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GS Paper: Indian Economy

  • International Comparison Programme (ICP) by World Bank

    The World Bank has released its ICP report for the reference year 2017. India has retained its position as the third-largest economy in the world in terms of purchasing power parity (PPP), behind the US and China.

    Try this MCQ:

    Q. The International Comparison Programme (ICP) Report recently seen in news is released by:  IMF/World Bank/OECD/None.

    The International Comparison Programme (ICP)

    • ICP is one of the largest statistical initiatives in the world.
    • It is managed by the World Bank under the auspices of the United Nations Statistical Commission.
    • Globally 176 economies participated in the 2017 cycle of ICP. The next ICP comparison will be conducted for the reference year 2021.

    The main objectives of the ICP are:

    (i) To produce purchasing power parities (PPPs) and comparable price level indexes (PLIs) for participating economies;

    (ii) To convert volume and per capita measures of gross domestic product (GDP) and its expenditure components into a common currency using PPPs.

    Highlights of the report

    • India accounts for 6.7% or $8,051 billion, out of the world’s total of $119,547 billion of global GDP in terms of PPP compared to 16.4 % in case of China and 16.3 % for the US.
    • India is also the third-largest economy in terms of its PPP-based share in global Actual Individual Consumption and Global Gross Capital Formation.
    • In the Asia-Pacific Region, in 2017, India retained its regional position, as the second-largest economy, accounting for 20.83 % in terms of PPPs.
    • China was first at 50.76% and Indonesia at 7.49% was third.
    • India is also the second-largest economy in terms of its PPP-based share in regional Actual Individual Consumption and regional Gross Capital Formation.

    Trends in INR

    • The PPPs of Indian Rupee per US$ at the GDP level is now 20.65 in 2017 from 15.55 in 2011.
    • The Exchange Rate of US Dollar to Indian Rupee is now 65.12 from 46.67 during the same period.

    Significance of PPP

    • Purchasing Power Parities are vital for converting measures of economic activities to be comparable across economies.
    • It is calculated based on the price of a common basket of goods and services in each participating economy and is a measure of what an economy’s local currency can buy in another economy.
    • Market exchange rate-based conversions reflect both price and volume differences in expenditures and are thus inappropriate for volume comparisons.
    • PPP-based conversions of expenditures eliminate the effect of price level differences between economies and reflect only differences in the volume of economies.

  • Different response to a different economic crisis

    The economic crisis in the wake of the pandemic is different from past crises. In the past, the financial crisis led to economic shock. This time its economic shock that that is causing the financial crisis. This also means that our response to this crisis should also be different. This article elaborates on the fiscal and monetary policy response to the crisis.

    Pattern followed by economic crises

    • There is a well-established pattern to economic crises in emerging markets (EMs).
    • First, because of loose fiscal and monetary policies, the economy goes into a demand overdrive.
    • Demand overdrive spikes inflation and widens the current account deficit (CAD).
    • Then, CAD is financed by foreign capital chasing the promise of even higher growth and asset prices.
    • At some point, the overdrive is perceived as unsustainable, which triggers a reassessment of growth, inflation, and financial stability.
    • Domestic and foreign investors stop new investments, large capital outflows ensue.
    • Banks stop giving new loans and rolling over old ones on fears of worsening credit quality.
    • Growth collapses and a full-blown economic crisis follows.
    • The 1995 Mexican, the 1997 Asian, the 1999 Russian, the 2008 sub-prime, and the 2013 Taper Tantrum are all examples of such crises.
    • In the case of India, the 1981-82, the 1991-92, and the 2013 crises all had the same characteristics.

    Pattern in response to such crises

    • The first response is to restore confidence in policymaking.
    • It means large increases in interest rates, massive withdrawal of liquidity, and deep cuts in fiscal deficit.
    • Just before the crisis assets [which reflects in bank’s balance sheets] are severely overvalued on inflated views of growth, profits, and income prior to the crisis.
    • So, the second step is to restart the economy by restructuring the tattered balance sheets of banks, firms, and households.
    • This means debt restructuring and bank recapitalisation aided by privatisation, closures, and mergers.
    • These measures often need to be bolstered by structural reforms.
    • The economic crisis makes it easier to forge the political consensus for the reforms.

    But the economic crisis caused by pandemic is different

    • Why is it different?
    • Because, before the COVID-19 outbreak far from overheating, Indian economy was slowing down.
    • The financial system had virtually shut off the flow of credit as it wrestled with its bad debt burden.
    • This is not an instance of a financial crisis turning into an economic shock weighed down by damaged balance sheets.
    • Instead, this is an instance of an economic shock that could turn into a financial crisis if the damaged balance sheets are not repaired.

    So, should the response also be different?

    • Yes.
    • Do the opposite of what is done in a typical EM crisis: Cut interest rates, increase liquidity support, and allow the fiscal deficit to widen.
    • The RBI has done the first two generously, although with the coming disinflation, it needs to cut interest rates much more.
    • But, what about the fiscal policy of the government?

    Fiscal policy of the government: Doing not enough

    • The government’s approach to fiscal policy, however, seems ambivalent.
    • The overall fiscal support from the government will be limited to 2 per cent of the GDP.
    • So all the revenue shortfall and the pandemic-related budgetary support must add up to 2 per cent of the GDP.
    • If the revenue shortfall is more than 2 per cent of GDP, then total spending will need to be cut.

    Why fiscal policy matters for balance sheets

    • In this crisis, the causality of damage to balance sheets runs opposite.
    • Balance sheets will be damaged not because of prior excesses but because of the collapse in incomes during the lockdown.
    • Consequently, debt doesn’t need to be restructured to resume the flow of credit and get the recovery going.
    • Instead, what is needed is adequate income support to households and firms.
    • Such support will provide the needed time and space for the recovery to take hold.
    • Which, in turn, would repair much of the damage to the balance sheets.
    • But the fiscal response so far has been inexplicably restrained.

    What should the government focus on

    •  What matters today is the assurance of medium-term growth and not a few higher or lower points in this year’s fiscal deficit.
    • To do that, the government needs to allow the deficit to rise.
    • This extra deficit should help accommodate the decline in revenue and also provide adequate income support.
    • Some have argued that the government, instead, needs to offset the decline on private demand by increasing public spending.
    • This is an odd argument.
    • It would mean letting demand collapse and then compensating it with higher government spending.
    • Instead, using the same resources to ensure that private demand did not decline was the more natural and efficient response.

    What should be the RBI’s response

    • The RBI, too, has a very large role to play.
    • As elsewhere, it is now the only entity that has a strong enough balance sheet to provide any meaningful support.
    • The RBI is keeping markets flush with liquidity and low interest rates.
    • However, the RBI also needs to undertake extensive quantitative easing to keep bond yields from spiking given the likely large increase in deficit.
    • Because of the depth of the growth shock, bad debt will rise.
    • The natural instinct of banks is to cut back credit because of worsening credit quality.
    • To prevent this from happening, the RBI will need to extend substantial regulatory forbearance on accounting norms, provisioning rules, and, if needed, even capital requirements.
    • In addition, like the US Fed and the ECB, the RBI might also need to provide liquidity directly to corporates.
    • As of now, banks are providing liquidity to corporates supported by government guarantees as proposed now.

    Consider the question “The economic crisis brought by the corona crisis is not like the ones we faced before. This crisis is about an economic shock turning into the financial crisis. So, what should be fiscal and monetary policy interventions to tackle the crisis?”

    Conclusion

    This is not a crisis like the ones before. This time around, we need to weigh not the cost of taking these measures but the cost of not taking them.

  • Why bad loans won’t start piling right away

    Steps taken by the government have averted the piling up of the bad loans, though for the time being only. When the moratorium period ends, we will see the spike in the bad loans. This article explains the same.

    Why bad loans are expected to increase

    •  Consumer spending has collapsed over the last few months due to the pandemic.
    • Though lately there have been some signs of revival, it will take a while before spending comes anywhere near the pre-covid level.
    • This will mean that many businesses will start running out of cash pretty soon if they have not already.
    • A company that starts running out of cash will not be in a position to repay its loans and, thus, will ultimately default.

    How individuals will be affected

    • A recent estimate by rating agency Crisil suggests that about 70% of 40,000 companies have cash to cover employee costs for only two quarters.
    • This tells us that companies will fire employees, before, during, or even after defaulting on a loan.
    • If companies do not resort to employee retrenchment, they will cut salaries and many already have.
    • Past payments and future business with vendors and suppliers will be negatively impacted.
    • In this situation, the problem at the company level will impact individuals too.
    • When individuals start having a cash flow problem, it will lead to defaults on retail loans

    But why we are not seeing the defaults happening already?

    • A moratorium is a deferment of repayment to provide temporary relief to borrowers. The loan ultimately needs to be repaid.
    • The Reserve Bank of India has let banks and non-banking financial companies (NBFCs) offer a moratorium on loans.
    • Hence, until the end of August, borrowers have an option to not repay the loans, without it being considered as a default.
    • Hence, any loan defaults will start only after August but they won’t be immediately categorized as a non-performing asset or a bad loan.
    • Bad loans are largely those loans that have not been repaid for 90 days or more.
    •  Hence, defaulted loans will be categorized as bad loans only post-November.
    • This will be revealed when banks publish their results for October to December 2020, in January-February 2021.

    Conclusion

    Even if 20% of loans that end up under a moratorium are defaulted on, the quantum of bad loans, especially those of public sector banks, will go up big time.

  • Asian Infrastructure Investment Bank (AIIB)

    The Government of India and the Asian Infrastructure Investment Bank (AIIB) has signed a $750 million agreement for “COVID-19 Active Response and Expenditure Support Programme”.

    Try this question from CSP 2019

    Q.With reference to Asian Infrastructure Investment Bank (AIIB), consider the following statements

    1. AIIB has more than 80 member nations.
    2. India is the largest shareholder in AIIB.
    3. AIIB does not have any members from outside Asia.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

    What’s so special about this assistance?

    • This is the first-ever budgetary support programme from the AIIB to India.
    • The project is being financed by the AIIB and Asian Development Bank (ADB) in the amount of $2.250 billion, of which $750 million will be provided by AIIB and $1.5 billion will be provided by ADB.
    • The package aims to assist India to strengthen its response to the adverse impacts of the COVID-19 pandemic on poor and vulnerable households.
    • The current loan will be the second to India from AIIB under its COVID-19 crisis recovery facility apart from the earlier approved $500 million loans.
    • The primary beneficiaries would be families below the poverty line, farmers, healthcare workers, women, women’s SHGs, widows, PWDs, senior citizens, low wage earners etc.

    About AIIB

    • The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank with a mission to improve social and economic outcomes in Asia, began operations in January 2016.
    • AIIB has now grown to 102 approved members worldwide.
    • AIIB is a brainchild of China. The prime aim of the AIIB is infrastructure development.
    • By establishing interconnectivity across Asia through advancement in the construction of infrastructure and other productive services, the AIIB can stimulate growth and economic development in the Asian Region.

    Must read:

    International Economic Institution’s: ADB, BRICS Bank, AIIB

  • What explains the new mark crosses by our Forex reserves

    At first, it seems almost contradictory. And so it is. Our foreign exchange reserves touched new high of $500 billion for the first time, but the time in which this has happened makes it paradoxical. At the time when economies around the world are touching new lows, this rise in the Forex seems all but usual. In this article, you’ll learn about the 4 factors that made it happen.

    1. Decreased oil imports

    • Usually, we import a lot of oil.
    • But the payment here is dollar-denominated since very few countries are going to accept our currency (Rupee) as is.
    • So, you have to expend dollars i.e. the foreign exchange reserves to keep the flow of crude oil intact.
    • However, with the nationwide lockdown in place, our import bill has reduced drastically.
    • We simply don’t need as much oil anymore.
    • And considering oil prices have also taken a beating simultaneously, our Forex Reserves have been piling up.
    • Less oil import. More Forex reserves.

    2. Dollars coming with foreign investors

    • Contrary to popular opinion, foreign investors have been pouring money into India of late.
    • You could attribute a bulk of these inflows to Reliance Jio.
    • They’ve been enticing investors all over the world and they’ve been doing it at a pace that belies all rational expectations.
    • They’ve raised close to $15 Bn over the course of a few months and it doesn’t look like they’re stopping anytime soon.
    • So technically, dollar inflows have spiked and therefore, Forex reserves get a boost once again.

    3. RBI preparing itself for a bad time

    • Another popular explanation is that the RBI is preparing a war chest to stave off future uncertainties.
    • At a time when the world economy is reeling from an unprecedented crisis, it’s perhaps prudent to build up reserves for a rainy day.
    • So the RBI buys gold and dollar-denominated assets using our national currency and builds up the foreign exchange reserves.
    • Inadvertently, this increases the money supply within the economy.
    • There will be more “Rupees” floating around.
    • As more Indian currency keeps entering the ecosystem, the value of the rupee depreciates.
    • And yes, the value of rupee has tumbled recently, but we are not in dire straits yet.
    • But if India’s economy takes a turn for the worse, it becomes incumbent on the RBI to ensure price stability.
    • Imagine the value of the rupee starts fluctuating wildly because of economic uncertainties.
    • The RBI has to intervene.
    • It has to exchange the foreign reserves for the Indian currency.
    • If they keep mopping up the excess Rupees floating in the system, they could ensure the value of the rupee remains stable.
    • So long as the value of the rupee remains stable, prices of commodities will follow the same cue, all things remaining equal that is.
    • Now, there’s still no clear consensus on what kind of reserves we might need if things do go south.
    • Although there have been recommendations made in the past about hoarding too much, it’s still the RBI’s call at the end of the day.

    4. The RBI is doing it for the government

    • The RBI can turn a profit if it wants to.
    • And once it does turn a profit, it can transfer a part of the surplus to the government — as dividends.
    • Now if the RBI wanted to offer the government a higher dividend, it has to simply turn a higher profit.
    • One way to accomplish this is to simply let the value of the rupee depreciate. Do not intervene.
    • Do not forego the reserves. Let the rupee tumble.
    • And so long as you don’t intervene, all the dollar-denominated assets you own will be worth more in rupee terms.
    • Consider the hypothetical example-suppose the exchange rate was 1$= Rs. 71 in March 2020, then the rupee loses value and you see the same line item once again in June 2020 will be 1$=Rs. 76.
    • The extra ₹ 5 is treated as a profit. And this profit could be ploughed back to the government.

    Consider the question “With the economy in the tailspin amid pandemic, the news of India’s Forex reserves touching the $500 billion mark for the first time provided the semblance of solace. Examine the factors that could explain this increase.”

    Conclusion

    Though there will always be the debate over the optimum value of the Forex reserves, the new level it reached in such an uncertain time for the economy is, nonetheless, a cause for celebration.

     

    Reference Source : https://finshots.in/archive/india-foreign-exchange-reserves/

  • GST on processed food items

    A recent GST ruling sparked off the debate with the Authority for Advance Rulings (AAR, Karnataka Bench) suggesting parottas would be subject to a higher GST rate of 18 per cent as compared to roti.

    Try this question from CSP 2018:

    Q. Consider the following items:

    1. Cereal grains hulled
    2. Chicken eggs cooked
    3. Fish processed and canned
    4. Newspapers containing advertising material

    Which of the above items is/are exempt under GST (Goods and Services Tax)?

    (a) 1 only

    (b) 2 and 3 only

    (c) 1, 2 and 4 only

    (d) 1, 2, 3 and 4

    What is the Case?

    • Bengaluru-based food products company involved in preparation and supply of ready-to-cook items had approached the AAR regarding whether preparation of whole wheat parotta and Malabar parotta attracting 5 per cent GST.
    • The products khakhra, plain chapatti and roti are completely cooked preparations, do not require any processing for human consumption and hence are ready to eat food preparations.
    • The impugned product (whole wheat Parottas and Malabar Parottas) are not only different from the said khakhras, plain chapatti or roti but also are not like products in common parlance as well as in the respect of essential nature of the product.

    Classification of food items for GST

    • Most food items, especially those of essential and unprocessed nature, are charged nil GST.
    • But processed foods attract higher rates of 5%, 12%, or 18% depending on the food product.
    • For instance, pappad, Bread (branded or otherwise), are charged zero GST, but pizza bread is charged 5% GST.
    • Heading 1905 under the Harmonised Commodity Description and Coding System classifies pizza bread, khakhra, plain chapati or roti, rusks, toasted bread in one category, for which a 5% GST rate is levied.
    • Similarly, in the ready for consumption category, unbranded namkeens, bhujia, mixture and similar edible preparation attract 5% GST, while such branded namkeen, bhujia, mixture attract 12% GST.

  • How fuel price decontrol works — or why consumers always lose out

    India fuel prices are somewhat stagnant these days despite spikes in global crude oil prices. The key beneficiary in this subversion of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing companies as well. Let’s see how.

    Do you know?

    Grade of crude oil processed in Indian refineries:  ‘Sour grade’ (Oman and Dubai average) and ‘Sweet grade’ (Brent)

    Oil and India

    • In theory, retail prices of petrol and diesel in India are linked to global crude prices.
    • There is supposed to be complete decontrol of consumer-end prices of auto fuels and others such as the aviation turbine fuel or ATF.
    • It means that if crude prices fall, as has largely been the trend since February, retails prices should come down too, and vice versa.

    So, why is there a divergence in the trends?

    • Oil price decontrol is a one-way street in India — when global prices go up, this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
    • But when the reverse happens and prices go down, the government — almost by default — slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer, who should have ideally benefited by way of lower pump prices.

    How does decontrol work?

    • Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost and profits.
    • Fuel price decontrol has been a step-by-step exercise, with the government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October 2014.
    • Prior to that, the Government used to intervene in fixing the price at which the fuel retailers used to sell diesel or petrol.
    • While fuels such as domestic LPG and kerosene still are under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be reflective of the price movements of the so-called Indian basket of crude oil.

    Are India’s taxes on fuels high? Obviously, Yes!

    • On May 5, the Centre announced one of the steepest ever hikes in excise duty by Rs 13 per litre on diesel and Rs 10 per litre on petrol, following up on another round of sharp hikes in the first week of March.
    • All of this effectively cements India’s position as the country with among the highest taxes on fuel.
    • Prior to the increase in excise duty (in February 2020), the government, centre plus states was collecting around 107 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 69 per cent in the case of diesel.
    • With the second revision in excise duty in May, the government is collecting around 260 per cent taxes, (Excise Duty and VAT) on the base price of petrol and 256 per cent in the case of diesel (as on 6th May 2020), according to estimates by CARE Ratings.
    • In comparison, taxes on fuels as a percentage of pump prices was around 65 per cent of the retail price in Germany and Italy, 62 per cent in the UK, 45 per cent in Japan and under 20 per cent in the US.

    Do OMCs also benefit?

    • The only entity that benefits at the consumer’s expense is the government — in fact, both the Central and state governments.
    • OMCs, interestingly, are also among the losers from the sharp downward gyrations in oil prices.
    • The problem for companies such as IOC or BPCL is that a continuous slide in fuel prices leads to the prospect of inventory losses.
    • It is a technical term for the losses incurred when crude oil prices start falling and companies that have sourced the oil at higher prices discover that the prices have tumbled by the time the product reaches the refinery.
    • Including both crude oil and products, companies such as IOC keep an inventory of about 20-50 days.

    Also read:

    [Burning Issue] Oil Prices and OPEC+

  • NITI Aayog bats for Border Adjustment Tax (BAT)

    A notable NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries.

    Note how BAT is different from the Custom Duties on imports. Refer to our B2B section.

    What is the proposed Border Adjustment Tax?

    • BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry.
    • It is proposed to be a non-creditable levy on imported goods. The idea is to bring similar goods in the imported and domestic baskets at par.

    Why need BAT?

    • Generally, BAT seeks to promote “equal conditions of the competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction.
    • The Indian industry has been complaining to the government about domestic taxes like electricity duty, duties on fuel, clean energy cess, mandi tax, royalties, biodiversity fees that get charged on domestically produced goods as these duties get embedded into the product.
    • But many imported goods do not get loaded with such levies in their respective country of origin and this gives such products price advantage in the Indian market.

    Will it be WTO compatible?

    • Countries that are members of Geneva-based global watchdog WTO have locked the upper limits of customs levies for product lines that they trade-in.
    • Any additional duty that gets imposed by WTO members are scoffed upon and in many instances, extra customs duties led to countries being dragged to international arbitration under WTO.
    • Commerce Ministry believes that the proposed extra customs duty through the Border Adjustment Tax is compatible with global trade norms.
    • Officials maintain that Article II: 2(a) of GATT allows for import charge that is equal to the internal tax of the country with respect to a “Like Product” or an item from which the imported product is made. Legal opinion on the proposed levy has also been taken.

    Back2Basics: Customs Duty

    • It refers to the tax imposed on the goods when they are transported across international borders.
    • The objective behind levying customs duty is to safeguard each nation’s economy, jobs, environment, residents, etc., by regulating the movement of goods, especially prohibited and restrictive goods, in and out of any country.

    Customs duties are charged almost universally on every good which are imported into a country. Some of these are:

    •      Basic Customs Duty (BCD)
    •      Countervailing Duty (CVD)
    •      Protective Duty
    •      Anti-dumping Duty etc.

  • Faults in section inserted for the suspension of IBC amid pandemic

    Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

    What changes were made?

    • In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
    • Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
    • The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
    • Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

    What are the issues with section 10A?

    • Section 10A provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from this period, as may be notified in this behalf”.
    • This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
    • However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
    • While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
    • The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
    • However, the proviso here expands the substantive provision in the main section.
    • Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
    • In this case the main provision appears clear, only to be obfuscated by the proviso.
    • The proviso therefore does not appear to be legally tenable.
    • As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
    • But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
    • This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

    Painting all defaults with the same brush

    • The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
    • There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
    • The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
    • Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25 due to similar reasons.
    • This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

    Issue with increasing the default amount limit

    • Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
    • This was purportedly done to protect MSMEs from insolvency petitions.
    • However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
    • The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

    Conclusion

    The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

    B2BASICS:

     Insolvency and Bankruptcy Code, 2015

    The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

    Timeline

    • The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

    Insolvency Resolution Plan

    • The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

    Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

    • The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

    Information Utilities

    • Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

    Bankruptcy and Insolvency Adjudicator

    • The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
    • The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

    Insolvency regulators

    • The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

  • Payments Infrastructure Development Fund (PIDF)

    The RBI has created a Payments Infrastructure Development Fund (PIDF) with an outlay of Rs. 500 Cr.

    Possible prelims question:
    Q. Which of the following is the major aim of Payments Infrastructure Development Fund (PIDF) recently created by the Reserve Bank of India (RBI)?
    a) Promotion of UPI payments

    b) Deploying Points of Sale (PoS) infrastructure

    c) Creation of digital wallets

    d)All of the above

    Payments Infrastructure Development Fund (PIDF)

    • PIDF aims to encourage acquirers to deploy Points of Sale (PoS) infrastructure — both physical and digital modes in tier-3 to tier-6 centres and north eastern states.
    • The setting of PIDF is in line with the measures proposed by the vision document on payment and settlement systems in India 2019-2021.
    • It is also in line with the RBI’s proposal to set up an Acceptance Development Fund which will be used to develop card acceptance infrastructure across small towns and cities.

    Its working

    • The PIDF will be governed through an Advisory Council and managed and administered by RBI.
    • It will also receive recurring contributions to cover operational expenses from card-issuing banks and card networks.
    • RBI will also contribute to its yearly shortfalls, if necessary.

    Why need PIDF?

    • Over the years, the payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc.
    • To provide further fillip to digitization of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in under-served areas.