CURRENT AFFAIRS

Economics

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Notes

Contents

Public Debt Management Agency (PDMA)

Statutory Liquidity Ratio (SLR)

Monetary Policy Transmission

Monetary Policy Committee

PM an Dhan Yojana

Differentiated Bank Licenses

Black Money

GAAR -General Anti Avoidance Rule

P-NOTES

BUDGET - 2015

Goods and Services Tax

MAT Controversy

Tax Terrorism - An Overview

FMC Merger with SEBI

Inflation

Insurance Reforms

YUAN : Devaluation of Yuan and its implication on global and Indian economy

E-Commerce

FDI in B2C e-commerce

Technology Startups in India

Do we need big bang reforms - VIEW OF ECONOMIC SURVEY

FSLRC - Financial Sector Legislative Reforms Commission

Revised Draft of Indian Financial Code

Balance Sheet Syndrome

Bankruptcy Reforms

Trans-Pacific Partnership Agreement

MAKE IN INDIA - A critical examination An essay

Two New Gold Schemes

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Notes

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Public Debt Management Agency (PDMA)

1.

Public Debt Management Agency (PDMA) is a specialized independent

agency that manages the internal and external liabilities of the Central
Government in a holistic manner and advises on such matters in return
for a fee. In other words, PDMA is the Investment Banker or Merchant
Banker to the Government. PDMA manages the issue, reissue and trading
of Government securities, manages and advises the Central Government
on itscontingent liabilitiesand undertakes cash management for the central
government including issuing and redeeming of short term securities and
advising on its cash management.

2.

PDMA was proposed to be established in India through theFinance Bill,

2015. As a corollary of the decision to create a PDMA, the RBI or the
Central Bank in India was given the task ofinflation targetingunder
amonetary policy framework agreement.

3.

Features of PDMA as outlined in the Finance Bill, 2015 : Structure &

Administration

4.

a.

PDMA is acorporate bodyto be run on the grants or loans received

from the Central Government and from other sources as may be
prescribed by the central government.

b.

PDMA is headed by a chief executive officer (CEO) and he has

powers of only general direction and control in respect of all
administrative matters of PDMA.

c.

PDMA can set advisory councils if it wishes to do so.

d.

PDMA is empowered to create by-laws.

e.

The Board of Directors include nominee directors of the Central

Government and RBI.

f.

Being an agency of the Government, the Central Government has

the right to terminate the services of a Member of the Board even
before the expiry of her tenure on grounds of moral turpitude,
unsound mind, insolvency and for abuse of position.

g.

Legal protection is given for actions taken in good faith.

h.

PDMA is given exemption from all kinds of taxes for all its operations.

Notes

Functions:
a.

Collecting and publishing information about public debt, including

borrowings by the central government.

b.

Issue of government securities (in demat or electronic form) and

maintenance and management of the registry of holders (which would
actually be maintained by the depositories) and making payments to
them. However, the terms and conditions of Government-Securities
would be prescribed to the PDMA and hence, central government
would be liable to meet the obligations arising from the financial
transactions authorized by it and undertaken by the PDMA.

c.

Purchasing, re-issuing and trading in Government-Securities

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d.

managing contingent liabilities of the Central Government including

developing ways for its measurement, reduction in quantum and cost
of such liabilities.

e.

Advising central government on its contingent liabilities.

f.

Undertaking cash management of the central government including

acquiring information about its cash assets, predicting the future cash
requirements and issuing and redeeming such short term securities
required to meet the cash requirements etc.

g.

advising central government on management of cash assets.

5.

However, the creation of PDMA was put on hold due to the difference
of opinion on the matter and the relevant clauses were dropped from the
Finance Bill, 2015 while the latter was passed.

6.

The need for PDMA was felt due to the following reasons:
a.

PDMA is considered to be set up with theobjectiveof minimising

the cost of raising and servicingpublic debtover the long-term within
an acceptable level of risk at all times, under the general
superintendence of the central government. This will guide all of
its key functions, which include managing the public debt, cash and
contingent liabilities of Central Government, and related activities.

b.

Fragmented jurisdiction in public debt management: Before the

creation of PDMA, the central Bank or RBI used to manage the
market borrowing programmes of central and state governments. On
the other hand, external debt was managed directly by the central
Government. Establishing a debt management office would
consolidate all debt management functions in a single agency and
bring in holistic management of the internal and external liabilities.

c.

Some functions that are crucial to managing public debt were not
carried out. For instance, no agency used to undertake cash and
investment management and information relating to contingent and
other liabilities. Hence, there was no comprehensive picture of the
liabilities of the central government, which impeded informed decision
making regarding both domestic and foreign borrowing.

d.

An autonomous PDMA can be the catalyst for wider institutional

reform, including building a government securities market, and bring
in transparency about public debt.

e.

It is considered as an internationally accepted best practice that debt

management should be disaggregated from monetary policy, and taken
out of the realm of the central bank. Most advanced economies
have dedicated debt management offices. Several emerging economies,
including Brazil, Argentina, Colombia, and South Africa, have
restructured debt management in recent years and created an
independent agency for the same. The sources of these conflict of
interest in RBI managing the Government debt, as listed out in
the2008 report of the Governmentare as under:
i.

There is a severe conflict of interest between setting the short

term interest rate (i.e. the task of monetary policy) and selling
bonds for the government. If the Central Bank tries to be an

Notes

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effective debt manager, it would lean towards selling bonds at

high prices, i.e. keeping interest rates low. This leads to an
inflationary bias in monetary policy.
ii.

Notes

Where the Central Bank also regulates banks, as in India, there

is a further conflict of interest. If the Central Bank tries to do
a good job of discharging its responsibility of selling bonds, it
has an incentive to mandate that banks hold a large amount of
government paper. This bias leads to flawed banking regulation
and supervision, so as to induce banks to buy government
bonds, particularly long-dated government bonds. Having a pool
of captive buyers undermines the growth of a deep, liquid
market in government securities, with vibrant trading and
speculative price discovery. This, in turn, hampers the
development of the corporate bond market - the absence of a
benchmark sovereign yield curve makes it difficult to price
corporate bonds.

iii. If the Central Bank administers the operating systems for the
government securities markets, as the RBI currently does, this
creates another conflict, where the owner/ administrator of
these systems is also a participant in the market.

Statutory Liquidity Ratio (SLR)

View of Economic survey 2014-15 on SLR
1.

SLR requirements have traditionally been high. From 38 per cent in the
period before 1991, there was a dramatic decline to about 25 per cent at
the end of the 1990s. As of Feb 4, 2015 the minimum requirement is
21.5 per cent of total assets.

2.

Why to reduce it ?

3.

a.

Its a financial repression on banks as it forces banks to hold govt

securities.

b.

Easing SLR requirements will provide liquidity to the banks, provide

depth to the government bond market, and encourage the development
of the corporate bond market and allow banks to offload G-secs and
thus earn money which will help them to recapitalise themselves.

c.

The public debt situation has been steadily improving overall

indebtedness (center and states) has declined from over 80 percent
to 60 percent in a decade. Thus SLR can be lowered.

Suggestion

Combine the SLR and the Capital to risk weighted assets ratio
(CRAR) into one liquidity ratio set at a desirable level depending on
international norms.

About SLR
4.

Share of banks total deposits (NDTL) which it must maintain with itself
in safe and liquid assets.

5.

Examples of liquid assets

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6.

a.

Governemnt securities (bonds) Maximum is kept in this, it enables

the governemnt to borrow

b.

Cash

c.

Gold

Uses of SLR
a.

Main aim is to enable government to borrow from banks to finance

its expenditure.

b.

Acts as instrument of monetary policy (like CRR) thus can be used

to infuse/absorb liquidity.

c.

Ensures solvency of banks as banks are putting 25% of assets in safe

assets like securities etc. It is one of the reason that banks did not
fail in India due to high SLR. Also prevents panic among people or
ensures solvency of banks.

Monetary Policy Transmission

1.

Monetary transmission is a process through which changes in a central

banks monetary policy get reflected in the real economy. E.g. If RBI
reduces repo rate (rate at which it lends banks) then it would also expect
that banks in turn will reduce the interest rate it charges from customers.

2.

Now in April 2015, RBI governor expressed disappointment that monetary

transmission hasnt yet taken place. RBI governor commented that banks
are quick to hike interest rates but are slow in cutting them.

3.

Why are banks unable to cut rates? Because the cost of deposits does not
adjust immediately, given the fixed nature of deposit contracts. Also the
banking system continues to be under stress due to rising non-performing
assets (NPAs) especially in infrastructure. Thus banks are risk-averse and
reluctant in lending to these sectors. Instead of repo rate, cut CRR to
make the monetary transmission effective; to inject liquidity. Currently,
banks have to maintain four per centCRR with RBI, on which they do
not earn any interest. With competition from small savings instruments,
it is difficult to cut rates it offers depositors. Finance ministry should
review the interest it pays on small savings.

4.

Now lower interest rates are important to spur consumption as also

investment, and therefore economic growth. So banks are unlikely to match
RBIs rate cuts. In April 2012-June 2013 period, a combined cut of 325
points in repo and CRR led to a bank-base rate reduction of just 50 bps.
Clearly, more rate cuts are needed to nudge banks towards lower rates in
the coming months.

5.

So government has to lower the small savings rate. Also banks need to fix
their lending rates based on marginal cost of funds. (RBI is expected to
release guidelines for the same in Nov, 2015).

Monetary Policy Committee

At present, Under the RBI Act, 1934, RBI governor decides the policy
rates by taking into the view of technical advisory committee (appointed
by him/her from RBI ). Now Various committees (YV Reddy Committee,

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2002, FSLRC, 2013, Urjit Patel committee, 2014) have recommended the
creation of a Monetary Policy Committee to decide policy actions

Now we should have a MPC because it will bring diversity of view

leading to more informed monetary policy decision making. It will make
the monetary policy decision more contestable (at present RBIs view
prevails); Will bring more transparency and a committee appointed under
the act will ensure greater accountability; Will also involve the perspective
of the govt. concerned with growth (At present government may from
time to time give directions to the Central Bank, although it has never
done so)

But there is a debate on its composition Composition according to draft

codes (draft Indian Financial Code (IFC) by FSLRC, 2013 and revised
IFC by finance draft ofIndian Financial Code (IFC)was released on 23
July by the Finance Ministry differs. Earlier it had 7 members (4 from
RBI, 3 appointed by central govt), but now it haS 7 members (3 from
RBI, 4 appointed by central govt). Draft proposes RBI chairperson (not
governor) to head the panel. RBI governor may be redesignated as
chairperson. Earlier Decision of MPC was Earlier decision of MPC was
binding on RBI, except when RBI governor supersedes it, but according
to new code it will be binding on RBI. For veto power of RBI governor
in case of disagreement among members, earlier RBI had veto power, but
now in the event of a tie among the members of the monetary policy
committee, the Reserve Bank Chairperson will have a second and casting
vote.

Now MPC should be dominated by RBI because it requires avoidance of

conflict of interest (without having business agenda), committed full-time
and has detailed knowledge of MP nuances. Thus RBI experts. In case of
growth-inflation debate, government appointed members will be biased
towards the governments objective of growth rather than its objective of
inflation targeting. If RBI loses its power to decide interest rate then it
could have serious implications

Now what about Governors role? One group says that governor having a
veto will dilute the committee mechanism.But then the other group says
that we should give him a veto as to do a veto you have to do with so
much explanation. So it wont be misused.Also in cases of growth-inflation
debate he will take a balanced view (delivering on inflation target, keeping
of course in view the objective of growth). Thus we can have a mechanism
of MPC having 7 members three from inside the Reserve Bank and 3
from outside appointed by the government and the governor having a
casting vote. So it is not of course a veto but for all practical purposes,
it gives the governor a veto.

Notes

Monetary Policy Committee Framework

In February 2015, RBI and GOI signed a monetary policy framework

agreement under it adopted a flexible inflation targeting regime. RBI will
operate it. According to the framework, objective of monetary policy is
to primarily maintain price stability, while keeping in mind the objective
of growth.

Under this RBI will bring inflation below 6 % by January 2016 and within
4 % with a band of (+/-) 2 % for 2016-17 and all subsequent years. If
inflation is above 6% or below 2% for 3 consecutive quarters, it is deemed

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to have failed. In the case, RBI is requried to state the reasons for its
failure and remedial actions it proposes.

It was done on the recommendation of Urjit Patel committee

Arguments in favor of it are that it increases transparency; makes RBI

more accountable. In the long-term a stable inflation of 3-4% is actually
beneficial for growth predictability; businesses will be able to take more
informed decisions and be able to predict RBIs masses.

But it is opposed as how can cut in repo rate affect the prices of tomato
and onions. And share of this food inflation in CPI is 45% which is
volatile that RBI cannot control. The recent decline in inflation is due to
global fall in prices of oil/commodities, not due to RBIs action.

Also it is not desirable as post 2008 crisis many countries have stopped
targeting inflation because that took away their focus from growth. RBI
will be cautious in cutting down rates at witnessed which is required for
giving a thrust to manufacturing, employment and growth.

Thus instead of overall inflation, only corre inflation, which is not

influenced by external/volatile events, should be targeted.

Monetary Policy Statement of September 2015

Following are the key decisions announced by RBI in its monetary policy
statement on September 29, 2015 - Repo rate cut 50 basis points to 6.75
% from 7.25 %; CRR kept unchanged at 4% and ceiling on SLR securities
to be cut to 21.5% from January 9, 2015

The cut in repo rate was hailed as it will help retail customers or individuals
lower their cost of borrowing when they buy a home, automobiles,
consumer durables or other assets. This demand boost will spur economic
activity, companies will produce more goods with lower rates, as the
demand for loans picks up, the income of banks and their earnings will
be boosted. They are witnessing NPAs, thus will help them. Done in
backgound of disinflation and slowdown in china global demand has
plummeted, with Indian exports registering nine straight months of decline,
thus need to boost domestic economy.

Monetary policy transmission wasnt happening, banks were asking for

more cuts from RBI. The 50 basis points (bps) rate cut took the cumulative
reduction in policy rate to 125 bps in the first nine months of 2015. Now
banks should also lower rates. Government should also cut the small
savings rate. The cut in the repo rate is not the end of policy making.
Govt should imropve ease of doing business to persuade domestic investors
to invest, get the promised FDI; resolve the new tax issues, implement
GST.

PM JAN DHAN YOJANA

1.

Pradhan Mantri Jan Dhan Yojana (PMJDY), the biggest financial inclusion
initiative in the world, completed its First Anniversary. It was announced
by the Prime Minister Shri Narendra Modi on 15th August 2014 15
million bank accounts were opened on the first day.

2.

The target of opening one account per household was achieved by

26thJanuary 2015 barring few areas in J & K and left wing extremism
affected districts. The success of the Pradhan Mantri Jan Dhan Yojana
had shown the potential of the enormous role that the financial inclusion

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program can play in the rise of the economy.At present more than17.5
crore bank accounts have been opened under Pradhan Mantri Jan Dhan
Yojana (PMJDY) andthe people have deposited more thanRs.22,000 crore
in these accounts.
3.

4.

Notes

Milestones achieved under PMJDY a.

Jan Dhan Yojana features in Guinness Book of World

Records:Guinness World Records recognised the achievements made
under PMJDY for opening 18,096,130 accounts by Banks in a week
(from 23 to 29 August, 2014) as a part of Financial Inclusion
Campaign.

b.

Banks have opened17.74Crore accounts under PMJDY with deposit

of more than22000crores.

c.

Aadhaar has been seeded in41.82%of accounts opened under

PMJDY.

d.

To ensure universal banking access, more than1.26lakhs Bank Mitras

have been deployed with on- line devices capable of e-KYC based
account opening and interoperable payment facility.

e.

131012Mega Financial Literacy camps were organized by banks

under PMJDYin coordination with various agencies
and89876Financial Literacy counters,to spread awareness on
PMJDY, use of RuPay cards etc.147418students in2567schools/
college were imparted training on Financial literacy from September
2014 to April 2015.

f.

More than10 lakhsaccounts have been found eligible for overdraft

facility. Out of these, the facility has been availed by164962account
holders.

g.

847Claims of Life cover of Rs.30000 and389Claims ofaccident

insurance cover of Rs. 1 lakhhave been successfully paid.

h.

As on 22ndAugust, 2015,8.17crore beneficiaries have been enrolled

under the Pradhan Mantri Suraksha Bima Yojana and2.76crore have
been enrolled under Pradhan Mantri Jeevan Jyoti Bima
Yojana.6.83lakh account holders have been enrolled under Atal
Pension Yojana.

i.

Zero balance accounts in PMJDY have declined from 76%

to45.74%from September 2014 to August 2015.

Problems with Jan Dhan

a.

After the initial euphoria, banks are reluctant to open bank accounts
for the poor (due to apathy, ignorance or arrogance). Existence of
duplicate accounts (customers already having accounts asked to open
accounts); due to Aadhar being not universal, government has failed
to track duplicate accounts. Thus accounts need to be linked with
Aadhar. Lack of awareness of the program among among bank
employees, business correspondents as well as poor.

b.

Only overdraft facilities are given to customers; many households

havent received the RuPay card and accident insurance accompanying
the account.

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c.

Majority of these zero balance accounts are dormants (accounts

lying unused). Thus Banks have started closing these accounts. Zero
balance accounts in PMJDY declined from 76% to 46% from
September 2014 to July2015. Reasons - people still in poverty;
component of financial literacy havent been purused. Products havent
been designed specifically for the needs of low income households.
This target approach, of making records in a hurry should be changed.

d.

Since there was a time constraint, banks have not been able to strictly
follow the KYC (Know Your Customer) norms, thus can worsen
their NPA/stressed loans.

e.

The scheme has been criticized by many experts from the banking
sector as an effort to please voters that has created unnecessary
work-burden on the public-sector banks.

f.

As per the scheme, a very few people are eligible to get the life
insurance worth Rs. 30,000 with a validity of just five years.

g.

The claimed overdraft facility has been completely left upon the
banks. As per the government notice, only those people would get
the overdraft facility whose transaction record is satisfactory as per
the banks.

h.

The claimed accidental insurance has also proved to be a non-existing

scheme as the Rupay card holders have got no legal paper for any
such accidental insurance.

Differentiated Bank Licenses

1.

Differentiated banking model means banks undertake specific banking

activities such as retail, infrastructure financing and rural banking etc,
depending on the core expertise of the organization.

2.

Nachiketmor Committee (January 2014) recommended to move towards

differentiated banking model by setting up small finance banks and
payment banks. In August 2015, RBI granted license to 11 new payment
bank.These banks are expected to take off by February 2017. In Septmeber
2015, RBI granted in-principle approval for 10 companies to set up small
finance banks.

3.

SMALL FINANCE BANKS Aim for whole range of banking activities

including giving loans, but in a limited area.

4.

PAYMENT BANKS To provide payment and remittance services and

demand deposit products to small businesses and low-income households.
Activities cannot be undertake are lending activities, issuing credit cards,
can accept basic deposits but not term deposits.

5.

Advantages of Payment banks with 800 million mobile phones, they

can revolutionize the banking system. Government can deliver social
welfare payments directly into citizens accounts rather than channeling
through a web of intermediaries. It will meet the remittance needs of

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small businesses, unorganized sector and especially migrant work force. It

will eliminate cash transactions among low-income households its also
more faster and will check black money. These banks have massive reach
e.g. Airtel with 23 crore subscribers and India post with 1.55 lak post
offices has massive reach.
6.

Advantages of Small Finance Banks Lending to small diamond cutting

and polishing units, small restaurant owners, is a specialized affair and thus
will meet credit needs of unorganized sector especially MSMEs; thus will
boost Make In India. MFIs which already have a large network of banks
have been granted license of SFB.

7.

Challenges
a.

Regional rural banks (RRBs) and local area banks can be considered
to be a form of niche banks but they never really took off due to
restrictions on businesses, lending norms LABs are private banks of
a local nature; with jurisdiction over a maximum of 3 contiguous
districts; launched in 1996 but now only four are operating.

b.

In the end, Commercial viability rather than socio-economic

considerations will drive the opening of these banks.

c.

Other specific issues with payment banks like data security issue,
need to invest in training agents in rural networks; long gestation
period before it makes profitable (we are addicted to cash, will take
time to switch to cashless transactions); Rural-Urban differences in
tele-density and ensuring convenience to users.

Notes

Mission Indradhanush
1.

It is a plan unveiled by government in August 2015 to address the 7

challenges faced by public sector banks. Many of them are for implementing
the recommendations by PJ Nayak committee

2.

List of points
a.

Appointments : Separation of post of CEO and MD, inducts private

sector talent (as recommended by PJ Nayak committee)

b.

Bank Board Bureau : It will replace appointments committee to

select PSB officials; will also guide these banks on matters of strategy,
including mergers. (as recommended by PJ Nayak committee). It
will become operational by April 2016.

c.

Recapitalization : Allocation of Rs. 20,000 crore for 13 PSBs this

fiscal year.

d.

De-stressing PSBS : Resolve issues in infrastructure sector to bring

down bad loans and stressed assets.

e.

Autonomy/empowerment: No interference by government in working

of banks, more flexibility to banks for hiring manpower.

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3.

f.

Accountability: New key performance indicators, streamlining

vigilance procedures to improve efficiency.

g.

Governance reforms : Next Gyan Sangam in January 2016.

People were expecting big bang reforms like dilution below 51% as
recommended by PJ Nayak committee which wasnt done which is a
sensible and pragmatic approach. Setting up of BBB is excellent But
theres little clarity on the bureaus governance, its functions, powers,
selection of members and especially its operational independence, given
that three members will be officials. Nayak Committee had intended the
BBB as an interim arrangement until the creation of a Bank Investment
Company (BIC) to which the governments equity stakes in PSBs would
be transferred. BIC was to be formed to find new means to raise resources
for the banks, the plan offers nothing concrete to address bad loans.
Success of Indradhanush depends on the effective implementation.

Black Money
Overview
1.

Money that have neither been reported to the public authorities at the
time of their generation or at any time of possession; no taxes have been
paid on it. Also known as Phantom trades, Shadow economy according to
National Institute of Public Finance and Policy report of Aug 2014,
Indias black money is nearly 75 % of the GDP.

2.

Reasons for black money are many: Income generated from illegitimate
activities like smuggling, arms trafficking, corruption; even those generating
income through legitimate activities avoid paying taxes because of excessive
taxation, greed, and perception that govt is corrupt, wont use it for public
good; lack of seriousness on the part of government like it is not revealing
the names. Only committees are being setup, but without concrete action.

3.

Black money is 60 times the annual revenue from income tax in the
Union budget. It affects our national security (used for terror financing).
This money brought back can be used to clear external debt (According
to GFI report India lost a $462 billion from 1948 to 2008 abroad. Our
external debt as of 2008 was $230.6 billion) and for economic development;
funding infrastructure.

Way forward recommendation by various committees including the SIT

on black money

12

a.

Reducing disincentives by rationalization of tax rates, reduce tax

terrorism (retrospective amendments), pass GST and reducing
transaction costs by providing internet-based services to pay tax,

b.

Creation of effective credible deterrence by setting up an investigation

unit with Enforcement Directorate as the nodal coordinating agency
to remove problem of lack of coordination; CAG should audit on
suspicious exports; Vulnerable sectors like real estate, jewelry, financial

Notes

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markets, should have time frame for Income Tax and CBEC for
completing cases.
c.

Need to amend PMLA, FEMA and make tax evasion a serious

criminal offence

d.

Establishment of a central KYC (Know Your Customer) registry to

deal with the problem of multiple identities of an individual in
financial transactions.

e.

To ensure that banks on a real time basis, report all suspicious

transactions, SIT must seek a report from the financial Intelligence
Unit (FIU) of the Indian government on what it has done about
suspicious transactions reported by banks.

f.

To pressurize Swiss authorities to give name of US citizens who have

opened numbered bank account in Swiss Banks, US arrested Senior
bank officers of Union Bank of Switzerland on charges of espionage.
India also has Swiss bank branch offices in Mumbai.

g.

Reform political funding in India.

Notes

Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015

1.

It was Passed by parliament during the Budget Session of 2015.

2.

According to it, all entities (bank & individuals) are liable for penalty.
Mandatory filing of return in respect of foreign assets, a flat rate of 30
% tax would apply to undisclosed foreign income of the previous
assessment year; provides a one-time compliance opportunity to persons
having undisclosed foreign assets. Such persons can declare it and pay a
penalty at the rate of 100%.For non-filing of returns rigorous
imprisonment upto 7 years; and for tax evasion rigorous imprisonment
upto 10 years; a penalty rate of 300%.

3.

But the bill has been criticized for various reasons:

a.

Tax amnesty scheme doesnt work. According to official statistics

released in oct 2015, government mobilized only Rs 3,770 crore
through a one-time compliance window. PM promised to recover
Rs.6,500 crore immediately, thus Rs 2,800 crore less than the
promised. People feared that their cases will be re-opened although
amnesty has been granted.

b.

Limited in scope, since it applies only to illegal money held or earned

abroad; excludes income held within the country.

c.

People will be punished only when the money is detected, but it

doesnt have any mechanism for detection In past detection hasnt
been rigorously pursued. Government claims to have names of Indians
having swiss numbered accounts but information received has been
kept out in the public domain and no action has been taken against
them. Govt argues that it will use DTAA and TIEAs but these

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agreements are about the declared incomes of individuals and not

about their undisclosed wealth or incomes.
d.

NRIs are excluded from its purview. So an Indian resident can work
out in an arrangement with NRIs to show his income as theirs.

GAAR General Anti Avoidance Rule

1.

Tax avoidance using legal means to avoid orreduce taxliability; tax

evasion using illegal means to to avoid orreduce taxliability e.g. by
falsification of books, suppression of income, overstatement of deductions,
etc.

2.

Anti Avoidance Rules are broadly divided into two categories namely
General and Specific. SAAR - laws are amended/enacted to check
tax avoidance when noticed. GAAR having a general set of broad rules
to check the potential avoidance of the tax which cant be predicted.

3.

In India till recently SAAR was in vogue. However, now Indian tax
authorities wants to move towards GAAR Draft Direct Taxes Code of
2009 first talked of it, but due to negative publicity, it has been continuously
postponed. Budget 2015 said the following things with respect to GAAR
(1) GAAR to be deferred by two years (2) GAAR to apply to investments
made on or after 01.04.2017, when implemented.

4.

It is being opposed in India as SAAR being more specific, provides

certainty to taxpayers where as GAAR being general in nature can be
interpreted arbitrary by tax authorities. Due to fear of tax terrorism although
many developed countries like France, Germany have introduced it but
countries like USA and UK have adopted a cautious approach and havent
implemented it.

5.

Shome Panel setup to draw final guidelines on GAAR recommended that

GAAR should not be used for filling revenue shortfalls. It should be
avoided in cases like IT commissioner should send notices only in cases
where he can recover more than 3 crore rupees; in retrospective cases, to
recover tax dues. Not to demand additional penalty and exempt the
buying/selling of company shares from capital gains tax. It also
recommended not to implement GAAR from 2014 but from April 2016.

P-NOTES
1.

P-notes are instruments used by foreign investors that are not registered
with the SEBI to invest in Indian securities also called as Offshore
Derivatives Instruments (ODIs). FIIs issue them to investors outside India
and they derive their value from equity/share.

2.

Special Investigation Team (SIT) on black money on P-notes in its 3rd

report criticized P-notes, as
a.

14

This route is misused by money launderers for round-tipping of black

money because it ensures anonymity to investors (as they dont have
to register with SEBI). 31% of P-notes investment came from Cayman
island (a tax haven).

Notes

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b.

There is fear that investors with a short-term perspective (e.g. hedge

funds) can enter through this route.

3.

So whats the way forward SEBI should identify individuals holding Pnotes. Then SEBI should not only ban them but should initiate prosecution
proceedings and take preventive and punitive actions. SEBI should
examine whether P-notes have in anyway eased foreign investment.

4.

But then it is argued that in 2007 it accounted for 50% of FIIs investment.
But now it accounts for ~15-20% of FII assets due to steps by SEBI like
imposing restrictions on the issue of these instruments, FII registration
was made easier and improving the monthly disclosures by FIIs who are
issuing P-notes. Also P-notes help to attract those investors who do not
want to register with SEBI for avoiding security transaction tax.

5.

Should we regulate it further? Outstanding value of P-notes at the end of

February 2015 was2.7 lakh crore which accounts for 15-20% of FIIs
investment. Thus a huge amount is prone to money laundering. So SIT
has a strong ground to recommend its phasing out. But these are unlikely
to be banned because the government fears investor exit. (Finance Minister
subsequently said that there wont be any knee-jerk reaction). Also bring
other financial reforms so that investors invest directly in India.

Notes

BUDGET 2015
Amrut Mahotsav
It is a vision document comprising 13 goals which has to be achieved by Team
India (led by the States and guided by Center) by 2022 (75 th year of
independence).
1.

Housing for all - 2 crore houses in Urban areas and 4 crore houses in Rural
areas.

2.

Each house in the country should have basic facilities of 24x7 power,
clean drinking water, a toilet and road connectivity.

3.

At least one member has access to means for livelihood.

4.

Substantial reduction in poverty.

5.

Electrification of the remaining 20,000 villages including off-grid solar

Power- by 2020.

6.

Connecting each of the 1,78,000 un-connected habitation by all weather

roads.

7.

Providing medical services in each village and city.

8.

Ensure a senior secondary school within 5 km reach of every child, while

improving quality of education and learning outcomes.

9.

To strengthen rural economy - increase irrigated area, improve the efficiency

of existing irrigation systems, and ensure value addition and reasonable
price for farm produce.

10. Ensure communication connectivity to all villages.

11. To make India the manufacturing hub of the world through skill India and
the Make in India Programmes.

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12. Encourage and grow the spirit of entrepreneurship - to turn youth into job
creators.
13. Development of Eastern and North Eastern regions on par with the rest
of the country.
Social Dimension Budget 2015
1.

Negatives
a.

Total subsidy as percentage of GDP has come down from 2.1 per
cent to 1.7 per cent.

b.

Reduced allocation for MGNREGA, food subsidy, health (cut on of

5,000 crore), housing and urban poverty alleviation, Tribal Sub-Plan
(less by Rs.5,000 crore compared to last year), for the SC Sub-Plan
(less by Rs.12,000 crore). allocation of only Rs.5,300 crore for the
Pradhan Mantri Krishi Sinchai Yojna. The gender Budget cut by 20
per cent (less by Rs.20,000 crore). The ICDS programme has been
halved, from over Rs.16,000 crore to Rs.8,000 crore.

c.

Education received token mentions in the form of a few new IITs,

IIMs and AIIMS instead of fundamental overhauls.

d.

Environment did not appear to be on the agenda.

e.

Tax benefits to rich

f.

2.

16

i.

The budget proposals will reduce direct taxes by Rs.8,315 crore

benefiting the rich and increase the burden on people through
indirect tax hikes of Rs.23,383 crore.

ii.

Wealth tax has been abolished, corporate tax planned to reduce

from 30 to 25 per cent.

Further, the reduction in the tax concessions given by the Central

government to the rich (subsidies to the rich called tax incentives)
results in a revenue loss which is more than the actual fiscal deficit.
Hence, our economy is suffering from a deficit burden primarily due
to such subsidies to the rich, not due to subsidies for the poor.

Positives
a.

In budget 2015-6 there was a sharp decline in allocations to the social

sector in the form of concessional grants to the states. But this
decline has happened to accommodate a large increase in tax
devolution (32% to 42% as recommended by FFC). i.e. fund allocation
to centrally sponsored schemes has reduced.

b.

Subsidies need to be reduced (not eliminated). Its better for the

government to get its citizens to learn how to fish rather than handing
out a fish each day for them to consume.

c.

Infrastructure Giving consumers and businesses the essential tools

such as critical road networks, uninterrupted electricity, sensible
transportation and storage logistics which connect the country will be
crucial to accelerating progress. An incremental $12bn in targeted
infrastructure spending proposed in this budget is just what the doctor
ordered. And this is important for poverty alleviation and job creation.

Notes

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d.

Widen the social security and pension net jan dhan se jan suraksha.

e.

MUDRA bank launched.

Notes

Goods and Services Tax

1.

GST is an indirect tax system that would subsume various central and
state indirect taxes and apply on the supply of goods and services.

2.

Constitution (122nd ) amendment bill, 2014 for implementing the GST

has been passed by Lok sabha but is opposed by states for various reasons

3.

Features of bill and various reasons for being opposed

Features of the bill

Exemptions

Integrated-GST
(IGST)

Additional Levy

1.

Alcoholic products excluded

2.

GST to be levied on 5 petroleum

products but on a later date.

Opposition by states
Petroleum products to be kept out of
GST.

Centre to impose IGST on inter-state States are comfortable with this

trade. This tax will be shared between provision.
center & states.
Centre may levy an additional tax of upto
1% on supply of goods in course of inter- 1.
state trade for 2 years and will be given 2.
to states from where supply of goods
originates.

Will lead to cascading of taxes;

Instead states should be given 4%
of centers share of IGST.

Centre wants to keep it at 16%;States

want to keep it at 26% (which is too
high)

Rate of GST

To be defined by GST council

Compensation
to
states GST council

Parliament may provide for compensation 100% compensation to be provided for

to states for a period of 5 years.
5 years

4.

1.

Form a GST council to recommend 1.

on tax limits, taxes to be included &
excluded

Center to have weightage of 25%

and states have weightage of 75%
of total votes cast.

2.

For a decision to be passed 75% of 2.

votes required (center has weightage
of 33%and states have weightage of
67% of total votes cast).

Create a separate dispute settlement

authority.

3.

GST council will resolve disputes.

Criticism of the bill by experts Not an IDEAL GST

a.

Ideally there is universal application of GST, but the bill contains

exemptions (alcoholic & petroleum products); will reduce tax base.

b.

Imposition of additional 1% tax on inter-state trade will

c.

i.

lead to cascading of taxes (especially if good passes through

multiple states; thus making it expensive for consumers.

ii.

Prevent the creation of harmonized creation of market.

According to 13th Finance commission, instead of IGST create a

modified bank model so as to avoid cascading effect; to ensure that
tax accrues to state where the final consumer is located.

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5.

d.

Ideal aim is to reduce multiple loans; a country has one GST; but
Indian version allows for each state to enact a law thus having one
central law and 28 different state laws.

e.

Rates of GST are too high; even 16% is too high, ideally it should
be 12%.

Advantages of having an ideal GST

6.

a.

Widens tax base; increases revenue mobilization.

b.

Increases transparency (hidden levies to be replaced by a single

transparent tax).

c.

Eliminates cascading effect of tax.

d.

Seamless/uniform tax will remove tax bottlenecks.

e.

Will reduce incentive for tax evasion.

f.

Will increase GDP by ~2%.

Way forward
a.

GST wont be implemented by 1st April, 2016. But it is required to

be implemented as soon as possible.

b.

Centre should persuade states to deploy statecraft in passing it (the

way bill was passed to settle boundary dispute with Bangladesh).

c.

If states still disagree then center should implement a central GST

from 1st April, 2015 by merging excise and service tax, as
i.

It wont require any major legislative changes.

ii.

The demonstrate commitment to GST and give confidence to

industry.

iii. Seeing its benefits states will join soon.

d.

It will take time for full fledged GST even in 2016 as it required
having the required GST network (IT infrastructure); requirement of
half of the states to ratify it.

MATControversy
1.

MAT has been levied on all companies except those in infrastructure and
power sectors since the late 1980s.

2.

In early 2015, IT department imposed MAT on capital gains made by

Foreign Institutional Investors (FIIs) prior to April 1, 2015.The Income
Tax Department has slapped notices on 68 FIIs demanding MAT dues of
Rs. 602.83 crore for previous years.

3.

This move was criticized by FIIs as MAT is applicable only to domestic

companies that had their base in India. By virtue of not being established
in India, they should be exempted. They also criticized this arbitrary
application as case of tax terrorism. It led to outflow of investment in
August 2015.

4.

Government subsequently appointed a committee under former Justice

AP Shah which submitted its report in August 2015. It argued that there

18

Notes

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is no basis for MAT and thus shouldnt be imposed. Amend Section

115JB of the Income-tax Act to clarify the inapplicability of MAT
provisions to FIIs/FPIs for the period prior to April 1, 2015.
5.

Notes

Governemnt in September 2015 accepted its recommendations and decided

to waive MAT on capital gains made by Foreign Institutional Investors,
(FIIs) prior to April 1, 2015. The decision, to be carried out through an
amendment to the Income Tax Act.

Tax Terrorism An Overview

1.

Tax terrorism Means when taxman extracts more tax than what is due
from an honest taxpayer. It happens by imposing unjust and inequitable
tax law, viewing every transaction with suspect.

2.

Indian scenario Evolution

3.

4.

5.

a.

The term was to describe the adversarial approach adopted by tax

authorities under the previous regime.

b.

Retrospective amendments after Vodafone Indian taxmen lost a

case with Vodafone in January 2012 (capital gains tax on an offshore
transaction) in the Supreme Court. But Instead of calling it a day,
they amended tax laws with retrospective effect, making Vodafone
liable for a tax on a past transaction.

But, instead of repealens it has been continued. Recent cases

a.

Cairn In March, the tax department used Indias notorious

retroactive tax law to demand $3.3 billion fromCairn India for
transactions dating back to 2007.

b.

MAT/FIIs In April 2015, Tax authorities issued notices to collect

$6.4 billion in taxes from a group of 100 FIIs for the year 2012-13
for avoiding MAT. Until last month, the levy had never been applied
to foreign investors.

c.

ITR In April 2015, government came out with a 14 page ITR

which was criticized by the industry and MPs as they felt it impinged
on the individuals privacy by seeking details of all bank accounts
and foreign travel.

Reasons:
a.

The temptation of millions and billions of dollars.

b.

Complicated tax laws we have tax laws and then laws for deductions
and exemptions which is used by companies to avoid taxes.

c.

DTAA are a source of unwanted confusion. It is not clear that who

stand to benefit from them.

Criticisms
a.

It has repelled away the investors. FDI and FIIs both have been
affected. After the Vodafone retrospective amendment, in next 2
years Net investments of Rs 1,68,000 crore dropped to Rs 51,000
crore

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6.

b.

Roadblock to PMs Make in India program.

c.

Increase tax litigation, over-burdening of judiciary

d.

Criticism of MAT case with respect to FIIs it is impossible to

believe that the IT department would have allowed legitimate tax
dues of Rs 40,000 crore from FIIs to be evaded for several years.

Way forward
a.

As Indian government has rightly remarked, India is not a tax haven:

legitimatetaxesmust be paid.But tax terrorism is also wrong.

b.

What to do - simplify tax system, pass GST; retrospective

amendments to tax laws should be avoided as a principle.

FMC Merger with SEBI

A step towards Unified Financial Agency (UFA) as envisaged by FSLRC
1.

In Sept 2015, commodities regulatory body Forward Markets Commission

(FMC) today merged with the capital markets watchdog SEBI.

2.

The commodities market entities would get a timeframe of up to one

year to adjust to the new regulations as they would have to follow the
same norms that are applicable to their peers in the equity segment. i.e.
to ensure that nothing is disrupted, there is no discontinuity. We are giving
some timeframe so that they can adjust with the new regulations.

3.

Rationale for Convergence and Opportunities

20

a.

First, it will improve the comparability of financial information, in

terms of consistent valuation practices of both stock and commodities
businesses with respect to reliable price discovery and effective risk
management.

b.

Second, the auditability of financial statements of exchanges and

member firms may be on a par with global exchanges since
fungibility bridges the gap in the nomenclature of stock and
commodity exchanges. Improvisation in the financial statement
comparison and auditability would be the natural outcomes of the
process.

c.

Third, worldwide there are many instances where a single regulator

has successfully regulated equities and commodities segments as
they are traded in a single regulated entity. Such examples of regulated
exchanges trading in both commodities and securities exist in
Australia (Australian Stock Exchange, and Sydney Futures Exchange),
France (Matif), the UK (London International Financial Futures and
Options Exchange), Taiwan, South Korea and so on.

d.

Fourth, from the hedging perspective, the merger reduces the

transaction cost. There are many physical market players who have
to take positions in both commodities and currencies for risk
managementmore so, while dealing in international commodities
such as bullion, base metals and the like. Since these two had so far
been dealt with by two different regulators, the hedgers had to comply
with two different regulatory norms. Now, with regulatory convergence,

Notes

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that situation will change and this has the potential to reduce the cost
of hedging.
e.

Fifth, this merger opens up avenues for various types of products

that could not be traded under the outmoded FCRA. These include,
in particular, options and index-based products. These enormous
opportunities can bring about various product innovationsinvestment
derivatives such as exchange traded funds for silver and other metals,
weather and freight derivatives, and index futures and options trading
in commodities can be introduced. In the process, it will offer arbitrage
opportunities across various segments in an exchange, and make
margin money fungible for trading across various asset classes such
as commodities, currencies and equities. Thus, if stock exchanges
begin trading in commodity derivatives, the same margin money can
be made applicable to all segments because the clearing corporation
will be the same. In other words, market depth and liquidity
enhancement would be an outcome of the regulatory convergence.

f.

Sixth, from the participation standpoint, since the regulatory system

will move to an autonomous regulator, avenues for banks and financial
institutions are opened in the process. This will not only help the
hedging efficiency process, but also infuse liquidity and bring in more
depth to the market.

g.

Seventh, it will reduce or eliminate the scope of regulatory arbitrage,

a process by which agents in the principal agent framework could
have capitalised on loopholes in regulatory systems to circumvent
what they perceive as unfavourable regulation.

h.

Eighth, and most importantly, the merger could reduce the potential
threat of systemic risks and the cascading effect of inter-sectoral
defaults, and might bring down search or information costs. The
convergence might offer flexibility to stock brokers to operate in
financial as well as in commodities markets simultaneously as it
allows integration at the level of brokerage firms. These entities are
required to comply with the regulatory prescriptions capital adequacy,
various types of margins, nature of membership, and net worth,
among others of their concerned regulator and exchanges. It may be
noted that exchanges and brokers may leverage their operations
(without having two independent entities/establishments dealing with
commodities and stocks) in a uniform overarching regulatory
architecture. There need not be separate set-ups for commodities,
securities and currencies. As a natural corollary, interoperability
between stock and commodity exchanges would take place in
terms of limit order book maintenance, order entry, margin calculation
and value-at-risk analysis of holding portfolios.

i.

FMC before the merger was not an autonomous regulator, unlike the
other market regulators. It was under finance ministry. The need for
an autonomous and strong regulator for the commodity markets has
been long expressed in the academic literature, as also in policy
circles (FCRA Amendment Bill 2010). Public perception of the steady
growth of capital markets under the regulatory control if the SEBI
has strengthened the need to put in place an equally powerful statutory
regulator for commodity markets, especially because the scale of its
effect is significantly larger than that of the capital markets.

Notes

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j.

Budget speech stated, there is no distinction between derivative

trading in the securities market and derivative trading in the
commodities market, only the underlying asset is different.

k.

Various opportunities accompany the merger of the Securities

Exchange Board of India with the Forward Markets Commission,

l.

This will usher in a new era not only in the domain of financial
markets and its regulation, but also in the regulatory architecture of
the generic financial market in India.

m. Regulatory convergence is being seen as the new emerging face of

the regulatory architecture of financial markets in many parts of the
world. This has been achieved either through the mechanism of
creating a super-regulator overseeing regulators or through merger of
regulators (Turner 2013). There is now a global trend towards even
greater regulatory convergence, which accelerated after the 2008
credit crisis and is being pursued with an enthusiasm that is sidelining
the earlier trend towards multilateral rule convergence.

4.

n.

It has been widely accepted that competition in regulation is not as

efficient as cooperation.

o.

Regulatory convergence in the present case seems to be an outcome

of the recommendations of several committees, for instance, the
Inter-Ministerial Task Force on Convergence of Securities and
Commodity Derivative Markets (2003); the Parliamentary Standing
Committee on the Forward Contracts (Regulation) Amendment Bill,
2006; the Percy Mistry Committee (2007); the Raghuram Rajan
Committee (2007); the Parliamentary Standing Committee on the
Forward Contracts (Regulation) Amendment Bill, 2010; and the
Financial Sector Legislative Reforms Commission (2013).

p.

The missing bond currency derivatives (BCD) nexus, emphasised, A

series of measures are needed to achieve market integration and
convergence and thus enable economies of scale, economies of scope,
greater competition, and enhanced IFS export capability.

q.

The Financial Sector Legislative Reforms Commission (FSLRC) that

submitted its report in 2013 felt that regulatory convergence is one
of the ways for markets to move in synchronisation, and exploit
economies of scale and scope recommended by the FSLRC was
merger of the SEBI, FMC, Insurance Regulatory and Development
Authority of India (IRDA), and Pension Fund Regulatory and
Development Authority (PFRDA) into a single regulator called the
Unified Financial Agency (UFA), on the ground that all financial
activity other than banking and the payments system, which would
continue to be regulated by the Reserve Bank of India (RBI), should
be brought under a single authority. So, it is noteworthy that the
initiative of merging the SEBI and FMC was well thought out, and
a competent authority weighed the merits and drawbacks of it in the
light of recommendations by several committees.

Challenges Necessary Ramifications and Challenges

a.

22

At the same time, important regulatory and developmental challenges

have to be overcome for instilling efficiency in the market, along
with promoting investor protection.

Notes

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b.

The effect of the SEBI FMC merger as a case of regulatory

convergence may be amplified in the regulatory architecture in
commodities markets, among others, in productmarket innovation,
surveillance and risk management and conflict management of the
regulator and exchanges/members and protection for customers.
However, the implications of the SEBIFMC merger need to be
examined from an economic and regulatory standpoint. Regulatory
harmonisation in terms of consistency and complementarity is of
crucial relevance to the convergence.

c.

The SEBI needs to work on how to pursue financial regulatory

harmonisation and how it should instill rationality in commodity
trade with the adoption of a utilitarian approach to exchanges and
brokers/members. Domain expertise of the FMC may help the SEBI
understand the depth and breadth of commodity futures and its
underlying markets. The most important issue is that the commodity
derivatives markets will be under a strong, autonomous regulator
that can come down heavily on illegal trading, also known as dabba
trading. As such, the FMC, through various by-laws, has acquired a
few powers but that often prove inadequate to curb practices that are
off-markets. With an autonomous regulator in place, more trades
will come under legal purview, and in the process help the government
exchequer.

d.

The convergence may have some positive effect on governance.

Exchanges, regardless of commodity/stock, need to adopt good
governance practices to strengthen their operations by formalising
performance goals in alignment with their mission and vision.
Adoption of good governance practices could help rationalise their
existence and the constitution of a diversifyed board through
succession planning, and it may be a desired outcome of the SEBI
FMC merger. A principle-based regulatory structure will help rope in
the commodity and financial ecosystem and infuse more rationality
in the commodity value chain. The new regulator could be able to
resolve the inherent confl icts between the principal and agents.

e.

Governance may resolve inherent conflicts between the exchange

and its promoters and members and help constitute a diversified
board. While talking about the regulation of the Chicago Board of
Trade, Lurie presented a view on the management of board in the
corporation. A basic purpose of the board was to facilitate profitable
table economic activities by members. Thus its directors had to
sense with some accuracy how far they could go in the areas of rule
enforcement. If rules were enforced too harshly, board members
could either ignore them or decline to remain in the organisation.
Another purpose of the exchange was to rationalise the commodities
market through effi cient and effective regulation. The efforts of the
directors to reconcile this inherent tension between private economic
activities and an ordered national market represent a recurring theme
throughout Board history.

f.

An autonomous regulator may bring about certain guidelines and

terms and conditions on the functioning of the board. Incidentally,
the FMC brought about quite a few guidelines on the functioning of
exchange boards.

Notes

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24

g.

On the other hand, since agency problem seems to have surfaced in

earlier regulatory structures, the new regulator being a principal will
impose a set of checks and balances on activities of exchanges
(agents) on market monitoring, surveillance, and risk management.
This might help regain market integrity, trust and completeness.

h.

The inclusion of independent directors (not in relation to promoters

or members of family-run business entities) by the SEBI might be
viewed as a positive stroke to regulatory harmonisation. In addition,
changes in surveillance of exchanges on audit and technology adoption
may be accomplished, bringing vibrancy to commodity markets.

i.

Another challenge arises here. Despite the 2013 budget declaring the
similarity of characteristics of traders trading in the commodities
and stock markets, it needs to be understood that commodities and
capital markets are fundamentally different. While a rise in stock
prices is viewed as a signal towards general well-being, if the
commodity derivatives market is an avenue for price discovery, a rise
in prices in the derivatives markets might lead to inflationary pressures
in the economy. Hence, commodity derivatives markets need to be
regulated with adequate price circuits, position limits, consortium
limits, and so on so that its price risk management platform does not
become a source of inflation risks. The FMCs initiative in managing
this deserves special mention. Therefore, despite the last guar gum
price rise issue for which no such empirical evidence for vilifying
commodity exchanges was found, there have been no recent allegations
of futures markets leading to infl ation.

j.

As the capital market regulator enjoys flexibility in the given regulatory

capacity, it might work on design-related issues and contract specifi
cations for commodity markets. So far, this has been the domain of
the exchanges, and this worked well, given that contract design by
the exchanges engendered competition among them and led to market
development on certain counts. But, there is another framework that
exists with the SEBI and that is with regulation of the currency
derivatives markets that are traded in the stock exchanges. The
currency contracts are homogeneous and this has helped in market
penetration and risk management. So, it is now up to the SEBI to
decide which specific model or a combination of both (some working
contracts left to the exchanges, some to be designed by the SEBI) is
more applicable for general well-being. Apparently, it seems that
there is a need to engender competition and so exchanges should be
encouraged to innovate further, even as the regulator may also
mandate certain necessary products designed by it to be traded for
enhancing social well-being.

k.

On the social welfare front, active intervention of the new regulator

and the Ministry of Finance is expected, especially in a developing
market such as India, where financial (and commodity) markets are
not so perfect or legal and other infrastructures are relatively
insufficient, in addition to varied risk structures and governance
mechanisms.

Notes

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l.

The challenge arises not merely from the perspective of regulatory

convergence between different markets. The issue of regulatory
convergence across different jurisdictions to prevent regulatory
arbitrage and migration of risk is extremely important. For instance,
the Financial Stability Board (FSB) and International Monetary Fund
(IMF) are overseeing regulatory convergence across major jurisdictions,
including through peer reviews such as the Financial Sector
Assessment Programme (FSAP), which provides in-depth
examinations of countries financial sectors. In this context, it is
noteworthy that the FSB has brought about significant regulatory
structures for financialisation of commodities for Group of Twenty
(G-20) nations (Gibbon 2013). In April 2010, the FSB created the
OTC Derivatives Working Group (ODWG) that plays a pivotal role
in transposing the G-20s objectives into domestic regulations, relating
to central counterparties and trade repositories.

Notes

m. Therefore, in the context of the SEBIFMC merger, while the

challenge of regulatory arbitrage and risk migration arises, there are
international examples showing pathways to combat such challenges.
5.

Concluding Remarks
a.

It is yet to be seen whether this move towards regulatory convergence

needs to be typified as a one-off incident or as the initiation of a
process of regulatory convergence, as is the worldwide trend and the
recommendation of the FSLRC only time can say. Be that as it may,
there are merits from various perspectives in the move to regulatory
convergence, as illustrated above. Yet, the challenges are also many.
As such, onsize-fi ts-all might not work for the commodity segment
and the new regulator needs to be cautiously optimistic in market
regulation and management of exchanges and market participants.

b.

Blanket application of stock exchange practices might not enhance

the efficacy of commodity exchanges. It has to embrace the good
features already prevalent in commodity market regulatory
frameworks and the proclivity of exchanges product innovations.
Rather, if a greater regulatory convergence is envisaged bringing in
other market regulators as per the FSLRC recommendations, one
needs to apply regulatory norms according to the needs of the market
concerned so as to bring about product innovation, process innovation
and safeguarding the interests of investors.

c.

The FMC, within the ambit of the FCRA, has done its bit to the
extent possible. The SEBI has shown exemplary performance as the
regulator of securities markets up to now. With the two coming
together, the possibility of good results exists. At the same time, the
new regulator has to adopt a protectionist approach to safeguard the
interests of producers and commercial userskey stakeholders in
commodities markets.

d.

Do we have really similar types of opportunities and challenges with

mergers of the PFRDA and the IRDA with the SEBI FMC to form
a Unified Financial Agency? It is diffi cult to address at this stage.

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Commodity derivatives and stock futures and options in terms of

apparent structure may be identical, though different in terms of
their effects on the macroeconomy, and characteristics. Stock markets
are meant for investment, while commodity markets were opened
for hedging against adverse price movements. On the other hand, it
has been proposed that commodity futures can be stated as insurance
products because they can be construed as providing insurance against
price risks. In contrast, the provident fund is a different animal
altogether, with major implications for social security benefits. This
necessitates a deeper analysis in a broader regulatory context to
examine whether the same economies of scale can be achieved
through following the FSLRCs recommendations to form a single
unified regulator to regulate the financial market beyond the money
market.

Inflation
Deflation or disinflation?
The Chief Economic Advisor in September 2015, raised an alarm when he
said, price-wise, the economy appears to be in or close to deflation territory,
and this view was based on the GDP deflators estimated through first-quarter
GDP data. This is indeed a serious issue at a time when all out efforts are on
to revive the investment cycle and growth in the economy. So how serious is
the issue of deflation in India?
1.

To begin with, one needs to understand that deflation is falling prices over
two consecutive quarters. In other terms, it is negative inflation.

2.

To answer the query about deflation, one would have to look at global
prices trends, along with data from both the wholesale price index (WPI)
and the consumer price index (CPI).
a.

Based on WPI inflation, one might infer that we are in a deflationary

situation because, for the 10th straight month, inflation is in the
negative zone. That is, prices have been falling every successive month.
For August, WPI inflation stood at minus 4.95 per cent.

b.

But the CPI inflation data tells a different story. As compared to the
deflationary trend in the WPI, the CPI is experiencing disinflation.
That is, while prices continue to rise, the rate of inflation (or price
rise) is slowing. This is contrary to what the trend in the WPI suggests.
In essence, it implies that consumer prices continue to rise, but at a
progressively slower rate. The combined CPI inflation stood at 3.66
percent in August.

4.

Thus India is experiencing disinflation, not deflation as we judge inflation

at household level by CPI.

5.

Solution for divergence between CPI and WPI:

a.

26

The ongoing confusion about whether or not India is experiencing

deflation is largely due to the divergence in these two main price
indices of the economy.

Notes

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6.

b.

With the availability of economy-wide inflation data, CPI numbers

have become the nominal anchor for monetary policy in India and are
therefore subject to rigorous scrutiny, both by producers as well as
users of the data. On the other hand, WPI inflation, which reflects
only a segment of the price pressures in the economy it essentially
covers about 40 per cent of economic activity receives far less
scrutiny.

c.

Moreover, a significant portion of the prices included in the WPI is

still administered by the government.

d.

Under the circumstances, and to avoid confusion, it might be a good

idea to discontinue the WPI and focus on a producer price index
(PPI). A PPI maps the prices received by domestic producers in the
wholesale market and is, as such, a better measure. The work for
building a PPI is already underway. So instead of using WPI data and
arriving at erroneous estimates of GDP growth and its deflators, it
would be better to simply dump the index itself.

Notes

Now why disinflation is happening why price rise is declining

a.

Steep decline in crude oil and global commodity prices especially

crude-oil prices are on decline.

b.

Good food management by the government (as said in RBI study).

c.

Monetary policy, including the new framework (inflation targeting).

d.

Factors like high rural wages, higher level of MSP, and rise in input
cost have been instrumental for elevated inflation in the last few
years. At present, growth of all these drivers have been slowed down
considerably and this could result in keeping food inflation within
limits.

e.

Lack of adequate demand is another reason. Its indicator is low growth

rate of bank credit (12.6 per cent in 2014-15).

Flexible inflation targeting regime

1.

Inflation targeting requires central banks to aim for a target ideally of

low, steady inflation.

2.

In February 2015, RBI and GOI signed a monetary policy framework

agreement under it adopted a flexible inflation targeting regime. RBI will
operate it. According to the framework, objective of monetary policy is to
primarily maintain price stability, while keeping in mind the objective of
growth. Under this RBI will bring inflation below 6 % by January 2016
and within 4 % with a band of (+/-) 2 % for 2016-17 and all subsequent
years.If inflation is above 6%or below 2% for 3 consecutive quarters, it is
deemed to have failed. In the case, RBI is required to state the reasons for
its failure and remedial action it proposes.

3.

Why adopted
a.

Because that creates the best climate for investment and raise or
lower interest rates accordingly. The rationale is that investors need
price stability to make decisions, so stability automatically maximises
investment and thus growth.

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b.
4.

28

Rajan has claimed that, far from destroying growth, his policies are
safeguarding Indias capacity for sustained growth in the long run.

To anyone who rightly worries about inflation, it is appropriate that the

Central bank should be concerned with it. But to recommend that a
Central bank focus on inflation does beg two questions. First, how
effectively can the RBI control inflation? And, second, are there possibly
adverse effects of attempting such control?
a.

The promise of inflation targeting is that inflation can be controlled

by monetary policy and that there are no trade-offs to a policy of
inflation targeting. This can hardly be assumed, and has been strongly
contested by economists.

b.

Going by recent history, there is reason for some scepticism about

the RBIs ability to control the inflation rate. From 2008 onwards,
inflation had shifted gear upwards for five years. It would be difficult
to square this with the suggestion that it reflects the banks efforts to
maintain growth, for growth has actually been lower in this period.
While we have a complete explanation of the phenomenon of rising
inflation and slowing growth, and it rests on the role of agricultural
output fluctuations, it need not detain us here. The point of recounting
this history is to suggest that it is far from clear that the RBI can
fine-tune the inflation rate as is conveyed in the draft IFC which
states that the objective of monetary policy in India should be price
stability, in the context to be understood as a stable inflation rate.

c.

Secondly, would inflation targeting be desirable now? We can best

answer this by looking at recent experience in the United States. For
a decade from the mid-1990s, the inflation rate there had been low
and steady, eliciting the epithet the Great Moderation. But this
phase had masked the brewing of a financial crisis in the form of an
asset bubble, responsibility for which American commentators trace
to the Federal Reserve that had, in view of the low inflation,
maintained unusually low interest rates. A feeding frenzy had followed
with credit fuelling house price increases. It is in the nature of inflation
targetting that sectoral-price increases are ignored. When the bubble
finally burst and house prices collapsed, the banks that had financed
their purchase found themselves holding worthless assets. A
spectacular inter vention by the Federal Reser ve, termed
unconventional monetary policy, saved the day for the U.S.
economy. This episode demonstrates two things.That financial crises
are possible even with low inflation and that the Central bank can
make a difference with respect to output. Though a U.S.-style
crisis is unlikely in India given so large a presence of the public
sector, it does point to the need for the Central bank to be concerned
with financial stability.

d.

When the idea of inflation targeting had gained prominence in

academia, the Federal Reserve had been lectured for not focussing
on inflation. However, it is interesting to note that the U.S. has done
far better than Europe in terms of employment post-crisis. Moreover,
its record as far as inflationary expectations, and thus inflation, is
concerned is no worse than that of countries with central banks that
pursue inflation targeting.

Notes

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5.

e.

This is not surprising, for, as stated on its website, the Federal Reserve
is firmly committed to fulfilling its statutory mandate from the
Congress of promoting maximum employment, stable prices and
moderate long-term interest rates. By contrast, the Draft IFC declares
that The objective of monetary policy is to achieve price stability
while striking a balance with the objective of the Central Government
to achieve growth. The point is that if the RBI is to pursue an
inflation target set by the government it must accept the growth.

f.

An argument for inflation targeting made at the highest level of

Indias economic policy-making establishment is that in the long run
there is no trade-off between inflation and unemployment. This is an
assertion more ambiguous than it sounds. If it is a period of undefined
duration that is meant by long run then we can never be assured
that in this long run we are not simply in yet another short run. Long
ago, the economist, John Maynard Keynes, had restored perspective
to this thought experiment. He had remarked: The long run is a
misleading guide to current affairs. In the long run we are all dead.
Economists set themselves too easy, too useless a task, if in
tempestuous seasons they can only tell us that when the storm is
long past the ocean is flat again.

g.

Since this is a Mathematical ideal that has never existed in the real
world, except perhaps momentarily at the very beginning of
industrialisation, inflation targeting has no theoretical foundation.
The case for it rests solely on its observed effects.

h.

And here the evidence of a correlation, which was slender even

before 2008, has disappeared even in the industrialised countries.

i.

What Stiglitz pointed out in the context of the global financial crisis
holds equally true for Indias crisis of growth. For inflation targeting
has neither brought down inflation nor promoted economic growth.

j.

On the contrary, through the last seven years, inflation has declined
and growth has spurted only when interest rates have come down.
The reason, as Stiglitz warned in 2008, is that in India, as in most
developing countries, inflation in both 2006-08 and 2009-11 came
through international trade because of huge global oil, food and
commodity price increases triggered by Chinas voracious demand.
By the same token, inflation measured by every price index except
the cost of living, disappeared rapidly in the second half of 2014
because of the severe, and deepening, slump in the Chinese economy.
Curbing the growth of demand in India did not make the slightest
dent. What it did was to kill the growth of manufacturing and
employment.

Notes

Way forward
a.

RBI should focus on output at least as much as it does on inflation,

but this sits uncomfortably with the mandate of inflation targeting
that is proposed in the draft IFC.

b.

Then it should continue its historic role of supervising the financial

system, in which task it has done the Indian citizen proud by
discharging itself without fear or favour. But there is a task on which
it may have slipped a bit of late.

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c.

Amid the highfalutin talk of anchoring expectations, forward

guidance and the natural level of output, it seems to have been
forgotten that the RBI has the monopoly on the note issue, one
granted with a view to facilitating economic exchange. Today, extreme
hardship is caused by a shortage of small denomination currency
notes in the bazaar. This raises transaction costs as agents struggle
to make payment.

Insurance Reforms
1.

2.

Huge potential in insurance industry

a.

Insurance industry in India is a $250 billion industry, equivalent to

four-fifth of the countrys foreign exchange reserves.

b.

Life insurance has potential to grow at 12 per cent annually and

general insurance by 22 per cent in the next ten years as insurance
penetration is one of the lowest in the world.

c.

A CII report prepared in partnership with global consultancy firm

McKinsey says the Insurance industry in India is at an inflexion
point in its development. With Governments reformative drive and
resolve, the industry can jointly achieve the vision of building a
customer centric and value-creating industry over the next decade.
The inclusive growth will enable India to become a global top 10
insurance market with a total Gross Written Premium size of $250
billion.

d.

The Life Insurance industry has around 380 million policies in force
and pays claims for around 12 per cent of the total deaths in the
country. It has a critical role given the limited social security avenues
available and has also played a crucial role in inculcating the savings
habit among a large mass of the population which has limited access
to other forms of savings, the CII study says.

e.

Apart from deepening penetration, the opening up of insurance and

pension sector helps Indian government and companies to access
long-term funding for infrastructure projects, which require investment
up to $1 trillion in the next five years. Only pension and insurance
funds can provide long-term capital of 10-30 years duration as only
they have access to such long term deposits. Unfortunately in India
commercial banks fund infrastructure projects because access to
long-term capital is now limited. Banks by nature get deposits shortto-medium term and hence lend short-to-medium term. Now by
lending long term, banks in India have asset-liability mismatch. Access
to pension and insurance funds will make it easier for long term
funding of infra projects. Foreign insurance players operating in India
will now provide access to pension and insurance funds of their
parent companies.

Challenges to insurance industry

a.

30

India had very poor penetration of life insurance cover accounting

for less than one per cent of population. With the opening up of the
sector to private players and foreign direct investment up to 26 per
cent in the late 1990s, the life insurance cover has more than trebled

Notes

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to 3.7 per cent of the population by 2012. With FDI cap being raised
up to 49 per cent now, the life insurance cover will nearly double to
6 per cent of population in the next five years and to more than 10
per cent by 2025.

3.

b.

The last few years have been challenging for the industry with declining
growth in life insurance premiums and significant challenges in nonlife profitability. This was driven by a combination of macro-economic
factors and structural challenges inherent in the insurance industry.

c.

Its growth has been hampered because of the unusual delay in the
passage of Insurance amendment bill, which 10 years after it was
conceived was passed by Parliament recently. What was standing in
the way was infusion of fresh capital, particularly foreign, which was
possible only if the foreign direct investment cap is raised.

d.

To achieve the targets set for next five years, India needs nearly Rs
50,000 crore of additional capital in the sector, of which nearly half
would have to come by way of foreign investment.

e.

Over the last five decades, the industry has developed significantly
on dimensions related to access, efficiency and structure. However,
much of the gains of the first 10 years of insurance sector
liberalisation have been wiped out in the past 4 years as the industry
has been impacted significantly by macro-economic, regulatory and
internal structural challenges. The industry is at the crossroads today,
with a real risk of losing its relevance if the status quo continues.
The insurance reform bill has therefore come at an appropriate time.

f.

Take for instance health insurance cover. The amount of money

individuals spent on medical treatment totaled to around Rs 3 lakh
crore annually in India, of which only Rs 20,000 crore is through
insurance cover. The rest Rs 2.8 lakh crore is spent on medical
treatment particularly by the poor and lower middle class through
their hard-earned savings or borrowing at high cost or by selling family
silver. The general insurance cover, of which health and motor vehicle
insurance formed part of it accounted for only 0.7 per cent of the
population. It is expected to double to nearly 2 percent in the next
five years. With life and general insurance cover doubling in the next
five to 10 years more than 700 million lives can be covered providing
much needed social safety net hitherto not available to vast majority
of the population. Crop insurance is yet another area where there is
a lot of potential.

Notes

Steps taken
a.

The Insurance amendment bill has precisely done that by raising

the FDI cap to 49 per cent from the present 26 per cent.
Confederation of Indian Industry is of the view that this can be
reversed by concerted action by industry players. The Insurance
amendment bill also brings in regulatory reforms. It is also not true
to say that state-owned Life Insurance Corporation of Indias growth
has been stunted with the opening up. In fact opening up has helped
LIC as new technologies and methods have come into the sector
now and competition had made the state owned organization more
aggressive. LICs annual premium on life insurance has increased

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from Rs 19,000 crore at the turn of the century to 3.64 lakh crore
by 2012. The Insurance Amendment Bill, passed by parliament also
safeguards Indian ownership and control and provided Insurance
regulator, Insurance Regulatory and Development Authority of India
(IRDA) flexibility to discharge its functions more effectively and
efficiently.The Bill amends the Insurance Act, 1938, the General
Insurance Business (Nationalization) Act, 1972 and the Insurance
Regulatory and Development Authority (IRDA) Act, 1999. The
amended law, which replaces an ordinance enacted in December
2014, also enables foreign reinsurers to set up branches in India
including top global re-insurance company Llyods.
b.

With Jan-Dhan Yojana, which has a mandatory accident insurance

cover, can help in insurance penetration.

c.

The government sponsored Rashtriya Swasthya Bima Yojana (RSBY)

provides coverage to the population below the poverty line. The
health insurance cover provided to poor in Tamil Nadu has worked
wonders. It has not only helped the poor to get treatment but also
helped government earn money through insurance claim. The Tamil
Nadu governments popular health card scheme that provided
insurance up to 2 lakh per family or individual has helped General
Hospital in Chennai alone earn Rs 18 crore last year by way of
insurance claim for treatment of poor people covered under the
scheme. This scheme could be a win-win for both government and
poor people.

d.

The government has recently announced that it would promote

universal health coverage. There are several learnings from other
markets as well. In Brazil 40 per cent of the spending on health is
through health insurance unlike in India where it is just 6-7 per cent.
Health insurance has potential to penetrate to more than 75 per cent
of 1.2 billion population in the country.

e.

Jan dhan to Jan suraksha : In May 2015, government launched 3

new social security schemes (two insurance schemes and one pension
scheme).The schemes are particularly for people in the unorganized
sector. However, it is also open to all SB account holders irrespective
of their economic status. It aims to provide social security net that
will be linked to individual users bank accounts.
i.

PMSBY (PM Suraksha Bima Yojana) : It provides For all

account holders whose age is between 18 70 years accident
insurance worth Rs. 2 lakh at just Rs. 12 per annum. Insurance
covers death and permanent disability due to accidents.

ii.

PMJJBY (PM Jeevan Jyoti Bima Yojana) : It provides for all

account holders whose age is between 18 56 years a life
insurance worth Rs. 2 lakh at just Rs. 330 per annum.

iii. Atal Pension Yojna : It is for all bank account holders whose
age is between 18 to 40 years. One can avail monthly pension
of Rs. 1,000 to 5,000 (depending on your contribution) from
the age of 60 years. In the initial five years, the government
will co-contribute 50 per cent of the amount put in by the
subscriber or Rs 1,000 per annum, whichever is less.

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YUAN : Devaluation of Yuan and its implication

on global and Indian economy

Notes

Context
The fragile foundations of the global economy have been shaken again by the
recent devaluation of the Chinese Yuan by 1.9% against the Dollar. The Chinese
authorities allowed the redback to depreciate not once, but thrice in quick
succession, an occurrence that was received with a sense of shock the world
over.
Reasons for devaluation
1.

Since the beginning of 2014, there were clear signs that the Chinese
economy was slowing down, a development that President Xi Jinping
wanted the world to accept as the new normal of Chinas economy.
Until the first half of 2011, the Chinese economy grew close to the old
normal rate of close to 10%, but by the fourth quarter of 2014, the
growth rate fell to just over 7%. There was more disappointing news in
the first quarter of 2015; Chinas Gross Domestic Product (GDP) growth
dipped below 7%, the first time since the early 2009 when the Chinese
economy was rocked by the global economic downturn. Although in the
second quarter, growth rate was back to 7%, the IMF has estimated that
the Chinese economy would grow by 6.8% in 2015 (IMF Survey 2015).
Should this prediction be true, it would be the first time a sub 7% growth
would be recorded for a full year since 1991.

2.

Chinas GDP growth has been severely dented by the slowing down of
its merchandise trade. Since 2012, Chinas merchandise trade has been
on a decelerating growth path; in 2014, the growth was down to just 3.4%.
During the year, imports barely grew, while exports grew by only 6%. For
the first time in its post-reform phase, Chinas trade sector is heading for
a negative growth in a normal year. In the first seven months of the
current year, Chinas imports have declined by over 7.5% and its exports
are down by nearly 4%, as compared to the corresponding period in the
previous year. These numbers were possibly the clearest signals that Chinas
economic woes had reached the tipping point.

3.

These perceived signs of economic uncertainty were fanned by the negative

sentiments emanating from the capital market. Over the past two years,
China has been witnessing outflows of capital, which, according to market
analysts have grown rapidly in recent months. According to JP Morgan,
in the past four quarters, capital outflows from China were in the range
of $450 billion (Bloomberg Business 2015), after adjusting for changes in
the valuation of foreign exchange reserves. Charles Dumas of Lombard
Street Research has made an assessment that capital outflows from China
had reached $800 billion over the past year, while Robin Brooks of Goldman
Sachs estimated that the second quarter of 2015 alone had seen outflows
exceeding $200 billion (International Business Times 2015). However, the
veracity of these numbers remains doubtfulsimilar estimates provided
for the third and the fourth quarters of 2014 were found to be considerably
larger than the official statistics provided by Chinas State Administration
of Foreign Exchange. Thus, while there are no two opinions that the
Chinese economy is experiencing capital outflows like never before, the
precise magnitude of these outflows remains debatable.

4.

Putting further pressure on the Chinese authorities was the upward push
faced by the yuan following the appreciation of the dollar. Although the

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Yuans formal peg to the greenback was removed a decade back, there
is nonetheless a tacit link. The Yuan has been pegged to the Dollar via a
daily reference rate set by the Peoples Bank of China and is allowed to
fluctuate within a fixed band, set at 1% on either side of the reference
rate. The steep appreciation of the dollar in the recent past was rubbingoff on the Yuan and an appreciated Yuan was eroding the competiveness
of Chinese exports. The value of its currency played a significant part
when China was pushing its products in the international market and
interestingly, the same factor had once again raised its head in making its
products uncompetitive. In recent months, the fact that yuan was
overvalued has been accepted even by the IMF. In its report following the
recent Article IV Consultation with China, the IMF (2015a) has reported
that the REER (Real Effective Exchange Rate) has been on an
appreciating trend since the 2005 exchange rate reform, gaining an average
of 5% a year during 200614(3% in 2014). According to the IMF, in all
the Yuan has appreciated 55 percent since the exchange rate reform in
2005. With the yuan now adjusting to lower levels, Chinas sagging
exports could receive a much needed proportion There could be two more
advantages for China, both of which are intrinsically linked.
a.

The first of these is that China now has the opportunity to silence
its critics, especially from the US, that it does not allow its currency
to respond to market forces.

b.

The second and more important advantage that China could cash in
on, as a result of making its currency respond to market forces, is
that the yuan could be on its way to be included in the basket of
currencies used to determine the value of the special drawing rights
(SDR). The yuan has been on the threshold of being included in the
basket, but was found wanting on one of the two criteria used for
including any currency in the basket. IMF (2015c) considers a
currency for inclusion in the basket whose exports of goods and
services had the largest value over a fi ve-year period, and have been
determined by the IMF to be freely usable. In the previous review
of the basket undertaken in 2010, the yuan was not considered
because it was seen as not fulfilling the latter criteria. Now that its
currency is on its way to becoming more market determined, China
would have a strong case for its inclusion in the SDR basket and be
recognised as a reserve currency.

Implications for India

What could be the likely implications of yuan devaluation for India?
1.

The first and the most obvious is the impact on Indias bulging trade
imbalance with its largest trading partner. Over the past decade, the trade
imbalance in IndiaChina trade has increased by 33-fold. This spectacular
increase in trade deficit was fuelled by a steep increase in Indias import
bill with China, from less than $11 billion in 200405 to over $60 billion
in 201415, and, on the other, by almost crawling export earnings; the
latter increasing from $5.6 billion in 200405 to less than $12 billion in
201415.

2.

In terms of the broad product groups provides yet another facet to

understand the likely impact of Yuan devaluation on India.

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3.

While the composition of Indias exports to China has changed considerably,

the composition of its imports from China have remained fairly stable.
Over the past decade, India has graduated from being a supplier of raw
materials and intermediates to China. Consumer and capital goods, which
made up for just 5% oftotal exports in 2005 had increased to more than
a fourth of Indias exports in 2014. At the same time, the share of raw
materials in Indias total exports to China decreased from nearly 70% in
2007 to less than 24% in 2014. An interesting development has been that
the share of intermediate goods in total exports had exceeded 50% in
2014. This number could be seen as a measure of participation of
manufacacturing units based in India in the production networks that
Chinese entities are involved in. Thus, while absolute levels of Indias
exports to China have looked increasingly dismal, especially over the past
few years, the commodity composition of Indias exports has shown a
distinct improvement, with value-added product groups increasing their
shares. Yuan devaluation, therefore, imposes an additional burden on
the fledgling manufacturing sector to find ways of maintaining this
favourable trend in commodity composition.

4.

Indias imports from China are largely capital and intermediate goods
(nearly 82% of the total in 2014). Yuan devaluation would therefore have
a favourable impact on the projects that are relying on supplies from
China and may, in course of time, encourage new projects to import from
the same source.

5.

Similarly, use of intermediates imported from China would provide an

additional price advantage to Indian manufactures, particularly in the
competitive global markets. But with manufacturing imports from China
becoming attractive, domestic manufacturers would face a further squeeze
on their bottom lines. India Inc has already been making demands for
increasing tariff protection to protect its interests from Chinese imports
(Economic Times 2014), and such demands are likely to increase in the
ensuing days.

6.

Among the specific industry groups, which could face serious competition
in the international markets arising from the devaluation of the yuan, an
important one is textiles and clothing. This group has the largest share of
Indias exports among manufacturing industries (12% in 201415). Further,
its share has increased over the past few years. In the global markets,
Indias textiles and clothing have had to compete with, among others, the
market leader, China. Interestingly, Indias share in the global market for
textiles has been rising steadily over the past decade, while its share in the
market for clothing has remained stagnant. This industry, which is also one
of the largest employers in manufacturing, would need to be supported by
the government to face the challenge posed by Yuan devaluation.

7.

There is therefore little doubt that the devaluation of the yuan would
adversely affect the interests of Indias manufacturing sector, a scenario
that does not bode well for the Make in India project.

8.

In this context it should be pointed out that the real impact of Yuan
devaluation could be felt through another development. Currently, India is
engaged in the shaping of the Regional Comprehensive Economic
Partnership (RCEP), a mega-regional free trade agreement in which 15

Notes

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countries in the East Asian region, including China, are participating. The
nature of tariff cuts that India would offer to China while signing on to
the RCEP would also have a role to play in determining the extent of
market penetration that products from Asias largest economy would
eventually make.

E-Commerce
What is e-commerce ?
1.

E-commerce means sale or purchase of goods and services conducted

over network of computers or TV channels by methods specifically
designed for the purpose. Even though goods and services are ordered
electronically, payments or delivery of goods and services need not be
conducted online. E-commerce transaction can be between businesses,
households, individuals, governments and other public or private
organizations. There are numerous types of ecommerce transactions that
occur online ranging from sale of clothes, shoes, books etc. to services
such as airline tickets or making hotel bookings etc.

Business to Business (B2B) or Business to Consumer (B2C)

2.

The bookings done through electronic communication could be Business

to Business (B2B) or Business to Consumer (B2C).

3.

Business to Business i.e. B2B is e-commerce between businesses such as

between a manufacturer and a wholesaler or between a wholesaler and a
retailer. As per the WTO report WT/COMTD/W/193, global B2B
transactions comprise 90% of total e-commerce. According to research
conducted by USA based International Data Corporation, it is estimated
that global B2B commerce, especially among wholesalers and distributors
amounted to US$12.4 trillion at the end of 2012.

4.

The bookings done electronically between Business to Consumer for

purchase or sale of goods and services is known as B2C e-commerce.
Although B2C e-commerce receives a lot of attention, B2B transactions
far exceed B2C transactions. According to IDC, global B2C transactions
are estimated to have reached US$ 1.2 trillion at the end of 2012, ten
times less than B2B transactions. B2C e-Commerce entails business selling
to general public/ e-catalogues that make use of shopping place. There
are several variants in B2C model that operate in e-commerce arena.

How it e-tailing differs from conventional retail model

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Notes

Market-place and inventory model

From the point of view of business, there are two models of e-commerce. First
model is known as Market Place model, which works like exchange for
buyers and sellers. The Market Place provides a platform for business
transactions between buyers and sellers to take place and in return for the
services provided, earns commission from sellers of goods/services. Ownership
of the inventory in this model vests with the number of enterprises which
advertise their products on the website and are ultimate sellers of goods or
services. The Market Place , thus, works as a facilitator of e-commerce. Different
from the Market Place model is the second category of business known as
Inventory Based model. In this model, ownership of goods and services and
market place vests with the same entity. This model does not work as a
facilitator of e-commerce, being delineated there from, but is engaged in ecommerce directly.
Evolution in india
1.

Circa 1991: Introduction of E-Commerce

a.

2.

The year 1991 noted a new chapter in the history of the online world
where e-commerce became a hot choice amongst the commercial use
of the internet. At that time nobody would have even thought that
the buying and selling online or say the online trading will become
a trend in the world and India will also share a good proportion of
this success.

Circa 2002: IRCTC teaches India to Book ticket online

a.

India first came into interaction with the onlineE-Commerce via the
IRCTC. The government of India experimented this online strategy
to make it convenient for its public to book the train tickets. Hence,

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the government came forward with the IRCTC Online Passenger

Reservation System, which for the first time encountered the online
ticket booking from anywhere at any time. This was a boon to the
common man as now they dont have to wait for long in line, no
issues for wastage of time during unavailability of the trains, no
burden on the ticket bookers and many more. The advancements in
the technology as the years passed on have been also seen in the
IRCTC Online system as now one can book tickets (tatkal, normal,
etc.) on one go, easy payments, can check the status of the ticket
and availability of the train as well. This is a big achievement in the
history of India in the field of online E-Commerce.
3.

Circa 2003: Introduction of Low Cost Airline with AirDeccan

a.

4.

Circa 2007: The Deep Discounted model of Flipkart

a.

5.

After the unpredicted success of the IRCTC, theonline ticket booking

system was followed by the airlines(like Air Deccan, Indian Airlines,
Spicejet, etc.). Airline agency encouraged, web booking to save the
commission given to agents and thus in a way made a major
population of the country to try E-Commerce for the first time.
Today, the booking system is not just limited to the transportation
ratherhotel bookings, bus bookingetc. are being done using the
websites like Makemytrip and Yatra.

The acceptance of the e-commerce on a large scale by the Indian

people influenced other business players also to try this technique
for their E-businesses and gain high profits. Though online shopping
has been present since the 2000 but it gained popularity only with
deep discount model of Flipkart. In a way it re-launched online
shopping in India. Soon other portals like Amazon, Flipkart, Jabong,
etc. started hunting India for their businesses.

Circa 2015: Current Scenario

a.

Online shoppingin its early stage was a simple medium for shopping
with fewer options. The users can just place an order and pay cash
on delivery. But, in last few years this field has been renovated to a
high extent and hence fascinated many customers. Today, the online
shopping has become a trend in India and the reason behind the
adoption of this technique lies in the attractive online websites, user
friendly interface, bulky online stores with new fashion, easy payment
methods (i.e. secure pay online via gateways like paypal or cash-ondelivery), no bound on quantity & quality, one can choose the items
based on size, color, price, etc.

b.

Despite being a developing country, India has shown a commendable

increase in the ecommerce industry in the last couple of years, thereby
hitting the market with a boom. Though the Indian online market is
far behind the US and the UK, it has been growing at a fast page.

c.

Further, the addition of discounts, coupons, offers, referral systems,

30days return guarantee, 1-7 days delivery time, etc. to the online
shopping and the E-Market have added new flavors to the industry.

Reason for its growth in India

According to KPMG (Oct 2015), e-commerce sector in india is projected to
cross $80 billion by 2020 and $300 billion by 2030

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1.

Growth of home grown players flipkart, snapdeal, makemytrip etc.

2.

Innovative models like cash on delivery.

3.

Market place model (or non-inventor model allows the e-commerce players
to provide attractive discounts and offers which are difficult for inventoryled brick-and-mortar shops due to high costs of holding inventory, poor
logistics and supply chain challenges.

4.

Rising youth population, urbanization, rising salary and consumers.

5.

Increasing adoption of Smartphones & thus growing internet penetration.

6.

Setting up of payment banks by digital companies like paytime, airtel will

boost cashless transaction and e-commerce.

7.

Spillover effect on associate industries such as logistics, online advertising,

media and IT/ITES it has increased entrepreneurship (60% of e-commerce
ventures have been started by 1st time entrepreneurs).

8.

Even government is using it. In May 2015, Indian post launched a center
in Delhi (Safdarjung) to exclusively handle all the e-commerce business.
It will help e-tailers in delivering parcels especially in rural areas.

Notes

Challenges
While the growth in this sector excites entrepreneurs and financial investors
alike, some serious challenges are beginning to weigh down on the sector. ECommerce players in India need to address eight key aspects of their business,
both internal and external.
External challenges : External forces impact how e-commerce companies
plan their growth strategy and provide seamless customer experience onsite
and pos transaction.
1.

Product and market strategy: e-commerce companies have to address issues

pertaining to rapidly evolving customer segments and product portfolios;
access information on market intelligence on growth, size and share; manage
multiple customer engagement platforms; focus on expansion into new
geographies, brands and products; and simultaneously tackle a
hypercompetitive pricing environment.

2.

Customer and digital experience: Companies have to provide a rich, fresh

and simple customer experience, not geared towards discovery; manage
inconsistent brand experience across platforms; manage proliferation of
technologies; and handle time-to-market pressure for new applications. In
the recent past, social media has become more influential than paid
marketing.

3.

Payments and transactions: e-commerce companies may face issues around

security and privacy breach and controlling fictitious transactions. Further,
RBI restrictions for prepaid instruments or e-wallets act as impediments.
From a transactions perspective, cross-border tax and regulatory issues,
and backend service tax and withholding tax can have serious implications.

4.

Fulfilment: Companies will need to check if the physical infrastructure

gets affected by the internet speed. Also, the lack of an integrated end-toend logistics platform and innovation-focused fulfilment option could cause
delivery issues. Challenges around reverse logistics management and third
party logistics interactions could also act as barriers to growth.

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Internal challenges : Internal forces impact how e-commerce companies can

organise to drive and sustain growth.
1.

Organisation scaling: e-commerce companies will have to make sure

organisation design keeps pace with the rapidly evolving business strategy,
along with fluid governance, strong leadership and management
development. From a growth perspective, identifying acquisition
opportunities, fund raising and IPO readiness becomes necessary. From a
technology perspective, it is important to transform IT as an innovation
hub and address the lack of synergy between business, technology and
operations functions of the enterprise.

2.

Tax and regulatory structuring: Companies will need to address issues

around sub-optimal warehouse tax planning; imbalance between FDI norms
vis--vis adequate entity controls; inefficient holding, IPR or entity
structures; and international tax inefficiencies. Future challenges include
the new Companies Act, policy on related-party transaction pricing, and
the uncertainty around GST roadmap.

3.

Risk, fraud and cyber security: From a risk perspective, e-commerce

companies could face issues around brand risk, insider threats and website
uptime. Issues around employee-vendor nexus, bribery and corruption
make companies vulnerable to fines. Cyber security also raises some
concerns around website exploitation by external entities.

4.

Compliance framework: e-commerce companies have to comply with

several laws, many of which are still evolving. Potential issues around
cyber law compliance, inefficient anti-corruption framework, legal exposure
in agreements or arrangements, indirect and direct tax compliance
framework and FEMA contraventions and regularisation could pose
problems. Also, uncertainty around VAT implications in different states
due to peculiar business models could cause issues.

FDI in B2C e-commerce

Context
As per extant FDI policy, FDI, up to 100%, under the automatic route is
permitted in B2B e-commerce activities.
In recent months, there has been a lot of interest and debate around permitting
FDI in B2C e-commerce. While its proponents perceive enormous benefit,
there is no dearth of people who have serious apprehensions to this proposition.
In response to news reports appearing in print and electronic media, a number
of representations have been received in this department from different
stakeholders. Their broad points of view are described in the following
paragraphs.
A national level body of internet and mobile phone companies, highlighting
the challenges as regulatory restriction to raise funds from foreign PE/VC, has
suggested a caveat based approach to allowing FDI in the sector. Another
national body of software and IT companies has made persuasive case for
allowing FDI in B2C ecommerce. It is stated that e-commerce can be aligned
to the objectives of national development by providing impetus to
manufacturing sector, order consolidation and distribution, facilitating and
supporting SMEs, improving outreach and access to buyers/sellers, bringing
traceability and transparency in transactions, empowering consumers with
information and data and finally creating new job opportunities. One body of

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industries has stated that MSMEs / traders are currently benefitting from ecommerce in India and there is huge scope of further involvement and growth
of MSMEs / traders with further boost to e-commerce. Even small traders
have enhanced their coverage by using e-commerce platforms like JustDial,
Quikr etc. An international council has stated that India could reap enormous
and nearly immediate benefits by creating an exemption from its retail FDI
rules to permit the unrestricted marketing of retail goods through e-commerce.

Notes

A national body of traders has strongly opposed allowing any FDI in ecommerce. They have stated that Indian market is not yet ready for opening
up e-retail space to foreign investors. Small time trading or opening corner
stores still remains a large source of employment. FDI in the sector will have
disastrous impact on this domestic industry leading to monopolies in e-commerce,
manufacturing, logistics, retail sector etc. and causing large scale unemployment.
Because of scale of economic operations, e-commerce players will have more
bargaining powers than standalone traders. Allowing FDI in e-commerce will
provide e-commerce players with complete geographical reach, which will be
against the spirit of FDI in multi brand retail trade i.e. being restricted to cities
with a population of more than one million in consenting states or any other
city of their choice. Moreover, Indian e-commerce industry which is at a nascent
stage of development will be seriously threatened.
Representations have also been received from certain multinational companies.
One such MNC engaged in the inventory based e-commerce has stated that
open and deregulated e-commerce sector would create new markets for small
businesses/entrepreneur and help them scale at almost no cost and generate
employment through investment/innovation in supply chain management,
warehousing, logistic services and other ancillary sector. It is suggested that in
order to bring much-needed parity between e-commerce and recently liberalized
brick and mortar retail trade policy, enabling greater inclusion of remote
consumers and small businesses, a separate policy framework for FDI in ecommerce that relies on nuanced, functionality-based treatment of e-commerce
platforms in their various existent forms could be considered. Another MNC
which also operates front end stores is in favour of opening the sector to FDI.
However, another MNC engaged in Market Place model of e-commerce
having presence in the country since last few years has not given any views on
opening of FDI for inventory based B2C e-commerce. It may be mentioned
that FDI in Market Place model is already present in the country.
As regards domestic e-commerce companies, their views appear to be divided.
This is on account of varying commercial considerations of entrepreneurs i.e.
opting to stay in or exiting out of business, capital requirement, choosing
between financial and strategic investment etc. One of the leading domestic
companies has stated that Indias e-commerce industry has been developed by
first time Indian entrepreneurs with active participation from the PE / VC
industry which has infused approx. US$ 2 billion in Indias fledgling e-commerce
industry over the last 2 years. It is stated that the outlined need for foreign
capital in this industry can be met by VCs and PEs which are willing to invest.
Therefore, it is suggested that foreign capital in the inventory led e-commerce
industry may be allowed in financial form and not in strategic form. However,
100% strategic investment over a period of 3 - 4 years in a phased manner, by
which time these companies would build scale and can compete with large
corporations, can be considered. Another domestic entity citing a number of
benefits, has suggested to allow 100% FDI under automatic route in the sector,
subject to certain conditions like no offline retail trading activity by B2C ecommerce company, 40% sourcing from SME/MSME and other local business

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and no sale of food/agriculture produce/ processed food on B2C e-commerce

platforms.
Advantages of FDI in the sector:
1.

Boost to the infrastructural development: Increased capital will help to

establish supply chain, distribution system and warehousing.

2.

Impetus to manufacturing sector: Growth in retail sector will have cascading

effect in the manufacturing sector which will positively contribute to overall
growth of economy and job creation.

3.

More efficient supply chain management: Will reduce the need for
middlemen leading to lower transaction costs, reduced overhead and reduced
inventory and labour costs.

4.

Adopting best global business practices: Will lead to better work culture
and customer service.

5.

Increased outreach: Will provide increased access to buyers/sellers, allow

MSMEs and artisans to reach out to customers far beyond their immediate
location, both locally within India and abroad.

6.

Traceability and transparency: Will not only empower consumers with

information and data but also help in better compliance of regulatory
framework.

7.

Reduced costs: On marketing and distribution, travel, materials and supplies

will benefit businesses.

8.

Improved customer service: providing more responsive order taking and

after-sales service to customers and competitive pricing.

Disadvantages of FDI in the sector:

1.

Works against the spirit of FDI policy in MBRT. Allowing FDI in ecommerce will provide ecommerce players complete geographical reach
which will be against the spirit of FDI in multi brand retail trade i.e. being
restricted to cities with a population of more than one million or any
other city as per the choice of consenting states.

2.

Indian market is not yet ready for opening up e-retail space to foreign
investors. It will seriously impair small time trading of brick and mortar
stores. Small time shopkeepers are not highly qualified and will not be
able to compete with sound e-retail business format.

3.

Because of scale of economic operations, e-commerce players in the

inventory based model will have more bargaining power than standalone
traders and will resort to predatory pricing.

4.

The infrastructure created by major e-commerce players will be captive

and government will not be able to achieve its objective of creating back
end infrastructure.

5.

Indian e-commerce market is at a nascent stage of development. With

FDI in e-commerce, global players will have adverse impact on this domestic
industry. It will lead to monopolies in e-commerce, manufacturing, logistics
and retail sector. Inventory based e-commerce competes directly with
MSMEs. Indian e-commerce B2C is growing in an eco- system with Indian
owned/led companies offering open marketplace models which provide a

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technology platform to help MSME reach across India and even globally.
These marketplaces do not compete with MSME or retailers and allow
everyone to trade. On the other hand, allowing the entry of inventory
based large foreign e-tailers may shrink Indian entrepreneurship and the
MSME sector
6.

MNCs may dump their cheaper products in the market causing a negative
impact on the Indian manufacturing sector in general and to MSMEs in
particular.

7.

Small time businesses/ kirana stores remain the largest source of

employment in the country. Opening of B2C e-commerce on inventory
based model is likely to seriously impact these shopkeepers leading to
large scale unemployment.

Notes

Conclusion and recommendations

Overall, e-commerce including online retail in India constitutes a small fraction
of total sales, but is set to grow to a substantial amount owing to a lot of
factors such as rising disposable incomes, rapid urbanization, increasing adoption
and penetration of technology such as the internet and mobiles, rising youth
population as well as increasing cost of running offline stores across the country.

Technology Startups in India

Since 2010 there has been a significant rise in the number of technology startups. Today our country boasts of 3,000 + tech/digital start-ups; it become the
4th largest base of technology start-ups in world. Some 800+ startups are
coming up every year. Going by this trend by 2020 more than 11,500 startups are expected to get established in India, generating employment opportunities
for over2.5 lakh people.
Now there are various drivers for growth like opportunities exist in domestic
market, Rising consumer middle class, Increasing penetration of internet due
to smart-phones and those, Multiple sources of funding (banks, financial
institurions, venture capital funds) Increased M&A and consolidation activities
and emergence of new technologies like cloud computing, augmented reality
etc.
Now this should be promoted because it has huge impact on economy. By
2020 can generate employment opportunities for over2.5 lakh people; Niche
solutions like edu-tech and health-tech are important for health, education and
agriculture; Young entrepreneurs dominate the startup landscapes (73% of
founders below the age of 36 years) and technology being gender neutral,
women entrepreneurs are also on rise (6% women founders).
But this huge potential is under-utilized. There are so many Indians working
in Google. Why are they not setting up their own Google here? Young
ventures were shifting out of India as a result of various grievances. By tapping
into the new wave of tech entrepreneurship we can create large global software
product companies (India is known for IT services companies, not product
ones).
Now this is because of various challenges like ease of doing business is poor,
need tax incentives, due to the excessive red tape in the investment process,
many companies are leaving India Government is clubbing startups with SMEs
which startups are opposed to, they want govt. to remove regulatory hassles,
Excessive red tape in investment processes. The start-up ecosystem is not

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properly understood by the government. At the moment, the government does

not distinguish between a start-up and an SME [small and medium enterprise].
There is lack of innovation (Techies cite the low ranking of India in the
Global Innovation Index while speaking about the state of innovation in the
country. India came 81st (behind Trinidad and Tobago) out of 141 countries
in the latest Global Innovation Index, a leading benchmarking tool for anyone
seeking insight into the state of innovation. Techies also require the government
to change the intellectual property and innovation scenario. One regulatory
intervention that Indian tech entrepreneurs seek is the abolition of the capital
gains tax that would allow successful Valley-based entrepreneurs to invest
early in Indian start-ups and help them build global businesses. The idea is
they would bring with them their highly valued expertise, knowhow and
informed risk-taking ability, ingredients that are in short supply to this first
generation of product companies in India.
In this background, government has taken various steps like
1.

SETU Self-Employment and Talent Utilisation - Govt. has established

SETU under NITI Aayog. SETU is a Techno-Financial, Incubation and
Facilitation Program to support all aspects of start-up businesses,
particularly in technology-driven areas.

2.

In Budget 2015, Finance Ministry announced that an AIM (Atal innovation

mission) will be set up in NITI Aayog. It will be a Promotion Platform
involving academics, entrepreneurs and researchers to foster a culture of
innovation, R&D and scientific research in India.

3.

Start-up India; Stand up India its a new campaign announced by

PM in his Independence Day speech to promote entrepreneurship. He
said that he is looking at systems for enabling start-ups. He exhorted all
1.25 lakh bank branches to fund at least one start-up of tribals and Dalits.
But there are some concerns like Indian banks have already such a huge
NPA. Considering the success rates of the start ups, Indian banks are
taking a huge risks with there money; finance is just a fraction of issues
the entrepreneurs are facing. Thus solve the above mentioned issues.

4.

During Modis US visit in Sept 2015, Qualcomm announced setting up of

$150 million venture fund to invest in Indian startups in the mobile and
internet-for-everything (IOE) ecosystem.

5.

Subsequently, the Commerce and Industry Ministry started working on a

framework to encourage start-ups and boost job creation. The final
framework is expected to be unveiled in November, 2015.

6.

In June 2015, SEBI relaxed the norms for technological start-ups to raise
funds from the capital market.

7.

In July 2015 Finance Ministry and in sept 2015 Prime Minister visited
Silicon Valley, the worlds Internet innovation hub where he made a pitch
for Indias digital future focussing on startups, innovation & technology
and how to further support them in India.

Do we need big bang reforms? VIEW OF

ECONOMIC SURVEY
1.

44

Given the expectations surrounding the upcoming budget, one question

needs to be addressed head on: Does India need Big Bang reforms?

Notes

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2.

Much of the cross-country evidence of the post-war years suggests that

Big Bang reforms occur during or in the aftermath of major crisis. Moreover,
Big Bang reforms in robust democracies with multiple actors and institutions
with the power to do, undo, and block, are the exception rather than the
rule. India today is not in crisis, and decision-making authority is vibrantly
and frustratingly diffuse. Not only are many of the levers of power
vertically dispersed, reflected in the power of the states,policy-making has
also become dispersed horizontally. The Supreme Court and the
Comptroller and Auditor General have all exerted decisive influence over
policy action and inaction. Moreover, some important reforms such as
improvements to tax administration or easing the cost of doing business,
require persistence and patience in their implementation, evoked in
MaxWebers memorable phrase, slow boring of hard boards.

3.

Hence, Big Bang reforms as conventionally understood are an unreasonable

and infeasible standard for evaluating the governments reform actions.
Equally though, the mandate received by the government affords a unique
window of political opportunity which should not be foregone. India needs
to follow what might be called a persistent, encompassing, and creative
incrementalism but with bold steps in a few areas that signal a decisive
departure from the past and that are aimed at addressing key problems
such as ramping up investment, rationalizing subsidies, creating a
competitive, predictable, and clean tax policy environment, and accelerating
disinvestment.

4.

Thus, Webers wisdom cannot be a licence for inaction or procrastination.

Boldness in areas where policy levers can be more easily pulled by the
center combined with that incrementalism in other areas is a combination
that can cumulate over time to Big Bang reforms. That is the appropriate
standard against which future reforms must be assessed.

Notes

FSLRC Financial Sector Legislative Reforms

Commission
1.

In 2011 government setup an FSLSRC under the chairmanship of BN

Srikishna to submit its report in 2013.

2.

It was setup because institutional foundation (laws and organizations) of

the financial sector has various problems. Today, India has over 60 Acts
and multiple Rules/ Regulations that govern the financial sector. Many of
them have been written several decades back. e.g. RBI Act, 1934, Insurance
Act,1938. To address present requirements, they have been amended from
time to time which has led to fragmentation, often adding to the ambiguity
and complexity of regulations in the financial sector.

3.

Its recommendations:
a.

Proposed a sector-neutral, principle-based Indian Financial Code to

replace multiple and old financial sector laws. these should be principlebased because broad principles do not vary with financial or
technological innovation. Non-sectoral means an overreaching
primacry law. Regulators will write subordinated legislation.

b.

Have a seven agency structure for the financial sector which are the
i.

RBI - Regulator of Banking & Payments monetary policy.

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ii.

And newly created Unified Financial Agency (UFA)

Regulator of financial firms and activities other than banking
and payments (subsumes SEBI, IRDA, PFRDA).

iii. Resolution Corporation: Deals with closure of distress in firms.

iv.

Financial Redressal Agency: Single window complaint

mechanism against financial institutions and intermediaries.

v.

Financial Stability & Development Council: Recast as statutory

body. Will manage systematic risks and development.

vi. Public Debt Management Agency: Governments debt manager.

vii. Financial Sector Appellate Tribunal: Will hear complaints
against all financial regulators.

4.

5.

c.

The tasks/mandate of the regulators are consumer protection,

prudential regulation, resolution mechanism , capital controls,
systematic risk, financial inclusion and market development, and
monetary policy which need to be addressed in a non-sectoral manner.

d.

Ensure greater transparency and accountability in the functioning of

financial sector regulators in terms of their reporting system, making
public consultation mandatory in policy making.

Criticism
a.

The major flaw is that the report is a by-product of open conflict

between the erstwhile UPA government and regulators, particularly
the Reserve Bank of India (RBI).

b.

By having single law and unified regulator it leads to centralization

of powerprovide for better governance and accountability.

c.

Use all points of Criticism of PDMA.

Present status
a.

Its recommendations are being debated and in the process of being

implemented.

b.

Government in July 2015 released the revised draft of IFC which

was also criticized.

Revised Draft of Indian Financial Code

1.

FSLRC in its report submitted in 2013, recommended a draft financial

code to replace the existing laws. But this was criticized from various
stakeholders and in this background a revised draft ofIndian Financial
Code (IFC)was released on 23 July by the Finance Ministry.

2.

List of recommendations

46

a.

Monetary policy instead of RBI, a monetary policy committee

headed by RBI chairperson will decide the key policy rates. Out of
7 members, 3 will be from RBI (including RBI chairperson).

b.

Debt management instead of RBI, an independent debt management

committee will decide it.

Notes

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3.

4.

c.

NBFCs instead of RBI, a financial authority will regulate it.

d.

Payment system only systematically important payments systems

will be regulated by RBI (at present all PS are regulated).

e.

Consumer protection to setup a separate consumer agency to

protect consumer interest (as banks flout the norms; mis-sell their
products), RBI at present has been ignoring this area.

f.

Capital controls - Under FEMA, RBI deals with capital account

regulation. The code suggest that government will consult RBI to
make rules on capital controls.

g.

Money markets - At present RBI regulates all these markets. But

code recommends separating regulation of such markets from RBI.

h.

RBI, and the central government in their annual reports must give a
complete disclosure of their performance. This will bring about muchneeded transparency and will reduce information asymmetry that
currently plagues the system

i.

Establish a Resolution Corporation to carry out resolution of certain

types of financial institutions in distress. At present there is no
Resolution Corporation.

Notes

Critical aspects
a.

In light of the changing dynamics of the domestic economy owing

to assorted factors falling outside policy controls, the importance of
a cohesive action plan should not be underestimated. Given this, it
is not incorrect to allow the government a say in matters of monetary
policy. However the revised draft, however, seems to be trying to
push too much of government into monetary matters.

b.

Seen in tandem with its earlier bid to remove from the RBI the
public debt management function, this move only appears intended
to undermine the RBIs autonomy

c.

All these changes can have various negative implications - if RBI

loses its power to decide interest rate then it could have serious
implications. If RBI loses its primacy in capital control regulation
then its conduct of monetary policy will be weakened. It played an
important role in global financial crisis

d.

In the background of these criticisms govt. was quick to disown the

revised draft.

RBI has succeeded in insuring the Indian economy against the profligate
policies of successive governments, and the financial shenanigans in other
economies. Also RBI is not subject to electoral cycles. Prudence suggests
that RBI and like institutions must be allowed to function independently.

Balance Sheet Syndrome

1)

Capital flows are increasing but yet to translate into real investment

1.

Since the new government assumed office, a slew of economic reforms

has led to a partial revival of investor sentiment. Tentative signs that the
worst is over are evident for example in data that shows that the rate of

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stalled projects has begun to decline and that the rate of their revival is
inching up.
2.

But increasing capital flows are yet to translate into a durable pick-up of
real investment, especially in the private sector.

2)

Reason balance sheet syndrome

Notes

This owes to at least five, interrelated factors that lead to what the Mid-Year
Economic Analysis called the balance sheet syndrome with Indian characteristics.
1.

2.

Weal profitability; overindebtedness

Bankruptcy

3.

Problem with PPP model

4.

Balance sheets of banks

(NPAs; stressed assets)

5.

48

Risk aversion

First, hobbled by weak profitability and weighed down by overindebtedness, the Indian corporate sector is limited in its ability
to invest going forward (the flow challenge).

One key indicator of profitabilitythe interest cover ratio, which

if less than one implies firms cash flows are not sufficient to pay
their interest costshas also worsened in recent years.

Further the debt-equity ratios of the top 500 non-financial firms

have been steadily increasing, and their level now is amongst the
highest in the emerging market world.

Second, weak institutions relating to bankruptcy means that the

over-indebtedness problem cannot be easily resolved (the stock
and difficulty-of exit challenge).

This is reflected in the persistence of stalled projects which have

been consistently around 7 to 8 percent of GDP in the last four
years.

Third, even if some of these problems were solved, the PPP

model at least in infrastructure will need to be re-fashioned to
become more viable going forward (the institutional challenge).

Fourth, since a significant portion of infrastructure was financed

by the banking system, especially the public sector banks, their
balance sheets have deteriorated.

For example, the sum of nonperforming and stressed assets has

risen sharply, and for the PSBs they account for over 12 percent
of total assets.

Uncertainty about accounting and valuation, and indeed the history

of banking difficulties across time and space, counsel in favor of
over- rather than under recognizing the severity of the problem.

When banks balance sheets are stressed they are less able to
lend, leading to reduced credit for the private sector (the financing
challenge).

Finally, in a peculiarly Indian twist, this financing problem is

aggravated by generalized risk-aversion (the challenge of inertial
decision-making).

For the public sector banks in particular, which are exposed to

governmental accountability and oversight, lending in a situation
of NPAs is not easy because of a generic problem of caution,
afflicting bureaucratic decision-making.

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Steps are being taken but still little impact Actions being undertaken by the
government to enhance the supply of critical inputs such as coal and gas, as
well as regulatory reform, will alleviate some of these constraints, especially
in the public sector where the data identify them as being regulatory in character
(clearances and land acquisition). Steps are being taken to address the institutional
problem, by creating a better framework for PPPs and for infrastructure
investment in general. The RBI is making efforts to get banks to recognize
their bad loan problems, and address them. But the impact of these initiatives
has so far been limited. The stock of stalled projects remains extraordinarily
high; firm profitability, especially for firms working in the infrastructure sector,
remains low. So, questions on the pace and strength of recovery of private
sector investment remain open.
3)

Notes

Way foward

If the weakness of private investment offers one negative or indirect rationale

for increased public investment, there are also more affirmative rationales.
Indias recent PPP experience has demonstrated that given weak institutions,
the private sector taking on project implementation risks involves costs (delays
in land acquisition, environmental clearances, and variability of input supplies,
etc.). In some sectors, the public sector may be better placed to absorb some
of these risks.
Further, there continue to remain areas of infrastructure rural roads and
railways that provide basic physical connectivity- in which private investment
will be under-supplied. One irony is that while financial and digital connectivity
are surging ahead, basic physical connectivity appears to lag behind.
Therefore, as emphasized in the Mid Year Economic Analysis 2014-15 it seems
imperative to consider the case for reviving targeted public investment as an
engine of growth in the short run not to substitute for private investment but
to complement it and indeed to crowd it in. The two challenges of raising
public investment relate to financing and capacity. (Financing issues were
addressed earlier chapter of growth-fiscal policy challenge)
Public sector implementation capacity in India is variable. But the analysis in
the next chapter of this volume suggests that the Indian Railways could be the
next locomotive of growth. Greater public investment in the railways would
boost aggregate growth and the competitiveness of Indian manufacturing
substantially. In part, these large gains derive from the current massive underinvestment in the railways. For example, China and India had similar network
capacities in until the mid-1990s but because it invested eleven times as much
as India in per-capita terms, Chinas capacity and efficiency have surged. In
contrast, stagnant investment has led to congestion, strained capacity, poor
services, weak financial health, and deteriorating competitiveness of logisticsintensive sectors, typically manufacturing. Congestion has effectively led to
the railways ceding a significant share in freight traffic to the roads sector. This
is not a welcome development since rail transport is typically more cost and
energy efficient. The profits generated by freight services have cross-subsidized
passengers services and Indian freight rates (PPP adjusted) remain among the
highest in the world.
What the previous NDA government did for roads, the present government
could do for the railways, strengthening the physical connectivity of the Indian

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population, with enormous benefits in terms of higher standards of living,

greater opportunities, and increased potential for human fulfillment.

Bankruptcy Reforms
Overview
1.

According to TK Viswanathan committee on bankruptcy reforms

(submitted report in Feb 2015) the average time taken to resolve insolvency
in India is about 4.3 years, while it is only 1.7 years in high-income
OECD countries. Doing Business, 2015 Report ranked India at 137 for
resolving insolvencies.

2.

Some of the reasons for it are Failure of SICA (Sick Industrial Companies
Act) and BIFR (Bureau for Industrial and Financial Reconstruction);
Judicial delays

3.

Now all these have various negative consequences-

d.

a.

It is one of the 5 features of reason for balance sheet syndrome.

b.

Stalled projects are 7-8 % of GDP in the last four years.

c.

Lacks of laws was written respect to it rendering even good policies

ineffective.

Stronger bankruptcy laws protect the rights of borrowers and lenders,

promote predictability and makes collection of debt through bankruptcy
proceedings more attractive.

Bankruptcy Law Reforms Committee (TK vishwanathan committee)

The Bankruptcy Law Reforms Committee submitted its interim report to the
Ministry of Finance on February 11, 2015. The Finance Minister in his budget
speech in July 2014 had announced that an entrepreneur-friendly, legal framework
for bankruptcy would be introduced for small and medium enterprises. Thereafter,
the Bankruptcy Law Reforms Committee was formed under Mr. T. K.
Vishwanathan in August 2014. The Committee aimed to: (i) examine current
legal framework for corporate insolvency, and (ii) develop an insolvency code
for India to cover personal and business insolvency. Recommendations in the
interim report include:
1.

Sections 253(1) and 253(4) of the Companies Act, 2013 should be amended
to allow: (i) any secured creditor to initiate rescue proceedings if a debtor
company fails to pay a single debt owed to it, within a month of serving
the notice, and (ii) the debtor company to initiate rescue proceedings for
itself for the grounds of not being able to pay any value owed to the
creditor.

2.

The Companies Act, 2013 currently does not provide any criterion for
determining sickness of a company, and leaves it to the discretion of the
National Company Law Tribunal (NCTL). The Committee recommends
the committee of creditors decision on whether the company should be
rescued or liquidated should be supported by 75% of secured creditors by
value, or 75% of all creditors by value, for a company with no secured
debt.

3.

Grounds on which the NCTL can grant, refuse or lift a moratorium on a

business are also listed in the recommendations.

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4.

Section 253 of the Companies Act, 2013 should be amended to allow

unsecured creditors (representing 25% of the value of the total amount
owed to all unsecured creditors), to initiate rescue proceedings if the
debtor company does not pay a single debt owed by it, within a month
of serving the notice.

Notes

Trans-Pacific Partnership Agreement

Trans-Pacific Partnership agreement among the 12 Pacific rim nations was
agreed in october 2015

2.

a.

Over a decade ago, on June 3, 2005, on the sidelines of a meeting

of Asia-Pacific Economic Cooperation (APEC) ministers in Jeju,
South Korea, representatives from Brunei, Chile, New Zealand and
Singapore agreed to enter into a trade pact, the Trans-Pacific Strategic
Economic Partnership Agreement. Two and a half years later, in
January 2008, the US decided to enter into talks with these four
Pacific rim countries on trade liberalisation in financial services, a
move that eventually set the stage for the Trans-Pacific Partnership
or TPP.

b.

The TPP was subsequently broadbased to include 12 Pacific rim

countries. Apart from the US and the four original APEC members,
it includes Japan, Malaysia, Vietnam, Australia, Canada, Mexico and
Peru. The agreement, one of the most ambitious free trade agreements
ever signed, aims at slashing tariffs on most goods traded between
these countries, and the creation, over time, of a unified market like
in Europe. The scale would be much bigger the 12 countries are
together home to nearly 800 million people close to double the
EUs single market and already account for 40% of world trade.

Which goods and services have been included?

a.

3.

What needs to be done to ratify the deal?

a.

4.

A full range tariffs will be removed immediately in some cases,

and phased out over time in others. Japanese carmakers like Toyota,
Nissan and Honda will benefit from cheaper access to the US, their
biggest export market. US vehicle exports too would find new markets
if tariffs of up to 70% in countries such as Vietnam and Malaysia are
slashed. US farmers and poultry firms stand to benefit; other foods
that would see lower taxes include dairy, sugar, wine, rice and seafood,
with exporter countries such as Australia and New Zealand benefitting.
Liberalised free trade is likely in services. The challenge for negotiators
was to find meeting ground on concerns raised by disparate
stakeholders from Canadian dairy farmers to Japanese rice cultivators.
An adverse impact could be seen in the biotech sector.

Finer details of implementation will be debated in the legislatures of

individual countries in the coming months. According to reports, the
pact is likely to come before the US Congress in the midst of the
presidential primaries.

What is the opposition to the deal?

a.

The five-year talks have been largely secret, and campaigners have
criticised the lack of transparency. There is speculation that the
negotiations focussed on keeping China at bay.

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b.

5.

How will the larger WTO negotiations be impacted?

a.

6.

The TPP will intensify competition between countries labour forces.

Labour groups are worried it would result in jobs moving from
economies such as the US to countries with lower wages and less
strict labour laws. Vietnam is being seen as a big winner analysts
predict the deal would boost its growth by over 10% in the next
decade while economies such as Peru might suffer.

WTO negotiations have been plagued by missed deadlines and a

lack of consensus. The Doha Development Round is clearly dead,
and the outlook for upcoming talks at Nairobi in December is not
promising. WTO Director-General Roberto Azevedo has been
guarded on the TPP breakthrough calling on WTO members to
accelerate their work even as he congratulated ministers and
negotiators from the 12 countries. As a forum, the WTO is clearly
crumbling, considering there are two other large regional trade
agreements currently under negotiation the Transatlantic Trade
and Investment Partnership (TTIP) between the US and the European
Union, and the Regional Comprehensive Economic Partnership
(RCEP) between the Association of Southeast Asian Nations
(ASEAN) and its four free-trade partners, including China and India.

What can be the impact of the TPP on India?

a.

Pacts like the TPP and TTIP could erode the demand for Indian
products in traditional markets such as the US and EU, benefitting
the partners to these agreements. Vietnam is expected to gain at the
expense of India in the garments business in the US market, as it
will have zero-duty access to the US for textiles as against the 1430 per cent duties that Indian exporters will have to pay. A yarn
forward provision in the TPP, which requires clothing to be made
from yarn and fabric manufactured in one of the free trade partners
to qualify for duty-free treatment under the trade pact, could impact
yarn and fabric exports from India to countries such as Vietnam.
The Peterson Institute for International Economics (PIIE) in a report
released in September said that if China and the rest of the APEC
forum join a second stage of the TPP that continues to exclude
India, Indias annual export losses would approach $ 50 billion.

b.

Some analysts want India to calibrate the impact of the TPP fineprint,
and then get its act together on regional pacts that it is part of,
including the RCEP. The agreement, according to Amitendu Palit, a
senior research fellow at the Institute of South Asia Studies at the
National University of Singapore, is taking off at a time when India
is aiming at greater integration with the Asia Pacific. In a report on
TPP and Indias Emerging Challenges, Palit has urged India to study
the TPP carefully for anticipating its possible impact on its RCEP
negotiations. India will gain from speeded-up RCEP negotiations,
given that the agreement will offer its exports greater access to several
Asia Pacific markets, including China.

MAKE IN INDIA A critical examination

1)

Preface

Make in India is now an all-pervasive catchphrase. An impressive force, an

ad campaign, the neoliberal dream of the efficient state to comes true Make
in India is not some brilliant brainwave of the governemnt it is the culmination

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of very intensive campaign of worldwide propaganda that has been launched

by global corporate capital.
2)

Notes

What is Make in India?

Deregulation and delicensing of the manufacturing sector

i)

Introducing self-certification or third-party certification for safety standards;

for activities classified as non-risk or non-hazardous its to be entirely selfcertified (seeming to render the very act of certification a misnomer).

ii)

The process of applying for industrial licenses is to be made through an

online portal.

iii) The validity of industrial licenses is extended from two to three years.
iv) A number of sectors such as defence and construction have been opened
up entirely (a further dwindling of the number of licensed industries at
the end of the deregulation phase in 199798, only nine industries had
some regulations in terms of entry by private investors).
New Infrastructure
1.

Building industrial corridors and smart cities

2.

Strengthening intellectual property regime compliance with global

standards

3.

Skill development

Opening up Indias high-value industrial sectors

Defence, construction and railways are open to private investment; in defence
the FDI cap has been doubled, and on a case-to-case basis, 100% FDI may be
permitted; 100% FDI in rail projects and in construction
Specific targeting of twenty-five sectors
These include automobiles, auto components, aviation, biotechnology, chemicals,
defence manufacturing, electrical machinery, IT, pharmaceuticals, roads and
highways, food processing, mining, oil and gas, and thermal power. Largely,
these are capital-intensive and require highly skilled labour; even if in themselves
they are not capital-intensive, the idea is clear that youre going to use imported
technology which as I will argue later on is inherently biased against employing
a lot of labour.
And finally, and most importantly, our new government apparently has anew
mindset,as it claims with such fresh-faced Pollyanna-esque innocence: an
attitudinal shift in how India relates to investors: not as a permit-issuing authority,
but as a true business partner.
3)

Evaluating Make in India

To make sense of the strategy and critique it in a real way, one needs to know
what the stated objectives are, figure out how successful it is likely to be in
achieving this, and finally to question the objectives and the strategy itself.
The programme aims to increase opportunities for productive employment for
a wide subset of the population via the means of growth in private
manufacturing. The method being pursued is to integrate India into global
manufacturing value chains as a way of driving export-led industrial growth.

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This leads us naturally to the next part of the exercise: namely, what are the
effects of such a process, how does it proceed, who does it benefit ? In other
words, we need to analyse the political economy of Make in India.
The political economy of Make in India
At a fundamental level Make in India is an attempt to alter the production
structure of the economy. A shift from agriculture to manufacturing, is what
is being drummed into our heads.
Producing goods for export and having these goods produced by multinational
companies have very specific implications, and this requires consideration. The
demand for these commodities come from export markets abroad and from
the urban/metropolitan middle classes, and richer sections of the rural classes.
In other words, domestic markets are extremely narrow Ford and Honda
arent producing for the typical rural agricultural worker or urban casual labourer.
The other important consideration is that these industries are capital-intensive
and/or employ largely skilled labour (employment growth is therefore likely
to be minimal, especially since domestic industry will undergo considerable
upheaval and displacement).The reason why the incoming investment wont
generate employment is simply this: manufacturers producing abroad are likely
to have developed processes that reflect the capital-labour ratios that are
prevalent in advanced capitalist countries. And because this sort of investment
makes use of highly-skilled highly-paid workers, the income distribution will
get even further skewed.
Constraints and limits to export-led narrow-based growth
Now have seen how Make in India, and strategies running parallel to Make in
India, could benefit the upper sections of society while marginalizing those
already poor and vulnerable, we must recognize that such a strategy could fail:
i)

Internal/domestic demand is necessarily constrained. Demand from the

developed world for Indian exports is likely to be low as well, particularly
in the context of a global recessionary climate.

ii)

Lack of infrastructure: a bid to build infrastructure via the thoroughly

discredited PPP model is unlikely to solve the very real problem India
faces in terms of infrastructure

iii) In order to attract global capital the Indian state needs to undertake certain
measures that ensure the cheap manufacturing costs: giving capital access
to cheap labour and natural resources as has already manifested itself
in recent changes in the labour laws, in the land acquisition act, and in the
flexibility of environmental clearances. Social resistance to such measures
is inevitable.
iv) Other developing economies are also competing to be low-cost
manufacturing locations, and the state will have to work doubly hard to
ensure a favourable investment climate, and having to suppress resistance
and social struggles as and when they arise.
4)

To sum up:

Make in India is not a novel or radical turn-about for the Indian economy, the
way it is made out to be it is merely an intensification (more blatant, more
brazen, and more assertive) of the policy stance that has dominated discourse

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since the nineties. It represents a significant worsening of the economic

marginalization of the poor and the vulnerable both if it succeeds, and if it
doesnt.

Notes

Two New Gold Schemes

In budget 2014- 5 governemnt announced the two following new schemes with
respect to gold which were subsequently approved by cabinet in September
2015.
Gold Monetization Scheme (GMS)
1.

In this, individual/institution can open a gold savings account with a bank

and deposit minimum 30 gm of gold after certification from a hallmarking
centre for short, medium or long term. Redemption in gold/cash will be
in short term and only cash in medium/long-term.

2.

Its advantages are that it will help in mobilizing the large amount of gold
lying as an idle asset with households, trusts into productive use. Mobilized
gold will also supplement RBIs gold reserves and will help in reducing the
governments borrowing cost. Gold mobilized under the scheme can also
be used for meeting the requirements set by RBI. And thus they can use
the extra cash for lending. At present CRR is 4% and SLR is 21.5%. so
25.5% of the cash deposit mobilized by banks are locked in these 2
statutory ratios. So, if mobilized gold is considered for meeting the CRR
and SLR requirements, then bank would have additional cash for lending
purposes. It would benefit the Indian gems and jewellery sector as RBI
can lend this gold to them. In long term will reduce import of gold to
meet domestic demand.

3.

But there are various challenges. A large chunk of privately held gold in
India is in the form of jewellery, not bullion. The sentimental value attached
to jewellery is a significant hurdle in people giving up their gold. Women
see it as a status symbol and temples treat them as having devotional
value. Success is linked to the level of tax breaks as well as amnesty
against any wrongdoing in procuring the gold. There is a fair chance that
the monetization scheme may, in fact, lead to some traders importing
more gold, in the form of bullion, just in order to earn interest. Rate of
interest should be attractive enough.

Sovereign Gold Bonds Scheme (SGBS)

1.

In this Instead of earning physical gold, individual/institution can purchase

gold bonds in denomination of 5, 10, 50, 100 gm of gold. Minimum
Tenure of bond is 5-7 years. There would be a cap of 500 grams that a
person can purchase in a year.On maturity, redemption will be in rupee
amounts only.

2.

It has various advantages like it will cut down demand for gold & its
import thus reducing CAD (At present people dont have an investment
avenue, thats why they purchase gold and thus more demand and import).
Both schemes will ensure moderation of gold prices.

3.

There are various challenges to it. Indias appetite for gold leads to an
annual import of about 800 to 1,000 tonnes of gold. Gold imports were
second only to oil imports and the highest in the world.

Indias appetite for gold has traditionally remained immune, both to increased
prices and to summary import bans. This is due to the lack of sufficient

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mineral resources (There are only 3 active gold mines, which meet less than
1 per cent of domestic demand).
Less financial inclusion : With limited access to financial instruments, especially
in the rural areas, gold and silver are popular savings instruments. Due to higher
return it is an important investment tool and status Symbol /part of our
culture.

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Notes