GS Paper: Indian Economy

What are White Label ATMs?

atm

The Reserve Bank of India (RBI) has extended the validity of authorization issued to Vakrangee to setup, own and operate White Label ATMs in India.

What is White Label ATM?

Usually ATMs are managed by banks. But White Label ATMs are owned and operated by non-banking entities.
ATMs operated under this business model allow customers to use them for banking transactions regardless of the bank they have an account with.
RBI approved the operation and inclusion of WLA ATM by non-banking organisations under the Payment and Settlement Systems Act of 2007.
It was introduced to expand India’s ATM network, especially in semi-urban and rural areas.

How does it work?

White Label ATM companies work with banking networks to enable bank customers to use banking services like withdrawing funds, paying bills and depositing cash.
White Label ATM (WLA) operators’ charge card-issuing bank fees to provide this facility to the bank’s clients.
The transaction process in White Label ATM operators consists of a lending bank, a sponsor bank that handles settlements and an ATM network provider.
The Sponsor bank provides the cash facility for the White ATM.

Significance of WLA: Financial Inclusion

Financial inclusion is concerned with the availability of financial services and adequate financing to low-income individuals and other vulnerable segments of society.
ATMs promote financial inclusion and provide customers with various banking services at any location and time.

White Label ATM Operators in India

Non-banks set up and operate White ATMs as per the rules laid down by RBI for using ‘other bank’ ATMs.
These ATMs accept all domestic debit cards and offer the first five or three transactions per month free of cost, depending on the location.
Below mentioned are some examples of companies that operate white label ATMs:

Indicash – India’s largest White Label ATM network responsible for ‘uberisation of ATMs.’
India1 Payments (BTI Payments Pvt. Ltd.)
Hitachi Payment Services Pvt. Ltd.
Tata Communications Payment Solutions Ltd.
Vakrangee Limited

Benefits of White Label ATMs

There are many benefits of White Label ATMs:

Customers benefit from White Label ATMs since they eliminate the need to visit a bank branch on a regular basis
ATMs are available 24 hours a day, seven days a week, including holidays
Banks benefit from this because they do not have to maintain a huge staff/office (compared to a system without ATMs). It lowers their branch-operational costs
Financial inclusion of rural, semi-urban, and low-income people
It allowed ATM cards to be issued by any bank that can be used at White Label ATMs
WLA atm also provides mobile recharge, energy bill payments, and other value-added services

Limitations of White Label ATMs

There are also a few limitations of White Label ATMs:

The issue of unsuccessful transactions is a key source of concern. In the event of a dispute, the dispute resolution method will include three entities, namely the WLA operator, the WLA operator’s sponsor bank, and the customer’s bank.
Customers will be discouraged by the cost issue, as they will be obliged to pay a price to use the White Label ATMs, as only a limited number of free transactions are permitted on the WLAs
White label ATMs’ financial viability is questioned because of their low interchange charge and hefty operational expenses
If there is a bank-managed ATM in the same area as a WLA ATM, the White Label ATMs may not be able to generate a profit

Differences Between Brown Label and White Label ATMs

The differences between Brown Label ATM and White Label ATMs are:

Brown Label ATM	White Label ATM
Brown Label ATMs have their hardware and ATM machine leased by a service provider	Non-banking entities own and operate ATMs
The sponsor bank’s brand name appears on the Brown label ATM	There is no bank logo on a white label ATM machine
The RBI is not directly involved. These outsourcing firms are bound by contracts with their respective banks	The RBI is directly involved as white label companies must obtain a license or permission from the RBI in order to conduct business

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February 8, 2023

Wealth Tax: Does It Distort the Economy Too Much?
Context
- There is a good reason we do not tax wealth directly. Actually, there are many good reasons. But that’s not stopping some states from giving it a try. There are much more effective options for targeting wealthy people for tax revenue that are better for the economy. Some the US is already doing, such as state property taxes, federal capital gains taxes and estate taxes on inheritances.
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What is wealth tax?
- Wealth tax is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax.
- It aims to reduce the inequalities of wealth.
- It is based on the market value of assets owned by a taxpayer and charged on the net wealth of super rich individuals.
Why in news?
- The new bills this week by California and Washington propose taxing their richest residents 1% to 1.5% each year.
- Four other states including New York and Illinois propose taxing unrealized capital gains, or taxing wealth based on how much it grew in the last year whether or not you sold any assets.
Crafting good tax policy starts with a question: How much will it distort economic behaviour?
- Creates distortions: Many economists say that wealth taxes create the most distortions, followed by income and consumption taxes.
- Wealth taxes discourage saving and investment: A 1% or 2% wealth tax may sound small, but it’s very large compared with current tax rates. Since it’s levied each year, it’s better compared to current taxes on realized capital income. These plans drastically reduce the return on risky investment, and rewarding risk is important for economic growth.
- Unrealized capital gains, are much harder to measure: Income is relatively easy to measure. Your employer sends you money that is well documented and has an objective value. Overall wealth, especially unrealized capital gains, are much harder to measure.
- Mostly rich people hold Wealth in assets: Very rich people also tend to hold a lot of their wealth in assets that aren’t publicly traded, either in private equity, in their own businesses, fine art, gold bars or other possessions.
- Hard to implement effectively: Most jurisdictions have abandoned wealth taxes. They are very hard to implement at the federal level, let alone by states with fewer resources to collect and assess data on wealth holdings.
- Example of Switzerland: A possible model is Switzerland, where individual cantons have their own wealth tax, but the tax accounts for a trivial share of tax revenue.
- A wealth tax is a bad policy based on the economics and feasibility: Collecting it will require tremendous resources that states don’t have and it won’t produce the revenue they’re counting on.
Wealth Tax in India
- Abolished wealth tax: The government abolished wealth tax as announced in the budget 2015. In its place, the government decided to increase the surcharge levied on the ‘super rich’ class by 2% to 12%. (Super rich are persons with incomes of Rs.1 crore or higher and companies that earn Rs.10 crores or higher).
- Abolished to simplify tax structure and discourage tax evasion: The abolition was a move to do away with high costs of collection and also to simplify the existing tax structure thereby discouraging tax evasion.
- No wealth tax at present: India presently does not have any wealth tax i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment.
Way ahead
- Promising that a few wealthy people can pick up the public tab is bad economics.
- States would be better off making their consumption taxes larger and more progressive.
- They can tax luxury goods like designer clothes, private jet travel or second homes heavily.
- Governments can better enforce our existing wealth taxes by eliminating loopholes in capital gains and estate levies.
Conclusion
- Wealth taxes will continue to be in the conversation as states and the federal government need more revenue and are reluctant to raise taxes on anyone who earns more than $400,000 a year. Many economists say that wealth taxes create the most distortions, followed by income and consumption taxes. Wealth taxes need to studied not only from the lens of fiscal challenges that the states face but also market economies and probable distortions.
Mains question

Q. What is wealth tax? Highlight the present status of Wealth tax in India. It is said that Wealth tax distorts economic behaviour. Discuss in the context of States in the US proposes taxing the rich.

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February 6, 2023
Opportunity to unlock the full Potential of MSMEs
Context
- India overtook the UK as the world’s fifth-largest economy in 2022, and is on track to achieving PM Narendra Modi’s vision of a $5 trillion economy by 2026-27. Despite concerns of a looming global recession, supply disruptions and the Russia-Ukraine war, India has stood out as a bright spot, growing faster than most major emerging markets. The government’s budget for 2023 presents an opportunity to make the Indian MSMEs competitive and self-reliant.
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What are MSMEs? How are they defined?
- Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 which was notified on October 2, 2006, deals with the definition of MSMEs. The MSMED Act, 2006 defines the Micro, Small and Medium Enterprises based on:
1. The investment in plant and machinery for those engaged in manufacturing or production, processing or preservation of and
2. The investment in equipment for enterprises engaged in providing or rendering of services.
MSMEs in India at present
- The 6.3 crore micro, small and medium enterprises which account for 30 per cent of GDP and employ nearly 11 crore people have demonstrated this spirit of resilience.
- With sales in several industries across the MSME sector reaching 90 per cent of pre-pandemic levels, India’s small businesses are scripting a turnaround.
Union budget 2023: An opportunity to make MSMEs more competitive and self-reliant
- Streamlining input tax credit for e-commerce suppliers: Currently, suppliers selling on e-commerce platforms need to procure input services like logistics, which are taxed at 18 per cent. This leads to precious working capital getting blocked without any visibility of future realisation, potentially discouraging suppliers from adopting e-marketplaces.
- Adequate working capital for small businesses: From meeting fixed expenses such as electricity, rent and employee wages to investing in future growth, adequate working capital is a must for small businesses.
- Lowering GST rates on input services: By lowering GST rates on input services availed by online sellers, the government will not only shore up their finances but also give a leg-up to their digitisation journey. Further, refunds of accumulated input tax credit will improve their cash flow situation.
- Expedited GST relaxation for small online businesses: There is also a need to expedite GST relaxation for small online businesses. In a landmark move last year, the GST Council announced a relaxation of rules for small businesses looking to go online.
- GST relaxation measures for small online vendors: Among other measures, mandatory GST registration was waived for small online vendors with a turnover of less than Rs 40 lakh and Rs 20 lakh for goods and services, respectively.
- Unlocking the potential of MSMEs through Digitization: With just 10 per cent of our MSMEs currently online, expeditious implementation of these new norms is key to unlocking their full potential. Millions of small businesses are waiting in the wings, hoping to reap the benefits of digitisation such as a much bigger addressable market, increased efficiencies and easier access to capital.
- The National Logistics Policy (NLP) can also be leveraged to make MSMEs competitive: The NLP aims to bring down logistics costs as a percentage of the GDP from 13-14 per cent to 8 per cent, on par with developed nations. While lower costs will encourage more MSMEs to use tech-powered logistics services, they will need support to tap rising e-commerce demand from smaller towns and semi-rural areas.
- Indian post and railways can be utilized for cost effective last mile delivery: The government could rope in India Post as a tech-enabled last-mile delivery partner that can facilitate cash-on-delivery transactions at competitive prices. Similarly, the unparalleled reach of Indian Railways can be synergised to ship wares to the remotest parts of the country quickly and cost-effectively.
Why the MSME sector is important especially for India?
- Employment: The Indian MSME sector provides maximum opportunities for both self-employment and wage-employment outside the agricultural sector.
- Help building inclusive and sustainable society: It contributes to building an inclusive and sustainable society in innumerable ways through the creation of non-farm livelihood at low cost, balanced regional development, gender and social balance, environmentally sustainable development, etc.
- For example: Khadi and Village industries require low per capita investment and employs a large number of women in rural areas.
- Contribution to GDP: With around 36.1 million units throughout the geographical expanse of the country, MSMEs contribute around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities.
- Exports: It contributes around 45% of the overall exports from India.
Conclusion
- With a visionary government charting out the nation’s growth path, it is anticipated that the budget would certainly deliver on the challenges for MSMEs and take us closer to the dream of an Atmanirbhar Bharat.
Mains question

Q. Highlight the significance of MSME’s for India. What more efforts can be taken to make MSMEs more competitive and self-reliant?

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February 1, 2023
Possibility of global recession?
Context
- There have recently been growing concerns about the global economy slipping into recession. These concerns were primarily triggered by the contraction of the US economy, observed in the first half of 2022. Negative growth in two consecutive quarters is commonly but not officially used as an indication of recession.
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Background: Status of the US economy
- First and second quarter of 2022: As reported by the Bureau of Economic Analysis (BEA), the US real Gross Domestic Product (GDP adjusted for inflation) decreased at an annual rate of 1.6 per cent and 0.6 per cent in the first and second quarters of 2022, respectively.
- Third quarter: In the third quarter, however, the US economy grew by 3.2 per cent, signalling a significant recovery.
- Fourth quarter: The latest BEA advance estimates show that the US real GDP increased at an annual rate of 2.9 per cent in the fourth quarter.
- Expansion of US economy a positive sign: Despite the slight decrease from the third quarter, the continued expansion of the US economy at the end of 2022 marks a positive sign, soothing concerns about a recession in 2023.
Economic recovery of the US economy
- Positive growth in fourth quarter: The positive growth in the fourth quarter can primarily be attributed to consumer spending, which increased by an annualised rate of 2.1 per cent, and private inventory investment that showed an upturn in 2022. Although a significant decline from the 5.9 per cent increase in 2021, the difference accounts for the enthused post-Covid economic recovery in 2021.
- The US labour market continues to remain robust: The unemployment rate was recorded at a low of 3.5 per cent in December 2022, matching the pre-pandemic levels. Also, the total non-farm payroll employment increased by 2,23,000 in December, exceeding the Dow Jones estimate of 2,00,000.
- Inflation has eased: While the labour market remains tight, US inflation has eased in the last few months. Consumer prices fell 0.1 per cent in December the largest month-over-month decrease since April 2020, due to reductions in motor vehicle and gasoline prices.
- Layoffs not yet translated into rise in jobless claims: Although not a perfect association, the decline in jobless claims in January shows that the mass layoffs in recent weeks, particularly in the tech sector, have not yet translated into a rise in claims, suggesting the possibility of finding new jobs.
- The reopening of China’s borders can have positive implications for the global economy: As China resumes its economic activities to pre-Covid levels by boosting growth, domestic consumption is expected to increase significantly. With the ease of trans-border movement and eventual increase in exports of consumer and industrial goods, global trade is expected to strengthen as well.
What is Recession?
- A recession is a significant decline in economic activity that lasts for months or even years.
- Experts declare a recession when a nation’s economy experiences negative GDP, rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.
- Recessions are considered an unavoidable part of the business cycle or the regular cadence of expansion and contraction that occurs in a nation’s economy.
Possibility of a global recession
- Elevated inflation continues to be a cause for global concern: Despite the fall in consumer prices, the headline CPI for the US showed an annual increase of 6.5 per cent in December 2022. In spite of the slow-paced increase in headline CPI, persistent elevation in core inflation excluding food and energy continues to be a major issue across economies.
- Interest Rate Hikes on the Horizon: Consequently, the central banks are expected to continue with interest rate hikes in the coming months. On an annualised level, the CPI inflation in Australia also jumped to 7.8 per cent in the 2022 fourth quarter, increasing the likelihood of respective interest rate hikes as well.
- China’s Impact on Commodity Prices: Moreover, an increase in China’s demand for goods post-reopening could drive up commodity prices, thereby creating an inflationary impact. For instance, China’s increased demand for natural gas would mean more competition with the European market, leading to higher commodity prices that can put further inflationary pressures on Europeans already dealing with high energy bills.
- Higher borrowing costs: Rising interest rates would incur even higher borrowing costs that could dampen consumer spending. While sectors sensitive to high borrowing costs such as housing and construction have slowed down significantly.
Conclusion
- Among the positive signs are the continued expansion of the US economy and the reopening of China’s borders. Rising inflation remains a cause for global concern. However, prevalence of mixed signals suggests that the onset and depth of a global recession in 2023 are not certain.
Mains question

Q. Highlight the current situation of global economies. Discuss if there’s a global recession in 2023?

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January 31, 2023
Process to set up 16th Finance Commission set to kick off soon
The Centre will soon kick off the process to set up the Sixteenth Finance Commission, with the Finance Ministry likely to notify the terms of reference.

What is the Finance Commission?
- The Finance Commission (FC) was established by the President of India in 1951 under Article 280 of the Indian Constitution.
- It was formed to define the financial relations between the central government of India and the individual state governments.
- The Finance Commission (Miscellaneous Provisions) Act, 1951 additionally defines the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission.
- As per the Constitution, the FC is appointed every five years and consists of a chairman and four other members.
- Since the institution of the First FC, stark changes in the macroeconomic situation of the Indian economy have led to major changes in the FC’s recommendations over the years.
Constitutional Provisions

Several provisions to bridge the fiscal gap between the Centre and the States were already enshrined in the Constitution of India, including Article 268, which facilitates levy of duties by the Centre but equips the States to collect and retain the same.

Article 280 of the Indian Constitution defines the scope of the commission:
1. Who will constitute: The President will constitute a finance commission within two years from the commencement of the Constitution and thereafter at the end of every fifth year or earlier, as the deemed necessary by him/her, which shall include a chairman and four other members.
2. Qualifications: Parliament may by law determine the requisite qualifications for appointment as members of the commission and the procedure of selection.
3. Terms of references: The commission is constituted to make recommendations to the president about the distribution of the net proceeds of taxes between the Union and States and also the allocation of the same among the States themselves. It is also under the ambit of the finance commission to define the financial relations between the Union and the States. They also deal with the devolution of unplanned revenue resources.
Important functions
- Devolution of taxes: Distribution of net proceeds of taxes between Center and the States, to be divided as per their respective contributions to the taxes.
- Grants-in-aid: Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
- Augment states fund: To make recommendations to the president as to the measures needed to augment the Fund of a State to supplement the resources of the panchayats and municipalities in the state on the basis of the recommendations made by the finance committee of the state.
- Any financial function: Any other matter related to it by the president in the interest of sound finance.
Members of the Finance Commission
- The Finance Commission (Miscellaneous Provisions) Act, 1951 was passed to give a structured format to the finance commission and to bring it to par with world standards.
- It laid down rules for the qualification and disqualification of members of the commission, and for their appointment, term, eligibility and powers.
- The Chairman of a finance commission is selected from people with experience of public affairs. The other four members are selected from people who:
1. Are, or have been, or are qualified, as judges of a high court,
2. Have knowledge of government finances or accounts, or
3. Have had experience in administration and financial expertise; or
4. Have special knowledge of economics
Key challenges for 16^th FC
- Overlap with GST council: A key new challenge for the 16th FC would be the co-existence of another permanent constitutional body, the GST Council.
- Conflict of interest: The GST Council’s decisions on tax rate changes could alter the revenue calculations made by the Commission for sharing fiscal resources.
- Feasibility of recommendations: Centre usually takes the Commission’s recommendations on States’ share of tax devolution and the trajectory for fiscal targets into account, and ignores most other suggestions.
Major outstanding recommendations
- Creating a Fiscal Council: The 15th FC has suggested creating a Fiscal Council where Centre and States collectively work out India’s macro-fiscal management challenges, but the government has signalled there is no need for it, he pointed out.
- Creating a non-lapsable fund for internal security: The centre accepted to set up a non-lapsable fund for internal security and defense ‘in principle’, its implementation still has to be worked out.
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January 31, 2023
China plus one (C+1) strategy and advantage for India
Context
- In January 2023, India surpassed China to become the world’s most populous country with a population count of approximately 1.417 billion as against China’s 1.412 billion, as estimated by the World Population Review (WPR). This creates both opportunities and challenges for India.
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The global turmoil and China as enablers of the Indian growth story
- There are three factors that have enabled the Indian growth story.
- Overdependence on specific economies: If the pandemic had had one crucial lesson for the global economy, it must be reducing the overdependence on China-specific Global Value Chains (GVCs). As is evident from the pandemic, the subsequent Ukraine-Russia war or the recent disastrous COVID-19 surge in China the overdependence on specific economies is bound to have cascading effects on the world economy because of the macroeconomic shocks they produce.
- Glocalised models of economic partnerships: Countries now strive to strike the right balance between globalisation and localisation, through bilateral and multilateral platforms characterised by leveraging sub-regional comparative advantages. To a large extent, these emerging forms of glocalised models are also based on controlling Beijing’s political and economic prowess in the Indo-Pacific and beyond, where India plays an active role.
- Use of technology: There is no doubt that the pandemic has provided an uptick in the use of technology ranging from the provision of social security payments at the grassroots to government-level conferences.
China plus one (C+1) strategy
- The US-China trade war and the pandemic-induced supply chain disruptions emanating from China have indeed paved the way for many western corporates to consider a China Plus One (C+1) strategy.
- The strategy would entail diversifying investments from China to other countries, to mitigate the economic and geopolitical risks associated with the former.
- While many also hail Vietnam as another economy to be in the race of attracting investments fleeing China, India could be the potential frontrunner in the C+1 game.
Why makes India to surge ahead in C+1?
- India’s economic advancement: India has a demographic advantage over China, with a larger percentage of its population under 30. This young population is expected to drive consumption, savings, and investments, leading to India’s goal of a multi-trillion dollar economy.
- Low cost of labour is an advantage: India has a low cost of labor and other forms of capital, making production costs lower and increasing competitiveness in international markets. India’s labor cost is also half that of Vietnam, making it a strong player in electronics and semiconductor manufacturing.
- India’s heavy infrastructure investment: A heavy investment in physical infrastructure through the National Infrastructure Pipeline (NIP) is expected to reduce costs in manufacturing sectors and cut transportation time and costs by 20%. This is in contrast to China, where multiple companies handle different parts of the transportation process, increasing costs
- India’s conducive business environment: Recent policy interventions in India such as the Production Linked Incentive (PLI) scheme, tax reforms, liberalization of FDI policies, setting up of land pools and organizing business summits have helped attract investments to the domestic economy. These efforts, driven by the Make in India initiative, have also been supported by efforts to promote competitive federalism and reduce transaction costs of doing business.
- India’s digital advantage: India’s high internet penetration at 43% allows for digital skilling initiatives to bring returns across various economic sectors, particularly services. A combination of home-grown technologies and greater access to Google and Facebook, which are banned in China, gives Indian youth a digital edge.
- As English is the second language provides ease of communication: the prevalence of the English language skill set in the young Indian populace undoubtedly puts India ahead of China. As English is the second official language in the Indian states, it provides business executives with ease of communication in conducting business with North American and European clients.
- Well balanced economic partnerships: India’s economic partnerships are characterized by utilizing sub-regional comparative advantages and controlling Beijing’s political and economic power in the Indo-Pacific. India’s decision to not join the RCEP in 2020 to protect its domestic market and curb trade deficits sends a strong signal of its disassociation with Beijing in trade partnerships. The CEPA signed with the UAE in 2022 is expected to increase two-way trade to $100 billion in five years by opening access for Indian exporters to Arab and African markets.
- Dynamic Indian diplomacy: India has strengthened its economy through diplomatic partnerships and trade agreements, such as the QUAD, I2U2, and agreements with Australia, Canada, the European Union, and African countries. These partnerships have provided Indian businesses with greater access to finance, technology, and new markets. As India assumes the presidency of the G20 and the Shanghai Cooperation Organization this year, it is well-positioned to navigate changing globalisation trends and be a strong voice for the Global South.
- Most important is the large domestic market: India’s large domestic market with a population of 1.3 billion and increasing incomes at 6.9 percent per annum offers a competitive alternative to China’s massive domestic market. With a population base of 98 million, Vietnam’s market is much smaller in comparison.
Conclusion
- Indian economy that has risen from the ashes like a phoenix after a year of negative growth caused by the pandemic-led lockdown. India’s 74th Republic Day, therefore, should not merely mark a remembrance of the past or a celebration of adoption of the world’s largest and most comprehensive constitution, but should also be a celebration of the dazzling future of a roaring economy that will show light to a dreary world.
Mains question

Q. What is China plus one (C+1) strategy? Discuss why it is said that India will surge ahead in C+1?

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January 27, 2023
New T+1 Settlement Cycle comes into effect
After China, India will become the second country in the world to start the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities today.

What’s the T+1 settlement plan?
- The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
- For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
- This is different from T+2, where they will be settled on Friday.
- As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, will come under the T+1 settlement from Friday.
What was the earlier settlement system?
- Until 2001, stock markets had a weekly settlement system.
- The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
- In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.
What are the benefits of T+1?
- T+1 system brings operational efficiency, faster fund remittances, share delivery, and ease for stock market participants.
- In the T+1 format, if an investor sells a share, she will get the money within a day, and the buyer will get the shares in her demat account also within a day.
- The shorter trade settlement cycle augurs well for the Indian equity markets from a liquidity perspective.
- This will also help investors in reducing the overall capital requirements with the margins getting released on T+1 day, and in getting the funds in the bank account within 24 hours of the sale of shares.
- The shift will boost operational efficiency as the rolling of funds and stocks will be faster.
Issues with T+1 system
- T+1 is being implemented despite opposition from foreign investors.
- The United States, United Kingdom and Eurozone markets are yet to move to the T+1 system.
Why are foreign investors opposed?
- Foreign investors have some operational issues as they operate from different geographies.
- Among the issues raised by them were time zone differences, information flow processes, and foreign exchange problems.
- Foreign investors said they would also find it difficult to hedge their net India exposure in dollar terms at the end of the day under the T+1 system.
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January 27, 2023
Insolvency and Bankruptcy Code 2016 (IBC)
Context
- The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 brought about a structural change in the resolution architecture in the country. However, despite its promise, the IBC, in its functioning, has fallen short of expectations. Last week, the Ministry of Corporate Affairs invited comments on a fresh set of changes it is considering to bring about in the Code. This is a welcome step.
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What is Insolvency?
- Simply speaking, insolvency is a financial state of being one that is reached when you are unable to pay off your debts on time.
- Insolvency is essentially the state of being that prompts one to file for bankruptcy. An entity a person, family, or company becomes insolvent when it cannot pay its lenders back on time.
What is Bankruptcy?
- Bankruptcy, on the other hand, is a legal process that serves the purpose of resolving the issue of insolvency.
- Bankruptcy is a legal declaration of one’s inability to pay off debts. When one files for bankruptcy, one obliges to pay off what is owed with help from the government.
What is the Insolvency and Bankruptcy Code 2016 (IBC)?
- The IBC was enacted in 2016 to simplify insolvency and bankruptcy proceedings, safeguard interests of all stakeholders (the firm, employees, debtors and especially creditors), and resolve non-performing assets.
- From a ‘debtor in possession’ regime, it was a shift to a ‘creditor in control’ one.
- IBC provides for a time-bound process for resolving insolvencies.
- The Insolvency and Bankruptcy Board of India (IBBI) is the regulator implementing the code and overseeing the functioning of stakeholders.
Why the IBC introduced?
- Increasing Non-Performing Assets: In 2016, at a time when India’s Non-Performing Assets and debt defaults were piling up, and older loan recovery mechanisms were performing badly, the IBC was introduced to overhaul the corporate distress resolution regime in India.
- Time bound mechanism: To consolidate previously available laws to create a time bound mechanism with a creditor in control model as opposed to the debtor in possession system.
- Two positive outcomes: When insolvency is triggered under the IBC, there can be just two outcomes: resolution or liquidation. liquidation means the process of winding up a corporation or incorporated entity
What are the shortcomings in the code’s functioning?
- Timelines are not followed: Realizations of creditors have been lower than expectations, and the strict timelines prescribed in the Code for resolving cases have not been adhered to.
- Less realizable value: According to the most recent data, the total realisable value in cases resolved till September 2022 stood at only 30.8 per cent of the admitted claims.
- Average time is rising: The data also shows that 64 per cent of the ongoing cases have crossed 270 days. In fact, as per reports, the average time taken for cases to be resolved has risen, driven in part by more time being spent on associated litigation.
Proposals to address the shortcomings
- Removing ambiguity and bringing the predictability: The changes aim to reduce the time for admitting cases and streamline the process by pushing for greater reliance on data with Information Utilities. Considering the delays in admitting cases, and the implications of recent judicial interventions, this proposal seeks to remove ambiguity, and bring about predictability in the process.
- Extending the pre-packed resolution to other firms: It has also been proposed that the pre-packaged insolvency resolution process that was introduced for micro, small and medium enterprises now be extended to other firms as well. While such a proposal should be appealing, so far very few cases have been admitted under this.
- A clear distinction between the real estate projects: A distinction is now being made between a particular real estate project and the larger corporate entity. The government’s rationale for doing so is that this could allow the corporate entity to continue on other projects, while the stressed project can be tackled separately.
- Changes to the manner in which proceeds will be distributed: Creditors will receive proceeds up to the liquidation value in line with the priority as prescribed under section 53 of the Code, and any surplus over such liquidation value will be rateably distributed between all creditors in the ratio of their unsatisfied claims.
Conclusion
- Attempts to improve IBC’s functioning are welcome. But some of the proposals need more careful examination. Changes to the Code should, after all, be driven by the objective of improving its functioning, and outcomes. This should be done keeping in mind the incentive structures of all stakeholders.
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January 24, 2023
State of the Economy Report and the Macroeconomic Stability
Context
- The Reserve Bank of India (RBI) just-released State of the Economy report. The report suggests that while controlling inflation was a big concern in 2022, the bank may now be more focused on avoiding a recession in 2023. There is still debate about whether the recession will be short and mild or long and severe.
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What is State of the Economy report?
- A State of the Economy report is a paper that the Reserve Bank of India (RBI) releases which gives a summary of how the country’s economy is doing.
- The report talks about things like prices going up, how much the economy is growing, how many people have jobs, and the bank’s plan for managing money.
- The RBI uses the report to make decisions about interest rates and other economic rules, and it also helps people like economists, investors, and regular citizens understand the economy and make smart choices.
What the RBI’s State of the Economy report says?
- Retail inflation eased: Retail inflation eased to 5.72 per cent in December. In November, the inflation print was 5.88 per cent. The government has mandated the central bank to keep inflation at 4 per cent with a +/- 2 per cent band.
- Consumer price inflation within RBI’s upper tolerance limit: The report said the country’s macroeconomic stability is getting bolstered with inflation being brought into the tolerance band. consumer price inflation in the last two months falling within the RBI’s six per cent upper tolerance limit
- Hopeful for the fiscal consolidation: It is even hopeful of fiscal consolidation underway at central and sub-national levels and the external current account deficit on course to narrow through the rest of 2022 and 2023. RBI said in a report that they want to keep prices steady at a certain level and bring it down to 4% by 2024.
- Narrowing CAD: Lead indicators suggest that the current account deficit is on course to narrow through the rest of 2022 and 2023.
- Stock market continue to outperform peers: The country’s stock markets stood out in 2022 and continue to outperform peers on the strength of macroeconomic fundamentals and retail participation.
Who prepares the report and what the authors says?
- Views expressed are not of the institution: The report was prepared by RBI’s deputy governor Michael Patra and other RBI officials. The views expressed in the report are of the authors and not of the institution, the report said.
- India at a bright spot: Authors said the prospect of India as a bright spot amidst 2023’s encircling gloom is burnished by most recent history and current developments. By cross-country standards, the country’s economy exhibited resilience through 2022 in the face of the triad of shocks war; monetary policy tightening; and recurring waves of the pandemic.
- India will be ahead of UK: According to the authors, at current prices and exchange rates, India will still be the 5th largest economy in the world in 2023, worth $3.7 trillion and will be ahead of the UK.
Back to basics: What is Monetary policy?
- Monetary policy is the macroeconomic policy laid down by the central bank.
- It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
- A contractionary policy increases interest rates and limits the outstanding money supply to slow growth and decrease inflation.
- During times of slowdown or a recession, an expansionary policy grows economic activity, by lowering interest rates, saving becomes less attractive, and consumer spending and borrowing increase.
What are the concerns and prognosis over the report?
- Predictions are too optimistic: The report’s release is significant, as it comes before the Union Budget for 2023-24. However, the report’s predictions may be too optimistic.
- Risks tilted towards growth than inflation: The balance of risks is currently tilted towards growth rather than inflation, both globally and domestically.
- Slowing down the pace of monetary tightening: It is appropriate for the RBI to slow down or pause the pace of monetary tightening. Monetary policy takes time to have an effect, so the impact of these increases may take a few quarters to realise actually.
- Wait and Watch Approach: The RBI can afford to adopt a wait-and-watch approach and allow the impact of past actions to be fully felt. This does not mean neglecting inflation, as bringing it down to 4% is still important.
Conclusion
- The world is, no doubt, viewing India favourably as an investment destination, both for its large domestic market and the need to de-risk from China in the current geopolitical environment. The government’s focus on improving the country’s physical as well as digital infrastructure is boosting the investors’ confidence. Demonstrating macroeconomic stability and policy credibility can be the icing on the cake to bring the world to India.
Mains question

Q. Highlight RBI’s State of the Economy report and discuss what makes India a favorable investment destination?

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January 23, 2023
Forex Reserves zoom by $10.417 billion to $572 billion
India’s forex reserves zoomed by $10.417 billion to $572 billion, making it one of the biggest weekly jumps in recent times.

Recent trends in FOREX Reserves
- In the previous reporting week, the overall reserves had dropped by $1.268 billion to $561.583 billion.
- In October 2021, the country’s forex reached an all-time high of $645 billion.
- The reserves have been declining as the central bank deploys the kitty to defend the rupee amid pressures caused majorly by global developments.
- In October 2022, the reserves had swelled by $14.721 billion during a week.
What is Foreign Exchange (Forex) Reserve?
- Foreign exchange reserves are important assets held by the central bank in foreign currencies as reserves.
- They are commonly used to support the exchange rate and set monetary policy.
- In India’s case, foreign reserves include Gold, Dollars, and the IMF’s quota for Special Drawing Rights.
- Most of the reserves are usually held in US dollars, given the currency’s importance in the international financial and trading system.
- Some central banks keep reserves in Euros, British pounds, Japanese yen, or Chinese yuan, in addition to their US dollar reserves.
India’s forex reserves cover:
1. Foreign Currency Assets (FCAs)
2. Special Drawing Rights (SDRs)
3. Gold Reserves
4. Reserve position with the International Monetary Fund (IMF)
Countries with the highest foreign reserves
- Currently, China has the largest reserves followed by Japan and Switzerland.
- India earlier overtook Russia to become the fourth-largest country with foreign exchange reserves. (Data from August 2022)
1. China – $3,349 Billion
2. Japan – $1,376 Billion
3. Switzerland – $1,074 Billion
4. Russia – $597.40 Billion
Why are these reserves so important?
- All international transactions are settled in US dollars and, therefore, required to support India’s imports.
- More importantly, they need to maintain support and confidence for central bank action, whether monetary policy action or any exchange rate intervention to support the domestic currency.
- It also helps to limit any vulnerability due to sudden disturbances in foreign capital flows, which may arise during a crisis.
- Holding liquid foreign currency provides a cushion against such effects and provides confidence that there will still be enough foreign exchange to help the country with crucial imports in case of external shocks.
Initiatives taken by the government to increase forex
- To increase the foreign exchange reserves, the Government of India has taken many initiatives like AatmaNirbhar Bharat, in which India has to be made a self-reliant nation so that India does not have to import things that India can produce.
- Other than AatmaNirbhar Bharat, the government has started schemes like Duty Exemption Scheme, Remission of Duty or Taxes on Export Product (RoDTEP), Nirvik (Niryat Rin Vikas Yojana) scheme, etc.
- Apart from these schemes, India is one of the top countries that attracted the highest amount of Foreign Direct Investment, thereby improving India’s foreign exchange reserves.
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January 21, 2023