Economics

- No need to know the salient features of the scheme but must mention the scheme
when analysing an issue and outlining the steps government takes

o Understand and purpose and rationale behind the scheme

- Economics questions – based on macroeconomic analysis

- Employment/Unemployment and Wage estimates

- Heads

o Measurement

o Types – Formal/Informal

o Problems and Challenges

o Sectoral Employment

- Measurement of Employment

o Formal Employment

 Registered with the government under an applicable law

 Social Security

 Security of Job

 Salaried Job

 Contractual Nature of Employment

 Size of Enterprise

 Clarity of job description

 Inclusion in the tax net

o Problem – Lack of clarity of definition of formality

o 2007 – National Commission for Categorisation of Unorganised Workers

  Any enterprise employing more than ten people if powered by
electricity

 Any enterprise employing more than twenty people if not powered by

electricity

 Used synonymously and interchangeably – as organised sector

generally has formal jobs in it

 But – liberalization and globalisation and changing work demands –

have led to a greater degree of informalization of jobs in organised
sector – prevalence of contractual labour is rising faster than formal
jobs

 These jobs have a degree of surety by virtue of the contractual terms

but are outside of various other job security benefits provided by the
employer

 Lack of a single common criterion for formal employment means that

different criteria are used in various surveys leading to different results

 The growing use of contractual and outsourced labour in an attempt to

stay out of the purview of statutory obligations have led to the use of
additional criteria to identify the formal sector

 Economic Survey used two criteria to measure extent of formalization

in the economy

 If the employer is paying any kind of tax

 If the workers under an employer is within the ambit of social

security cover

 But going by this criteria – leads to discrepancy as 53% companies pay

tax but only around 33% pay social security benefits

o How to improve measurement

 To create a common encompassing definition of formal sector – for

instance include only companies that pay both tax and social security
benefit – but need to have only a single criteria
  Formal sector is measured through multiple database – NSSO, Census,
Annual Employment Survey, Annual Survey of Industries, Socio
Economic and Caste Census and by the private sector through the
Centre for Monitoring of Indian economy. There is a need to
rationalise this criteria and bring harmony to the methods of collection
by having all surveys collect data for formalization through a
commonly agreed benchmark.

 Annual Survey of Industries for instance collect data from only

a sample of large industries this is extrapolated not mere to the
other firms in the industry but also to the economy at large,.
Other surveys too use their own approaches, leading to
different outputs.

- Formalization in the economy

o Only around ten percent is in the formal sector

o Jobless Growth

 Said to be when the economy is growing but it cannot create jobs.

 Employment elasticity is zero or minimal – employment growth

created on each unit of GDP growth – New Employment created/GSP
growth

 GDP Growth

o Inflation

o Increase in Productivity

o Increase in Employment

 In the pre liberalization era of employment elasticity – was at about 0.4

but post LPG it has fallen drastically to 0.02 at present

 Due in part to the fact that the economy output is far greater in the
service sector but creates little employment – and India’s GDP has
 increasingly been driven by the service sector instead of primary and
secondary sectors

o Counter Employment

 NITI Aayog – Not the problem of unemployment but under

employment

 India is not witnessing jobless growth as the additional job output

created by the economy is still far higher than what is required
compared to the people entering the labour force in most states for
every month of job data – around two crore jobs are created per month
for every one crore of job seekers

 The present challenge is of under employment as the new jobs created

in the sector is not commensurate with the skill levels of the persons
seeking jobs. This is leading to voluntary unemployment as people are
unwilling to seek the new jobs

o Benefits of Formal Sector

 Better Social Security

 Better Living Standards

 Better Scope for Developing One’s Capabilities

 Wider Tax Base For The Government

o How to improve formalization in the economy

 Needs an incentive for all the informal firms to be formalised

 This is to be done by increasing the ease of compliance and reducing

the cost of compliance

 Multiple laws require multiple documentation, certification,

inspection and accounting requirements – incurring time and
monetary costs

 Easing of labour laws – labour code

  Self certification

- Read on Gig Economy – In the material

o Here the employment is not based on clarity of job description. The

employment is in place as and when job comes but has no certainty as to the
quantum of work that employee can get in a day

o Uber, Ola, Zomato etc

o What are the benefits and challenges that gig economy can have for India

 On the one hand these firms are within the ambit of the government
and must pay taxes, its employees are also registered with the
government and has data on the payment made to their employees

 But the social security protection is minimal and there is no certainty

as to income or work

 Benefits

 Skill requirement is low

 Risks are hedged

 Provides seasonal employment

 Greater resistance to financial shocks

 Challenges

 Temporary measure with no certainty of employment or

income

 Lack of security

 Technology revolution created jobs – advancement in sectors

like robotics and AI can lead to these jobs being slashed –
research data makers, freelance services, driving and automated
services

- Job creation
  EPFO – study by Ghosh and Ghosh – 10 million new jobs are created
in the economy – study criticised by stating that informal sector has
formalised due to GST and Demonetization pressures rather than new
creation in economy – but critiques miss that this was accounted for
and factored in the study

 Later – revised the estimate to be 12 million

 Centre for Monitoring of Industrial Employment – number of people

employed has decreased – indicating a reduction in actual number of
employment by 0.2 million – problem was that this study measures
only formal employment in large employment which is then
extrapolated to the entire economy

 Indicates the problem of measurement – as none of the industries and

survey approaches used has created a clear sample

 EPFO – Is based on data directly available before the government so

National Sample Survey Organisation’s data is to be a better measure
as its base in broader and more accurate - > CONCLUSION

o Job Creation – Numbers

 National Manufacturing Policy 2011 – aims to develop skills for 100

million workers by 2026

 Extrapolated based on data which shows ten million workers

enter job market each year

 But according to EPFO date – 6 to 7 million

- Reforming Labour Laws

o One integral element in furthering

o Over fifty laws by the Centre and laws of the states

o Now proposed to be collated into four codes on different aspects

 Wages
  Industrial Relations – Governs the relations between industry and
employee, right and requirements to be complied with to form unions,
and the procedure to resolve disputes as

 Security

 Conditions of Work

- Living wage, Fair wage and Minimum Wage

o Living Wage

 A wage that is the minimum required to fulfil the basic needs of person
and standard of security as well as opportunity. More than a mere
animal sustenance.

o Fair Wage

 Wage to be paid is based on demand and supply as well as the capacity

of the employer to pay

 So it will generally be atleast equal to or higher than minimum wage.

o Minimum Wage – Minimum Wages Act, determined by the government

stipulating the minimum wage to be paid by an employee

 Differs across profession and regions

 Central Government lays down the formula to calculate minimum

wage leaving the calculation to the states, who can add to this
minimum by legislation

- Race to Bottom

- Phillips Curve – Relationship between unemployment and inflation

- Question – Problems and Challenges of having a statutorily determined minimum

wage

o More minimum wage – more people will join – more money will mean more
goods – as inflation rises giving impetous to production – overall production
rises
 o More minimum wage – going beyond the market clearing wage – will mean
that it is more than the capacity of the firm to pay – as capacity to pay wages
declines – will lead to some workforce being jobless as they are dropped to
offset the rising income

o So Minimum Wage depends on how much inflation the economy can tolerate
– should not increase minimum wage beyond that and try to achieve full
employment – as it will lead to a high inflation level which will cause greater
harm

o The economy can have minimal inflation and suffer some inflation or the
other. Government must decide the ideal rate

- Race to Bottom – Stronger due to globalization – as developing countries weaken

their regulative regimes to ease conducting business as all these countries are vying
for investment – minimising cost of compliance

o Industrial relations code bill is doing away with the condition on notifying in
case of retrenchment if it has less than three hundred employees (was earlier
100)

o Requirement of paying one month’s salary in case of retrenchment is also to

be done away

o The government must balance this so as to ensure minimum protection to

workers while also creating new jobs to absorb additional workers

- Labour Code on Social Security and Welfare

o Multiple Social Security Schemes will be collated

o Proposal – Government to provide part of the mandatory EPFO that is to be

paid by the employer for new employees

 This imposes burden on the tax payer

- Labour Code on Occupational Health and Safety

o Regular Inspections

o Fine if not complied with

- Skill Development

o Three aspects – Lack of skill, steps taken and challenges ahead

 NMP = 2011 – 100 mil by 2026

 Skill Programmes

 Use stats – earlier only one mil now has reached 5 mil per year

o Problem – on one side it is high (problem of under employment) but also low
(in terms of average skill set globally)

o India – high disguised employment in agriculture who when opting for other
sectors available – like construction – very minimal

o The training for high level industrial/manufacturing jobs too is inadequate –

training and apprenticeship in industries is minimal – only three percent

o High skill jobs – not sufficient and uptodate so as to be relevant for jobs with
newer technology while there is also a lack of jobs adequate for their skill
levels

 Superfluous degree – qualification greater than what is necessary for

the job

- Issues with Existing skill development programme

o Currciculim not developed – minimum industrial involvement and mentorship

– current draft skill development framework provides incentives to expand
skill

o Lack of forthcoming to obtain certification – aspirants and employers don’t

place the same degree of recognition to these skill development initiatives
rendering the skill certification valueless

o Demand supply mismatch

o Inadequate funding

o Penetration is minimal

o Lack of recognition for firms

- Skill Development in the face of fourth industrial revolution

o Incorporating the information and communication technology tools in a

manner beyond the digital realm to impact the physical, biological and social
realms of people

o Fourth industrial revolution is skill driven and those who are not skilled is
bound to be left behind. This discrepancy will only get stronger and eliminates
opportunities an unskilled person or a person skilled outside of the effective
technology use can eliminate them

o Problem of making inclusive growth – By eliminating the digital divide and

reskilling them

o Read section on concerns

o Read on Way Forward

 NITI Aayog – Sustainable Action for Transforming Human Capital

- Inclusive Growth/Pro Poor Growth

o Pro Poor Growth

 Specifically targets reduction in inequality and poverty

 Minimise the poor in economy

 Can be in multiple ways

 Trickle down – the wealthy is equipped with features which

enable it to profit, and the fruits derived from the growth is
redistributed to the benefit of others

 Here does not contribute to growth but are only passive

recipients of benefit

o In Inclusive Growth

 Not mere pro poor growth but where the people otherwise excluded
from the growth process is given adequate tools and opportunities to
 build their capabilities, enabling them to contribute in growth, making
them stakeholders in the growth rather than passive recipients

o Can capitalism contribute to growth process

 Inclusive growth – requires the poor to be part of growth process – but

the capitalists will not be willing to contribute directly to the bottom –
so government must directly take stand and redistribute wealth from
top through taxes to develop bottom

- Inclusive Development Index – World Economic Forum

o Environmental Sustainability

o Protecting the future generations from debt – inter generational equity of debt
is a measure of inclusiveness – next generation will need to repay the debts,
meaning they cant take more debt and lost part of their investing capability

o Living Standards

- Measuring Poverty

o Different measures of poverty – asked before – YK Alag, Lafda, Tendulkar,

Rangarajan

o Problems with measuring poverty line – asked before

o Is there case for revision of poverty line given that India is now a middle
income country

 Mixed recall period reform

 2011 Tendolkar – 21.9% poverty head account ratio

 Mixed recall period - used in Tendolkar

o – monthly survey based on consumables

o Annual survey based on capital goods – long term non

consumable goods
  ENgers Deaton – Nobel winner 2016 – three recall periods was
suggested – one week/one month/one year and a six month
period if required

o Applying this for 2011 will make it only 15% head

count ratio

 2014 Rangarajan – Still has not been notified as the official

measure – 29.2%

 Brookling Institution – reported that 44 people are coming out

of poverty in every minute – but applying Angers Deaton will
make it 90 per minute

 Expected that those below poverty is only 5$ in 2017

 Problem

 Poverty line has not grown along with the economy

 It fails to take into account standards of living and changing

living requirements in economy

 Minimum requirements – in the Tendulkar or Rangarajan is 28

per day

 World Bank – 1.9 Dollars in PPP terms per person per day –
basis of Tendulkar poverty line

 World Bank – using 1.9 Dollars per person per day

methodology – measures India’s poverty line in 2014 –
measured it as 2014

 But this measure is for low income countries – while India has
risen to a middle income country status in per capital income

 The poverty line of middle income countries of World Bank is

3.2 dollars – middle income countries – then it is predicted to
be ten percent
  Problem is not on methodology per se but in revising income
standards to correspond with changing income level of the
country

- Consumption Expenditure – 2004 to 2012 – 3 percent per year

o Economic growth rate at that time was between 8 to 9%

o Indicates

 High savings

 High inequality – if consumption at the bottom was so small then they

didn’t get all the fruirs of growth

o From 2009 to 2017

 Consumption grew at 4.7% per year

 Commensurate with rising rate of poverty reduction

 As ability to consume more indicates their reduction in poverty

- Strategy on Resource Efficiency

o How much input is consumed per unit of output

o Not very important

- Trnasformation of Aspirational Districts

o Read box showing how it is different from earlier programmes

 Indicators developed – specific to districts

 Focused targeting – from bottom

- Read Island development authority and important of islands – from ecology and
security

- Finance and Banking

 Problems in Banks

 Problems in Credits – including NPA

  Issues with RBI

 Issues with Banks

o NPA’s

 Non Performing Assets

 If interest or principle – not paid for more than ninety days

 Loans earn income for banks – assets while Deposits are

Liabilities as it must be returned on demand

 Spread – Interest of Saving Accounts and the Marginal Cost of

Lending Rate

 Bank must comply with certain standards so as to ensure that

the risks they take are contained – keeping its deposits from
being exposed to vulnerable securities

o Government Securities – SLR – 21% - almost entirely

of banks go to Gov Security as it is secure. General
trend is that upto 30% in Govt Ratio

o Cash Reserve Ratio – 4% to be kept with RBI

o Provisioning Amount – if Bank lends to someone, Bank

must evaluate risks and setaside a portion from the
deposits and not lend it to anyone

o Capital Adequacy Ratio – The percentage of money that

the bank must retain from the income it receives on
loans provided

o Provisioning Amount is to compensate the depositors

but Capital Adequacy Ratio is for liabilities other than
those towards depositors

- Despite banks being flush with funds credit growth rate has not increased much.
Why?
 o The income they expected to receive from their loans was not forthcoming –
due to assets being NPA – this led to a reduction in capital adequacy ratio –
which indirectly capped the amount they could rent – the lower than adequate
Capital Adequacy Ratio prevented them from lending

- NPA is a liability as it has ceased earning income

o Provisioning for a NPA is 100% - this is because the risk has become certain

 This reduced the amount bank can lend – as more amount will have to
be set aside for provisioning

 The same will also reduce its Capital adequacy reason (as stated
above)

- Twin balance Sheet Problem

o Bank’s balance sheet – inadequate capital adequacy ratio and the provisioning
requirement due to NPA meant that it lead to a reduction in the deposits it
could lend out

o Company’s balance sheet – it estimated a flow of income for future on the

basis of which it borrowed – but it could not obtain the expected returns and
pay back the loans – this led to a reduction in the money banks could lend to
them

- Insolvency and Bankruptcy Code

o Predecessor

 Recovery of Debts Due to Banks and Financial Institutions Act, 1993

 Established Debt Recovery Tribunals which could determine

how bank could recover debt

 No automated right to liquidate security – bank only held

custody – required the process before DRT

 Time consuming process – as multiple entities were involved

 Securitization And Reconstruction of Financial Assets and

Enforcement of Securities Interest Act, 2002
  Banks gave the power to securitise the asset – auction the asset
without going through the Debt Recoverty Tribunal

 Offered a faster process – Onus was on the lender to approach

DRT to prevent disposal

 Companies Act 2013

 Created the National Companies Law Tribunal

 Insolvency And Bankruptcy Code

 Debt Resolution Committee

 Allows more creditors – like suppliers to claim debt

 NCLT has been made the judicial body for companies while
DRT is for individuals

 Allows for Debt Reconstruction – by Insolvency Resolution

Professional if both party consents

 180 days time frame and 90 days to create a plan to which all
parties agree

 If not – liquidation will commence – division of proceeds will

be waterfall/bucket method with debt resolution professional’s
dues and expenses, banks with secured debt, 24 months arrears
to labourers, 12 months salaries of employees, operational
creditors, and shareholders

- Rationale

o To avoid undue delays due to judicial proceedings

o Alternate measures through debt resolution professionals

o Focus on Asset reconstruction where possible

- Quantitative Easing

o Creation of large assets

 o To kick start the economy by relinquishing burgeoning reserves

o Easy Money Policy/Quantitative Easing – Foreign exchange given at low

interest rates

o This was invested in government bonds by US investors into Indian and

Chinese Economy as they offered greater interest rate in government bonds

o But this rate of return is not the effective/real rate of return as the currency
value will fluctuate on investment as the currency is not acceptable
everywhere. Leads to depreciation in value so to minimise this some expense
is incurred in order to hedge risks

o But once US Federal Reserve decides to increase interest rate on bonds,

investment in India will go out even with smaller increases as the
US/European markets have greater prospective benefits and lower risk
minimising or eliminating the need to hedge compared to India. So similar
returns in effect to match the actual interest but with lesser risks

- Finance and Banking

o NPA and IBC already covered

o RBI Issues

 Amendment to the RBI Act criticised that it will dilute independence

of RBI

 Current Concern – Conflict of Interest

 RBI obligated to take steps to maintain 4% (+/- 2%) inflation

under the inflation targeting framework in determining its
monetary policy

 This requirement to maintain inflation through monetary policy

will interfere with other interests like the investment in the
economy – if inflation is at six percent – RBI will increase
interest rate – making credit more costly for investors

 Principle of Effective Debt Management by the Government

 o The Debt must be obtained at least cost (low interest
rate)

o The maturity of the loan must be long term rather than

short term – preference for long term debt rather than
short term debt as payment can be stretched further

o Source of loan – whether the loan is from domestic or

foreign source. Domestic source is preferred as there no
currency risk due to volatility in the foreign exchange
market

o The government cannot crowd out the private player

from the credit market

 RBI’s dilemma – it is also the debt manager of the government

and must ensure that the government must get the loan with
least risk

 Measure – Constitute a public debt management agency – as a

separate institution to manage government debt thereby freeing
up the RBI from this conflict of interest

o Will be effgective from 2019

o Right now PDMA is only responsible for the CG debts

both foreign and domestic – state debts are still with
RBI

 Transmission of Monetary Policy/Why interest rate continues to be

high despite the reduction of Bank Rate by RBI

 Why has benefits of RBI policy not transmitted to the

consumers

o Transmission is not effective as the banks do not change

their interest rate to reflect the changes of RBI
 o Banks waited for a prolonged period until major shifts
accrued in the RBI’s repo rate before changing their
own interest rates.

o There were thus delays in the measure impacting the

customers as RBI had to compel banks by oral
instruction to change the rates

 Solution

o Introduction of the Marginal Cost of Funds Based

Renting – which banks are required to revise on a
monthly basis

o Modifies the existing Base Rate system

o RBI has formed the benchmark reference below which

banks cannot rent, for different classes of customers
based on the time period of the loans

o Now banks are required to consider the repo rate when

calculating their interest rate for the customers

o Bank can change this reference rate of interest based on

the Spread (Riskiness) of the borrower

o Ensures that banks do not gain their spread merely on

account of a reduction in repo rate by RBI and this falls

 Marginal Cost of Funda Based Renting

o Costs of Banks – refers to the interest they have to pay

the depositors

o Marginal – refers to the changed cost they will incur on

account of changed RBI policy

o Four components

 Marginal Cost of Funds

  Negative Carry on Account of CRR

 Tenor Premium

 Operating Cost

 Banks are required to disclose calculation of MCLR but does

not create an obligation on bank transmit the entirety of change

o Banking Reforms

 Why NPA Ratio of Public Sector Banks are higher

 March 2018 – 10.2% for public sector banks

 In the same period – private sector banks – 3%

 Reason

 Public Sector Banks hold a lot more deposit than private sector
banks, by virtue of trust people associate with them – so more
capability to lend

Public Sector Banks also take up far greater sum of money as

loan for projects – meaning major projects like infrastructure,
aviation, construction etc approach PSU – increasing the risk
they are subject to

 Risk analysis mechanism is not robust – In PSU risk analysis of

applications is also to be carried out by the General Staff who
are already burdened with other functions – management of
deposits, assets, administrative and managerial functions,
recovery etc. In contrast Private Sector Banks have specialised
departments for this purpose

 Reach and Obligations of Public Sector Banks – They extend to

priority sector obligations and reach in areas with lower
financial security and projects which are far more vulnerable to
becoming NPAs –
 o Priority Sector Lending – Only 1% of the value of loans
which are NPA is in PSL for public sector so a small
quantum and these obligations extend to both public and
private ssector

 Culture in Public Sector Banks – Top down structure which

leaves it vulnerable to pressure from top and inefficiencies in
procedure which lead to greater risk

 Number of Loans – Only around forty percent of the accounts

of loans are given to PSL, but account for only 1% of NPA

- Priority Sector Lending Rates

o Given at market rates

o Only condition is that 40% of net bank credit given must go for Priority Sector
Lending

o Agriculture, Education, Power and Infrastructure, Renewable Energy, Export

Sector etc

o Reasons – Paying Capacity is less but the risk is more in these sectors so in a
free market these sectors will find it impossible to receive loans; and enable
giving impetuous to certain sectors which government needs to encourage
development in.

o Problems

 Following PSL Norms lead to higher costs – as Banks are required to

maintain presence in these areas which offer less business value for
banks

 Agricultural loans will require opening branches in villages

where other opportunity for loans are not open

 Skewed lending – 18% of the loan in 40% was earmarked for farmers;
initially all loan was taken up by the large farmers. RBI required loan
share of small farmers to be mandatorily ten percent but productivity
 did not rise as well as compared to other sector where PSL was given.
Loans advanced were not used for productive purposes

 Expertise – Private Banks and Large Private Sector Banks do not

engage as well as Regional Rural Banks, Cooperative Societies and
Non Banking Finance Cooperation and this leads to inefficiency

 If Banks failed to meet their priority sector lending certificate

they were required to park their funds with RIDF managed by
NABARD. This however offered a much lower rate of return

 Priority Sector Lending Certificate – introduced by government

to offer a better alternative to banks

o Regional Rural Bank which exceeds its PSL Target can

sell, via Priority Sector Lending Certificate, its excess
loan to one with deficiency in Priority Sector Lending
via v avis target. This can be shown by the deficient
Bank to RBI for indicating that it has met the PSL target

- Banking Reforms Road Map – Page 22

o Enhance Access And Service Excellence Based on Six Themes

- Health of Banks – Determined by examining how well the bank’s budget is vis a vis
its capital adequacy ratio. – lend based on Credit risk to asset ratio – if the capital is
less then regardless of size of deposits it cannot lend

- Governemnt – Aims at recapitalisation of banks – two lakh crore to be infused into

banking capital – Only to Feed into CRAR – and not to be used for lending

o Three methods

 Gross Budgetary Report – Allocate part of the revenue earned by the

government through the annual budget

 Market Borrowing – money is to be raised by disinvesting some of

government shares in the PSU

 Recapitalisation Bonds – Government will borrow from the bank in

lieu of recapitalisation bonds which the government will infuse back to
 the bank as capital -> PSU banks will be required to repay what is due
on the bond as interest back to the government

o Government will infuse capital only if certain conditions are fulfilled

 Read these conditions from RM – General strategies to improve

governance of banks – ease reforms

 Indradhanush Reform – two years back – on similar parameters

- Issues with consolidation of PSB and challenges of consolidation of banks

o Purpose – to create a strong bank – with strong assets, with reduced liabilities
and good capital

o Small banks have less capital and lending ability due to small lending capital –
the lower capital adequacy ratio means they cant lend as much

 By merging banks – CAR improves and stronger assets means it can

lend to large projects by itself

 Expected to improve competitiveness of the Indian banks in the global

market

 This is also expected to boost efficiency gains by removing duplication

of procedure and ensuring uniform flexible practice stracture

o Issues

 Creates more D-SIB Banks which need greater safeguards as the loans
their collapse can lead to severe dominos effect

- Priority Sector Lending Norms

o Read from RM

o Has the time come to phase out PSL norms – In RM think

- IBC – Why IBC read from RM

o Long Time to resolve bankruptcies – 4 and a half years

o High cost of process

 o Low recovery rate – For a rs loan the rocvery was about 23 paise compared to
90 paise in Japan

o Project Sakshat and Chakravyuh Problem

- Challenges of IBC

o RBI notification requiring banks to recover through IBC as soon as the asset
became NPA. This closed other routes of recovery that banks might have had

 Power Sector – largest contributor of NPA – inter connected as it

depends on supply and transmission costs, suppliers, high
infrastructure and sale recovery, failure in any avenue can substantially
decline its capacity to pay back loan – low buyer attractiveness as it is
impossible to recover even a minuscule portion of investment on
liquidation sale.

 IBC also minimises bank’s power over restructuring process as other

players will also be a part of the resolution council

o Project Sakshat – proposed alternative of the government to IBC – by financed

ministry

- Ombudsman Scheme for NBFCs

o On importance of NBFCs

 They have domain expertise of operation

 Have greater flexibility and less stringency

 Challenges

 Inadequacy to respond to customer complaints

 Lack of the same degree of financial security

- What are ponzi schemes and government taken to curb these

o A lot of fraud schemes come together

o Collective Investment Schemes and Multiple Marketing Schemes

 o Amway and Garden Reach ( can be in the guise of Multilevel Marketing),
Sahara and Speak Easy (can be in the guise of Collective Investment Scheme)

o Collects investment from persons by promising disproportionately high returns

and drives its promises through investment till it collapses once returns are
insufficient to fulfil promises

o These Ponzi scheme have been declared illegal as a form of cheating. But not
all CIS and MM are Ponzi (Chit funds Act) – can be regulated by RBI, SEBI
or State Government depending on scope and scale

o Chit Funds Amendment Bill and Banning on Unregulated Depository Scheme

o Earlier operated in regulatory vaccum due to there being no laws or direct

agency – now mandated

- Public Credits Registry

o CIBIL – Credit score information data

o Similarly companies are also rated

o These are to be stored in a common database to be stored for banks

- Taxation

o On two themes – Tax Base and Tax Buoyancy

o Tax to GDP ratio has only risen at about 1 percent per decade

o Steps taken to increase tax gdp Ratio

 Depends upon number of people who are paying tax and the rate of tax
– both direct and indirect

 So firstly must increase base of people paying

 Recognition of income – more economy is to be moved to

formlalisation enables government to detect flow of money

 Rationalization of Tax Structure – By bringing more persons

under the tax net
o For Individuals – Income Tax

o For Coeporations – Corporate Tax

o Having high corporate tax rate – of about 33% before

2014

 Companies are unwilling to invest in India or

relocate in India while those companies which
are in India are unwilling to disclose their actual
revenue

 Demand for exemptions led to nominal rate

being only 23%

 This also leads to costs in rationalising tax as

exemptions and deduction need to be assessed
and returnd as required

o Income tax – also suffers similar flaws

 Medical, house rent and transport allowance

exemptions

 Now instead a flat exemption of Rs 40k is given

– easing filing of income tax returns while
minimising likelihood of fake exemptions

 Suhag scheme etc

o Slabs of Income Tax/Indirect Tax

 Had multiple slabs and heads compared to

before

 The bottom slab of income tax has increased

disproportionately when compared to revenue
growth in India – leaving the bulk of populace
out of the slab
  Rationalize and ensure flat rate – will also
minimise rate of subsidies and
examptions/deductions

 Requirement

o Tax of compliance should be less and non compliance

should be high

 GST for instance – no multiple taxes and tax

collecting authority (CST, Octroi and Excise for
Central Govt while State VAT went to State
Govt) – now only a single tax and authority

 More incentive to pay and come within tax net –

formalising and widening tax net

 Cost of bribe, penalty and fear is higher because

the regulatory regime is harsher

o Rationalisation of GST and impact to revenue

 Most of the twenty eight percent moved to 18% and so now most
goods are in the 12 and 18 brackets

 Will lead to a deficit in revenue – affecting the expected

revenue estimate

 But might encourage entrants and competition increasing tax

base in the longrun through favourable tax structure

- Ways to improve tax buoyancy – read from RM

- Why need for new direct tax law – Read from RM

- GAAR – Read from RM

- Pros and Cons of including petroleum in GST

o Now almost fifty percent is paid as tax

 o But bringing it under GST can cause a substantial fall in the revenue of tax
government adversely impacting central government’s ability to compensate
as well

- Definition of Governance

o Manner in which power is exercised in management of a country’s resources

for its economic and social development

- Corporate Governance

o The system of rules, procedures and institutions that a company has put in
place to improve its governance

o 3P’s – Planet, People, Profit

- Good Governance

o When the exercise of power is fair, just and transparent

o Uday Kotak Panel and Narayan Murthy OPanel – Concerns of Corporate

Governance in India

o Must be fair and just

 Increased Transparency

 Increased accountability

 Stakeholder oriented rather than promoted oriented

 SEBI empowerment – stringent measures against insider trading

 Issuing of Corporate Governance

 Different positions of authority

 Lack of clearly defined role of independent directors

 Nepotism in Indian companies

- Shell company crackdown – Registrar of Companies closed 2.5 lakh companies – No

legal definition in any law – it is a form of dormant company for a prolonged period
 nearly all through its life but its business investments do not reflect its positions in the
market

- Corporate Social Responsibility – How has CSR performed since its mandatory
induction under Company’s Act

o Note activities that witnessed rise and which reflected decline

o Challenges

 Regional Equities – Companies concentrate CSR in areas they already

operate in – which are usually relatively advanced compared to other
states

- Land related policies

o 53% of land is used for agriculture – which is insufficiently productive

o Problem – allocation of scarce resources should be in whicb country – for

example land

o Even in manufacturing – resource investment is for sectors that are only

marginally more productive

o Should target sectors which are having more potential for productivity and
employment in the sector – for example apparel and leather sectors, Food
Processing Industry

o Model land leasing law

 Aims to place rights and responsibilities of land owners and cultivators

so as to encourage leasing

o Land Pooling and Land Banks

- Agriculture Sector

o Agricultural Stress

o Improving Agricultural Income

o Agricultural Exports