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GS Paper: Indian Economy

  • How effective is the stimulus package to revive the supply chains?

    Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

    Disruption in supply chains and decline in output

    • Much of the decline in output is due to supply chain disruptions generated by the lockdown.
    • Government spending can do little to alleviate this.
    • Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
    • In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

    Let’s understand how supply chains work

    •  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
    • These machines are used to sow seeds, harvest crops, and transport fuel.
    • Finally, the harvested crops are used by downstream sectors to produce flour and bread.
    • At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

    So, how lockdown affected the supply chains?

    • Under the lockdown, numerous inputs have not moved from their producers to their users.
    • These disruptions may not at first generate a reduction in consumer goods like bread.
    • However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
    • And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
    • Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
    • How far is the long run? This is difficult to say; there may be some variation across goods.

    Impact of labour shortage on supply chains

    • The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
    • Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
    • This is because of the higher labour intensity of production in India.
    • To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
    • Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

    Adapting and Adjusting to the new reality

    • As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
    • The world supply chain must adapt.
    • Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
    • But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
    • Furthermore, the investments must be guided by price signals.
    • Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
    • As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
    • As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
    • The key to economic recovery lies in millions of such adjustments.
    • Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

    How fiscal stimulus would disrupt the recovery of supply chains?

    • Market adjustment processes are likely to be disrupted by government stimulus packages.
    • Governments spend by printing money, raising debt, or increasing taxes.
    • Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
    • When governments print money, they draw resources through inflation.
    • Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
    • Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
    • As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

    A lesson from West Germany after WW II

    • The experience of West Germany after World War II has a useful lesson for India.
    • Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
    • This destruction of the supply chain devastated the German economy.
    • Per person food production fell to about half of its pre-war level.
    • Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
    • West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
    • By 1950, per capita income in West Germany had reached its pre-war level.

    Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”

    Conclusion

    The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

  • The perils of the liquidity push

    Whether to focus on demand side or supply side is the dilemma policymakers dealing with the financial crises have always faced. If we look closely, the focus of the package announced by the government is on the supply side and pushing liquidity in the economy. This article examines the various measure announced in the package and elaborated why such measures are likely to fail.

    Focus on credit and liquidity in the package

    • The government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small.
    • These are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning.
    • The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system.
    • RBI offered the financial institution capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.

    Let’s understand liquidity and its role in crisis

    • The Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package.
    • What is liquidity: In economic and business parlance, liquidity refers to ease of access to cash.
    • A liquid asset is one that can be easily sold for or replaced with cash.
    • And a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value.
    • In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch.
    • Relaxing that crunch is a focus of the government’s crisis-response package.
    • So, the government has given a much larger role to enhancing liquidity than it does either to direct transfers.

    So, let’s look at steps taken by the government to ensure liquidity

    1. LTRO and issues with it

    • Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs).
    • LTROs allowed banks to access liquidity at the repo rate to lend to specified clients.
    • One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures.
    • What went wrong? That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects.
    • There is little evidence that this is triggering new investment decisions.

    2. Focus on saving NBFCs and why it failed to give the desired result?

    • The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike.
    • NBFCs were finding it difficult to roll over the short-term debt they had incurred to finance longer-term projects.
    • Banks were wary about lending to these NBFCs.
    • Banks feared that their clients could default in amounts that would bring the viability of these institutions into question.
    • Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds.
    • Franklin Templeton set off redemption requests across the NBFC sector, as investors rushed to take back their money.
    • This happened at a  time when the ability of these institutions to mobilise funds to meet these demands had been impaired.
    • Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.

    3. More intermediaries and credit guarantee by the government

    • Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries.
    • These intermediaries include the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank.
    • The intermediaries were expected to refinance lending by the banks to different sections.
    • To persuade the banks and other intermediaries to take up these offers when the clients they must lend to MSME, street vendors, marginal farmers, etc. are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted.
    • The government also sought to persuade the RBI to lend directly to NBFCs against their paper.

    Why the above 3 measure won’t succeed?

    • These measures, which are only marginally effective even in the best of times, will not work during this crisis.
    • Consider a bank or NBFC lending to small business.
    • With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs.
    • Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable.
    • It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections.
    • Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit.
    • This would mean that credit flow would actually not revive.
    • This danger is even greater because the government has been measly with its guarantees.
    • The government doesn’t want to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.

    Increasing the disposable income

    • Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections.
    • Such measures include advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months.
    • These measures are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others.
    • These are marginal in scope, if relevant at all.
    • They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.

    Way forward

    • What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes.
    • That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low-interest rates from the central bank or a “monetisation” of the deficit.
    • Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the government is unwilling to take that route.

    Consider the question “Every stimulus package provokes a debate for its emphasis on either supply-side or the demand side. Examine the provision in the stimulus package announced by the government which focuses on the supply side. What are the issues with supply-side focus in the package?”

    Conclusion

    Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues.

  • Digital currency plan made in China

    Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

    Digital currency by China’s central bank

    • In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
    • This pilot has now been expanded to include several other cities.
    • This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
    • Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
    • It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
    • This is the first such serious initiative in the whole world.

    Why central banks are sceptical of cryptocurrencies?

    • Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
    • The reasons for scepticism includes following problems-
    • 1) Wild fluctuations in the value of cryptocurrencies.
    • 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
    • 3) The looming possibility of software bugs.
    • 4) The tainted shadow of the dark web.

    But some central banks have been planning to issue fiat digital currency

    • Authorities were far more intrigued by CBDCs.
    • In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
    • The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
    • Some have been planning to issue a fiat digital currency in the short to medium term.
    • In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

    If you cannot beat them, join them

    • So, what factors led China to release the cryptocurrency?
    • Chinese investors were always attracted to cryptocurrencies.
    • With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
    • As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
    • The PBoC tried hard to curtail this exuberance but achieved limited success.
    • The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
    • Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

    Advantages and concerns

    • At a practical level, the benefits of CBDC are manifold.
    • First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
    • Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
    • Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
    •  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
    • In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.

    Concerns

    • All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
    • If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

    But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

    • An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
    • In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
    • In tier 1, the central bank would interface with financial intermediaries.
    • In tier 2, the financial intermediaries would interface with the general public.
    • Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
    • It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

    Silver bullet to slay three dragons

    • What may China be signalling with the launch of DCEP?
    • First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
    • Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
    • Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

    Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”

    Conclusion

    From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.

  • Focus on supply side

    Whether to focus on supply side or demand side is the dilemma governments often face while deciding the measures to cure the ailing economy. This article explains using basic economics and evidence from across the world to make the case for a focus on the supply side. In doing so, it explains the problems with demand side measures such as cash transfers and tax rebets.

    Issue of neglect of demand side

    • The Union government is often criticised for its apparent neglect of the demand side and its excessive focus on the supply side.
    • Structural reforms — the COVID-19 package was no exception.
    • Low credit growth, weak inflation, and flat wage growth are the factors focused by demand-side proponents.
    • The deand side proponents suggest measures such as cash transfers, income tax cuts, and cheap credit to consumers.

    So, let’s focus on Demand vs. Supply side debate

    Low growth in credit to MSME

    • A demand shock typically leads to a rise in both volume and the price.
    • A supply shock not only hurts the volume but also leads to price rise.
    • In banking, a good proxy for the price of credit is the spread.
    • Spread is difference between lending rate and the funding rate  repo rate or deposit rates for the banks.
    • The spread reflects the risk premium banks charge to their customers.
    • The spread has consistently risen from just below 4 per cent at the start of 2018 to around 6 per cent in January 2020.
    • That means, the banks charged 4-6 per cent more on loan than it paid to its depositor or to RBI on the funds it got from them.
    • The fact that spreads are rising was highlighted by the 2019 Economic Survey as well.
    • At the same time, the credit growth — especially for public banks and to the MSME sector — has been sluggish for the previous two to three years.
    • The MSME sector witnessed sub-zero credit growth for the whole of 2017 and even now, the credit growth is very tepid at around 2 per cent Y-o-Y.
    • Rising spreads with lower credit volume provide a clear sign that credit supply is broken.

    What a paper by Nobel laureates on MSME says?

    • Paper by Nobel laureates Abhijit Banerjee and Esther Duflo examines the reasons for MSME problems.
    • The paper amply highlights the fact that the MSME sector suffers from lack of credit availability to finance investments rather than the lack of demand for credit.
    • They showed that when the government changed the definition of small firms, the firms newly covered by the priority sector lending programme used the extra credit to increase production and investment.
    • If there was no demand for credit, cheaper credit under the priority sector programme should have been used to repay the older expensive sources of borrowings.

    So, how will the recently announced package help MSEs?

    • Consistent with this view, we think that the government’s approach of guaranteeing SME credit by resolving the risk-sharing problem for banks will expand credit to credit-starved SMEs at lower credit spreads.
    • Similarly, expansion of the universe of small/medium firms will bring fresh investments from the firms, which are newly covered under priority sector programme as they will be able to get cheaper credit.

    2 Measures to increase consumer demand and issues involved

    1. Direct transfers schemes

    • No doubt that cash-transfers are superior to distortive subsidies and the “Garib Kalyan” package was a step in this direction.
    • In fact, the government has already transferred close to Rs 40,000 crore to bank accounts including Rs 10,000 crore to women under PMJDY.

    But is cash-transfers the ultimate solution to recovery?

    • In fact, the PMJDY account balance has increased.
    • The increase is from close to Rs 1,17,000 crore before the advent of COVID-19 to Rs 1,35,911 crore as of May 13 .
    • This is a massive jump of close to Rs 18,000 crore.
    • Recent research by Prasanna Tantri and co-authors shows that PMJDY account holders actively use the accounts — 1.12 transactions per quarter compared to the World Bank standard of one transaction.
    • In fact, PMJDY accounts see withdrawals when account holders are in distress, according to the study.
    • So the rise in balances is not mechanical.

    So, why are they not spending?

    • It’s not that people covered under PMJDY are comfortable financially.
    • A number of papers show that tax rebates boost demand in the short-run, but the quantum is limited.
    • For example, Sumit Agarwal and his co-authors show that the 2001 tax rebate programme in the US led to an average spending of only $60 on $500 rebate over nine months.
    • A recent study at the Kellogg Business School by Christian Borda and co-authors shows that tax rebates after the 2008 crisis in the US led to rise in spending, but by only 3.5 per cent in the first month of the rebates.
    • The crux is that no rational consumer goes on a consumption spree when he is facing job uncertainty!

    2. What about providing cheap credit to customers?

    • Trying to boost demand by providing cheap credit to consumers is not a good idea either as evidenced by the debt-financed housing boom in the US, which led to the 2008 crisis.
    • In fact, Atif Mian and Amir Sufi, using a large panel of 30 countries, uncover a more general pattern — an increase in household debt to GDP ratio leads to a sustained drop in future GDP, investments, and unemployment.
    • On the other hand, the economic cycles are much more muted when the initial growth is caused by structural reforms as pointed in a recent IMF study covering over 80 countries.

    Consider the question “Whenever governments decide on the stimulus package amid financial crises, supply side vs. demand side debate flares up. This has also been the case in India as the government announced the stimulus package recently. In light of this, examine the issues involved in demand side measures.”

    Conclusion

    To put the burden of recovery on risk-averse consumers, incentivising them to spend rather than save when there is employment uncertainty, is against any reasonable risk-sharing principle. Risk should be borne by those who have the appetite — the firms and government.

  • Stimulus package aims to turn the crisis into opportunity

    Economic disruption caused by the corona crisis stems from both-demand side and supply side. So, the stimulus package announced was expected to address the issues on both sides. This article breaks downs the various elements of the package in demand-side as well as supply-side measures. We also know aggregate demand is not just consumption demand. So, this fact was also considered while deciding the demand-side measures.

    Twin mantra of stimulus package

    • 1) To ensure that human cost of the crisis is minimised, especially for those at the bottom of the pyramid.
    • 2) To convert this crisis into an opportunity by implementing bold structural reforms.
    • Such reforms will go beyond repairing the damage to the production capacities and enhance the overall supply response capabilities of the economy.

    Impact on demand side as well as supply side

    • The present crisis is far worse than both the Asian financial crisis of the late Nineties as well as the global financial crisis of 2008-09.
    • It has seriously impacted both the supply and demand side of the economy.
    • The government’s response has been to effectively address both these aspects.

    Government’s four-fold response to address supply-side problems

    1. Ensuring food security

    • To ensure that the government declared agriculture and all related activities as essential services.
    • This permitted the successful harvesting and efficient procurement of the critical Rabi crop.
    • It also implied pumping in Rs 78,000 crore as new purchasing power in the hands of the farmers.

    2. Preventing cash/liquidity crunch

    • Preventing the pressing cash/liquidity crunch was necessary to avoid insolvencies and bankruptcies.
    • An immediate moratorium was announced on their debt servicing obligations to commercial banks.
    • This measure was reinforced for MSMEs, for whom an additional credit line of Rs 3 trillion without any fresh collateral was extended.
    • MSMEs could also avail of new equity from the Rs 50,000 crore fund of funds and take advantage of the subsidiary debt facility announced by the FM.
    • These measures provided succour to a large number of businesses, especially those in the services sectors like hospitality, entertainment and retail.
    • The Rs 90,000 crore credit package made available to state discoms should also be included in this set of measures.
    • It will prevent bankruptcies of state electricity utilities and the power producers, which would have had disastrous results.

    3. Reforms in agriculture and manufacturing sector

    • The third set of measures were directed to significantly improve the ecosystem for private producers, both in agriculture and manufacturing.
    • Long-pending reforms to give farmers the much-needed freedom to choose their clients and for traders and exporters of agro-products to maintain necessary stocks have now been announced.
    • Defence production and exports will get a new fillip with the liberalisation measures.
    • Greater space will be given to private businesses in sectors in which public sector enterprises hitherto had either a monopoly or a predominant presence.

    4. Credit to street vendors

    • Finally, this is a measure that does not have a large fiscal footprint, but touches the lives and livelihoods of more than 50 lakh families.
    • Under which street vendors all over the country have been given a credit of Rs 10,000 each for re-stocking and use as working capital.

    Understanding the aggregate demand

    •  It is important to point out that aggregate demand is made up of- i) consumption, ii) investment iii) demand for intermediate goods.
    • So,  the cash-in-hand of consumers is not the only means for reversing the declining demand in the economy.
    • Therefore, additional credit lines provided to MSMEs, vendors or farmers will contribute to the strengthening of aggregate demand.

    Government’s response to address demand-side problems

    • A significant number of measures were announced to hike consumption demand directly as well.
    • Among these are:
    • Rs 1.73 lakh crore for improving the incomes and welfare of the most vulnerable, including the 20 crore female Jan Dhan account holders who will receive monies directly into their bank accounts.
    • Rs 50,000 additional incomes in the hands of those whose TDS and TCS were reduced by 25 per cent.
    • Rs 40,000 crore additional allocation for MNREGA, which will provide jobs and succour to those returning to their villages from metros and cities.
    • Rs 30,000 crore for construction workers.
    • Rs 17,800 crore transferred to 12 crore farmers and Rs 13,000 crore transferred to states to finance the costs of running quarantine homes and shelters for migrant workers.
    • These measures, which will directly benefit different categories of individuals, will surely raise the flagging demand — the necessary condition for triggering a fast-paced recovery in economic activity.

    Consider the question “The stimulus package announced by the government in the wake of pandemic sought to address both the demand side as well as supply-side problems. Examine the various components of package and other reforms announced in the economy.”

    Conclusion

    Combined with the significant number of bold structural reform measures, which hold the potential to make Indian firms attain global scales and competitiveness and give the much-needed freedoms, flexibility and financial strength to our beleaguered farmers, “the package” promises to promote India’s economic recovery in the post-COVID-19 period.

  • India and China after pandemic

    The article broadly discusses the impact of the pandemic on the Indian economy. While the package has been declared to alleviate the economic pain, the government faces the challenge of finding the resources to plug the gaps. Though pandemic erupted from China, it successfully controlled it. This along with the its calibrated approach towards strategic progression is going to stand China in good stead.

    Grappling with the “unknown unknowns”

    • Several weeks before the advent of the COVID-19 pandemic, India’s Minister for External Affairs delivered a lecture.
    • In the lecture, he had observed that “what defines power and determines national standing is also no longer the same. Technology, connectivity and trade are at the heart of the new contestations.”
    • He did mention a point about “known unknowns”.
    • But the pandemic has forced us to face the “unknown unknowns”.
    • Within a few weeks, his prediction would be overtaken by a tectonic shift in the global situation thanks to a virus and a pandemic.

    Impact on India’s economy

    • What distinguishes the present pandemic from earlier ones is its economic impact.
    • The economic impact is perhaps even more threatening than the human costs involved.
    • In the case of India, all forecasts have had to be shredded.
    • Job losses have been massive, specially in urban areas.
    • India’s exports in the month of April, for instance, were the worst in the past 30 years.

    Finding resources for the stimulus package

    • Well before pandemic India had been witnessing a persistent economic downward slide.
    • Prime Minister Narendra Modi’s announcement of a ₹20-lakh crore stimulus package was, hence, timely.
    • Even though economists now believe that in real terms it amounts to around 2% of GDP rather than 10% .
    • Finding resources for even this stimulus package will, however, not be easy.
    • The Centre’s finances are not in the best of health. It has already had to resort to a second tranche of $1 billion loan from the World Bank to support COVID-19 relief measures.
    • The finances of States are, to say the least, in a perilous state.
    • Questions are, thus, bound to be raised as to whether adequate funds would be forthcoming for relief purposes.

    China’s calibrated approach: Strategic progression

    • Since its early recovery, China has followed a calibrated approach — one that stems from a policy of deliberate strategic progression conceived over the years.
    • It may be worthwhile to understand the facts so as to underscore the gap that currently exists between China and India.
    • In 2015, China’s President, Xi Jinping, had floated the idea of “a Community of Common Destiny of Mankind”.
    • In this, he outlined China’s viewpoint on aspects such as economic globalisation and the information technology revolution.
    • The Belt and Road Initiative — which encompasses policy, infrastructure, trade, financial, and people-to-people connectivity, and, implicitly also, security ties — was an adjunct to it.
    • The 19th National Congress of the Communist Party of China (2017), thereafter, gave its assent, considering it essential to enable China to achieve pre-eminence status within the global order.
    • Ever since, China has focused on-
    • i) attaining economic and technological progress.
    • ii) defining how power would be determined in the new globalised era through devising new international norms in many emerging domains such as cyber, space, artificial intelligence, etc.
    • China also set about rewriting international rules, premised not so much on governing where global goods are made, but on setting standards that define production, exchange and consumption.
    • China Standards 2035 plans to set new standards with regard to the Industrial Internet of Things (IoT) and define next-generation information technology and biotechnology infrastructure.
    • China is hoping, to reap the “early bird” advantage, even as other industrial nations struggle to recover from the devastation caused by the COVID-19 pandemic.
    • Internationalisation of Chinese standards would provide China a clear advantage by providing it an opportunity to set the standards in emerging industries such as high-end equipment manufacturing, unmanned vehicles, new materials, cybersecurity and the like.
    • This would enable it gain a dominant position in the global economy.

    India must plan well to cope with the China challenge

    • Mounting an effective challenge to China at this time would require a well-conceived and carefully calibrated plan of action by India.
    • As of now, this is not evident.
    • India and China will certainly emerge from the pandemic more diminished than previously, but to varying extents.
    • Each country will, no doubt, suffer an economic setback.
    • But while both nations would be among the very few that would still have a positive growth rate in the near future.
    • Which is 1% in the case of China and 1.8% in the case of India, according to the International Monetary Fund.
    • Given the size of China’s economy, it does not translate into a massive shift in India’s favour.

    Consider the question “Economies across the world have been bruised by the corona pandemic. There have also been talks of India being the beneficiary of changes in the global supply chains. In light of this, examine the issues and challenges that India may face in this regard.”

    Conclusion

    India would more than welcome some of the entities exiting China, but there are no “green shoots” to suggest that such a shift has, or is, about to take place. Many alternatives are available to these companies and it would be excessively optimistic on our part to hold on to the belief that India is the only alternative choice for most of them.

  • Exploring the avenues to fill the budgetary gaps

    What are the options available with the government to fill up the budgetary gaps created by the stimulus package? Well, one seems to be exercising its disinvestment or privatisations plans. But like always disinvestment comes with its own set of issues. The next could be raising the taxes and duties on the fuels. But this will defeat the very purpose of the package. Third option is borrowing. But borrowing in the external currency is another problem story. Let’s figure this all out with this article….

    Containing the fiscal deficit through privatisation

    • Government is apparently hopeful that money could come partly from the new privatisation programme.
    • Finance Minister recently said that privatisation — a policy that has already gained momentum in the last budget, would now be the order of the day.
    • According to the new Public Sector Enterprises Policy (PSEP), a list of strategic sectors will be notified where there will be no more than four public sector enterprises.
    • The PSEP is a strategic move intended to rationalise the public sector.
    •  Before the COVID-19 crisis, the government needed the privatisation money partly because its revenue from GST among other things was declining.
    • And this void could only partly be filled by alternative sources of tax revenues such as that on fuel.
    • Today, the government needs this money in order to contain the fiscal deficit.
    • So, the privatisation programme has suddenly been expanded.
    • The Centre has set a budget target of Rs 2.1 lakh crore from disinvestment in the current fiscal year.

    Progress made so far on disinvestment process

    • Towards the end of 2019, the government approved the privatisation of BPCL and the Shipping Corporation of India.
    • In addition to selling stakes in the Container Corporation of India, THDC and NEEPCO.
    • The government had initially planned to complete its “strategic disinvestment” in BPCL and Air India by the end of this fiscal year.
    • It now wants it completed earlier. Some estimate say that the government’s disinvestment in BPCL, SCI and CONCOR could fetch it Rs 78,400 crore.
    • Should India’s flying Maharaja also find a buyer, the government could raise over Rs 1,05,000 crore.

    Issues with privatisation

    • The revenue from privatisation is a one-off benefit and generally, only profit-making units are sold at a good price.
    • Privatisation is a two-way street — it requires a buyer and a seller. Who will be the buyers?
    • Excessive political interference with the private sector makes owning an ex-government entity risky.
    • A handful of Indian capitalists who are already at the helm of oligopolies may be in a position — financially and politically — to buy the big PSUs.
    • If they were allowed to grow even more by acquiring public entities, sectors of the economy would be under the influence of quasi-monopolies.
    • This could foster crony capitalism and may even result in the making of oligarchs.

    Where else can the government find the money it needs?

    1. Increasing tax and duties on fuel

    • Government has already increased the excise duty on petrol and diesel by Rs 3 per litre — the steepest hike since 2012.
    • The government imposed additional taxes while global crude oil prices fell.
    • As oil prices can only go up after the last round of negotiations between Russia and Saudi Arabia, the Indian government will not be in a position to use this source of revenue again.
    • Such a move would contradict the very idea of a relief and stimulus package anyway. Why?
    • An increase in the excise duty or tax would affect purchasing power, when the package is supposed to help the poor and to boost demand.
    • Low demand and lowest investment rate:  Even before the present crisis, industrialists complained that 25 per cent of their productive capacity was idle.
    • And that’s why their investment rate had never been this low, in the 21st century at least.

    2. Borrowing money and issues with it

    • Even if some privatisation helps India financially, it seems that the country will need to borrow money.
    • External borrowing, however, is problematic. There are three issues with external borrowing-
    • 1) The only way governments pay back external borrowings is by wisely using borrowed capital to drive high GDP growth and generating revenues.
    • Which is unlikely to happen any time soon as a recession is round the corner.
    • 2) The rupee is at its lowest level compared to the US dollar.
    • Any more devaluation will only make it harder for the government to pay back its debt.
    • Since external borrowings must be paid back in borrowed currency, exports and foreign reserves or gold reserves are generally the only two reliable options.
    • The third one being borrowing more to pay back the previous debts — a slippery slope to pay government debt.
    • However, India should account for the inevitable global slump in international demand and a consequent drop in its exports.
    • Other countries may also move towards “atmanirbharta” and over-regulate imports.
    • 3)  Indian industries are already a bit debt-laden.
    • Following factors compelled industries to resort to overseas borrowing-
    • i)The risk in the banking sector, tight liquidity in debt markets,
    • ii) Comparatively lower international borrowing rates
    • iii) The RBI’s ECB rationalising measures.
    • More overseas borrowing, combined with the industry’s high debt status, could lead to rating agencies downgrading India’s investment prospects — deterring foreign investments in the process.

    3. Foreign reserves and other options

    • On the positive side, India’s foreign reserves stand at an all-time high which could be strategically used to finance its needs.
    • The rest may have to come from privatisation, taxation, loans and more international aid.
    • Already, India is receiving more funds from the World Bank, the ADB and the Japanese ODA.
    • India may help others, but it needs aid too.

    Consider the question- “The government had to declare the relief and stimulus package in the wake of corona crisis. This expenditure leads to budgetary gaps. What are the options with the government to close this gap? Examine the issues associated with these options.”

    Conclusion

    The government must weigh each option with due consideration and explore all the possible avenues. Options like privatisation or borrowing must be exercised with caution. As these decisions could have severe consequences for the economy in the future.

     

     

     

     

     

     

     

  • Where the “fiscal space” debate should focus?

    The article focuses on the “fiscal space” debate in India. So, what is this debate? This debate is focuses upon the size of the fiscal deficit this year in India, ways that could be used to finance it and upper limit of this deficit etc. But the author argues that we should focus on debt/GDP trajectory in the subsequent years. Besides this, he suggests what our policy intervention comprise.

    Monetary policy and fiscal policy: Efficacy Vs. Space debate

    • In response to the economic disruption caused by Covid-19, monetary policy has moved swiftly and aggressively in many economies.
    • But questions remain on its incremental efficacy.
    • With a high level of uncertainty around, risk-averseness is evident in the financial systems.
    • This risk-averse tendency reduces the efficacy of lower rates and higher liquidity.
    • So, while monetary policy may have space, how much efficacy will it have?
    • Fiscal policy i.e. spending by the governments can have much efficacy.
    • But how much space does it have? Therein lies the debate.

    Focus on Debt/GDP trajectory, not on level

    • The “fiscal space” debate in India has centred exclusively on this year’s deficit and how it will be financed.
    •  But a more holistic assessment of fiscal space should focus on two factors 1) the government’s inter-temporal budget constraint 2)  how India’s debt/GDP evolves in the coming years.
    • These two are the factors that rating agencies and foreign investors will eventually focus on.
    • Following are the question that debate should focus on.
    • How much will India’s debt/GDP jump up this year?
    • More importantly, what happens thereafter?
    • Will debt/GDP keep rising year after year? Or will it start declining?
    • As research has found, it’s typically the trajectory of debt/GDP — more than the level — that impacts future growth.

    Evolution of debt

    • The evolution of debt is essentially a function of three variables:
    • 1) The primary deficit.
    • 2) Nominal GDP growth
    • 3) The government’s cost of borrowing.
    • The higher is the difference between growth and cost of borrowing, the greater is the depreciation of the existing debt stock.
    • High growth allows countries to “grow out” of their debts.
    • In contrast, high primary deficits worsen the debt burden.

    Where does India stand?

    • India comes into COVID-19 with a debt/GDP of about 70 per cent.
    • A primary deficit across the Centre and states of about 2.5 per cent of GDP including the Centre’s extra-budgetary resources. — based on the Revised Estimates for 2019-20.
    • A weighted average sovereign borrowing cost of about 7.5 per cent (on the stock of debt) and an estimated pre-COVID nominal GDP growth of 7.5 per cent in 2019-20.
    • In other words, the favourable gap between growth and borrowing costs had closed.
    • With this backdrop, one can simulate what happens to debt/GDP in the coming years under different growth, fiscal and interest-rate scenarios.
    • What do we find?
    • Even under relatively benign scenarios –nominal GDP growth of 4 per cent and a fiscal expansion of 3 per cent of GDP this year- India’s debt/GDP will balloon towards 80 per cent by the end of the year.
    • But India will not be alone. Public debt is expected to balloon all over the world.
    • Instead, what will matter for sustainability is the trajectory of debt thereafter.
    • Does debt/GDP come down or keep going up in subsequent years?

     Fiscal space depends on potential growth in coming years

    • The subsequent trajectory of Debt/GDP depends overwhelmingly on medium-term growth.
    • Consider the following two scenarios and refer to the figure given below-
    • 1. Fiscal Deficit 6%
    • Consider that this year’s combined fiscal deficit widens by 6 per cent of GDP.
    • But the primary deficit is then consolidated back to 2 per cent of GDP in the next 3 years.
    • And as long as nominal GDP is 10 per cent in the medium term which corresponds to real GDP growth of 7 per cent.
    • Debt/GDP gets on to a constantly declining path after the third year.
    • This suggests a bigger fiscal intervention is sustainable but only if medium-term growth prospects are lifted in tandem.
    • 2. Fiscal Deficit 3%
    • Consider that this year’s deficit widens by “just” 3 per cent of GDP.
    •  But medium-term nominal GDP growth settles at 8 per cent that is, real GDP growth of 5 per cent.
    • Debt/GDP rises relentlessly for the next decade towards 90 per cent of GDP.

    Key takeaway: focus on medium-term growth

    • This suggests even a relatively-conservative fiscal response this year becomes unsustainable if medium-term growth prospects are diminished.
    • Small changes in medium-term growth have large implications for fiscal sustainability.
    •  How much fiscal space India has to respond in the crisis year will depend crucially on what potential growth is likely to be in the coming years.
    • The more that India’s policy response can preserve, protect and boost medium-term growth — both through the nature of the policy intervention this year and the accompanying reforms — the larger the fiscal response India can mount.
    • Put more starkly, the fiscal debate between “need” and “affordability” is endogenous.
    • The medium-term sustainability of any fiscal package this year will depend on the nature of growth-enhancing interventions and reforms that accompany it.

    So, what could the interventions comprise?

    1. Keep small business afloat

    • Policy must ensure that all viable enterprises can survive the pandemic.
    • If economically-viable but illiquid small and medium enterprises go under, the implications both for unemployment and India’s underlying production capacity could be severe.
    • The government’s credit-guarantee scheme is, therefore, very important and should hopefully induce banks to provide much-need working capital to keep small businesses afloat.

    2. Reforms in the finance sector

    • It is important to jump-start a risk-averse financial sector into funding an economic recovery, more broadly.
    • Last week’s bond market interventions which involved special liquidity and partial guarantee funds are important to ease conditions at the financial periphery.
    • Over time, however, liquidity must give way to capital and reform.
    • Following steps will be crucial to strengthening the financial sector-
    • 1)Pre-emptively recapitalising public sector banks for growth and resolution capital.
    • 2) Conducting an AQR for the NBFC sector after pandemic.
    • 3) Then converting well-run NBFCs into banks to avail of a stable deposit franchise.
    • 4) Modifying the incentives under which public sector banks operate.
    • Higher potential growth is only feasible if the financial sector is able to fund it.

    3. Reforms in the other sectors

    • Real reforms must accompany those in the financial sector.
    • The government’s announcement on unshackling agriculture — if carried through to its logical conclusion — is potentially game-changing for farmers and will be a landmark reform for the sector.
    • As COVID-19 hastens the reorganisation of supply-chains within Asia, India must seize the moment to integrate into the Asian supply chain.
    • Revisit a Special Export Zone (SEZ) model with the appropriate regulatory environment to avoid the pitfalls of the past.
    • Path dependence will be key. If the first one or two SEZs succeed, it would create a powerful demonstration effect both externally to help attract more firms into India.
    • And internally inducing different states to compete to create their own SEZs to drive jobs and investment.

    4. Social infrastructure and ways to pay for it

    • If the virus has taught the world anything, it’s the criticality of social infrastructure.
    • India will not be able to fundamentally alter its growth potential without crucial investments in health and education.
    • The government’s announcement to boost health spending is, therefore, very welcome.
    • But how will this be paid for? This is where policy must get creative.
    • Existing assets on the public sector balance sheet must be aggressively monetised to fund growth-enhancing investments in physical and social infrastructure.
    • This will simultaneously take the pressure off the fiscal and financial sectors, and deliver a productivity-enhancing swap on the public sector balance sheet.

    The article is helpful to consolidate the basic understanding of the macroeconomic parameters of economy. Consider the question asked by UPSC last year “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments”

    Conclusion

    Higher potential growth is the antidote to many pressures, from incomes to jobs to debt sustainability. To the extent this unprecedented crisis creates political space and capital to reform, the opportunity must be seized.

    Back2Basics: Nominal GDP

    • Nominal gross domestic product is gross domestic product (GDP) evaluated at current market prices. 
    • GDP is the monetary value of all the goods and services produced in a country.
    • Nominal differs from real GDP in that it includes changes in prices due to inflation, which reflects the rate of price increases in an economy.

    Primary Deficit

    • Primary deficit refers to the difference between the current year’s fiscal deficit and interest payment on previous borrowings.
    • It indicates the borrowing requirements of the government, excluding interest.
    • It also shows how much of the government’s expenses, other than interest payment, can be met through borrowings.

    Debt/GDP ratio

    • The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP).
    • By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts.
    • Often expressed as a percentage, this ratio can also be interpreted as the number of years needed to pay back debt if GDP is dedicated entirely to debt repayment.

    AQR- Asset Quality Rating

    • An asset quality rating refers to the assessment of credit risk associated with a particular asset, such as a bond or stock portfolio.
    • The level of efficiency in which an investment manager controls and monitors credit risk heavily influences the rating bestowed.
    • And because asset quality is an important determinant of risk that profoundly impacts liquidity and costs, analysts go to great lengths to make sure they issue the most accurate evaluations possible.
    • After all, their pronouncements can greatly affect the overall condition of a business, bank, or portfolio for years to come.

  • Minimum Public Shareholding (MPS) Requirement

    The Securities and Exchange Board of India (SEBI) has relaxed the 25 per cent minimum public shareholding norm and advised exchanges not to take penal action till August 2020 in case of non-compliance.

    A statement based question can be asked about the SEBI in the prelim asking-

    If it is a statutory or quasi-judicial body ; Scope of its regulation; Appointment of its chairman etc..

    What is a Public Shareholding Company?

    • A Public Shareholding Company is a company whose capital is divided into shares of equal value, which are transferable.
    • Shareholders of a Public Shareholding Company are not liable for the company’s obligations except for the amount of the nominal value of the shares for which they subscribe.

    What is MPS requirement?

    • The 25 per cent MPS norms were introduced in 2013, whereby no listed company was permitted to have more than 75 per cent promoter stake.
    • The rules were aimed at improving liquidity and better stock price discovery by making higher float available with public.
    • The average promoter holding in India is among the highest globally.
    • Last year, the government had proposed to increase the minimum public float from the current 25 per cent to 35 per cent. It had met with opposition, forcing the government to drop the plan.

    Why ease MPS norms?

    • The Sebi move is aimed at easing such compliance rules amid the disruptions caused by the coronavirus pandemic.
    • The decision has been taken after receiving requests from listed entities and industry bodies as well as considering the prevailing business and market conditions.
    • As per the norms, exchanges can impose a fine of up to Rs 10,000 on companies for each day of non-compliance with MPS requirements.
    • Besides, exchanges can intimate depositories to freeze the entire shareholding of the promoter and promoter group. This circular will come into force with immediate effect.

    Back2Basics: Securities and Exchange Board of India (SEBI)

    • The SEBI is the regulator of the securities and commodity market in India.
    • It was first established in 1988 as a non-statutory body for regulating the securities market.
    • It became an autonomous body on 12 April 1992 and was accorded statutory powers with the passing of the SEBI Act 1992.
    • SEBI has to be responsive to the needs of three groups, which constitute the market:

    1) issuers of securities

    2) investors

    3) market intermediaries