Q. With reference to `IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct?

  1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
  2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector.

Select the correct answer using the code given below

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

Masala bonds:
  • Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than the local currency.
    • Masala is a Hindi word meaning spices. The term was used by the International Finance Corporation (IFC) to evoke the culture and cuisine of India.
  • Unlike dollar bonds, where the borrower takes the currency risk, Masala bonds makes the investors bear the risk.
  • Masala Bonds were introduced in India in 2014 by International Finance Corporation (IFC).
  • The first Masala bond was issued by the World Bank-backed IFC in November 2014 when it raised ₹10 billion bonds to fund infrastructure projects in India.
    • Later in August 2015 International Financial Cooperation for the first time issued green masala bonds and raised ₹3.15 Billion to be used for private sector investments that address climate change in India.
    • In July 2016 HDFC raised ₹30 billion from Masala bonds and thereby became the first Indian company to issue masala bonds.
    • In the month of August 2016 public sector unit NTPC issued first corporate green masala bonds worth ₹20 billion.
  • Characteristics of Masala Bonds:
    • Masala Bonds are rupee-denominated bonds issued outside India by Indian entities.
    • They are debt instruments which help to raise money in local currency from foreign investors.
    • Both the government and private entities can issue these bonds. Investors outside India who would like to invest in assets in India can subscribe to these bonds.
    • Any resident of that country can subscribe to these bonds which are members of the Financial Action Task Force. The investors who subscribe should be whose securities market regulator is a member of the International Organisation of Securities Commission. Multilateral and Regional Financial Institutions which India is a member country can also subscribe to these bonds.
    • According to RBI, the maturity period is three years for the bonds raised to the rupee equivalent of 50 million dollars in a financial year. The maturity period is five years for the bonds raised above the rupee equivalent of 50 million dollars in a financial year.
    • The conversion of these bonds happens at market rate on the date of settlement of transactions undertaken for issue and servicing of interest of the bonds.
  • The proceeds raised from these bonds can be used:
    • In refinancing of rupee loan and non-convertible debentures.
    • For the development of integrated townships and affordable housing projects.
    • Working capital to corporate.
  • RBI mandates the proceeds raised from these bonds cannot be used:
    • In real estate activities, not including the development of integrated townships and affordable housing projects.
    • Activities prohibited according to Foreign Direct Investment guidelines.
    • Investing in capital markets and usage of the proceeds for equity investment domestically.
    • Purchase of land.
    • On-lending to other entities for any of the above purposes.
International Finance Corporation
  • The International Finance Corporation (IFC) was founded in 1956 with Washington, DC as its headquarters.
  • It is the private sector arm of The World Bank. It is a member of the World Bank Group.
  • Mandate: Advance economic development and improve the lives of people by encouraging the growth of the private sector in developing countries.
  • Functions: It helps countries develop their private sectors in a variety of ways
    • Investing in companies through loans, equity investments, debt securities and guarantees.
    • Mobilizing capital from other lenders and investors through loan participations, parallel loans and other means.
    • Advising businesses and governments to encourage private investment and improve the investment climate.
  • Governance: The IFC is owned and governed by its member countries. It is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters.
  • The President of the World Bank Group is also the President of the IFC.
International Finance Corporation (IFC)

Q. In the context of which of the following do you sometimes find the terms ‘amber box, blue box and green box’ in the news?

(a) WTO affairs

(b) SAARC affairs

(c) UNFCCC affairs

(d) India-EU negotiations on FTA

Answer: (a) WTO affairs

Subsidies under WTO:
  • In WTO terminology, subsidies in general are identified by “Boxes” which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. be reduced), red (forbidden).
  • In agriculture, things are, as usual, more complicated. The Agriculture Agreement has no Red Box, although domestic support exceeding the reduction commitment levels in the Amber Box is prohibited; and there is a Blue Box for subsidies that are tied to programmes that limit production.
    • There are also exemptions for developing countries (sometimes called an “S&D Box or “development box”, including provisions in Article 6.2 of the Agreement).

Amber Box:

  • Amber box subsidies are those that can distort international trade by making a country’s products cheaper in comparison to those of other countries.
    • Examples: Subsidies for inputs such as fertilisers, seeds, electricity, irrigation, and Minimum Support Price (MSP).
  • According to the WTO, agriculture’s amber box is used for all domestic support measures that are deemed to distort production and trade.
    • As a result, the trade agreement requires signatories to commit to reducing trade-distorting domestic supports that fall into the amber box.
  • Members who do not make these commitments must keep their amber box support within 5-10% of their value of production. (Di Minimus Clause)
    • 10% for developing countries
    • 5% for developed countries

Blue Box:

  • It is the “amber box with conditions” — conditions, designed to reduce distortion.
  • Any support that would normally be in the amber box is placed in the blue box if it requires farmers to limit production.
    • These subsidies aim to limit production by imposing production quotas or requiring farmers to set aside part of their land.
  • At present there are no limits on spending on blue box subsidies.

Green Box:

  • The green box is defined in Annex 2 of the Agriculture Agreement.
  • Green Box is domestic support measures that don’t cause trade distortion or at most cause minimal distortion.
  • The Green box subsidies are government funded without any price support to crops.
    • They also include environmental protection and regional development programmes.
  • “Green box” subsidies are therefore allowed without limits (except in certain circumstances).
Development Box
  • Article 6.2 of the Agriculture Agreement allows developing countries additional flexibilities in providing domestic support.
  • The type of support that fits into the developmental category are measures of assistance, whether direct or indirect, designed to encourage agricultural and rural development and that are an integral part of the development programmes of developing countries.
  • They include investment subsidies which are generally available to agriculture in developing country members, agricultural input subsidies generally available to low-income or resource-poor producers in developing country members, and domestic support to producers in developing country members to encourage diversification from growing illicit narcotic crops.
WTO’s Peace Clause
  • As an interim measure, the WTO members agreed on a mechanism called the ‘Peace Clause’ in December 2013 and pledged to negotiate a permanent solution.
  • Under the Peace Clause, WTO members agreed to refrain from challenging any breach in prescribed ceiling by a developing nation at the dispute settlement forum of the WTO.
  • This clause will stay till a permanent solution is found to the food stockpiling issue.

Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR?

(a) Rouble

(b) Rand

(c) Indian Rupee

(d) Renminbi

Answer: (d) Renminbi

Special Drawing Right (SDR):
  • The SDR is an international reserve asset. The SDR is not a currency, but its value is based on a basket of five currencies—the US dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
  • The SDR serves as the unit of account of the IMF and some other international organizations.
  • The currency value of the SDR is determined by summing the values in US dollars, based on market exchange rates, of a SDR basket of currencies.
  • The SDR basket of currencies includes the US dollar, Euro, Japanese yen, pound sterling and the Chinese renminbi (included in 2016).
  • The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.
  • Quota (the amount contributed to the IMF) of a country is denominated in SDRs.
    • Members’ voting power is related directly to their quotas.
    • IMF makes the general SDR allocation to its members in proportion to their existing quotas in the IMF.
  • India’s quota in IMF:
    • In 2016, IMF’s quota and governance reforms took place.
    • According to which, India’s voting rights increased by 0.3% from then 2.3% to 2.6% and China’s voting rights increased by 2.2% from then 3.8% to 6%.
    • Presently, India holds 2.75% of SDR quota, and 2.63% of votes in the IMF.
    • India’s foreign exchange reserves also incorporate SDR other than gold reserves, foreign currency assets and Reserve Tranche in the IMF.
Quinquennial SDR valuation
What is the purpose of the SDR?
  • The IMF created the SDR as a supplementary international reserve asset in 1969, when currencies were tied to the price of gold and the US dollar was the leading international reserve asset. The IMF defined the SDR as equivalent to a fractional amount of gold that was equivalent to one US dollar.
  • When fixed exchange rates ended in 1973, the IMF redefined the SDR as equivalent to the value of a basket of world currencies.
  • The SDR itself is not a currency but an asset that holders can exchange for currency when needed. The SDR serves as the unit of account of the IMF and other international organizations.
Who can hold SDRs?
  • Individuals and private entities cannot hold SDRs. IMF members – and the IMF itself – hold SDRs and the IMF has the authority to approve other holders, such as central banks and multilateral development banks, while individuals and private entities cannot hold SDRs.
  • As of February 2023, there were 20 organizations approved as prescribed holders. Participating members and prescribed holders can buy and sell SDRs. However, prescribed holders do not receive allocations of SDRs, and they may not request an exchange of SDRs in transactions with designation as members do.
General allocations of SDRs
  • The Articles of Agreement allow the IMF to allocate SDRs to members – but not prescribed holders – under certain conditions.
  • There have been four general allocations, most recently in 2021, when the IMF’s Board of Governors approved a general allocation of about SDR 456 billion, equivalent to US$650 billion, to boost global liquidity.
    • The distribution – the largest SDR allocation in the history of the IMF – helped countries respond to the COVID-19 pandemic.
    • The general allocation of about SDR 161 billion in 2009, equivalent to US$250 billion, boosted liquidity amid a global financial crisis.
  • A general allocation of SDRs requires broad support from the IMF’s members. The IMF distributes a general allocation to member countries in proportion to their quota shares at the IMF.
  • Special SDR allocation:
    • The IMF made a special one-time allocation of SDR 21.5 billion (about US$33 billion) in 2009 to make the allocation of SDRs more equitable for countries that joined the IMF after 1981.
    • At the time, those countries – more than one-fifth of the IMF’s members – had never received an SDR allocation.
SDR allocation

Q. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news. Which of the following has declared that ranking?

(a) Organization for Economic Cooperation and Development (OECD)

(b) World Economic Forum

(c) World Bank

(d) World Trade Organization (WTO)

Answer: (c) World Bank

Notes:
  • The Ease of Doing Business Rank (EODB) is a measure of an economy’s position to the best regulatory practices. Though World Bank used to publish the ‘Doing Business’ reports from 2003, the ranking of economies started only from 2006.
  • The EODB study tries to capture the experience of small and mid-sized companies in a country with their regulators, by measuring the time, costs and red tape they deal with.
  • The goal of the World Bank in coming up with Doing Business score every year is to provide an objective basis for understanding and improving the regulatory environment for business around the world.
  • The Ease of Doing Business Rank is based on 10 parameters relating to starting and doing business in a country –
    1. Ease of starting a business.
    2. Dealing with construction permits.
    3. Getting electricity for the same.
    4. Registering your property.
    5. Getting credit for your business.
    6. Protecting minority investors.
    7. Paying taxes.
    8. Trading across borders.
    9. Enforcing contracts.
    10. Resolving insolvency.
  • It ranks countries on the basis of Distance to Frontier (DTF) score that highlights the gap of an economy with respect to the global best practice.
    • For example, a score of 75 means an economy was 25 percentage points away from the frontier constructed from the best performances across all economies and across time.
  • India’s Performance:
    • Notably, in three reports, released in 2017, 2018 and 2019, India ranked among the top 10 economies showing “the most notable improvement”.
      • Of the 79 positions in the Bank’s Doing Business rankings that India gained between 2014 and 2019, 67 rank improvements happened 2017 onwards, with the biggest 30-rank jump happening in the Doing Business 2018 report, released in October 2017.
    • The latest report, published in October 2019, placed India at 63rd in Doing Business, compared with 77th in 2018 and 100 in 2017.
      • India, along with other top improvers, had implemented 59 regulatory reforms in 2018-19, accounting for a fifth of all reforms recorded worldwide.
      • During 2018-19, India had implemented reforms across parameters such as ‘starting a business’, ‘dealing with construction permits’, ‘trading across borders’, and ‘resolving insolvency’. The government’s goal was to be among the top 50 economies by 2020.
    • The scores for India used to be based on coverage of just two cities, with Mumbai carrying a weight of 47% and Delhi a weight of 53%.
  • The World Bank would discontinue the practice of issuing ‘Doing Business report’ following an investigation reported “data irregularities” in its 2018 and 2020 editions (released in 2017 and 2019, respectively) and possible “ethical matters” involving bank staff.
    • It will be working on a new approach to assessing the business and investment climate.

Q. Consider the following statements:

  1. New Development Bank has been set up by APEC.
  2. The headquarters of New Development Bank is in Shanghai.

Which of the statements given above is/ are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (b) 2 only

New Development Bank:
  • New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a multilateral development bank established by the BRICS countries (Brazil, Russia, India, China and South Africa).
  • Objective: Financing infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.
  • The idea of setting up NDB was first conceived in 2012 during BRICS Summit in New Delhi, India. The Bank formally came into existence as a legal entity in 2015.
  • Headquarters: Shanghai, China
  • The first regional office of the NDB was setup in Johannesburg, South Africa. The second regional office was established in 2019 in São Paulo, Brazil, followed by Moscow, Russia.
  • Capital: The Bank has an initial authorized capital of 100 billion dollars and an initial subscribed capital of 50 billion dollars.
  • Membership in NDB is open to any member of the United Nations.
  • Governance Structure:
    • The Bank is governed by a Board of Governors made up of the finance ministers of the five BRICS countries, and a Board of Directors.
    • Voting power within the Board is based on each country’s shares in the bank.
    • While new members can join the NDB, the five BRICS countries will retain a minimum of 55% of total shares.
    • The NDB’s management includes a presidency which rotates among BRICS members, and four vice presidents who are selected from the remaining BRICS countries.
Asia-Pacific Economic Cooperation (APEC)
  • The Asia-Pacific Economic Cooperation is a regional economic forum and was formed in 1989.
  • Aim of the grouping – “leverage the growing interdependence of the Asia-Pacific and create greater prosperity for the people of the region through regional economic integration”.
  • The focus of APEC has been on trade and economic issues and hence, it terms the countries as “economies”.
  • It has been operating on the basis of non-binding commitments with decisions taken through commitments and consensus undertaken on a voluntary basis.
  • Member Countries:
    • Currently, APEC has 21 members.
    • The criterion for membership, however, is that each member must be an independent economic entity, rather than a sovereign state.
    • The grouping’s current members are Australia, Brunei, Hong Kong, New Zealand, Papua New Guinea, the Philippines, Indonesia, China, Japan, South Korea, Russia, Canada, the United States, Mexico, Peru, Chile, Malaysia, Vietnam, Singapore, Thailand and Taiwan.
  • Significance of APEC:
    • Since its formation, the grouping championed the lowering of trade tariffs, free trade, and economic liberalisation.
    • As per the US State Department, during its first five years of operation, APEC established its core objectives.
    • In the Seoul Declaration (1991), APEC member economies proclaimed the creation of a liberalised free trade area around the Pacific Rim as the principal objective of the organisation.
    • APEC accounts for nearly 62 per cent of global GDP and nearly half of global trade.
  • India’s Willingness to Join the APEC Grouping:
    • India, which presently has ‘observer’ status, has been very keen to join the economic grouping as a full member.
      • India has expressed interest in joining APEC, and made a formal request in 1991.
      • The request to join was based on India’s geographical location, the potential size of the economy, and degree of trade interaction with the Asia-Pacific.
    • India Needs APEC because
      • Strength of the grouping – The grouping represents more than a third of the world population, 47% of global trade and 60% of world GDP.
      • Aspiration of India – India aspires to become a $5 trillion economy and requires $1 trillion for investment in infrastructure.
        • Outside the west Europe, most of the capital surplus nations are in Asia Pacific which can quench India’s thirst for investment.
      • Natural Corollary to “Act East” Policy – Indian has already become a member of SCO. Joining APEC is a natural corollary to Act East Policy of India.
  • Why is India not a Part of the APEC Grouping?
    • Although many members have been in favour of the inclusion of India, some opposed the idea citing the economic reforms which took place in the country and claiming that it has ‘protectionist instincts’.
      • APEC’s guiding motive was to resist protectionist policies by individual member states, and the promotion of trade liberalisation and economic cooperation within the affiliated Asia-Pacific economies.
      • By that description, India did not seem to fit in.
    • The main impediment, apparently, has been the opposition of some participants who have held India’s record on economic reforms and WTO engagement to be unsatisfactory and unworthy of meriting inclusion as a member in the grouping.
    • Another reason for not making India part of the grouping was a membership freeze which came into force in 1997.  However, it was not extended in 2012.
    • There has been a renewed push to grant membership status to India.
    • A majority of members now believe that India must be brought into the fold for it has shown progress in reforming and liberalising its economy.
    • Granting India membership status may also act as a catalyst for trade reform among emerging economies.
    • Moreover, India’s maritime strength and strong strategic relations with the region’s major powers, member states point out, could be used to bring strategic balance within the grouping.

Q. With reference to the International Monetary and Financial Committee (IMFC), consider the following statements:

  1. IMFC discusses matters of concern affecting the global economy, and advises the International Monetary Fund (IMF) on the direction of its work.
  2. The World Bank participates as observer in IMFC’s meetings.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

International Monetary and Financial Committee (IMFC):
  • The International Monetary and Financial Committee (IMFC) is responsible for advising and reporting to the IMF Board of Governors as it manages and shapes the international monetary and financial system.
    • The IMF Board of Governors is advised by two ministerial committees, the International Monetary and Financial Committee (IMFC) and the Development Committee.
  • Composition: The IMFC has 24 members, drawn from the pool of 190 governors. Its structure mirrors that of the Executive Board and its 24 constituencies. As such, the IMFC represents all the member countries of the Fund.
    • It operates on consensus, including on the selection of its chairman.
  • A number of international institutions, including the World Bank, participate as observers in the IMFC’s meetings.
  • Working: The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discusses matters of common concern affecting the global economy and also advises the IMF on the direction its work.
  • The Development Committee:
    • It is a joint committee, tasked with advising the Boards of Governors of the IMF and the World Bank on issues related to economic development in emerging and developing countries.
    • The committee has 24 members (usually ministers of finance or development).
    • It represents the full membership of the IMF and the World Bank and mainly serves as a forum for building intergovernmental consensus on critical development issues.

Q. ‘Global Financial Stability Report’ is prepared by the

(a) European Central Bank

(b) International Monetary Fund

(c) International Bank for Reconstruction and Development

(d) Organization for Economic Cooperation and Development

Answer: (b) International Monetary Fund

Notes:
  • The Global Financial Stability Report (GFSR) is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging-market financing.
  • The Global Financial Stability Report provides an assessment of the global financial system and markets, and addresses emerging market financing in a global context.
  • It focuses on current market conditions, highlighting systemic issues that could pose a risk to financial stability and sustained market access by emerging market borrowers.
  • The Report draws out the financial ramifications of economic imbalances highlighted by the IMF’s World Economic Outlook. It contains, as special features, analytical chapters or essays on structural or systemic issues relevant to international financial stability.
  • It is released twice per year, in April and October.

Q. Which of the following best describes the term ‘import cover’, sometimes seen in the news?

(a) It is the ratio of value of imports to the Gross Domestic Product of a country

(b) It is the total value of imports of a country in a year

(c) It is the ratio between the value of exports and that of imports between two countries

(d) It is the number of months of imports that could be paid for by a country’s international reserves

Answer: (d) It is the number of months of imports that could be paid for by a country’s international reserves

Notes:
  • Import Cover meaning corresponds to measures the number of months of imports that can be covered with foreign exchange reserves available with the country’s central bank.
  • The import cover in India is an important indicator of the country’s external trade stability and its ability to meet its import obligations.
  • A higher import cover suggests a stronger position to manage potential fluctuations in imports or external shocks, while a lower import cover indicates a potential vulnerability in managing import requirements. 
  • Since India is a net importer rather than a net exporter, the Forex reserve is responsible for influencing the import cover of the Indian Economy.
  • The main reasons which influence the Import cover of the Indian Economy are:
    • Forex reserves
    • Depreciating/ Appreciating the value of the Indian Rupee in comparison to the US Dollar.
    • US Fed Rates
    • Inflow or Outflow of Foreign Institutional Investments
India Foreign Exchange Reserves

Q. With reference to ‘Financial Stability and Development Council’, consider the following statements:

  1. It is an organ of NITI Aayog.
  2. It is headed by the Union Finance Minister
  3. It monitors macro-prudential supervision of the economy.

Which of the statements given above is/ are correct?

(a) 1 and 2 only
(b) 3 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: (c) 2 and 3 only

Financial Stability and Development Council:
  • It is a non-statutory apex council under the Ministry of Finance constituted by the Executive Order in 2010.
    • The Raghuram Rajan committee (2008) on financial sector reforms first proposed the creation of FSDC.
  • Objective: 
    • Strengthening and institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.
  • Composition:
    • It is chaired by the Finance Minister and its members include the heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA), Finance Secretary, Secretary of Department of Economic Affairs (DEA), Secretary of Department of Financial Services (DFS), and Chief Economic Adviser.
      • In 2018, the government reconstituted FSDC to include the Minister of State responsible for the Department of Economic Affairs (DEA), Secretary of Department of Electronics and Information Technology, Chairperson of the Insolvency and Bankruptcy Board of India (IBBI) and the Revenue Secretary.
    • The Council can invite experts to its meeting if required.
  • Functions:
    • To strengthen and institutionalize the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.
    • To monitor macro-prudential supervision of the economy. It assesses the functioning of large financial conglomerates.
  • Sub-committee of FSDC:
    • A sub-committee of FSDC has also been set up under the chairmanship of Governor RBI.
    • It discusses and decides on a range of issues relating to financial sector development and stability, including substantive issues relating to inter-regulatory coordination.

Q. ‘The establishment of ‘Payment Banks’ is being allowed in India to promote financial inclusion. Which of the following statements is/are correct in this context?

  1. Mobile telephone companies and supermarket chains that are owned and controlled by residents are eligible to be promoters of Payment Banks.
  2. Payment Banks can issue both credit cards and debit cards.
  3. Payment Banks cannot undertake lending activities.

Select the correct answer using the code given below

(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 only
(d) 1, 2 and 3

Answer: (b) 1 and 3 only

Payment Banks:
  • A payments bank is like any other bank but operates on a smaller scale without involving any credit risk. 
  • It was set up based on the recommendations of the Nachiket Mor Committee.
  • Objective: To advance financial inclusion by offering banking and financial services to the unbanked and underbanked areas, helping the migrant labour force, low-income households, small entrepreneurs, etc.
  • It is registeredas a public limited company under the Companies Act 2013 and licensed under Section 22 of the Banking Regulation Act 1949.
  • It is governed by a host of legislation, such as the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, etc.
  • They need to maintain a Cash Reserve Ratio (CRR).
  • Features:
    • They are differentiated, and not universal banks.
    • These operate on a smaller scale.
    • The minimum paid-up equity capital for payments banks shall be Rs. 100 crores.
    • The minimum initial contribution of the promoter to the Payment Bank to the paid-up equity capital shall be at least 40% for the first five years from the commencement of its business.
  • Activities that can be performed:
    • It can take deposits up to Rs. 2,00,000. It can accept demand deposits in the form of savings and current accounts.
    • The money received as deposits can be invested in secure government securities only in the form of Statutory Liquidity Ratio (SLR). This must amount to 75% of the demand deposit balance.
    • The remaining 25% is to be placed as time deposits with other scheduled commercial banks.
    • It can offer remittance services, mobile payments/transfers/purchases, and other banking services like ATM/debit cards, net banking, and third-party fund transfers.
    • It can become a banking correspondent (BC) of another bank for credit and other services which it cannot offer.
  • Activities that can not be performed:
    • It cannot issue loans and credit cards.
    • It cannot accept time deposits or NRI deposits.
    • It cannot set up subsidiaries to undertake non-banking financial activities.
  • Other Important Provisions:
    • Capital requirement: The minimum paid-up capital for payments bank is Rs 100 crore.
    • Promoter’s contribution: Minimum initial contribution to the paid-up equity capital shall at least be 40% for the first five years from the commencement of its business.
    • Foreign shareholding: The foreign shareholding in the payments bank would be as per the Foreign Direct Investment (FDI) policy for private sector banks as amended from time to time.
Important Terms
  • Promoter: A person involved in setting up and funding a new company.
  • Credit Risk: Risk of loss or default which arises from the debtor being unlikely to repay the loan amount.
  • Paid-up Capital: Amount of money for which shares of the Company were issued to the shareholders and payment was made by the shareholders.

Q. What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?

  1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.
  2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

Notes:
  • MCLR, which stands for Marginal Cost of Funds based Lending Rate, is a fixed Internal Reference Rate given by the Reserve Bank of India (RBI) for banks under its jurisdiction.
  • This interest rate serves as the minimum lending rate for all banking and non-banking institutions.
  • MCLR is the minimum lending rate below which a bank is not permitted to lend.
  • It is aimed at facilitating the calculation of the minimal interest rate for various types of loans that banks offer.
  • The Reserve Bank of India (RBI) introduced the MCLR methodology for fixing interest rates on April 1, 2016, in order to enhance the effectiveness of monetary policy transmission as well as increase transparency in the rate of interest setting procedure. 
  • It replaced the base rate structure, which had been in place since July 2010.
  • How is MCLR calculated?
    • MCLR is determined internally by the bank depending on the period left for the repayment of a loan.
    • MCLR is closely linked to the actual deposit rates and is calculated based on four components:
      • the marginal cost of funds
      • negative carry on account of cash reserve ratio
      • operating costs
      • tenor premium.
  • Under the MCLR regime, banks are free to offer all categories of loans at fixed or floating interest rates.
  • The actual lending rates for loans of different categories and tenors are determined by adding the components of spread to MCLR.
  • Therefore, the bank cannot lend at a rate lower than the MCLR of a particular maturity for all loans linked to that benchmark.
  • Banks review and publish MCLRs of different maturities, every month. 
  • Certain loan rates, like those of fixed-rate loans with tenors above three years and special loan schemes offered by the government, are not linked to MCLR.
Difference between MCLR and Base rate
  • MCLR is an advanced version of the base rate.
  • The base rate is the minimum rate of interest set by the RBI; no financial institution can lend at an interest rate below the base rate.
  • MCLR is an internal benchmarking system applied by a financial institution, under which they can set their own lending rates considering a spread factor.
  • The base rate is based on the average cost of funds, but the MCLR is based on the marginal or incremental cost of money.
  • The base rate does not get impacted by the revision of RBI’s repo rate, while MCLR gets impacted as and when RBI revises the repo rate.
  • Usually, the minimum rate of return or profit margin is taken into consideration while deriving the base rate. While determining the MCLR, the tenor premium is taken into consideration.

Q. What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme”?

  1. To bring the idle gold lying with Indian households into the economy
  2. To promote FDI in the gold and jewellery sector
  3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c) 1 and 3 only

Notes:
  • Sovereign Gold Bond Scheme and Gold Monetization Scheme were launched by the Government in 2015.
  • The main objective of schemes like ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’ was to mobilize the gold held by households and institutions in the country to put this gold into productive use and in the long run to reduce the current account deficit by reducing the country’s reliance on imports of gold to meet the domestic demand.
Sovereign Gold Bond (SGB) Scheme
  • SGBs are government securities denominated in grams of gold.
  • The SGB Scheme was first launched by the Government of India (GOI) on October 30, 2015. 
  • They are substitutes for holding physical gold. Investors have to pay the issue price, and the bonds will be redeemed upon maturity.
  • The bond is issued by Reserve Bank on behalf of the GOI.
  • Who is eligible to invest in the SGBs?
    • The bonds will be restricted for sale to resident Indian entities, including individuals (in their capacity as individuals, or on behalf of minor child, or jointly with any other individual), Hindu Undivided Family (HUF), Trusts, Universities and Charitable Institutions.
  • What are the minimum and maximum limits for investment?
    • The bonds are issued in denominations of one gram of gold and in multiples thereof.
    • The minimum investment in the bond shall be one gram, with a maximum subscription limit of 4 kg for individuals, 4 kg for HUFs, and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year.
    • In case of joint holding, the investment limit of 4 KG will be applied to the first applicant only.
  • Tenor:
    • The tenor of the bond will be for a period of 8 years, with an exit option in the 5th, 6th, and 7th years, to be exercised on the interest payment dates.
  • Who are the authorized agencies selling the SGBs?
    • Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL), and the authorised stock exchanges either directly or through their agents.
  • Other Features:
    • Payment for the Bonds will be through cash payment (up to a maximum of Rs. 20,000/-), or demand draft, or cheque, or electronic banking.
    • Investors are assured of the market value of gold at the time of maturity and periodical interest.
    • These securities are eligible to be used as collateral for loans from banks, financial Institutions, and Non-Banking Financial Companies (NBFCs).
    • Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.
    • The bonds can also be sold and transferred as per the provisions of Government Securities Act, 2006.
    • Interest on the bonds will be taxable as per the provisions of the Income-tax Act, 1961.
    • The capital gains tax arising on the redemption of SGB to an individual has been exempted. 

Q. Which of the following is/are included in the capital budget of the Government of India?

  1. Expenditure on acquisition of assets like roads, buildings, machinery, etc,
  2. Loans received from foreign governments
  3. Loans and advances granted to the States and Union Territories

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (d) 1, 2 and 3

Capital Budget:
  • A capital Budget is the set of payments that create long-term assets in the economy and the receipts that are raised by the government with or without liabilities. 
  • Capital receipts and expenditures are included in the capital budget. It also includes transactions from the Public Account. 
    • Capital receipts are loans raised from the public (also known as market loans), borrowings from the Reserve Bank and other parties through the sale of Treasury bills, loans obtained from foreign bodies and authorities, and recoveries of loans granted by the Central government to state and Union Territory governments and other parties are all examples of capital receipts.
    • Capital expenditures include payments on assets like land, buildings, machinery, and equipment, as well as investments in shares, loans, and advances made by the federal government to state and union territory governments, government businesses, corporations, and other parties.
Classification of Government Receipts
Capital Expenditure and Revenue Expenditure

Q. Which one of the following is a purpose of ‘UDAY’, a scheme of the Government?

(a) Providing technical and financial assistance to start-up entre-preneurs in the field of renewable sources of energy

(b) Providing electricity to every household iv the country by 2018

(c) Replacing the coal-based power plants with natural gas, nuclear, solar, wind and tidal power plants over a period of time.

(d) Providing for financial turnaround and revival of power distribution companies

Answer: (d) Providing for financial turnaround and revival of power distribution companies

Ujwal DISCOM Assurance Yojana:
  • In 2015, the Government of India (Ministry of Power) launched UDAY Scheme to aid operational and financial turnaround of Power Distribution Companies (DISCOMs) owned by any state.
  • UDAY is basically a debt restructuring plan for DISCOMs (to improve their operational efficiency) and was kept optional for states.
    • Joining states to undertake 75% debts of their respective DISCOMs, while the remaining 25% debts will be issued to DISCOMs in the form of bonds.
    • These states will receive additional priority funding under numerous schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS).
  • This scheme was established with a vision to provide affordable and accessible 24×7 power to all.
  • It also aims to provide a solution for revenue-side efficiency and cost-side efficiency and envisages reform measures in the following sectors – generation, transmission, distribution, coal and energy efficiency.
  • Initially, the scheme was targeted for four years until 2019, providing a revival package for electricity distribution companies.
  • However, after understanding the impact and prospect of this scheme, the government launched ‘UDAY 2.0’ under the Union Budget 2020-21.
  • Key Objectives of the UDAY Scheme:
    • Reduce the aggregate technical & commercial (AT&C) loss (from ~22% to 15%) by 2018-19.
    • Improve operational efficiency via ensuring compulsory smart metering, upgrading transformers and meters.
    • Adopt energy efficiency measures such as initiate promotion of energy-efficient LED bulbs, etc.
    • Reduce power costs, interest burden and power losses in the distribution sector.
    • Encourage states to actively participate in the scheme by providing incentives to the performing state.
    • In addition, the following advantages will be provided:
      • Increased supply of domestic coal
      • Rationalisation of coal prices
      • Faster completion of interstate transmission lines
      • Power purchase through transparent competitive bidding, etc.

Q. With reference to ‘Stand Up India Scheme’, which of the following statements is/are correct?

  1. Its purpose is to promote entrepreneurship among SC/ST and women entrepreneurs.
  2. It provides for refinance through SIDBI,

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

Stand-Up India Scheme:
  • Stand up India Scheme was launched by Ministry of Finance on 5th April 2016 to promote entrepreneurship at grassroot level focusing on economic empowerment and job creation.
  • This scheme has been extended up to the year 2025.
  • Purpose:
    • Promote entrepreneurship amongst women, Scheduled Caste (SC) and Scheduled Tribe (ST) category.
    • Provide loans for greenfield enterprises in manufacturing, services or the trading sector and activities allied to agriculture.
    • Facilitate bank loans between Rs.10 lakh and Rs.100 lakh to at least one SC/ST borrower and at least one-woman borrower per bank branch of Scheduled Commercial Banks.
  • Facilitates Bank Loans:
    • The scheme aims to encourage all bank branches in extending loans. The desiring applicants can apply under the scheme:
      • Directly at the branch or,
      • Through Stand-Up India Portal (www.standupmitra.in) or,
      • Through the Lead District Manager (LDM).
  • Eligibility for a Loan:
    • SC/ST and/or women entrepreneurs, above 18 years of age.
    • Loans under the scheme are available for only green field projects. Green field signifies, in this context, the first-time venture of the beneficiary in manufacturing, services or the trading sector and activities allied to agriculture.
    • In case of non-individual enterprises, 51% of the shareholding and controlling stake should be held by either SC/ST and/or Women Entrepreneur.
    • Borrowers should not be in default to any bank/financial institution.
    • The Scheme envisages ‘up to 15%’ margin money which can be provided in convergence with eligible Central/State schemes.
      • In any case, the borrower shall be required to bring in a minimum of 10 % of the project cost as own contribution.

Q. ‘SWAYAM’, an initiative of the Government of India, aims at

(a) promoting the Self Help Groups in rural areas

(b) providing financial and technical assistance to young start-up entrepreneurs

(c) promoting the education and health of adolescent girls

(d) providing affordable and quality education to the citizens for free

Answer: (d) providing affordable and quality education to the citizens for free

SWAYAM:
  • Study Webs of Active Learning for Young Aspiring Minds (SWAYAM), was launched on July 9, 2017 by the Ministry of Human Resource Development to provide one integrated platform and portal for online courses.
  • This covers all higher education subjects and skill sector courses.
  • The objective is to ensure that every student in the country has access to the best quality higher education at the affordable cost.
  • Academicians from hundreds of institutions throughout the country are involved in developing & delivering Massive open online courses (MOOCs) through SWAYAM in almost all disciplines from senior schooling to Post Graduation.
  • SWAYAM Plus Platform:
    • Aligned with NEP 2020, SWAYAM Plus now offers industry-relevant courses to boost employability, with features like multilingual content, AI guidance, credit recognition, and pathways to employment, developed in collaboration with companies like L&T, Microsoft, CISCO, and others.
      • SWAYAM Plus primarily focuses on achieving the following:
        • Creating an ecosystem that supports professional and career development for learners, course providers, industry, academia, and strategic partners.
        • Implementing a system that acknowledges high-quality certifications and courses from top industry and academic partners.
        • Reaching a broad learner base nationwide, especially in tier 2 and 3 towns and rural areas, by providing employment-focused courses in various disciplines with vernacular language resources.
SWAYAM Prabha
  • It is an initiative of the Ministry of Human Resources Development to provide 32 High Quality Educational Channels through DTH across the length and breadth of the country on 24X7 basis.
  • It has curriculum-based course content covering diverse disciplines.
  • This is primarily aimed at making quality learning resources accessible to remote areas where internet availability is still a challenge.
  • The DTH channels are using the GSAT-15 satellite for programme telecasts.

Q. Pradhan Mantri MUDRA Yojana is aimed at

(a) bringing the small entrepreneurs into formal financial system

(b) providing loans to poor farmers for cultivating particular crops

(c) providing pensions to old and destitute persons

(d) funding the voluntary organizations involved in the promotion of skill development and employment generation

Answer: (a) bringing the small entrepreneurs into formal financial system

Pradhan Mantri MUDRA Yojana:
  • PMMY was launched by the Government of India in 2015.
  • The PMMY provides collateral-free institutional loans up to Rs. 10 lakhs for small business enterprises.
  • Mudra schemes are designed to bring enterprises into the formal financial system or to “fund the unfunded”.
  • Funding Provision:
    • It is provided by Member Lending Institutions (MLIs) i.e. Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).
  • Types:
    • The loan can be used for income-generating activities in the manufacturing, trading, services sector, and agriculture.
    • There are three loan products under PMMY:
      • Shishu (loans up to Rs. 50,000)
      • Kishore (loans between Rs. 50,000 and Rs. 5 lakh)
      • Tarun (loans between Rs. 5 lakh and Rs. 10 lakh).
  • Eligibility: 
    • Any Indian citizen who has a business plan for a non-farm sector income generating activity such as manufacturing, processing, trading, or the service sector and whose credit need is less than Rs 10 lakh can approach either a bank, MFI, or NBFC for availing of Micro Units Development & Refinance Agency Ltd. (MUDRA) loans under PMMY.
  • There is no subsidy for the loan given under PMMY. However, if the loan proposal is linked to some Government scheme, wherein the Government is providing capital subsidies, it will be eligible under PMMY also.
  • Steps Taken for the Improvement of the Scheme:
    • Provision for online applications through udyamimitra portal.
    • Some Public Sector Banks (PSBs) have put end-to-end digital lending for automated sanctions under PMMY.
    • Intensive publicity campaigns by PSBs and Mudra Ltd. for increased visibility of the scheme amongst the stakeholders.
    • Nomination of Mudra Nodal Officers in PSBs.

Q. Regarding ‘Atal Pension Yojana’, which of the following statements is/are correct?

  1. It is a minimum guaranteed pension scheme mainly targeted at unorganized sector workers.
  2. Only one member of a family can join the scheme.
  3. Same amount of pension is guaranteed for the spouse for life after subscriber’s death.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c) 1 and 3 only

Atal Pension Yojana (APY):
  • Atal Pension Yojana (APY) addresses the old age income security of the working poor and the longevity risks among the workers in unorganised sector.
  • It encourages the workers in unorganised sector to voluntarily save for their retirement.
  • The Government had launched the scheme with effect from 1st June, 2015.
  • The scheme replaces the Swavalamban Yojana / NPS Lite scheme.
  • Features:
    • Under the scheme, a subscriber would receive a minimum guaranteed pension of Rs 1,000 to Rs 5,000 per month, depending upon his contribution, from the age of 60 years.
    • The same pension would be paid to the spouse of the subscriber and on the demise of both the subscriber and the spouse, the accumulated pension wealth is returned to the nominee.
    • The Central Government would also co-contribute 50% of the total contribution or Rs. 1000 per annum, whichever is lower, to each eligible subscriber account, for a period of 5 years, that is, from 2015-16 to 2019-20, to those who join the NPS before 31st December, 2015 and who are not members of any statutory social security scheme and who are not Income Tax payers.
  • Benefits of APY
    • Fixed pension for the subscribers ranging between Rs.1000 to Rs. 5000, if s/he joins and contributes between the age of 18 years and 40 years.
    • The contribution levels would vary and would be low if subscriber joins early and increase if s/he joins late.
    • The same pension is payable to Spouse after death of Subscriber.
    • Return of indicative pension wealth to nominees after death of spouse.
    • Contributions to the Atal Pension Yojana (APY) is eligible for tax benefits similar to the National Pension System (NPS).
    • The tax benefits include the additional deduction of Rs 50,000 under section 80CCD(1).
  • Eligibility for APY
    • Any citizen of India can join the APY scheme. The age of the subscriber should be between 18 and 40 years.
    • Atal Pension Yojana (APY) is open to all bank account holders who are not members of any statutory social security scheme.
    • Any individual who is eligible to receive benefits under the APY will have to furnish proof of possession of Aadhaar number or undergo enrolment under Aadhaar authentication.
    • An APY subscriber will have to get the Aadhaar number recorded in his or her APY pension account and also in his/ her savings account where the periodic pension contribution instalments are debited and government co-contribution is to be credited.
  • Age of joining and contribution period
    • The minimum age of joining APY is 18 years and maximum age is 40 years.
    • Therefore, minimum period of contribution by the subscriber under APY would be 20 years or more.
  • Focus of APY
    • Mainly targeted at unorganised sector workers.
  • Enrollment and Subscriber Payment
    • All bank account holders under the eligible category may join APY with auto-debit facility to accounts, leading to reduction in contribution collection charges.
  • Enrollment agencies
    • All Points of Presence (Service Providers) and Aggregators under Swavalamban Scheme would enroll subscribers through architecture of National Pension System.
  • Operational Framework of APY
    • It is Government of India Scheme, which is administered by the Pension Fund Regulatory and Development Authority.
    • The Institutional Architecture of NPS would be utilised to enroll subscribers under APY.
  • Funding of APY
    • Government would provide
    • fixed pension guarantee for the subscribers;
    • Under the APY, the Central Government’s co-contribution of 50% of the subscriber’s contribution upto Rs. 1000 per annum, was available to each eligible subscriber, for a period of 5 years, i.e. from 2015-16 to 2019-20, who join APY before 31st March, 2016 and who is not a beneficiary of any social security scheme and is not an income tax payer.
    • Government would also reimburse the promotional and development activities including incentive to the contribution collection agencies to encourage people to join the APY.
    • Age of Joining, Contribution Levels, Fixed Monthly Pension and Return of Corpus to the nominee of subscribers
    • The Table of contribution levels, fixed monthly pension to subscribers and his spouse and return of corpus to nominees of subscribers and the contribution period is given below.
    • For example, to get a fixed monthly pension between Rs. 1,000 per month and Rs. 5,000 per month, the subscriber has to contribute on monthly basis between Rs. 42 and Rs. 210, if he joins at the age of 18 years.
    • For the same fixed pension levels, the contribution would range between Rs. 291 and Rs. 1,454, if the subscriber joins at the age of 40 years.

Q. The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of

(a) mining operation by multinational companies in resource-rich but backward areas

(b) curbing of the tax evasion by multinational companies

(c) exploitation of genetic resources of a country by multinational companies

(d) lack of consideration of environmental planning and developmental costs in the implementation of projects

Answer: (b) curbing of the tax evasion by multinational companies

Base erosion and profit shifting:
  • Base erosion and profit shifting refers to the practice of businesses moving their earnings to other tax jurisdictions where the tax rates are lower.
  • BEPS is a method of tax evasion employed by several multinational firms to artificially move earnings to low- or no-tax jurisdictions.
  • The integrity and credibility of tax systems are impacted because multinational corporations can use BEPS to gain a competitive advantage over domestic firms. It has weakened India’s tax base in the process.
    • For example, it involves the transfer of earnings from nations with high tax burdens (such the United States and European nations) to nations with low (or no) tax burdens (so-called tax havens), like Bahamas & Cayman Islands.
  • To address this, the OECD and G20 nations created the BEPS Action Plan in 2013.
  • Steps taken by government:
    • International Level:
      • India has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”) to  swiftly implement a series of tax treaty measures to update international tax rules and lessen the opportunity for tax avoidance by multinational enterprises. The MLI entered into force on 1st July 2018.
        • The convention will modify India’s treaties to curb revenue loss through treaty abuse and BEPS strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
      • India has also signed the Inter-Government Agreement (IGA) on Foreign Account Tax Compliance Act (FATCA) with United States.
      • India also has become a signatory of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in 2015.
      • India and the US signed an agreement for exchange of country-by-country report to enable the two countries to automatically exchange the reports filed by the ultimate parent entities of the multinational enterprises in the respective jurisdictions pertaining to the years commencing on or after January 1, 2016.
    • National level:
      • In Union Budget 2016 an ‘equalisation levy’ of 6 per cent on payments exceeding over Rs 1 lakh to online ad services from non-resident entities was introduced. Prominent companies affected would be new economy multinationals with Indian subsidiaries, like Facebook and Google.
      • India is the first country to impose such a levy, post the OECD action plans.
      • A tax panel has recommended expanding the ambit of this levy to cover a wide gamut of transactions including online marketing, cloud computing, website designing, hosting and maintenance, platforms for sale of goods and services, and online use of or download of software and applications.
      • India introduced core elements of the Country-by-Country reporting requirement in the Indian Income Tax Act, 196 through Finance Act 2016, effective from 1 April 2016.

Q. There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit?

  1. Reducing revenue expenditure
  2. Introducing new welfare schemes
  3. Rationalizing subsidies
  4. Reducing import duty

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4

Answer: (c) 1 and 3 only

Budget Deficit:
  • A budget deficit occurs when expenditures surpass revenue and then up impacting the financial health of a country. 
  • Certain unanticipated events and policies may cause budget deficits.
  • Countries can counter budget deficits by raising taxes or cutting spending.
Types of deficit
  • Revenue Deficit: 
    • It refers to the excess of total revenue expenditure of the government over its total revenue receipts.
      • Revenue deficit = Total Revenue expenditure – Total Revenue receipts.
      • OR Revenue deficit = Total Revenue expenditure – (Tax Revenue + Non-Tax Revenue)
  • Fiscal Deficit: 
    • Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year.
      • Fiscal deficit = Total budget expenditure – Total budget receipts excluding borrowings
      • OR Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts excluding borrowings)
    • Fiscal deficit shows the borrowing requirements of the govt. during the budget year. Fiscal deficit reflects the borrowing requirements of the govt. for financing the expenditure including interest payments.
    • Fiscal deficit = Revenue expenditure + capital expenditure – Revenue receipts – capital Receipts excluding borrowings
    • OR Fiscal deficit = Revenue expenditure + capital expenditure – Tax Revenue – Non-Tax Revenue – recovery of loans – disinvestment OR Fiscal deficit = Total borrowing requirement of the government
    • Fiscal deficit indicates the additional number of financial resources needed to meet government expenditure.
    • It is an indicator of the increase in future liabilities of the government on interest payment and loan repayment. The government has to pay back the borrowed amount with interest in future. Consequently, the government has to either borrow more from the people or tax people more in future to pay interest and loan amount.
  • Primary Deficit: 
    • Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings.
    • Primary deficit shows the borrowing requirements of the govt. for meeting expenditure excluding interest payment.
    • Gross Primary deficit = Fiscal deficit – Interest payments
    • Net Primary deficit = Fiscal deficit + Interest received – Interest payments. It shows the total amount that the central government needs to borrow.
Fiscal Deficit
  • Fiscal deficit refers to the shortfall in a government’s revenue when compared to its expenditure.
  • When a government’s expenditure exceeds its revenues, the government will have to borrow money or sell assets to fund the deficit.
  • Taxes are the most important source of revenue for any government. In 2024-25, the government’s tax receipts are expected to be Rs 26.02 lakh crore while its total revenue is estimated to be Rs 30.8 lakh crore.
  • When a government runs a fiscal surplus, on the other hand, its revenues exceed expenditure.
    • It is, however, quite rare for governments to run a surplus. Most governments today focus on keeping the fiscal deficit under control rather than on generating a fiscal surplus or on balancing the budget.
Why is it Important to Worry About Fiscal Deficit?
  • Impact on Inflation:
    • There is a strong direct relationship between the government’s fiscal deficit and Inflation in the country.
    • When a country’s government runs a persistently high fiscal deficit, this can eventually lead to higher inflation as the government will be forced to use fresh money issued by the central bank to fund its fiscal deficit.
      • The fiscal deficit in 2020 reached a high of 9.17% of GDP during the pandemic. It has since decreased significantly and is expected to reach 5.8% in 2023-24.
  • Fiscal Discipline Improves Ratings:
    • A lower fiscal deficit indicates better government fiscal discipline. This can lead to higher ratings for Indian government bonds.
    • When the government relies more on tax revenues and borrows less, it boosts lender confidence and lowers borrowing costs.
  • Management of Public Debt:
    • A high fiscal deficit can also adversely affect the ability of the government to manage its overall public debt.
    • In December 2023, the IMF warned that India’s public debt could rise to more than 100% of GDP in the medium term due to risks.
    • A lower fiscal deficit may help the government to more easily sell its bonds overseas and access cheaper credit from the international bond market.
What can be Done to Manage Fiscal Deficit and National Debt in India?
  • Fiscal Discipline and Consolidation:
    • Adhering to fiscal consolidation targets, as outlined in the FRBM Act is crucial.
    • The government should aim to gradually reduce the fiscal deficit-to-GDP ratio to ensure sustainable public finances.
    • Implementing prudent fiscal policies, including expenditure rationalisation, revenue enhancement measures, and subsidy reforms, can help in reducing the reliance on borrowing and mitigating fiscal imbalances.
  • Enhancing Revenue Mobilisation:
    • Strengthening tax administration and compliance to broaden the tax base and improve revenue collection.
    • Exploring avenues for diversifying revenue sources, such as introducing new taxes or levies on luxury goods, wealth, or environmental taxes.
  • Rationalising Expenditures:
    • Conducting a comprehensive review of government expenditures to identify inefficiencies and prioritise spending in key areas such as healthcare, education, and infrastructure.
    • Implementing measures to curb non-essential spending and subsidies, while ensuring targeted support for vulnerable populations.
  • Debt Management Strategies:
    • Developing a prudent debt management strategy to optimise borrowing costs and minimise refinancing risks.
    • Diversifying the investor base and sources of financing, including domestic and international markets, to mitigate exposure to market volatility.
  • Long-Term Structural Reforms:
    • Undertaking structural reforms aimed at improving the efficiency and competitiveness of the economy, including labour market reforms, ease of doing business initiatives, and governance reforms.
    • Addressing structural bottlenecks and challenges in sectors such as agriculture, manufacturing, and services to unleash growth potential and enhance fiscal sustainability.

Q. With reference to ‘Pradhan Mantri Fasal Bima Yojana’, consider the following statements:

  1. Under this scheme, farmers will have to pay a uniform premium of two percent for any crop they cultivate in any season of the year.
  2. This scheme covers post-harvest losses arising out of cyclones and unseasonal rains.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (b) 2 only

Pradhan Mantri Fasal Bima Yojana:
  • It was launched in 2016 and replaced all the prevailing yield insurance schemes in India. 
  • This scheme is being administered by the Department of Agriculture, Cooperation and Farmers’ Welfare under the Ministry of Agriculture, along with empanelled general insurance companies.
  • Aim: To support production in agriculture by providing affordable crop insurance to ensure comprehensive risk cover for crops of farmers against all non-preventable natural risks.
  • The scheme provides coverage for the entire cropping cycle, from pre-sowing to post-harvest and midseason adversities.
  • Objectives:
    • Providing financial support to farmers suffering crop loss/damage arising out of unforeseen events;
    • Stabilizing the income of farmers to ensure their continuance in farming;
    • Encouraging farmers to adopt innovative and modern agricultural practices;
    • Ensuring flow of credit to the agriculture sector, which will contribute to food security, crop diversification and enhancing growth and competitiveness of the agriculture sector besides protecting farmers from production risks;
  • Eligibility criteria:
    • The scheme is compulsory for loanee farmers availing Crop Loan /KCC account for notified crops.
    • The Scheme would be optional for non-loanee farmers.
  • Insurance Coverage:
    • Under this scheme, the insurance cover is limited to specific crops and agricultural risks related to crop yield.
    • The list of notified crops includes food crops (i.e., cereals, millets, and pulses), oilseeds, annual commercial crops, and annual horticultural crops.
  • General Exclusions: 
    • Losses arising out of war and nuclear risks, malicious damage and other preventable risks shall be excluded.
  • Premiums:
    • There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all Rabi crops.
    • In the case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%.
    • 95-98.5% actuarial premium is fulfilled by the state and central governments and shared on a 1:1 ratio.

Q. What is/are the purpose/purposes of ‘District Mineral Foundations’ in India?

  1. Promoting mineral exploration activities in mineral-rich districts
  2. Protecting the interests of the persons affected by mining operations
  3. Authorizing State Governments to issue licences for mineral exploration

Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (b) 2 only

District Mineral Foundation (DMF):
  • District Mineral Foundation (DMF) is a trust set up as a non-profit body under the Mines and Minerals (Development and Regulation) (MMDR) Amendment Act 2015.
  • Purpose: To work in the interest and benefits of persons and areas affected by mining-related operations in a manner as may be prescribed by the respective State Government.
  • Funding:
    • It is funded through the contributions from the holders of major or minor mineral concessions in the district, as may be prescribed by the Central or State Government.
      • The idea behind the contribution is that local mining-affected communities, mostly tribal and among the poorest in the country, also have the right to benefit from natural resources extracted from where they live.
  • Jurisdiction:
    • The operation of DMFs falls under the jurisdiction of the relevant State Government. 
    • The composition and functions of the District Mineral Foundation shall be such as may be prescribed by the State Government.
    • The fund for DMF is collected at the district level.
  • Functioning:
    • The functioning of the DMF trusts and the fund use governed by states’ DMF Rules incorporate the mandates of a central guideline, Pradhan Mantri Khanij Kshetra Kalyan Yojana (PMKKKY).
Pradhan Mantri Khanij Kshetra Kalyan Yojana (PMKKKY)
  • The Ministry of Mines launched PMKKKY in 2015 for the welfare of areas and people affected by mining-related operations, using the funds generated by DMFs.
  • Objectives:
    • to implement various developmental and welfare projects in mining-affected areas, complementing the existing ongoing schemes of the State and Central Government;
    • to minimize/mitigate the adverse impacts, during and after mining, on the environment, health, and socio-economics of people in mining districts; and
    • to ensure long-term sustainable livelihoods for the affected people in mining areas.
  • Implementation:
    • It will be implemented by the DMFs of the respective districts using the funds accruing to the DMF. The MMDR Amendment Act, 2015, mandated the setting up of DMFs in all districts in the country affected by mining related operations.
    • The Central Government has notified the rates of contribution payable by miners to the DMFs.
    • In case of all mining leases executed before 12th January, 2015 miners will have to contribute an amount equal to 30% of the royalty payable by them to the DMFs. If mining leases are granted after 12.01.2015, the rate of contribution would be 10% of the royalty payable.
  • Utilisation of Funds:
    • At least 60% of PMKKKY funds to be utilized for High priority areas such as Drinking water supply, Health care, Education, Environment preservation etc.
    • Up to 40% of the PMKKKY to be utilized for other priority areas such as- Physical infrastructure, Irrigation, Energy and Watershed Development etc.

Q. Which of the following is/are the indicator/indicators used by IFPRI to compute the Global Hunger Index Report?

  1. Undernourishment
  2. Child stunting
  3. Child mortality

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1 and 3 only

Answer: (c) 1, 2 and 3

Global Hunger Index (GHI):
  • The Global Hunger Index (GHI) is a peer-reviewed report, published on an annual basis by Concern Worldwide and Welthungerhilfe.
    • Concern Worldwide is an international humanitarian organization dedicated to tackling poverty and suffering in the world’s poorest countries.
    • Welthungerhilfe is a private aid organization in Germany. It was established in 1962, as the German section of the “Freedom from Hunger Campaign”.
  • The GHI is a tool designed to comprehensively measure and track hunger at global, regional, and national levels, reflecting multiple dimensions of hunger over time.
    • The GHI score is calculated on a 100-point scale reflecting the severity of hunger – 0 is the best score (implies no hunger) and 100 is the worst.
  • Calculation:
    • Each country’s GHI score is calculated based on a formula that combines four indicators that together capture the multidimensional nature of hunger:
      • Undernourishment: The share of the population whose caloric intake is insufficient;
      • Child Stunting: The share of children under the age of five who have low height for their age, reflecting chronic undernutrition;
      • Child Wasting: The share of children under the age of five who have low weight for their height, reflecting acute undernutrition; and
      • Child Mortality: The share of children who die before their fifth birthday, reflecting in part the fatal mix of inadequate nutrition and unhealthy environments.
  • Indian Government Initiatives to Address Hunger:
    • Eat Right India Movement
    • POSHAN Abhiyan(National Nutrition Mission)
    • Mid-day Meal (MDM) scheme
    • Pradhan Mantri Matru Vandana Yojana
    • National Food Security Act, 2013
    • Mission Indradhanush
    • Integrated Child Development Services (ICDS) Scheme
    • PM Garib Kalyan Yojna