Civil Services Answers to Model Main
Exam, 2015
General Studies, Paper-III Test
dated.25.10.2015
1. Salient feature of Gold
Monetization Scheme [GMS] and Sovereign Gold Bond Schemes [SGBS].
Ans.
It is obvious question. See the
additional Notes given below.
2. The GMS and SGBS are going to
reduce the gold imports and Current Account Deficit of India. Comment.
Ans.
The Government of India has launched two important schemes related to gold,
Gold Monetization scheme [GMS] and Sovereign Gold Bond Scheme [SGBS] to convert
non-productive gold into productive assets.
Under the GMS, gold is
monetized by depositing with the banks in gold deposit accounts. The minimum
deposit limit is 30 grams and no upper limit fixed. The Government has offered
interest @ 2.25% on medium term deposits [5 t0 7 years] and 2.5% on the long term [12 to15
years] and on short term deposits, interest will be decided by banks. This is a
good attraction for the temple trusts and individuals to earn interest on
otherwise, idle gold.
India has paid USD 34.32 billion to import around 930 tonnes of
gold in 2014- 2015 and likely to import gold around 1,000 tonnes during 2015-16, as India has
replaced china as world's biggest gold consumer during November, 2015. Further, the gold import bill is the second
largest, after oil in the import basket of India. According
to the World Gold Council's estimates, Indian households and other institutions
own around 22,000 MT (metric tonne) of gold. Even if the scheme is able to
create only 100-200MT in gold deposits every year over the next few years, it
could help reduce the gold import bill by 10-20 per cent ($3-6 billion)
annually.
Under SGBS, the paper gold
is promoted as against physical gold kept by people and that further would
reduce the demand for physical gold.
The gold deposits
attracted under, GMS, will be converted into bullion and sold to the jewelers in India by
the banks. This obviates the import of gold. Lower import of Gold will help to control
the current account deficit. [Current Account Deficit of last 2 years is 4.2%
and 4.8% respectively.]
3. Discuss the factors which are going
to/hinder the success of GMS and SGBS?
Ans.
The issues those may affect the success of the two schemes are as under.
1. Under the GMS, the persons depositing
gold is required to pay capital gain tax, albeit after getting the benefit of
indexation. Though the tax may not be much, but it will enhance the cost of the
gold for the investors and reduces the value of gold held by them.
2. If the gold invested is not 24 carat
or 99.9 fines, it will be tested for purity and converted into bullion. This
conversion reduces the quantum of gold, on account of impurities and cost of
the wastage paid at the time of buying.
3. The urge for having physical gold in
hand is more for Indians, especially the women folk, hence they may neither
like to monetize the existing gold and
nor like to buy gold bonds
4. The minimum gold limit to invest is 30
grams with no upper limit. But, they need to explain the sources for the gold
in their possession for the tax Department if asked in a future date. This
makes the people not to invest unaccounted gold under the scheme.
5. The procedure taking the gold to
assaying centre to obtain purity certificate and opening gold savings account
with bank, may look cumbersome for the ordinary citizens.
6. The long tenure of maturity period 5
to 7 years and 12 to 15 years and the offer of interest on the original value
of deposit rather than on the appreciate amount of gold at the maturity which
makes the offer less attractive.
7. The redemption of short term deposits
only in gold in bullion form or cash and the other tenures, it is only in cash
will also affect the psyche of the people.
8. Under SGBS, the gold bonds are issued
in d-mat form in stock exchanges. Given the percentage of participation of
Indians in exchanges, this may be catering to the urban and semi urban elite
rather than the masses.
4. The World countries are busy in
forging trade pacts with their allies or like minded members all over the
world. Comment
Ans.
1. TPP
2. RCEP
3. India-ASEAN Free Trade Agreement and
similar one with Sri Lanka
4. Trans Atlantic Free Trade Agreement
between Western Europe and North America.
The
same are explained in Q.5 and 6
5. The recent developments in the
Asia-Pacific region are affecting India in a big way. Comment.
Brief
Introduction
to the origin of new trade block
Effects
of TPP on India
RCEP
Elnino
Ans.
In the month of October, 2015, USA plus 11 countries in Asia Pacific region had
struck a big trade deal in the name of Trans Pacific
Partnership (TPP). India is not a part of
this mega-free trade deal which may have potential adverse effects on India.
If TPP is ratified and comes into effect, it may erode the existing
preferences for Indian products in established traditional markets such as the
US and the European Union (EU) and benefit India’s rivals such as Vietnam in
apparel market. Second, they are likely to develop a rules architecture which
will place greater burden of compliance on India's manufacturing and services
standards for access to the markets of the participating countries. The USA’s
source origin clause would adversely affect Indian exports. The IPR related
agreement, which is not made public, would pose a great threat to Indian
exports.
Another trade block is taking shape in the form of Regional Comprehensive Economic Partnership (RCEP)
which is a free trade agreement among the 10 ASEAN countries plus Australia,
China, India, Japan, South Korea and New Zealand. Parties to these negotiations
are engaged in serious discussion and expect to hammer out an agreement by
end-2015.
The
Elnino or ESNO which is weather phenomenon which has caused below normal South
West Monsoon and affected the production of pulses which are mostly rain fed in
India causing huge supply crisis and skyrocketing of principal pulses prices.
Hence,
the developments in Asia-Pacific region are worrisome and affect India in a big
way, unless suitable rectification measures are taken by India.
6. Answer the following questions
a. “The geo-politics in the
Asia-Pacific region are revolving around trade pacts”. Comment [100 words]
Ans. A
tough competition is underway in Asia-Pacific region to frame trade pacts with
allies and keeping the potential opponents at bay. The key player in the region, USA, has struck
deal with 11 countries in Pacific Rim, forming the largest trade pact, the
Trans Pacific Partnership [TPP] which represents countries with 40% of World
GDP. The USA kept China at bay, as it is a potential adversary in the region to
USA. However, India may be admitted to TPP in future, keeping the growing
strategic partnership with USA.
Contrastingly,
China has been negotiating a free trade agreement, Regional Comprehensive
Economic Partnership [RCEP], with 10 ASEAN
countries plus Australia, China, India, Japan, South Korea and New Zealand. USA
is not part of this grouping.
6.b. The imperatives of UN backed
climate talks for replacing Kyoto Protocol. [100 words]
Ans. The
ensuing agreement among the world countries at Paris, later this year, under United
Nations Framework Convention on Climate Change [UNFCCC] is going to replace
Kyoto Protocol w.e.f 2020. The imperatives of the ongoing talks shall be
1. 2.5 billion Humans and innumerable
number of flora and fauna are vulnerable to global warming worldwide. The
developed countries shall commit clear cut targets of funds contribution to
take mitigation measures and capacity building in the affected areas.
2. Intended Nationally Determined
Contributions [INDCs] gives responsibility to protect the planet from global
warming, but the developed countries shall provide technology and funding to
achieve them due to historical benefit enjoyed by them.
3. The agriculture and fishing dependent
population would lose their livelihood. Concrete measures requires to be taken
towards their livelihood needs by preparing them for alternatives
4. The developed countries need to amend
their Intellectual Property Rights [IPR] to transfer improved technologies in
the field of agriculture and renewables
5. Proper framework for fighting national
loss and damage caused by climate change.
7. “The bio-diversity loss is more
than what we know”. Comment in the light of recent discoveries of flora and
fauna in this regard.
The Living Planet Report 2014 of World Wildlife
Fund reports that the planet has lost 52% of its biodiversity since 1970. Of the loss, 39% accounts for the terrestrial
wildlife, 39% for the marine wildlife, and 76% for the freshwater wildlife. Biodiversity
took the biggest hit in Latin America, where loss is 83 percent. High-income
countries showed a 10% increase in biodiversity, which was canceled out by a
loss in low-income countries. This is despite the fact that high-income
countries use five times the ecological resources of low-income countries,
which was explained as a result of process whereby wealthy nations are
outsourcing resource depletion to poorer nations, which are suffering the
greatest ecosystem losses
About 60% of the large herbivores are
threatened and loss of large herbivores can have cascading effects on other
species including large carnivores, scavengers, meso-herbivores, small mammals,
and ecological processes involving vegetation, hydrology, nutrient cycling, and
fire regimes. Corals occupy 0.2% of the
Oceans, but contain 34% of the described marine species. About 90% of the
Ocean’s biodiversity is unexplored.
The
Biologists/taxonomists have been discovering new species every year in the
wild. The discovery of several species of frogs in Western Ghats of India and
Sri Lanka; sneezing monkey and 200 other species, including several plants,
amphibians and fishes in Eastern Himalayas are cases in point.
Hence,
it is obvious that the loss in biodiversity is more than recorded species as
unrecorded species are also vulnerable and getting extinct without the
knowledge of anybody.
8. Delineate reasons for high NPAs in
Public Sector Banks [PSBs]. What are the measures taken by Govt. to improve the
situation and what more steps you suggest for improving the health of PSBs?
Reasons
for high NPA ratio in PSBs:
ü Poor
governance structure and too many bosses and some of them without the knowledge
of banking operations.
ü Lax
credit appraisal systems, near absence of concept of risk and also corruption.
ü
Short tenures of the CMDs of the
PSBs, preventing them to have a long term view in running the bank on sound
financial lines.
ü
The extreme inefficiencies in credit
and recovery mechanisms remain the bigger issues, especially when compared with
private sector competitors
ü
Priority sector lending to meet social responsibilities and
vulnerability to political pressures to lend to certain segments of the economy
- known as and lending to major stressed sectors such as infrastructure, iron
and steel, textiles, aviation and mining.
ü
Relatively low innovation and adoption
of technology in relation to their counter parts in running kiosks, launching mobile applications,
e-wallets etc. PSBs have never been leaders in these game-changing
developments.
ü Lack
of fresh capital infusion where as the private banks are benefited by
increasing their market share through FDI and Foreign Portfolio Investments.
ü The lethargic working style and aging
workforce of the PSBs
Measures
taken to improve the situation: Please take the headlines, from the
notes given below, as an answer for the second part of the question]
Measures taken by RBI
to minimize NPAs in banks and suggestions:
ü The
GOI has made a beginning in the country's largest bank, the State Bank of India
(SBI), by setting in motion a gradual road map for a five-year fixed tenure for
Chairman. Arundhati Bhattacharya, who assumed the role of Chairperson, during
October, 2013 has fixed three-year tenure. Bhattacharya's successor, in October
2016, will have four-year tenure, while all chairmen thereafter will get five
years. The new policy change will also allow all the four MDs to compete for
the Chairman's post irrespective of their residual service on the date of
the retirement of the Chairman. The government should also replicate the fix
tenure in all other PSU banks for effective leadership.
ü The
PJ Nayak Committee on reviewing the governance of PSU boards has suggested
splitting the post of Chairman and MD. The bifurcation will allow an outside
professional of eminence to come as a Chairman. This change will improve
the governance, board deliberations and bring fresh thinking to deal with
risks. The private sector banks such as ICICI Bank and HDFC Bank have separate
Chairman and MD. Take, for instance, KV Kamath, who is ICICI Bank's
Non-executive Chairman, and Chanda Kochhar, who is the MD and CEO of the bank.
Today, large borrowing proposals go to a credit committee at the headquarters
where the CMD, executive directors and senior general managers take a call. The
splitting of CMD post will help in a focused role of a Chairman looking after
the larger issues than sitting on a credit committee.
ü There
are some banks such as SBI which are proactively reviewing the concept of
risk in lending and also tightening, but the PSU pack as a whole needs a lot of
prodding.
Measures
taken by RBI to minimize NPAs in banks:
1. New framework for containing NPAs: The RBI has come out with a new framework for
containing NPAs to force banks to take early action. The RBI has introduced a
new prudential framework from April, 2014 for early detection of stressed
assets. The regulator has asked banks to create a new asset classification
called 'Special Mention Accounts' to identify early signs of stress based on
stress indicators. The purpose is to increase the accountability of bankers.
2. Use of professional services in
dealing with stressed assets: There has been a shift in the
banks’ approach in addressing stressed assets. They are moving towards using
the services of external professional management agencies that can provide
transparent oversight and objectively drive operational improvements to
increase the borrowers's cash flows. This kind of services has been extensively
used in markets like the US and UK, but it is a relatively new concept in
India. The banks that have used this route in India have seen tangible value
created in their stressed assets. SBI had engaged the services of Alvarez &
Marsal to help them in restructuring cases.
3. Establishment of Central Repository
of Information on Large Credits (CRILC) and use of its information by the
banks: The RBI has also set up a credit central repository for
information of large borrowers of banks which will give information on the
loans obtained by the borrowers from various banks. The repository will help
lenders to know all the credit information at one place and also help in
knowing the credit worthiness of a borrower. Therefore, if a large borrower
defaults, the information will be shared with other lenders on a quarterly
basis. This measure will not only reduce the banks's leverage, but also keep
the bad borrowers away from the banking system. The lenders or banks are required to
report all such information here, including classification of an account as
SMA, on all borrowers having aggregate fund-based and non-fund-based exposure
of Rs. 5 crore and above.
4. Guidelines of RBI on working of JLF: The Reserve Bank of
India issued new guidelines during October, 2014, on the reporting of bad debt
and the working of the Joint Lenders' Forum (JLF). It said banks will be
permitted to report their SMA-2 (Special Mention Accounts) to the JLF
formations on a weekly basis, at the close of business on every Friday. If the
said Friday is a holiday, banks will have to report the details on the next
working day.
5. Measures to identify stress early: As already stated, RBI had set up three categories of SMAs.
These were SMA-0, where principal or interest payment was not overdue for more
than 30 days but the account showed signs of incipient stress; SMA-1, where
principal or interest payment was overdue for 31-60 days; and SMA-2, where
principal or interest payment was overdue for 61-180 days.
6. With the new
regulations, crop loans will be exempted from such reporting. However, banks
will have to continue reporting their other agricultural loans as earlier.
Banks also don't need to report their interbank exposures to CRILC, including
exposure to the national bank for Agriculture and Rural Development, Small
Industries Development Bank of India, Export-Import Bank of India and National
Housing Bank.
7. Banks must report
their cash credit (CC) and overdraft (OD) accounts, including overdraft arising
out of devolved letters of credit/invoked guarantees as SMA-2 when these are
'out of order' for more than 60 days. Similarly, bills purchased or discounted
(other than those backed by LCs issued by banks) and derivative exposures with
receivables representing a positive mark to market value remaining overdue for
more than 60 days should be reported as SMA-2
8. Lenders also need to
report the credit information and SMA status on loans extended by their foreign
branches. But in this scenario, a JLF formation won't be required in case the
offshore borrower has no presence in India, either by way of parent company or
a subsidiary.
9. The RBI
had directed that as soon as an account becomes SMA-2, the consortium banks
will have to form a JLF and formulate a corrective action plan (CAP). Earlier,
the JLF was required to come up with a CAP within 30 days after the account was
reported as SMA-2 or if a request was made from a borrower to form a JLF in
case it sensed imminent stress. RBI has now increased the time limit to 45
days.
10. Accounts with an
aggregate exposure of Rs.500 crore ore more than the Techno-Economic Viability
study and restructuring package prepared by the Corporate Debt Restructuring
cell or the JLF has to go before an Independent Evaluation Committee of
experts. Earlier, the time frame given for this was 30 days, now extended to 45
days.
11. RBI said it had also
noticed that in several cases, the JLF is not formed as the lead bank of the
consortium does not take the initiative. It has said that if the corrective
actions are not taken within the time frame suggested, the accelerated
provisioning will be applicable only on the bank with the responsibility to
convene a JLF and not on all the lenders in a consortium. RBI has also
suggested that if the lead bank fails to convene a JLF within 15 days of
reporting an SMA-2 status, the bank with the second largest exposure will have
to take the required steps. If the second lead bank also fails to convene a JLF
in the next 15 days, the same disincentives will apply to it, too.
12. The
RBI further said that “willful-defaulters will normally not be eligible for
restructuring.”
9. The Forward Markets Commission
[FMC] has been merged with SEBI, w. e. f 29.9.2015. What are the expected
benefits from the merger and problems arising out of the issue?
Ans. The possible benefits out of the merger of capital market
regulator, SEBI and the erstwhile commodity market regulator, the FMC are: [Headings
will make the answer for you]
1. Regulation of brokers:
It is believed that merger would bring about transparency to
commodity market because currently FMC has no power to regulate brokers. All
the existing commodities brokers have to register themselves with SEBI and
comply with SEBI’s “Fit and proper criteria”. SEBI would be able to curb wild
speculation in commodities market.
2. Launch of new products: In the Budget 2014-15,
the term Security defined in such a way which includes “commodities” which may
facilitate new products such as Options and indexes in the Commodities which
are not available at present. The products such as option, weather futures or
rain futures which are famous in developed countries may also be allowed by
SEBI in due course.
The changes will provide enormous opportunities:
investment derivatives such as exchange traded funds for silver and other
metals, weather and freight derivatives, and index futures and options trading
in commodities. It will offer arbitrage opportunities across segments in an
exchange, and make margin money fungible for trading across various asset
classes like commodities, currencies and equities. Thus, if BSE or NSE starts commodity
derivatives, margin money for equities or currencies will also be available for
commodities because the clearing corporation will be the same
3. Participation of new
players:
At present banks, Mutual and Pension Funds, FIIs and Hedge Funds are not
allowed to participate in the commodity market. It may become possibility by
this merger if allowed by SEBI. It is believed
that in due course, institutional investors like banks and mutual funds will
also be allowed to participate in these markets, which will increase liquidity
and, therefore, price discovery, and offer more opportunities for hedgers to
execute their transactions.
4. Changes in the Acts:
Repealing of the Forward Contract Regulation Act and changes
in the Securities and Contract Regulation Act were proposed in the Finance
Bill. However, to give effect to the merger, even the SEBI Act needs to be amended to allow
commodities derivatives as security and also to allow Securities Appellate
Tribunal to hear cases related to commodities as well.
5. Tuning of exchanges:
The exchanges, equity as well as commodity, have
initiated deliberations on their future strategies when the two market
regulators are merged. An industry insider says one should not be surprised if
NSE acquires NCDEX, in which it holds 15 per cent, or launches metals and
energy derivatives on its own platform. NCDEX
is predominantly into farm commodities, and has a separate subsidiary
for spot trading. Another insider says that BSE, which has SEBI's approval to
set up a commodity exchange, need not do that or buy into an existing commodity
exchange - it can simply launch a segment for commodity derivatives and save
costs.
MCX, the market leader (with over 85 per cent
share) that calls itself an exchange for metals and energy, has already
proposed to increase its stake in MCX-SX
(now Metropolitan Stock Exchange) to 15 per cent by converting the
warrants it holds. If SEBI approves that proposal, MCX will have access to currency
trading that is the natural hedge required for commodity traders. In the past,
MCX-SX was a market leader in currency derivatives. Eventually, MCX-SX merging
with MCX is also a possibility that many do not rule out.
6. Stock exchanges would be universal exchanges:
The implications of the merger are significant.
Stock exchanges will be able to become universal exchanges wherein equities, debt
instruments and currencies are traded under the same roof as commodity
derivatives. Stock exchanges already have depositories and clearing
corporations that will cater to the needs of commodity traders as well.
7. Other
benefits:
ü The
merger will give a significant boost to the integrity of the commodities
market. FMC was dependent on the government for finances. It was short staffed
and technologically constrained to regulate and monitor the markets. A Nielsen
report in 2013 suggested that dabba trading (illegal off-exchange derivative
trading) in commodities had increased 5-7 times after the commodity transaction
tax was introduced in July 2013. Sebi should be able to play an instrumental
role in controlling this and to bring back the dabba trading to the exchanges.
ü
The securities brokers who have
memberships of commodity futures through their subsidiary companies will
benefit, as it will reduce the duplication in a number of issues, as well as
decrease the cost of transaction and compliance.
ü
The merger should also mean an
improvement in the overall efficiency for the market participants, including a
reduction in transaction costs.
ü It
will streamline the transaction processing marketplaces in India and also bring
consistency in practices, regulations and operations for exchanges, exchange
members, investors and traders, and there will be a single KYC
(know-your-customer processing). Overall, a well-thought and positive move,
which will help the sector and investors alike.
10. The
Parliament of India has passed Black Money (Undisclosed Foreign Income and
Assets) and Imposition of Tax Act, 2015 (‘Black Money Act’) in May. About 4000
crores undisclosed assets and income have been declared by the citizens of
India who stashed their money or assets outside India. Give the reasons for the
failure or low disclosure under the scheme.
Ans. The
voluntary disclosure under Black Money Act, 2015 is much underwhelming and the
GOI has just got Rs.4000 crores and tax and penalty of Rs.2400 crores @ 30% tax
and 30% penalty. The reasons for low disclosure under the compliance window are
- The
scheme offered is not an Amnesty scheme as in the case of Voluntary
Disclosure of Income Scheme, VDIS in 1997. The persons who involved in
hawala activities and stashing their money outside India, appear to be not
interested to pay 60% of their money stashed abroad as tax and penalty,
just to get a peace of mind. The VDIS, 1997, got declarations of around
Rs.33,000 crore and collected taxes of more than Rs.10,000 crore.
- The
people’s mood in India is against black money, especially against those
who stashed their wealth abroad. The black money hoarders might not be interested
to socially stigmatized and lower their value in the eyes of the public,
their creditors and other stakeholders in their businesses.
- Most
big black wealth holders would be happy to take their chances with the law
as tax consultants and shady tax havens would have helped them keep their
money concealed and/or move it to different locations.
- The
Black Money Act provided for 120 percent tax and penalty, and jail term of
10 years, if foreign assets or income is detected by Indian taxmen after
expiry of the time allowed. The hoarders of black wealth are so confident
that it is impossible to detect their affairs are by the Indian taxmen, as
the transactions of Indians are not integrated as in USA and not to talk
about money which has taken out of India by illegal channels.
[Read
additional information given at the end also]
11. Critically evaluate the India’s
performance in achieving Millennium Development Goals [MDGs].
Ans.
MDGs are the set of development goals charted out by the UN with the aim to
reduce extreme poverty by half, universalize primary education, increase gender
parity, reduce child mortality, improve maternal health, combat diseases like
HIV/AIDS etc, environmental sustainability and achieve global partnership for
the above goals. The countries were needed to achieve the goals between the
period 2000-15.
Indian
performance in the same is a mixed bag of hits and misses.
1.
India has successfully reduced extreme poverty by half (49% in 1990 to 29.5% in
2011).
However, in absolute numbers, 300 million poor still lives in India.
2. Though
India has almost universalized primary education, but it’s more quantitative
than qualitative. As per ASER report of an NGO Pratham, 50% of 5th class
students fail at English and math’s of 2nd class.
3. Gender
equality has improved but still women labour force participation rate is 53 %
which impacts both social and economic development.
4. Child
mortality has come down from 88/1000 in 1990 to 49/1000 in 2012 but it’s still
very high as it should be 29 by 2015 and ideally zero.
4. Similarly
maternal mortality, a measure of maternal health stands at 190/1 lakh which was
560/1 lac in 1990. MMR has achieved considerable success but is still very high
at target stands at 100/ 1 lakh. Moreover 53% of Indian women are anemic. Early
marriage and pregnancy affects health of both mother and the children.
5.
On environment front India has reduced Co2 emission per dollar of GDP. It was
0.65 kg of CO2 emission per dollar in 1990 which now is 0.53 kg. However
pollution levels are still very high with cities becoming unsustainable and
climate change affecting every aspect of life.
6. India
has also achieved success to combat AIDS, TB spread through special programmes
and awareness still Dengue, Malaria, Cholera etc kills millions of men women
and children.
12. What are Sustainable Development
Goals [SDGs] and do you think that India would be able to achieve them?
Ans.
Question is obvious. You can read from any material.
13. What
do you understand by Base Erosion and Profit Sharing (BEPS) project of
Organization for Economic Cooperation and Development or OECD? How it will
create new and formidable challenges for many companies operating in India and
abroad?
Ans.
Base Erosion and Profit Shifting (BEPS) refers to tax
planning strategies that exploit these gaps and
mismatches in tax rules to
artificially shift profits to low or no-tax locations where there is little or
no economic activity, resulting in little or no overall corporate tax being
paid. BEPS is of major significance for developing countries due to their heavy
reliance on corporate income tax, particularly from multinational enterprises
(MNEs). The Vodafone tax tangle in India is a case point here.
The BEPS measures, according to one estimate, will affect
just under 200 large Indian companies.
1. Indian companies will
have to adhere to the country-by-country reporting standards for their
operations in different tax jurisdictions.
2. The global companies
or MNCs or Indian companies operating outside India, will have to reckon with
the tax policies in vogue in different countries where they have business
operations.
3. They have to upgrade
their transfer pricing rules, and upgrade the manner in which they report data.
4. The BEPS regime will
bring digital economy enterprises like start-ups and e-commerce ventures under
the tax net. The cost of compliance of these concerns will go up, affecting their
competitiveness.
[What
happened in Vodafone case: This is given for your understanding.
Hutchison
Hong Kong, a Cayman islands, has sold its 67% stake held by it in its
Indian unit, Hutch-Essar India to the
Vodafone International based in Netherlands, for a consideration of Rs.$
11billion [55000 crores], but the Vodafone has not deducted the tax from the
Hongkong Hutchison for the profit earned by it. The Supreme Court of India has
stated the transfer took place by way of share transfer outside India and hence
the same can’t be taxed in India. Further, the Hongkong Hutchison has no
permanent establishment in India which is a condition for deducting tax in
India. This is called profit shifting because the huge profit earned by Hutch
International has been shifted to tax haven, Cayman Islands. The base erosion
is the erosion of tax base in India].
14. What
are the effects of ElNino or ESNO in India and other countries?
Ans. This is obvious
question. You can get answer in all books or magazines or newspapers.
15. The price discovery mechanism of
agricultural produce under the existing APMC Acts is opaque and thus benefiting
the middle men rather than the farmers and end consumers. What are the latest
initiatives of Union and some states to improve the price discovery mechanism,
aiming at benefiting the farmers and consumers at one go?
Ans. There are about 6,000 mandis or Agriculture Produce Market
Committees in the country. At present the farmers have sell their agricultural
produce in their respective jurisdictions only. The Mandis act as water tight compartments,
where rates for the farmers produce is decided by a handful of traders and
commission agents. APMC-controlled regulated markets allow commission agents to
charge market fees. According to reliable estimates, the commission charged is
generally six per cent of the sale price of fruits and vegetables and about two
per cent in case of non-perishable commodities. Such a high incidence of commission
mostly realized from farmers and passed on to consumers, hurts the farmers and
consumers alike. Several studies have shown because of such distortionary
practices and existence of layers of intermediaries, primary producers end up
getting only 20-25 per cent of the retail price and remaining is garnered by
the middlemen.
The levies and
charges fixed in monopolistic mandis are not only non-transparent, but also
restricts farmers' access to the marketplace. The farmers do not have any
choice except to sell their produce at the rates fixed by the Mandis. Thus the
price discovery is opaque and transparent.
Steps taken by Union Government and States to improve the
situation:
ü The Centre has proposed an online National Agricultural
Market [NAM] which links all APMCs in
due course starting with 585 major mandis in 2015. Under NAM, farmers will have
choice to sell their produce at local mandi, or to the local trader if the
price offered is good or else, get their produce posted on the NAM platform.
ü The goods of the farmers would be accessed by the traders all
over India and thus helps the farmers to realize better price for their
produce. Under this model, agricultural commodities can be provided to the customers
at the best prices.
ü 2 years before NAM has been proposed, the Karnataka state has
created an e-platform by integrating all APMCs in the state. The price
discovery is far better than the previous regime under APMCs. The states of
Gujarat and Andhra Pradesh are in the process of integrating the mandis under
NAM.
ü The GOI has appointed Small Farmers' Agribusiness Consortium
(SFAC), as lead promoter of NAM over a period of five to seven years. We can
expect significant benefits through higher returns to farmers, lower
transaction costs to buyers and stable prices and availability to consumers.
ü The NAM will also facilitate the emergence of integrated
value chains in major agricultural commodities across the country and help to
promote scientific storage and movement of agricultural goods.
ü Certain states made amendments to APMC Acts and allowed
farmers to sell their produce directly to the customers under the schemes
called “Rytu-bazar” in AP, “Apna mandi” in Punjab etc.
ü In certain states “contract farming” is allowed making the
ryots to fix the price of their produce and to get seeds and fertilizers from
the prospective buyer of the produce.
16. “India has been progressing
aggressively on the agenda of Financial Inclusion in recent years”. Critically
evaluate the statement.
Ans.
The Financial Inclusion, providing saving, payment and insurance products to the
people at the affordable cost has been done aggressively by the GOI in recent
years.
The
agenda is explained as under.
1. No frill accounts: During
2005, the RBI has introduced no frills accounts where people can open bank
accounts with very low or nil balance e.g. Rs.5 only. These are accentuated
under PMJDY.
2. Kiosk banking where one or two
employees of a bank, create awareness about the banking and banking products in
a small, temporary, standalone booth
located in a high-foot-traffic areas.
3. Bank Sathis or Business
Correspondents: GOI has brought Swabhiman scheme in 2011, with a aim to make banking
facilities available to every habitat with a population more than 2000 by
March, 2012. Under the scheme, banks were dictated to provide basic services
like deposits, withdrawal, Kisan Credit Card (KCCs) etc via Business
Correspondents (BCs) also known as Bank
Saathi. The Bank
Sathis or Business Correspondents continue even today to facilitate the rural
people to deposit, withdraw money and enjoy other financial products through
BCs.
4. PMs Jan Dhan Yojana in 2014: The PMJDY
has entered into Guinness Books of Records for opening record number of bank
accounts under any scheme by the people. The accounts opened under the scheme
are 19.13 crores and Rupay cards issued are 16.46 crores by November, 2015. The
balance in the accounts is Rs.26, 355 crores. The zero balance accounts opened
under the scheme is 37%.
5. Small Financial Banks and Payment
Banks in 2015: The RBI has granted in-principle bank licence to 11 payment
banks and 10 SFBs in 2015 to further enhance the financial inclusion. The SFBs
are mandated to lend to the MSME sector, farmers, educational loans etc. and
payment banks will serve the un-served and under-served sections and areas.
6. Promotion of mobile valets and pre-paid
cash cards by the scheduled banks and other players such as telecom companies
is also promoting financial inclusion in a big way.
7. The GOI has launched
3 insurance schemes in 2015. They are Pradhan Mantri Suraksha Bima Yojana
[PMSBY] (accident insurance) and Pradhan Mantri Jeevan Jyoti Yojana [PMJJY]
(life insurance) and a pension scheme has been named after former prime
minister Atal Behari Vajpayee, Atal Pension Yojana [APY]
17. What is “ease of doing business”?
What are the measures taken by Union and states in this regard in recent years?
Ans. The World Economies are ranked on their ease of doing
business, from 1–189 by World Bank. A high ease of doing business ranking means
the regulatory environment is more conducive to the starting and operation of a
local firm. The rankings are determined by sorting the aggregate distance to
frontier scores on 10 topics,
each consisting of several indicators, giving equal weight to each topic. The
ranking of India in the list for 2016 has improved to 130 from 134 in 2015.
The 10 parameters for ease of doing business ranking are: Starting
the business, dealing with construction permits, Getting electricity,
Registration of property, getting credit, protecting the investors, paying
taxes, trading across borders, enforcing contracts and resolving insolvency.
The
measures taken by the NDA Government at Centre and certain states to create
ease of doing business in India are as under.
1.
Registration of the firms: Ministry of Corporate Affairs (MCA) has
made registration of companies easy in India by introducing Form INC-29, an Integrated Incorporation Form, in
place of earlier 8 forms.
2.
Trading across borders:
The GOI has reduced the mandatory forms for imports and exports from 10 to 3.
This measure would reduce transaction costs of
exporters and importers. They would considerably reduce the turnaround
time at the ports and for the banking channels.
3.
Construction permits: In India Local authorities issue construction permits which are very
cumbersome and delayed procedure. To curb this, common application forms have
been launched in Delhi. The Municipal Commission of Delhi will get clearances
from all departments, doing away with the running around involved and
cumbersome procedures involved. Also, online color-coded maps for Delhi and
Mumbai airports have been introduced to get no-objection certificate from
Airports Authority of India. Similar steps are being taken for Archaelogical
Survey of India and National Monuments Authority.
4.
Resolving insolvency: The only measure taken in this
regard by the government is the announcement of introduction of bankruptcy code
in India by Finance Minister while giving the Union Budget.
5.
Corporate Tax: The
Government has outlined the slashing of corporate tax from 30% to 25% over a
period of 5 years in a phased manner.
6.
Number of steps of procedure to apply for electricity connections
has been reduced by Maharashtra and Delhi government which is the sole reason
for climbing 4 places in the index in 2016.
7.
Labour reforms bill is pending in the Parliament and the similar
reforms bills passed by state Governments of Rajasthan, Madhya Pradesh are
pending for assent with the Union Executive.
18. “The climate talks are aimed at
fixing the liability for the past actions of some countries and future action
of the all the countries to save the planet from destruction”. Evaluate the
statement.
Ans.
The crux of the talks among the world countries under the aegies of UNFACCC is
to limit the global rise temperature to 2 degree Celsius of 1990 level.
1. As against the Kyoto Protocol which
has fixed responsibility of controlling the emission of greenhouse gases with
developed nations which had historically polluted the Earth and main harbingers
of global warming. However, over the years, the tone and tenor of the talks
have changed bringing the Intended Nationally Determined Contributions [INDCs]
to the core of the talks and making the other issues secondary.
2. Under INDCs, all the countries have to
give the level of reduction in GHG and methodology going to be adopted in
achieving the self-imposed targets and method of funding
3. The developed countries have
successfully diluted the main issue of “Combined but Different
Responsibilities” which wanted to cast more responsibility of paying the cost of
global warming, especially to mitigate the effects and adapt to the climate
change. Further, to transfer of technology and funding the green projects in
developing countries to reduce the GHG emissions.
4. The funding of USD 100 billion per
annum has to be worked out and there are no concrete promises from the
developed nations under the concept, “polluter pays”. This may get a shape at
COP 21 at Paris at the end of 2015.
5. All the top polluters has submitted
their INDCs which create great hope that planet earth can be saved from
catastrophe, but everything depends on the how the developed nations fund
the cost of climate change.
19. “The Basel III norms have set
certain regulatory and capital requirements for the sustainable performance of
banks and financial institutions all over the globe”. In this regard,
critically discuss the preparedness of Indian banks/Financial Institutions to
meet the conditions set by BCBS by March, 2019.
Ans.
The data being collected. Answer will be uploaded in due course.
20. “India
is on the threshold of perfecting the Geosynchronous launch vehicle (GSLV)
technology and it is believed that time is not far behind the launch of 4 ton
category of INSAT satellite from Indian soil”.
Critically evaluate the statement.
Ans. The
successful launch of Geosynchronous Satellite
Launch Vehicle-D6 [GSLV-D6] which has injected the satellite (GSAT-6) weighing
2.2 tonne into its precise orbit is a landmark in the history of India’s GSLV
programme. This is the second consecutive success of GSLV and the first was in
January 2014, using indigenously developed cryogenic engine has validated the
design of the launch vehicle and the working of the cryogenic engine. One more
such successful launch, makes India perfect player in launching 2 ton plus
category satellites into orbit, albeit commercially too. This is the most
significant achievement under sanctions and restrictions (on transfer of dual
use technologies) by developed nations.
The next task the Indian Space
Research Organization [ISRO] has taken up is tweak or fine-tuning GSLV to
enable it to carry a higher payload. Work is on to reduce the weight of the
launch vehicle which will then make it possible to put a 2.5 tonne payload. The
weight of GSLV-D6 (excluding the fuel and payload) was 53 tonne.
The next real technology leap for
ISRO is GSLV Mark III which will have the capability to put satellites weighing
5 tonne in orbit. It is a much larger vehicle weighing 640 tonne (GSLV-D6 in
comparison weighed 416 tonne). ISRO is developing a bigger cryogenic engine for
this vehicle and it has now been tested for 800 seconds. In December last, the
agency had successfully launched GSLV Mark III without the cryogenic stage to
validate the functioning of the first and the second stage of the rocket. GSLV
Mark III now awaits its cryogenic engine. If GSLV Mark III succeeds, India will
gain the capability to launch any communication satellites in the world.
GSLV-D6’s success gives the confidence that it is only a matter of time before
that will happen too.
21. Answer
the following questions
a. Air quality Index and its purposes:
Ans. The Air Quality Index gives the
details of respective proportions of the five pollutants in the air, namely,
Particulate Matter with a diameter less than 10 micrometres (PM10), Particulate
Matter with a diameter of less than 2.5 micrometers (PM2.5), ozone (O3),
Nitrogen Dioxide (NO2), and Carbon Monoxide (CO). India’s AQI has been started in 2015, based
on recommendations of Indian
Institute of Technology, Kanpur.
A monitoring station should be able to
give you the concentration of a particular pollutant at that moment in time,
and its average over a period of time – for CO and O3, the average is taken
over eight hours, while for the other three, it is a 24-hour average. The unit
of measurement is microgram (or milligram in the case of CO) per cubic meter.
Thus, the citizens can make informed choice or take precautions whether to send
the kids to school or not; whether to move in the city or stay indoors etc.
b. Commitments made by top polluters
of the world under INDCs and their adequacy in fighting climate change.
Ans. Intended Nationally Determined Contributions [INDCs]
are voluntary targets set by the world countries to reduce Green House Gases [GHG]
under UN Framework agreement on Climate Change. The China which is the largest
emitter of GHG, accounting for a quarter of world’s GHG, has committed to cut its
emissions by 60-65% of 2005 level by 2030 and peak its emissions by 2030. The USA which is the second most polluter in
the world with 14.4% pie in the green house gases has given its national target
of reducing CGH emissions to 26-28% of 2005 level by 2025. The European Union
which is the third biggest polluter intended to cut their emissions to 40% of
1990 levels by 2030. India being the 4th largest polluter of GHG has
committed to reduce 35% of 2006 level by 2030. To this purpose, committed to
increase the pie of non-renewable sources of energy to 40% to 350 GW from
existing 13% now and to create carbon sink of 2.5 to 3 billion tones of CO2 by
creating an additional forest and tree cover by 2030. Under INDCs, India
proposed an expenditure of $ 2.5 trillion at 2014-15 prices to meet climate change
action up to 2030 from now. Similarly, about 148 countries have submitted their
INDCs to fight climate change and put the rise in temperature of Earth within 2
Celsius zone.
It is welcome that major polluters have submitted
their INDCs which will be solidified in ensuring Conference of Parties-21 at Paris
in December, 2015. The success of the INDCs depend on the preparedness of the most
industrialized and developed countries to bear the cost for fighting climate change,
capacity building of the 2.5 billion affected people to face climate change effectively
and provide loss and damage due to climate
change.
22.
“Small Financial Banks [SFBs] and Payment Banks [PBs] are going to accentuate
the Financial Inclusion drive of the GOI”. Critically evaluate the statement.
Ans.
ü
The RBI has granted “in principle bank
licences” to 11 Payment Banks and 10 Small Finance Banks in 2015, with an
objective of extending formal finance access for
enterprises now dependent on high-cost un-organized sector funding and address
the abysmal levels of financial inclusion in India.
ü
SFBs are going to lend to small
business units, small and marginal farmers, micro and small industries and
other unorganized sector entities, currently underserved by regular commercial
banks
ü
Successful implementation of
Direct Benefit Transfer Schemes [DBTs]
ü
The RBI estimates that close to 90
per cent of small businesses today have no links with formal financial institutions
ü
Extending the formal banking
system’s reach will also ensure better monetary transmission, important for the
effectiveness of the RBI’s own interest rate policy actions.
ü
Payment and micro-insurance
services to the marginalized sections of the population
ü
Both SFBs and Payment banks have
to operate in unbanked and under banked areas which will surely help in
providing Financial services to these areas
ü
These are niche banks or
differentiated banks with high technology and innovations makes them extend
credit, payment, insurance and pension products to the hitherto un-served and
under-served areas.
ü
These banks will able to fill the
gaps left out by the universal and large banks, in funding MSMEs, SCs, STs and
vulnerable sections of the society. 8 out of SFBs licences were granted to
Microfinance institutions [MFIs] which have expertise in reaching out to the
under banked areas and population.
ü
Distribution of debit cards,
provision of ATM services and products of third parties such as Mutual Funds,
credit cards etc. will foster the financial inclusion.
23. “The conservation of nature and
natural resources and their sustainable utilization has been in the blood of
the indigenous communities”. Evaluate the statement with suitable examples.
Ans. The
indigenous communities who generally live in and around forest have a cradle to
grave relationship with forest or nature. The forest provides them food,
fodder, medicines and material for their religious-magical purposes. They
worship forest as their mother Goddess and treat certain tracts as sacred groves, certain animals or plants as
their totems which they shall never harm. They undertake tour of the forest
once in a year or at regular intervals to establish harmony with the forest.
Thus, the forest is central to their life and it is very difficult to see the
indigenous communities without forest.
1.
The Bishnoi communities of Rajastan who live in and around deserts have been
zealously guarding lush green forest stretches and the black bucks for centuries,
in the arid region of Rajastan, Punjab, Haryana and Madhya Pradesh, from
rapacious human encroachers.
2.
Many tribes have plants and animals as their totems whose killing is tabooed
and also it is their bounden duty to protect their totems by providing
congenial growth environment and stopping encroachments and poaching.
3.
The Talakona experiment of Joint Forest Management (JFM) in Sheshachala hills
of Eastern Ghats is worth emulating elsewhere for wonderful results. Talakona
is a famous eco-tourism center for its waterfalls and lush green forest, used
for shooting films. Here, the Forest Department of Andhra Pradesh has built a
conference hall and guest houses, called “log-huts”. These guest houses are
maintained by local self-help group of indigenous tribe, “Yanadi”, called “Vana
Samrakshana Samithi” (VSS). The Yanadi tribe, one of the Primitive Tribal Group
[PTG] in India shares the proceeds of guest houses and right to collect Minor
Forest Produce [MFP] such as honey, fruits of Amla, Tamarind, plums etc.
4.
The beliefs and religion of around 8000 Dongria Kondh’s of Niyamgiri Hills in
Odhissa have helped the growth of dense forest and unusually rich wildlife. The Dongrias worship the top of the
sacred mountain, the ‘mountain of law’ as the seat of their god, “Niyamaraja”.
The fought a heroic battle against mining giant Vedanta Resources and Odisha
Mining Corporation to save their sacred mountain.
These
case studies summarize the intricate relationship between the nature and tribal
life and tribal way of protecting the environment and forests.
24. It is believed that the Himalayan
country of Nepal and parts of Northern India are sitting on a landmine of
seismic activity which may explode at any time. What are the imperatives or
measures you suggest to avert this dangerous situation?
Ans. An earthquake is a sudden
violent shaking of the ground, typically causing great destruction, as a result
of volcanic action or movements deep within the earth’s crust. The recent
earthquake in Nepal and parts of North India resulted from a collision between
the Indian crustal block and the Eurasian continent. Geophysicists know that
the entire Indian subcontinent is being driven slowly but surely beneath Nepal
at a speed of five centimeters a year. This generates a five-metre contraction
over a century and results in silent stress build-up in the inner crustal rock.
An earthquake occurs when stress accumulation reaches critical point. Over
millions of years, the squeezing has crushed the Himalayas, raising mountains
and triggering earthquakes on a regular basis. This will continue. This dynamic
process will also induce stress accumulation in India. The Gujarat earthquake
of 2001 was a result of this process. This shows that a quake is sure to occur
in future.
We can’t avoid the occurring of
quakes, but surely take measures to manage the quake with least damage to
humans and property.
1. Planning
and construction of quake resistant buildings which cost more than the normal
buildings. The governments shall work with the builders, architects, media and
people closely to achieve this objective and even with law enforcement and
judicial sectors. Government may also consider giving tax incentives for
building quake prove accommodation.
2.
Wide publicity and awareness on the
modus of earthquakes and precautions to be taken at the occurrence of the
incident.
3.
The Government of India must develop
an anti-disaster technology that suits Indian construction and conditions.
4.
The house hold appliances such as
televisions, microwaves, hot water boilers, and refrigerators must be securely
fastened to the floors and the walls. Otherwise, they move and topple, killing
as readily as building collapse.
5.
The annual disaster prevention drill
in Japanese schools also plays an important role. Students are taught to hide
below their desks in a quake. In their syllabus, they learn about natural
disasters, disaster history, and hazard mapping. The same required to be
adopted in quake possibility areas especially north, North West and eastern
zones.
6.
Setting up of a real-time Earthquake
Early Warning (EEW) which alerts the incidence of earthquake. The electric signals travel faster than the
quake waves and thus all moving objects such as trains, machinery etc. can be
stopped and damage can be reduced.
7.
In Japan 90% of the houses are quake
resistant. put greater
priority on policies for disaster preparedness through greater public-private
cooperation and increased funding for projects such as reforming legal
provisions, nurturing human resources, and investing more in disaster-resilient
infrastructure.
25. Answer the following questions
25 (a). What made RBI to cut Bank Rate
by 50 basis points in its Monetary Policy statement released in the last week
of September, 2015?
Ans. 1. To promote
growth in India by reducing the cost of credit and avoiding the slowing down of the
economy. The central bank said although a tentative economic recovery is
underway, but the rate cut will help economy to become stronger.
2. Inflation has dropped to a
nine-month low, as projected. Wholesale inflation dropped to a new all-time low
of -4.95% from the earlier historic low of -4.05%. Retail inflation too fell to
a new low of 3.66% from the earlier 3.78%. The RBI said that despite a
deficit in the monsoons, food inflation pressures have been contained by
various actions taken by the government to manage supply.
3. The Area under sowing has
expended modestly from a year ago and first advance estimates indicate that
food grain production is expected to be higher than last year, reflecting
actions taken to contain the adverse effects of rain deficiency through timely
advisories and regular monitoring of seed and fertilizer availability.
4. The US Federal Reserve yet again
postponed its decision to normalize the policy regime to later this year.
5. Falling commodity prices globally.
25 (b). Do you think that this rate
cut would promote growth in India?
The
growth of a country depends on several factors such as skillfulness of the
labour, liberal and fair labour laws, availability of low credit, high ranking
in the parameters in ease of doing business, high Foreign Direct Investment,
technology etc. The rate cut has definitely a salutary effect on the growth as
it promoted low cost credit.
It is
believed that cut in bank rate by RBI from 8.25 to 7.75%, the bank’s credit
become cheaper to that extent. But, the onerous responsibility of passing this
benefit to the borrowers or investors is vested with the banks and this is
crucial for ensuring more investment in business and thereby creates more jobs.
More jobs mean more money in public hands which create demand for goods and
services and that accelerate the growth in a country.
*****
Note: The views expressed by the author are his personal and not that of Government of India.
Additional information:
Q.1. Gold Bond and Gold Monetization
Schemes:
The
cabinet has approved Gold Bond and Gold Monetization schemes which are expected
to help reduce physical holding of the precious metal and mobilize idle gold
lying with the households, temples and trusts for productive use.
Indian
is estimated to have 20000 tons of domestic stock of gold, which is neither
traded nor monetized. If the schemes help to mobilize at least a 10% of the
idle gold, it would help bring 2000 tons of gold into open market to be
utilized by the jewellery industry.
The
scheme will simultaneously help in reducing the demand for physical gold by
shifting a part of the estimated 300 tonnes of physical bars and coins
purchased every year for investment into gold bonds. Since most of the demand
for gold in India is met through imports, this scheme will, ultimately, help in
maintaining the country’s current account deficit within sustainable limits.
The Budget 2015-16 had proposed the launch of a Sovereign Gold Bond [SGB]
scheme to develop a financial asset as an alternative to gold. Under, Gold
Monetization scheme, the people holding idle gold can deposit it in banks for
short, medium or long term.
This
is not a black money immunity scheme and normal taxation laws would apply. It is reported that 1000 tonnes of gold is
imported annually and people hold such quantum of idle gold just for investment
purpose every year. By taking advantage of gold monetization scheme, people can
deposit idle gold with authorized agencies and take advantage of the price
escalation of gold as well as earn interest on the deposit. The issuance of gold bonds will be within the
government’s market borrowing programme for 2015-16 and onwards. The actual
amount of issuance will be determined by RBI, in consultation with the Finance
Ministry.
The
salient features of the Gold Bond Scheme [GBS] are
1. Sovereign gold bonds will be issued on
payment of rupees and denominated in grams of gold
2. Bonds will be issued on behalf of the
GOI by RBI, so that the bonds will have a sovereign guarantee
3. The issuing agency will need to pay
distribution costs and a sales commission to the intermediate channels, to be
reimbursed by the government.
4.
The bond would be restricted for sale
to resident Indian entities, with a cap of 500 grams per person per year.
5. The government will issue bonds with a
rate of interest which will take into account the domestic and international
market conditions and may vary from one tranche to another
6. The bonds will be available both in
d-mat and paper form
7.
The bonds will be issued in
denominations of 5, 10, 50, 100 grams of gold or other denominations
8. The price of the gold may be taken
from the reference rate, as decided, and the rupee equivalent amount maybe
converted at the RBI reference rate on issue and redemption. This rate will be
used for issuance, redemption and LTV purpose and disbursement of loans
9. Banks/NBFCs/post offices/NSC agents
and other as specified, may collect money/redeem bonds on behalf of the
government [for a fee, the amount would be as decided]
10.
The tenor of the bond could be for a
minimum of 5 to 7 years, so that it would protect investors from medium term
volatility in gold prices. Since the bond will be a part of the sovereign
borrowing, these would need to be within the fiscal target for 2015-16 and
onwards
11. Bonds can be used as collateral for
loans. The loans value ratio is to be set equal to ordinary gold loan mandated
by the RBI from time to time
12. Bonds can be easily sold and traded on
exchanges to allow early exits for investors who may so desire
13. KYC norms will be the same as that of
gold
14. Capital gains tax treatment will be
same as for physical gold for an “individual” investor. The Department of
Revenue has agreed that amendments to the existing provisions of the Income-Tax
Act, for providing indexation benefits to long term capital gains arising on
transfer of bond and for exemption of capital gains arising on redemption of
SGB will be considered in the next budget.
This will ensure that an investor is indifferent in terms of investing
in these bonds and physical gold- as far as tax treatment is concerned.
15. The amount received from the bonds
will be used by the centre in lieu of government borrowing and the notional
interest saved on this amount would be credited in an account “Old Reserve
Fund” which will be created. Savings in the costs of borrowing compared with
the existing rate on government borrowings will be deposited in the Gold
Reserve Fund to take care of the risk increase in gold price that will be borne
by the government. Further, the Gold Reserve Fund will be continuously
monitored for sustainability.
16. On maturity, the redemption will be in
rupee amount only. The rate of interest on the bonds will be calculated on the
value of gold at the time of investment. The principal amount of investment,
which is denominated in grams of gold, will be redeemed at the price of gold at
that time. If the price of the gold has fallen from the time that the
investment was made, or for any other reason, the depositor will be given an
option to roll over the bond for three or more years
17. The deposit will not be hedged and all
risks associated with gold price and currency will be borne by the Centre
through the Gold Reserve Fund. The position may be reviewed in case “Gold
Reserve Fund” becomes unsustainable.
18. Upside gains and downside risks will
be with the investor and the investors will need to be aware of the volatility
in gold prices
19.
The bond will be marketed through post
offices/banks/NBFCs and by various brokers/agents [including NSC agents] who
will be paid a commission.
GOLD
MONETISATION SCHEME [GMS]:
The
salient features of GMS are
1. The interested gold
sellers are required to open a gold savings account
with any bank by doing the Know Your Customer check. The account will be
denominated in grammes of gold.red
2. Once gold account is opened, the investor has to go to an
assayor. After the purity testing, the assayor will give a certificate that has
to be given to the bank. The bank will have a tripartite legal agreement with
refiners and collection and purity testing centres. The customer will not be
charged anything. The bank will pay the fee.
3. The minimum
deposit under the scheme is 30 gms
4. Under the scheme, three tenures are prescribed. Short term - one to three years (with a rollout in multiples of one
year); medium term - five to seven years; and long term - 12-15 years.
5. There will
be a penalty for withdrawing before the lock in period. Much like a fixed deposit,
breaking of the lock-in period will be allowed. However, there would a penalty
on premature redemption, including partial withdrawal.
6. In the short term, the bank will decide the
rate depending on the international lease rates, other costs and market
conditions. For medium- and long-term deposits, the rate of interest (and the
fees to be paid to the bank for their services) will be decided by the
government, in consultation with the Reserve Bank of India from time to time.
The interest rate for medium- and long-term deposits will be denominated and
payable in rupees, based on the value of gold deposited.
7. The redemption of physical gold is possible only for the short-term deposits. The customer will have the option of
redemption, for the principal deposit and interest earned, either in cash (in
equivalent rupees of the weight of deposited gold at the prices prevailing at
the time of redemption) or in gold (of the same weight of gold as deposited).
However, they have to indicate the option at the time of making the deposit. In
case you want to change the option in the interim, it will depend on the bank's
discretion. Redemption of fractional quantity (for which a standard gold
bar/coin is not available) would be paid in cash.
For medium- and long-term deposits, redemption
will be only in cash, in equivalent rupees of the weight of the deposited gold
at the prices prevailing at the time of redemption. The interest earned will,
however, be based on the value of gold at the deposit on the interest rate as
decided.
8. When gold is converted into gold savings scheme, there
will be a capital gains tax. But after conversion, there is no tax on interest
(in gold grams) or capital gains in future.
Q.10. The only sensible way of eliminating black money is to make it
economically unattractive. It means the following:
First, make tax rates – including indirect tax rates - reasonable.
While corporate taxes are moving in that direction, indirect taxes – especially
export and import duties – are not at levels that will discourage
over-invoicing and under-invoicing – two routes to generating black money
abroad.
Second, capital flows must become transparent. While capital
controls are slowly reducing, foreign portfolio investment is still coming
substantially through participatory notes – where the ultimate investor is
unknown. The chances are many of these investors are Indians with black money
hoards abroad. Participatory Notes hit a seven year high of Rs.2.72 lakh crores
in 2015.
Third, domestic black money is generated largely in two ways –
discretionary ministerial powers, and real estate controls. Discretionary power
in the allotment of coal and spectrum has been reduced, and will happen in the
case of other scarce resources too over time. But real estate shows no signs of
transparency and liberalization - which is why prices stay high despite lack of
consumer demand. Land is the most mismanaged natural resource where political
discretionary power is at its peak.
Fourth, elections must be state-funded. Once this is done, the need
for black money to fight elections will come down – and will become easier to
expose.
Fifth, to reduce the existing stock of black money – both abroad and
at home – we need an amnesty scheme with penalties, but there must be strict
non-disclosure clauses to protect identities.
Finally, the Benami
Transactions (Prohibition) (Amendment) bill, 2015 should be passed by
Parliament to deal with the rampant keeping the assets in name lenders name and
thus black money generation could dis-incentivized.]
Q.20. Why GSLV-D6’s success is significant for India and ISRO?
The launch of GSLV-D6 was by far one
of the most significant moments in the history of India’s Geosynchronous
Satellite Launch Vehicle (GSLV) programme. When the launch vehicle injected the
satellite (GSAT-6) weighing 2.2 tonne into its precise orbit at the end of its
brief 17.04-minute flight, the message to rest of the world was clear – India
has built and validated a perfectly working cryogenic engine. And the highly
complicated engine has delivered a perfect performance on flight not once but
twice (GSLV-D6 was the second successful launch using the indigenously
developed cryogenic engine after the January 2014 launch). This, despite
sanctions and restrictions (on transfer of dual use technologies) thrown at the
Indian Space Research Organisation (ISRO) by developed nations who were clearly
not comfortable with the idea of another player entering their select grouping
that had the capability to launch heavy communication satellites.
A series of failures for varied
reasons since 2006 had put enormous pressure on ISRO’s GSLV programme and the
morale of scientists working on it took a beating. But they laboured on. This
success would add to their confidence in a big way and it was already visible
in their body language at the GSLV-D6 post-launch press conference. With the
design of the launch vehicle and the working of the cryogenic engine validated,
ISRO has begun to talk about the commercial opportunities.
Space agencies of developed nations
have reason to be worried about Indian space programme in general and GSLV’s
success in particular. Consider this: It cost ISRO $36 million to put GSAT-6
using GSLV-D6 in orbit. This is far lower than the $60 million cost that the
European Space Agency’s Ariane 5 entails. ISRO says it is now ready to launch
commercial satellites weighing up to 2.2 tonne.
What next?
ISRO has to keep launching more
GSLVs to establish the reliability of the launch vehicle. Its customers who are
investing multi-million dollars in building advanced satellites are not going
to hand over them to ISRO simply on the basis of lower cost. Reliability is the
key in this business and it comes from repeated textbook launches. If ISRO’s
smaller launch vehicle PSLV (Polar Satellite Launch Vehicle) is attracting
orders in droves it is because it has been in service for 20 years and has had
29 continuous successful launches.
ISRO has decided to launch two GSLVs
a year. But this is easier said than done and requires the agency to augment
its capacity dramatically. It has already announced plans to build a third
launch pad and create another vehicle assembly facility. ISRO is also working
to reduce the lead time to launch. GSLV-D6 was launched in a record time of 100
days when the first part of the launch vehicle reached Sriharikota. If the
agency is planning to increase the number of launches, this will have to reduce
further. China, experts say, manages as many as 25 launches a year compared to
India’s five.
Apart from creating the capabilities
to increase the frequency of launches, ISRO is also working to tweak GSLV to
enable it to carry a higher payload. Work is on to reduce the weight of the
launch vehicle which will then make it possible to put a 2.5 tonne payload. The
weight of GSLV-D6 (excluding the fuel and payload) was 53 tonne.
The next real technology leap for
ISRO is GSLV Mark III which will have the capability to put satellites weighing
5 tonne in orbit. It is a much larger vehicle weighing 640 tonne (GSLV-D6 in
comparison weighed 416 tonne). ISRO is developing a bigger cryogenic engine for
this vehicle and it has now been tested for 800 seconds. In December last, the
agency had successfully launched GSLV Mark III without the cryogenic stage to
validate the functioning of the first and the second stage of the rocket. GSLV
Mark III now awaits its cryogenic engine. If GSLV Mark III succeeds, India will
gain the capability to launch any communication satellites in the world.
GSLV-D6’s success gives the confidence that it is only a matter of time before
that will happen too.
India’s space agency, ISRO, crossed another
milestone, launching its first 2000-kg-plus satellite on Thursday afternoon on
an indigenously built launch vehicle. The 2117-kg GSAT-6 communication
satellite flew into space on GSLV-D6 launch vehicle from the Satish Dhawan
Space Centre at Sriharikota. The launch was significant not only for the
heaviest satellite that has ever flown from Indian territory but also that it
was only the second successful flight of the GSLV using an indigenous cryogenic
engine– ISRO scientists have had a bitter-sweet experience with it till now.
GSLV, or Geosynchronous Satellite Launch Vehicle, is an advanced launch vehicle
that can be used to carry satellites heavier than 2000-kg, even those weighing
up to 5000-kg, into space. This is the vehicle that ISRO has been banking on to
realise its future projects to explore deep space, far beyond even Mars where
it has reached already. GSLV’s higher capabilities, as compared to the PSLV or
Polar Satellite Launch Vehicle that has made 28 successful launches in a row,
is made possible by a the cryogenic part of the three-stage engine. Cryogenics
is the science of extremely low temperatures. The cryogenic engine uses the
liquid engine and liquid hydrogen as propellants. Oxygen liquefies at
-183-degree centigrade while hydrogen exists in liquid stage below -253 degree
centigrade. The cryogenic engine is extremely efficient, providing greater
thrust for every kilogram of propellant used as compared to solid or
“earth-storable” liquid propellants. However, it is a highly complex system
owing to the extremely low temperatures that need to be maintained. The early
successful flights of GSLV used Russian-made cryogenic engines. ISRO’s initial
attempts to use its own cryogenic engine in the GSLV resulted in failure. It
was only in January last year that the first GSLV with an indigenous cryogenic
stage engine made a successful flight. The GSAT-6 satellite that will beam
communication signals from five slots in the S-band and one in the C-band for
“strategic purposes” will be placed in the geostationary orbit. In this orbit,
36,000 km above the earth’s surface, a satellite appears stationary from any
point in the earth because the time it takes to go around the orbit is the same
as earth’s rotational period. Ground stations can remain permanently pointed to
the satellites in this case and do not need to move to track them. The launch
vehicle will carry the GSAT-6 satellite till the geostationary transfer orbit
(GTO) from where the satellite will use its own propellants to make its way to
the geostationary orbit. GSAT-6 is the 25th communication satellite that India
will put in the geostationary orbit and the 12th in the GSAT series.]
22. [The RBI’s granting of
licences to 10 applicants for setting up small finance banks (SFBs) is a
significant step towards extending formal finance access for enterprises now dependent
on high-cost un-organized sector funding. Together with the 11 licenses awarded
for payment banks last month, it marks the beginning of a radical overhaul of
the banking structure that will hopefully address the abysmal levels of
financial inclusion in India. The SFBs are expected to focus primarily on
accepting deposits and lending to small business units, small and marginal
farmers, micro and small industries and other unorganised sector entities,
currently underserved by regular commercial banks. The RBI estimates that close
to 90 per cent of small businesses today have no links with formal financial
institutions. The key takeaway of this move is the RBI’s efforts to promote
niche banking. Commercial banks are largely interested in funding large and
medium corporations, or giving out loans for home and vehicle purchases. On the
other hand, it is not easy for diamond cutting and polishing units, job work
fabricators or small restaurant owners to get working capital finance support.
Lending to them is a specialised affair, just as truck financing is. These are
segments where regular banks have gradually withdrawn, with their place being
partly taken by various non-banking financial companies. SFBs can probably do
even better in filling the gap. The entities that have been given licences are
mainly microfinance institutions that have already reached out to remote
hinterlands. Currently, they are mainly on-lending funds from banks, which work
out to be rather costly for the ultimate small borrowers. Becoming SFBs will
allow them to directly take deposits, which will bring down their cost of funds
and translate into lower interest rates for clients. Regional rural and urban
cooperative banks ought to have performed this role, which they clearly haven’t
— not least due to political interference and being weighed down by high fixed
costs. The SFBs may be in a better position to exploit the huge business
opportunity in funding small and medium enterprises. The RBI expects them to be
high technology-low cost operators, while also bringing in innovations in
service delivery. It is heartening to see the RBI change its conservative
image, which ensured that till early 2014, only 12 new bank licences had been
awarded since liberalization. India needs a more dynamic and flexible banking
system. The SFBs and payments banks are a good initiative in that direction.
Extending the formal banking system’s reach will also ensure better monetary
transmission, important for the effectiveness of the RBI’s own interest rate policy
actions.
The lack of access to basic
banking services became glaring when the government tried to move away from the
subsidy model towards the direct cash benefit model, in which the subsidy
recipient's account would be credited with the amount of the subsidy enabling
them to purchase goods like kerosene at non-subsidized rates. While the direct
cash benefit model would have helped India's woeful balance of payments
situation, its implementation required subsidy recipients to have access to low
or zero balance accounts. The lack of basic banking services for most subsidy
recipients meant that the direct cash benefit model could not be fully
implemented
Payments banks are allowed to issue
"ATM" and debit cards, but not credit cards. Further, the banks can
provide internet banking and undertake bill payments. The banks are also
allowed to access payment gateways and process cross-border remittances that
are in the nature of personal payments and current account remittances.
Although payments banks cannot engage
in lending activities, they are permitted to engage in simple financial
activities not requiring any them to commit funds such as distributing mutual
fund units and insurance products, with the prior approval of the RBI.
Payments banks are a step in the
right direction to foster and encourage financial inclusion in India. The
deadline for receipt of applications to establish payments banks is 2 February
2015, and many private sector participants as well as government-operated India
Post are said to have applied to the RBI to establish payments banks. Similar
to the granting of universal banking licences by the RBI in 2014 to IDFC and
Bandhan, this too is expected to have a positive effect in strengthening and
deepening the Indian financial market.
This article was first published in
the February 2015 issue of the India
Business Law Journal.
The
content of this article is intended to provide a general guide to the subject
matter. Specialist advice should be sought about your specific circumstances.]
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