses on designing and manufacturing a wide range of medical products/devices for diagnosis, prevention, monitoring, treatment and patient care.
The Medi electronics sector is currently estimated to be at $10 billion and is expected to grow to $50 bn by 2025. However, there is a tremendous import dependency of around 75-80%.
MedTech Center of Excellence
MedTech Center of Excellence will provide state-of-the-art facilities to Startups in the field of Medi electronics and health informatics. It will result in an impetus for the startup culture in the state.
Features: The Center shall provide plug and play facilities, co-working/incubation space, High-Speed Internet (500MBPS), Medi electronics & Health informatics & IoT Labs, Support on Intellectual Property Rights, Assistance for Marketing among others.
Built by: The Centre has been built by Software technology Park of India, Ministry of Electronics and IT in partnership with the Government of Uttar Pradesh.
New warehousing policy
News: The Government of India has proposed a New Warehousing Policy.
About the proposed new warehousing policy
The Policy aims to reduce logistic costs and ease transportation by developing exclusive warehousing zones in the public-private partnership (PPP) model.
The policy will be framed and implemented by the National Highways Authority of India (NHAI).
The warehouses will be located outside city centres, especially around the land available with NHAI along highways and expressways.
These warehouses will house cold-storage chains and will be able to store all kinds of cargo—wet and dry.
Moreover, since warehouses are expected to come up outside city centres, large trucks carrying the cargo will not need to enter the city to unload their goods. This will also help boost bulk carrying capacity and save fuel. These large vehicles can also transport more goods compared to the smaller trucks.
Impact of the policy on logistics cost
Warehousing zones will help cut India’s logistics cost which is 14%-16% of gross domestic product (GDP) compared to 8%-10% of GDP in China and 12%-13% in the US.
Moreover, the Government of India is also developing 35 Multi-Modal Logistics Parks (MMLPs) to improve the country’s freight logistics sector. This will help aid the proposed warehousing policy.
Six platforms launched by the Ministry of Heavy Industries
News: The Ministry of Heavy Industries has launched six web-based technology innovation platforms.
The six platforms aim to bring together the Industry & Academia to foster technological innovations in heavy industries.
They do this by offering opportunities to industries to seek optimum solutions for technological problems faced by them from the vast pool of scientific & technical manpower in academia.
Platforms launched by the Ministry of Heavy Industries
TechNovuus: It has been set up and maintained by the Automotive Research Association of India (ARAI). The platform focuses on the automotive sector.
SANRACHNA: It has been set up and maintained by BHEL. The platform focuses on the power sector and renewable energy sector.
DRISHTI: It has been set up and maintained by Central Manufacturing Technology Institute (CMTI), Bengaluru. It focuses on the various technologies associated with Capital goods.
ASPIRE: It has been set up and maintained by the International Centre for Automotive Technology (ICAT). It focuses on Automotive Technologies development.
KITE: It has been set up and maintained by AMTDC-IIT Madras. It focuses on Robotics, Virtual Reality, and Machine Tools.
SURGE: It has been set up and maintained by HMT MTL Ltd- IISc Bangalore. It is a Technology Innovation Platform focussing on the Machine Tools sector.
News: The Engineering Goods exports have registered a growth of 54% during April-December 2021 as compared to the same period in the previous year (2020).
About Engineering Goods
The Engineering Goods sector comprises metal products, industrial machinery and equipment, automobiles and their components, transport equipment, bicycles, medical devices and renewable equipment.
The impressive growth in Engineering Goods exports in recent years has largely been due to the zero duty Export Promotion Capital Goods (EPCG) Scheme.
About Export Promotion Capital Goods (EPCG) Scheme
Nodal Ministry: Ministry of Commerce & Industry
The scheme forms part of the Foreign Trade Policy (FTP).
Note: The present FTP policy came into force in 2015 with validity up to 2020. In order to provide policy stability during the pandemic period, the policy was extended up to 31st March 2022.
The scheme allows the import of capital goods for pre-production, production and post-production at Zero customs duty.
However, imports under EPCG Scheme are subject to an export obligation. Such as, the goods manufactured from the imported machinery should be exported worth 6 times the duties, taxes, and cess saved on the capital goods within 6 years from the Authorization issue date.
News: The Union Minister for Finance has launched the e-Bill system for Central Government Ministries on the 46th Civil Accounts Day.
About the e-Bill System
Aim: To make the entire process of submission and backend processing of bills completely paperless and transparent for Central Government Ministries.
Developed by: Public Financial Management System (PFMS) Division in the office of the Controller General of Accounts in the Department of Expenditure, Ministry of Finance.
Objectives of the System
- Provide convenience to all vendors/suppliers of the government to submit their bills/claims at any time, from anywhere.
- Eliminate physical interface between suppliers and government officers.
- Enhance efficiency in processing bills/claims.
- Reduce discretion in the processing of bills through the “First-In-First-Out” (FIFO) method.
Significance of the System
Currently, the suppliers of various goods and services to the Government have to submit physical copies of their bills to the respective Ministries. Similarly, government employees also need to submit hard copies of their claims.
Due to this, the suppliers need to visit the offices to deliver bills. Moreover, they are unable to track the status of the processing of their bills.
But under this e-Bill system, vendors/suppliers can upload their bills online along with supporting documents at any time through digital signature. For those not having a digital signature, the facility of e-sign using the Aadhaar has also been provided.
Combined Reciprocal Common Transport Agreement
News: Governments of Delhi, Haryana, Rajasthan, and Uttar Pradesh of the National Capital Region (NCR) have signed a Combined Reciprocal Common Transport Agreements (CRCTA) covering both Contracts Carriage & Stage Carriage.
Note: National Capital Region (NCR) is a planning region centered upon the National Capital Territory (NCT) of Delhi. It encompasses Delhi and several districts surrounding it from the states of Haryana, Uttar Pradesh, and Rajasthan.
About the Combined Reciprocal Common Transport Agreements (CRCTA)
Signed by: Governments of Delhi, Haryana, Rajasthan, and Uttar Pradesh
Aim: To facilitate seamless movement of passenger vehicles in the National Capital Region (NCR).
Coverage: All Motor cabs/Taxis/Auto Rickshaws, All Educational Institution vehicles , and All Stage Carriage Buses of State Transport Undertakings (including City bus services) of NCR participating states will be covered under this agreement.
Key Features of the Agreement: The agreement provides for:
- Countersigning of permits and licenses for motor cabs, taxis, and auto-rickshaws registered in NCR for seamless movement.
- All permits/licenses including temporary permits/licenses (Contract Carriage and also Stage Carriage, as applicable) shall be issued only on Vaahan Software.
- The age of the Stage Carriage vehicles, as well as Contract Carriage vehicles, shall be limited to ten years for diesel vehicles and fifteen years for petrol/CNG vehicles.
- Single-point taxation to state-owned transport bodies, wherein road tax/passenger tax shall be payable by them only in one NCR State and exempted from such taxes/fees in the other NCR States.
- Exemption in taxes, including road taxes, to buses and other vehicles of educational institutions.
- All Public Service Vehicles (except those specifically exempted by MoRTH) shall be mandatorily fitted with Vehicle Location Tracking Device (VLTD) and one or more emergency buttons.
Significance of this agreement: One of the most significant aspects of this plan is the unrestricted movement of buses, taxis, and auto-rickshaws within NCR.
Cross Border Insolvency
News: The government is planning to bring personal guarantors for corporate debtors under the purview of the cross-border insolvency regime.
About the Cross Border Insolvency
Cross border insolvency denotes the treatment of financially burdened debtors where: the assets are in more than one country (or) creditors are in more than one country.
For example – Jet Airways (India) was one such case wherein Insolvency proceedings were initiated in the Netherlands and India simultaneously.
Does India have a Cross Border Insolvency Framework?
Cross border insolvency framework is yet to be notified under the Insolvency and Bankruptcy Code.
So far, the Government was planning to bring the Cross border framework only for corporate insolvency resolution. But now the government wants to notify it together for both companies and personal guarantors for corporate debtors.
Note: A personal guarantor is a person or an entity that promises the payment of another person’s debt, in case the latter fails to pay it off.
How will the Cross Border Insolvency Framework be based on?
The government is discussing bringing the Cross Border Insolvency Framework based on the UNCITRAL Model Law on Cross-border Insolvency, 1997.
About UNCITRAL Model Law on Cross-border Insolvency, 1997
UNCITRAL Model Law on Cross-Border Insolvency, 1997 (Model Law) provides a legal framework to deal with cross-border insolvency issues while ensuring the least intrusion into the country’s domestic insolvency law.
Principles: The model law deals with four major principles of cross-border insolvency:
- Direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor;
- Recognition of foreign proceedings & provision of remedies;
- Cooperation between domestic and foreign courts & domestic and foreign insolvency practitioners; and
- Coordination between two or more concurrent insolvency proceedings in different countries. The main proceeding is determined by the concept of centre of main interest (“COMI”).
India’s Space Economy
News: The Centre for Development Studies(CDS) and the Indian Institute of Space Science and Technology (IIST) has released a paper titled “The space economy of India: its size and structure”.
About the paper on the Space Economy of India
Purpose: The paper is a first-of-its-kind attempt at measuring the size of India’s space economy.
This paper relied on the data from the Indian Space Research Organisation (ISRO), Parliament documents, Comptroller and Auditor-General’s(CAG) reports, data on intellectual property rights and other government data.
Key highlights from the paper related to the Space Economy of India
Size of India’s Space Economy: It is estimated at ₹36,794 crores (approximately $5 billion) for the financial year 2020-21.
Estimated space size as a percentage of the GDP: This has slipped from 0.26% in 2011-12 to 0.19% in 2020-21.
Space Sectors: Among the space constituents, space applications accounted for the major chunk of the annual budget in 2020-21, followed by space operations and manufacturing.
Space budget as a percentage of the GDP: It has slipped from 0.09% in 2000-01 to 0.05% in 2011-12 and has remained more or less at that level since then.
India’s Space Spending compared to other countries: In relation to GDP, India’s space spending is more than that of China, Germany, Italy, and Japan but less than that of the U.S. and Russia.
About the significance of this paper
This paper has been released at a time when the Central government policies are opening up the sector to private players. These policies are very likely to enlarge the size of the sector through enhanced private investment and improved integration with the global private space industry.