💥Join UPSC 2027,2028 Mentorship (July Batch) + XFactor Notes & Microthemes PDF
Talk to Mentor

Civilsdaily

Login

GS Paper: Indian Economy

  • Centre must step up cash flow to states

    Context

    The states are borrowing less than expected in the first quarter of FY 2021-22 despite the negative impact of state-level restrictions, amidst the second Covid wave, on economic activity.

    An overview of borrowing by States

    • In 2020-21, the gross amount raised through state development loans (SDLs) or bonds had jumped to Rs 8 trillion, up from Rs 6.3 trillion in the previous year.
    • The increase was a fallout of the Covid-19 pandemic on state finances.
    • In the first quarter of the current financial year i.e. 2021-22, gross issuances of bonds stood at Rs 1.4 trillion.
    • This amount is 14 per cent lower than the bonds issued last year (Rs 1.7 trillion).
    • This is also around 20 per cent lower than what states had initially indicated they would borrow (Rs 1.8 trillion) through the indicative calendar of market borrowings released by the RBI.
    • As a result, state bond issuances have undershot expectations in the first quarter.

    Factor’s responsible for lower state borrowing

    •  Lower state borrowings were a consequence of three major factors.
    • First, an additional tax devolution of Rs 450 billion from the Centre in late March.
    • This amount was in excess of the Rs 5.5 trillion tax devolution that had been included in the revised estimates for 2020-21.
    • Second, record-high GST collections in April which doubled to Rs 1.3 trillion in the first quarter of this year, up from Rs 0.6 trillion in the same period last year.
    • Third, receipt of substantial grants from the Centre adding up to Rs 436 billion in April-May related to the recommendations of the Fifteenth Finance Commission.

    Factors that could influence the borrowing pattern in the next three quarters

    • First, the varying pace of unlocking and the consequent economic revival in states from June onwards may crucially affect state borrowings in the second quarter.
    • A faster ramp-up of vaccine administration may help some states, reducing the need to borrow.
    • Second, the eventual calendar for raising back-to-back loans by the GoI to compensate states for the loss in their GST revenues could also result in a change in the states’ borrowing schedule.
    • Third, the quantum, and timing of tax devolution will also play a role.

    Why timing of the Central tax devolution matters for States

    • Central tax devolution forms a quarter of states’ combined revenue receipts.
    • This revenue stream has contracted by 15 per cent in the first two months of the year, falling to Rs 392 billion each in April-May this year, from Rs 460 billion last year.
    • If the Centre continues to devolve to states this amount till February 2022, then a massive Rs 2.4 trillion (36 per cent of the budgeted amount) will be left for devolution in March 2022 — assuming that the devolution for the full year is not revised below the budgeted level.
    • From the states’ point of view, this would be rather inefficient from a cash flow perspective.

    Conclusion

    An early step-up in tax devolution by the central government may provide comfort to the states to accelerate expenditure during another uncertain year, without borrowings being pushed up in the next two quarters.

  • Failure to comply with international judicial rulings hurts India’s image as an investment destination

    The article highlights the lack of immediate compliance by the Indian government in awards involving foreign investors.

    Why honouring award is important

    • An important factor that propels investors to invest in foreign lands is that the host state will honour contracts and enforce awards even when it loses.
    • But when the host state refuses to do so, it shakes investors’ confidence in the host state’s credibility towards the rule of law, and escalates the regulatory risk enormously.
    • To an extent, this has been India’s story over the last few years
    • Last year, India lost two high-profile bilateral investment treaty (BIT) disputes to two leading global corporations — Vodafone and Cairn Energy — on retrospective taxation.
    •  India has challenged both the awards at the courts of the seat of arbitration.
    • As India drags its feet on the issue of compliance, it harms India’s reputation in dealing with foreign investors.

    Antrix-Devas agreement cancellation dispute

    • The other set of high-profile BIT disputes involve the cancellation of an agreement between Antrix, a commercial arm of the Indian Space Research Organisation, and Devas Multimedia.
    • This annulment led to three legal disputes — a commercial arbitration between Antrix and Devas Multimedia at the International Chambers of Commerce (ICC), and two BIT arbitrations brought by the Mauritius investors and German investors.
    • India lost all three disputes. 
    • The ICC arbitration tribunal ordered Antrix to pay $1.2 billion to Devas after a U.S. court confirmed the award earlier this year.
    • After the ICC award, Indian agencies started investigating Devas accusing it of corruption and fraud.
    • Last month, the National Company Law Tribunal (NCLT) ordered the liquidation of Devas on the ground that the affairs of the company were being carried on fraudulently.
    • This has led to Devas issuing a notice of intention to initiate a new BIT arbitration against India, sowing the seeds for complex legal battles again.

    Implications for investment in India

    • A closer reading of these cases reveals that whenever India loses a case to a foreign investor, immediate compliance rarely happens.
    • Instead, efforts are made to delay the compliance as much as possible.
    • While these efforts may be legal, it sends out a deleterious message to foreign investors.
    • It shows a recalcitrant attitude towards adverse judicial rulings.
    • This may not help India in attracting global corporations to its shores to ‘make for the world’.

    Consider the question “What are the factors that are leading to more Indian business disputes being settled elsewhere? What are the implications of delay by the government in honouring the awards of the disputes?” 

    Conclusion

    As India aspire to be the global destination of FDI, it needs to burnish its image on the dispute resolution front by honouring the awards.

  • Four years of GST Regime

    The Prime Minister has lauded Goods and Services Taxes (GST) on its completion of 4 years and said it has been a milestone in the economic landscape of India.

    What is GST?

    • GST is an indirect tax that has replaced many indirect taxes in India such as excise duty, VAT, services tax, etc.
    • The Goods and Service Tax Act was passed in Parliament on 29th March 2017 and came into effect on 1st July 2017. It is a single domestic indirect tax law for the entire country.
    • It is a comprehensive, multi-stage, destination-based tax that is levied on every value addition.
    • Under the GST regime, the tax is levied at every point of sale. In the case of intra-state sales, Central GST and State GST are charged. All the inter-state sales are chargeable to the Integrated GST.

    Answer this PYQ in the comment box:

    Q.All revenues received by the Union. Government by way of taxes and other receipts for the conduct of Government business are credited to the (CSP 2015):

    (a) Contingency Fund of India

    (b) Public Account

    (c) Consolidated Fund of India

    (d) Deposits and Advances Fund

    What are the components of GST?

    There are three taxes applicable under this system:

    1. CGST: It is the tax collected by the Central Government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    2. SGST: It is the tax collected by the state government on an intra-state sale (e.g., a transaction happening within Maharashtra)
    3. IGST: It is a tax collected by the Central Government for an inter-state sale (e.g., Maharashtra to Tamil Nadu)

    Advantages Of GST

    • GST has mainly removed the cascading effect on the sale of goods and services.
    • Removal of the cascading effect has impacted the cost of goods.
    • Since the GST regime eliminates the tax on tax, the cost of goods decreases.
    • Also, GST is mainly technologically driven.
    • All the activities like registration, return filing, application for refund and response to notice needs to be done online on the GST portal, which accelerates the processes.

    Issues with GST

    • High operational cost
    • GST has given rise to complexity for many business owners across the nation.
    • GST has received criticism for being called a ‘Disability Tax’ as it now taxes articles such as braille paper, wheelchairs, hearing aid etc.
    • Petrol is not under GST, which goes against the ideals of the unification of commodities.

  • Middle income trap

    The article suggests focusing on improving productivity and thereby the manufacturing sector to avoid the middle-income trap.

    What is the middle-income trap and why it matters for India

    • This trap was first conceived by World Bank economists.
    • They found that of the 101 developing economies that could be classified as ‘middle income’ in 1960, only 13 managed to become rich nations by 2008. 
    • There is little consensus on why some countries succeed in making the transition to high-income status.
    • But a distinctive attribute of those that succeed in the transition to high income is productivity improvement.
    • India could use its demographic dividend to avoid this predicament and achieve the critical velocity needed to move into the high-income bracket.

    How can India avoid the middle-income trap

    1) Improve productivity

    • Re-allocation of labour from low-productivity agriculture to high-productivity sectors, such as manufacturing, has been a primary channel through which today’s advanced economies raised their living standards.
    • In India, growth in labour productivity has consistently declined over the past decade.
    • The annual growth rate of output per worker has dipped from 7.9% in 2010 to 3.5% in 2019, as per International Labour Organization estimates.
    • This was also a period of low growth in India’s manufacturing sector.
    • In 2020-21, it accounted for only 14.5% of India’s gross value added, down from 17.4% in 2011-12.
    • An essential first step in improving productivity would be strengthening this sector.

    2) Strengthen manufacturing sector

    • Industrial labour relations is among the most critical elements to revitalize India’s manufacturing sector especially in the context of labour productivity.
    • These labour laws created incentives for firms to remain small and uncompetitive, thereby affecting productivity.
    • The new code, once implemented, would increase the threshold relating to layoffs and retrenchment in industrial establishments to 300 workers.
    • Other countries, such as China, Vietnam and Bangladesh, with whom India competes for foreign investment and export markets do not require the approval of administrative or judicial bodies for dismissals.
    • Therefore, in spite of recent reforms, India’s labour laws stay rigid in comparison with those of its competitor countries.

    3) Technology intensive manufacturing

    • Engendering innovation in higher value-added, tech-intensive activities is important for economies before they reach that juncture.
    • If exports are taken as a proxy for the manufacturing capabilities and competitiveness of an economy, the present status of tech-intensive manufacturing in India leaves a lot to be desired.
    • As per World Bank data, high-tech exports accounted for only 10.3% of India’s manufacturing exports in 2019.
    • Rival countries had a much higher share of the same: 31% in China, 13% in Brazil, 40% in Vietnam and 24% in Thailand.
    • Low R&D spending in India, ranging from a mere 0.64% to 0.86% of gross domestic product over the past two decades, has held the country back.

    Steps to improve tech-intensive manufacturing

    • The government has introduced a production-linked incentive scheme to ensure a greater share of local value addition.
    • While this would attract foreign investments in tech-intensive manufacturing, there is also a need for greater incentives for R&D investments by firms in India.
    • A first step in this direction could be reinstating the tax exemption on R&D under Section 35 (2AB), even for companies opting for the lower corporate tax rate of 22%.

    Conclusion

    We need appropriate interventions to improve productivity—both economy-wide and within the sector. And we must do it now.

  • Investors should not be tempted to ignore macroeconomic factors

    Despite gloom in the economy, financial markets are scaling new highs. The situations calls for diligence on the part of individual investors. The deals with this issue.

    What influences investors’ decision

    • Investors may not necessarily be always sensible or even capable of perceiving the larger picture.
    • Nobel laureate Daniel Kahneman argues that humans usually use the ‘first system’ of ‘fast thinking’ to hurriedly act and perceive their environment.
    • Consequently, they are susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ and ‘availability heuristic’.
    • These phenomena, thus, play their part in pervading optimistic market conditions.
    • As a result, investors often end up ignoring or overlooking uncertainties and risks involved in their decision.
    • At the same time, investors’ decision choices could be significantly influenced by ‘nudging’.
    • It is a deliberate tactics and method of behaviour modification by which it is the ‘choice architect’ that decides who does what and who does so, as argued by the Nobel laureate, Richard H. Thaler.
    • The present surge in the Indian stock market is indeed nudging individual investors to trade more.

    What makes individual investors vulnerable

    • National Stock Exchange data indicate following trends:
    • The share of the non-institutional individual investors in equity trading volume has risen to one half of the total turnover. in 2021.
    • It was around a third in 2016.
    • In contrast, the share of Foreign Institutional Investors (FIIs) in the total trading volume has shrunk to just about a tenth, it used to be one fifth in 2016.
    • Trading in the stock market, the sudden rise, the intraday moves, etc., are, thus, attributable largely to individual traders now. 
    • However, despite their large trading volumes, individual investors have actually contracted their holding of the market capitalisation.
    • The FIIs currently own around half of the free float of all Indian companies.
    • Apparently, the retail investors have constantly sold their stake to end up holding less than 20% shares now.
    • Trading, thus, seems to be the mainstay of retail investors and this is what makes them more vulnerable to the vagaries of the market.

    Market is ignoring macroeconomic factors

    • Centre for Monitoring Indian Economy Pvt. Ltd. data of the listed companies reveal a rise in their profit, due to rationalisation and cost-cutting.
    • Investors might be tempted to ignore macroeconomic factors and invest in such stock believing that it is the profit that impels the stock prices.
    •  In reality, however, share price is expected to ascend if a company declares to cut its wage bill.
    • This probably explains why stock markets around the world have been on the rise amidst the novel coronavirus pandemic; demand may have declined but profits have been least impacted.
    • At the larger economic level, however, real wages have plunged.
    • Clearly, the market has not entirely decoupled itself from the economic indicators.
    • Established wisdom suggests that corporates cannot sustain contraction in the economy for long.
    • Sustained decline in demand caused by waning disposable household income would catch them soon.
    • Robert J. Shiller attributes this phenomenon of creating a possible bubble to irrational exuberance.
    • When bubbles burst, they cause a kind of financial earthquake, in turn destabilising public trust in the integrity of the financial system.
    • Critically, as the past portrays, individual investors, with all their vulnerabilities, suffer the most devastating consequences.
    • Retail investors are as well susceptible to overreaction when negative news hits the market.

    Consider the question “What are the factors driving the financial markets up despite the weak macroeconomic foundations? What are the risks involved in such situation for the individual investors?”

    Conlcusion

    History of financial markets is replete with bubbles and bursts. Most affected in such burst are the individual investors. Informed decisions based on information and risks involved should form the basis of investment by individual investors.

  • Can India avoid a telecom duopoly?

    The Indian telecom sector faces the prospect of duopoly due to the impending exit of Vodafone-Idea. This has several implications.

    India’s telecom sector: From monopoly to hyper-competition

    • India’s telecom market has seen monopoly as well as hyper-competition.
    • Twenty-five years ago, the government alone could provide services.
    • Ten years later, there were nearly a dozen competing operators. Most service areas now have four players.
    • However, the possible exit of the financially-stressed Vodafone Idea would leave only two dominant players-Airtel and Jio in the telecom sector.
    • A looming duopoly, or the exit of a global telecommunications major, are both worrying.
    • They deserve a careful and creative response.

    Why it matters

    • Competition has delivered relatively low prices, advanced technologies, and an acceptable quality of services.
    • There is a long way to go in expanding access as well as network capacity.
    • For example, India is ranked second globally—after China—in the number of people connected to the internet.
    • However, it is also first in the number of people unconnected.
    • Over 50% of Indians are not connected to the internet, despite giant strides in network reach and capacity. India tops aggregate mobile data usage.
    • However, its per capita or device data usage is low.
    • It has an impressive 4G mobile network, however, its fixed network—wireline or optical fibre—is sparse and often poor.
    • 5G deployment has yet to start and will be expensive.
    • Filling the gaps in infrastructure and access will require large investments and competition.
    • The exit of the Vodafone-Idea will hurt both objectives.
    • The closure of Vodafone Idea is an arguably greater concern than the fading role of BSNL and MTNL.
    • The government companies are yet to deploy 4G and have become progressively less competitive.
    • Vodafone Idea, on the other hand, still accounts for about a quarter of subscriptions and revenues and can boast of a quality network.

    Way out

    1) Strategic partnership with BSNL-MTNL

    • A possible way out could be to combine the resources of the MTNL and BSNL and Vodafone Idea through a strategic partnership.
    • Creative government action can save Vodafone Idea as well as improve the competitiveness of BSNL and MTNL.
    • It could help secure government dues, investments, and jobs.

    2) Develop resale market

    • Global experience suggests that well-entrenched incumbents have massive advantages.
    • New players are daunted by the large investments.
    • However, regulators and policymakers have other options to expand choice for telecom consumers.
    • Their counterparts in mature regulatory regimes—e.g., in the European Union—have helped develop extensive markets for resale. 
    • Recognising the limited influence of smaller players, regulators mandate that the incumbent offer wholesale prices to resellers who then expand choice for end-users.
    • A key barrier to resale is India’s licence fee regime which requires licence-holders to share a proportion of their revenues with the government.

    Conclusion

    It would be tragic if India’s telecom-access market was to be reduced to only two competing operators, as we have a long way to go. The government needs to consider the implications of the situation arising due to the exit of one of the major players in the sector.

    Source:

    https://www.financialexpress.com/opinion/failing-to-connect-can-india-avoid-a-telecom-duopoly/2281486/

  • Privatisation of public sector enterprises in India

    The article suggests the privatisation of public sector enterprises by analysing their performance and devising strategy for privatisation accordingingly.

    Three categories of public sector enterprises

    1) Sick for long time and beyond redemption

    • There is the category of enterprises which have been sick for a long time.
    • Their technology, plants and machinery are obsolete. 
    • They should be closed, and assets sold.
    • The labour in these enterprises have had a political constituency which has prevented closure.

    What should be done with these enterprises?

    • The Government should close these in a time-bound manner with a generous handshake for labour.
    • After selling machinery as scrap, there would be valuable land left.
    • Prudent disposal of these plots of lands in small amounts would yield large incomes in the coming years.
    • All this would need the creation of dedicated efficient capacity as the task is huge and challenging.
    • These enterprises may be taken away from their parent line Ministries and brought under one holding company.
    • This holding company should have the sole mandate of speedy liquidation and asset sale.

    2) Financially troubled but can be turned around

    • Private management through privatisation or induction of a strategic partner is the best way to restore value of these enterprises.
    • Air India and the India Tourism Development Corporation (ITDC) hotels are good examples.

    What should be done with these enterprises?

    • Air India should ideally be made debt free and a new management should have freedom permitted under the law in personnel management to get investor interest.
    • As valuation rises, the Government could reduce its stake further and get more money.
    • If well handled, significant revenues would flow to the Government.

    3) Profitable enterprises

    • Pragmatism instead of ideology should guide thinking about them.
    • The Chinese chose to nurture their good state-owned enterprises as well as their private ones to succeed in the domestic and global markets by increasing their competitiveness in cost, quality, and technology.
    • The Chinese chose to promote both their public as well as their private sector enterprises to rise.
    • Both have made China the economic superpower that it is today.

    What should be done with profitable enterprises?

    • The Government can continue to reduce its shareholding by offloading shares and even reducing its stake to less than 51% while remaining the promoter and being in control.
    • Calibrated divestment to get maximum value should be the goal instead of being target driven to get a lower fiscal deficit number to please rating agencies.
    • In parallel, managements may be given longer and stabler tenures, greater flexibility to achieve outcomes, and more confidence to take well-considered commercial risks.

    Challenges

    • First, the number of Indian private firms which can buy out public sector firms are very few.
    • Their limited financial and managerial resources would be better utilised in taking over the large number of private firms up for sale through the bankruptcy process.
    • Then, these successful large corporates need to be encouraged to invest and grow both in brownfield and greenfield modes in the domestic as well as international markets.
    • Sale at fair or lower than fair valuations to foreign entities, firms as well as funds, has adverse implications from the perspective of being ‘Atma Nirbhar’.
    • Again, greenfield foreign investment is what India needs and not takeovers.
    • Public sector enterprises provide for reservations in recruitment.
    • With privatisation, this would end and unnecessarily generate social unrest.

    Conclusion

    Would it be in India’s interest to lose the strategic capacity that its ownership of public enterprises including financial ones provide it? It would be better to think carefully now.

  • Where is the Indian rupee headed?

    The article explains the factors affecting the Indian rupee’s value against the dollar in implications of change in value for the Indian economy.

    Factor’s affecting rupee’s value

    • First, India’s foreign exchange reserves need to be considered, which have been increasing quite rapidly.
    • Second, there are daily fluctuations caused by foreign portfolio investment (FPI) flows.
    • Third, there is the external factor of the dollar, when the US currency strengthens against the euro, the rupee tends to decline and vice-versa.
    • Fourth, there is the concept of the real effective exchange rate (REER), a construct of economists in which relative inflation comes into play.
    • If inflation in India is higher than in countries associated with its export basket of currencies, then the rupee is overvalued and will correct through depreciation.
    • Fifth, at what stage will the RBI intervene by buying or selling dollars to stabilize the Indian currency also matters.

    Let’s look at some of these factors in detail.

    Impact of the U.S. economy and Fed

    • The dollar is driven by the US economy as well as its Federal Reserve’s policies.
    • The Fed’s recent indication that it would raise its policy rate of funds in the years ahead was enough to strengthen the dollar and weaken the rupee.  As an increase in US rates could see global investor money flocking back to the US, the dollar gained in relative value.
    • The dollar should logically be strengthening, given improving US growth, now reinforced by the Fed.

    Inflation factor

    • The inflation factor, however, has been curious.
    • Indian inflation will be high in India and hence also the rupee’s REER.
    • To the extent the market understands this concept and uses it for valuation, it should be pushing the rupee downwards.
    • But the pressure will be less this time as global inflation is also being raised by rising commodity prices.
    • Indian inflation may not be so much higher as to warrant a deep depreciation.

    Increase in Forex reserves

    • An increase in forex reserves is an indication that India is getting in more dollars than we are spending.
    • This also means that our combined current and capital accounts are in surplus zone.
    • However, India’s current account will go into a deficit this year, as imports will be greater than exports, but will not be very high. Maybe 0.5-1% of GDP.
    • The capital account can get tricky.
    • Inward foreign direct investment was high in 2020-21.
    • At $60 billion in equity and $80 billion overall, it was one of the world’s highest.
    • Therefore, capital flows should remain strong.
    • External commercial borrowings could slow down amid weak investment within India.
    • So the fundamentals suggest that the rupee should be stable, with a tilt towards depreciation.

    The RBI intervention

    • The RBI’s surplus liquidity and accommodative stance have not worked in favour of the rupee.
    • In response to its April policy, when RBI affirmed its dovish stance, the rupee began falling on expectations that if RBI kept rates low at a time of high inflation and excessive market borrowing by the government, investors will potentially move out.
    • This pushed the rupee towards the 75 level against the dollar, but reverted with time as RBI kept infusing liquidity and managed the yield curve.
    •  In April, RBI bought $4.2 billion worth of the US currency.
    • Exports have grown smartly in the first two months of 2021-22, and at this stage, the central bank would not want to that trend by stalling the rupee’s depreciation.

    Conclusion

    Taking all these factors into account, one can foresee the rupee moving in the range of ₹74-75 to the dollar, unless there’s a shock of some sort, though none looks likely at present.

  • Microfinance institutions

    The microfinance institutions (MFI) faced several restrictions by RBI which were not applicable to banks, NBFC and small finance banks. This denied the MFIs level playing field. A recent Consultative document by the RBI frees MFIs from such restrictions. The article explains this in detail.

    Background of regulation of MFI’s  by RBI

    • RBI first allowed informal self-help groups to open savings accounts in banks and bank lending to these groups in 1991-92.
    • In 2000, RBI permitted all types of institutions to offer microcredit and bank loans extended to these institutions for on-lending were treated as part of the priority sector lending.
    • Beyond these, RBI was unwilling to bring in any regulations on the plea that as long as these are not deposit-taking institutions there is no need to regulate them. 
    • That was the stand of various RBI-appointed committees too, including the Vyas Committee of 2004.
    • Based on the Malegam Committee recommendations, RBI came out with detailed guidelines for microfinance institutions (not the microfinance sector) in 2011.
    • These guidelines introduced a new category of NBFCs, viz NBFC-MFIs (microfinance institutions).
    • It also set norms for income criteria for clients of MFIs, repayment period, borrower loan limits, interest rate norms and caps, limits on a number of lenders to a borrower and a host of other norms and criteria.

    How these norms created the issue of a level playing field?

    • After 2015-16, the entry of small finance banks, eight of which were MFIs, into the microfinance space started to create issues.
    • MFIs discovered to their dismay that while they had to adhere to a set of regulations, it was a free-for-all for non-MFIs (banks, SFBs and NBFCs).
    • The main issue was that non-MFIs need not adhere to the norm of number of lenders (two in the case of NBFC-MFIs) and per-borrower loan limits.
    • It prompted non-MFIs to target borrowers identified and nurtured by MFIs with higher loan amounts, leading to high levels of borrower indebtedness.
    • In addition, the interest rate cap (2.75 times the base rate declared quarterly by RBI) was squeezing the margins of small and medium MFIs, as none of them get loans from the biggest banks.

    Way forward

    • The recent Consultative Document by RBI frees MFIs from the restriction imposed by the 2011 regulations and gives them a level-playing field.
    • Another important feature for MFIs is that by doing away with the 50% income generation loans criteria and the repayment period norms.
    • RBI is facilitating credit flow into lifecycle needs like housing, water sanitation, education, health, renewable energy, etc, which are now as important as income generation.
    • On the interest rate front, initially, some upward correction could be there by medium and small MFIs based on their borrowing rates.
    • The document enhances the role for the regulator as the adoption of Board-approved policies to determine the norms of household indebtedness and to fix a transparent rate of interest by each institution and their implementation need a rigorous supervisory oversight

    Conclusion

    Providing a level playing field to the MFI is critical to their development, the document by RBI rightly does that. It will help in providing credit to those who remain outside the formal banking network.

    Source:

    https://www.financialexpress.com/opinion/unfettering-microfinance-recent-rbi-consultative-document-frees-mfis-from-shackles-imposed-by-2011-regulations/2277925/

  • Who is a Registered Valuer?

    A valuation report by a registered valuer is at the heart of the recent controversy surrounding a Rs 4,000 crore share allotment decision by PNB Housing Finance.

    Who is a Registered Valuer?

    • A registered valuer is an individual or entity which is registered with the Insolvency and Bankruptcy Board of India (IBIBI) as a valuer in accordance with the Companies (Registered Valuers and Valuation) Rules, 2017.
    • Under Section 458 of the Companies Act, IBBI has been specified as the authority by the central government.
    • The concept of registered valuer was introduced in the Companies Act in 2017 in order to regulate the valuation of assets and liabilities linked to a company and to standardize the valuation procedure in line with global valuation standards.
    • Before the concept of registered valuer became part of the Companies Act, valuation was done in an arbitrary manner, often leading to question marks over the authenticity of the valuation.

    What does the valuation report comprise?

    • As per the Companies (Registered Valuers and Valuation) Rules, 2017, the valuer should, in his/its report, state 11 key aspects including disclosure of the valuer’s conflict of interest, if any.
    • Among others, it must include the purpose of valuation; sources of information; procedures adopted in carrying out the valuation; valuation methodology; and major factors that influenced the valuation.

    Who can become a registered valuer?

    • An individual needs to clear the Valuation Examination conducted by IBBI.
    • The rules state that an individual who has completed 50 years of age and has been substantially involved in at least ten valuation assignments of assets amounting to Rs 5 crore rupees or more, during the five years preceding the commencement of these rules, shall not be required to pass the Valuation Examination.
    • The individual should, however, have a postgraduate degree in the specified discipline (relevant for valuation of the class of asset for which the registration is sought) and should have at least three years of experience in the discipline thereafter.
    • As of March 31, 2021 there were 3,967 registered valuers in the country. Only 40 of them are registered entities; the rest are individuals.

    For what assets can a registered valuer undertake valuation?

    • A registered valuer can get themselves registered for valuation of assets such as land and building; plant and machinery; and securities and financial assets.
    • They can get registered for valuation of all three classes, and can undertake valuation of only the assets for which they have got the registration.

    Answer this PYQ in the comment box:

    Q.Which of the following statements best describes the- term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (CSP 2017)

    (a) It is a procedure for considering the ecological costs of developmental schemes formulated by the Government.

    (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

    (c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

    (d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.