💥Mains Ready By December. Smash Mains & Smash PYQ Admissions Open

Talk to Mentor

Search results for: “”

Article 35A debate
Note4Students

Article 35A triggers the discussion of special privileges of Kashmir. Kashmir had been stirred with terrorism and other unrest. Another political controversy will drag the region into unrest again. It is important to find a solution. This article looks into various aspects of article 35A. In last, few years UPSC has asked a number of Questions on controversial constitutional articles and SC judgements, for example in 2013 UPSC asked a Question on Article 371 A and last year it asked a question on Article 239AA . Thus a question can be expected from this topic in Mains 2017.

Introduction

What is it?
1. Article 35A is a provision incorporated in the Constitution giving the Jammu and Kashmir Legislature the authority to decide who all are ‘permanent residents’ of the State and confer on them special rights and privileges in public sector jobs, acquisition of property in the State, scholarships and other public aid and welfare
2. The provision mandates that no act of the legislature coming under it can be challenged for violating the Constitution or any other law of the land.
Implications
1. Article 370 grants special status to J&K, while Article 35A, added to the Indian Constitution through a presidential order, empowers the J&K legislature to define the state’s “permanent residents” and their special rights and privileges.
2. Article 35A was incorporated into the Constitution in 1954 by an order of the then President Rajendra Prasad on the advice of the Jawaharlal Nehru Cabinet. The controversial Constitution (Application to Jammu and Kashmir) Order of 1954 followed the 1952 Delhi Agreement entered into between Nehru and the then Prime Minister of Jammu and Kashmir Sheikh Abdullah, which extended Indian citizenship to the ‘State subjects’ of Jammu and Kashmir.
3. So Article 35A was added to the Constitution as a testimony of the special consideration the Indian government accorded to the ‘permanent residents’ of Jammu and Kashmir.
Recent Developments
1. The threat of abrogation of Article 35A is leading to unprecedented political developments in the Valley. For instance, it is the first time in recent past that all major political parties in Kashmir, including the ruling People’s Democratic Party and the opposition National Conference, independent MLAs and even the Hurriyat have come together on an issue.
2. Attorney General KK Venugopal telling Supreme Court, during a hearing on 35A, that the Centre was in favour of a ‘larger debate’ sent alarm bells ringing through the Valley
3. Recently, a Kashmiri woman called Charu Wali Khan, settled outside the state, challenged the legality of Article 35A of the Indian Constitution that allows J&K to define its “permanent residents”. She claimed in her petition to the Supreme Court that such a law takes her succession rights away and disenfranchises her.
4. In 2014, NGO approached the Supreme Court challenging Article 35A on the grounds that it was illegally added to the Constitution as it was never floated before Parliament.
ANALYSIS

WHAT’S THE CHALLENGE TO IT?
1. Article 14 of the Constitution gives a fundamental right to equality before law. But 35A is heavily loaded in favour of males because even after marriage to women from outside, they will not lose the right of being permanent residents
2. Outsider vs insider: while a woman from outside the state shall became a permanent resident on marrying a male permanent resident of the state, a daughter who is born state subject will lose her permanent resident status on marrying an outsider.
3. It facilitates the free and unrestrained violation of fundamental rights of those workers and settlers like Scheduled Caste and Scheduled Tribe people who have lived there for generations. The Valmikis who were brought to the state during 1957 were given Permanent Resident Certificates on the condition that they and their future generations could stay in the state only if they continued to be safai-karmacharis (scavengers).
4. Children of non-state subjects do not get admission to state colleges.
5. It ruins the status of West Pakistani refugees. Being citizens of India they are not stateless persons, but being non-permanent residents of Jammu and Kashmir, they cannot enjoy the basic rights and privileges as being enjoyed by permanent residents of Jammu and Kashmir.
6. It gives a free hand to the state government and politicians to discriminate between citizens of India, on an unfair basis and give preferential treatment to some by trampling over others, since the non-residents of the state are debarred from buying properties, getting a government job or voting in the local elections.
7. At this juncture, it may be important to recall a landmark judgment delivered on October 2002, by the Jammu and Kashmir High Court, which held that women married to non-permanent residents, will not lose their rights, though children of such women will not enjoy succession rights.
Why does it matter?
1. The parliamentary route of lawmaking was bypassed when the President incorporated Article 35A into the Constitution.
2. Article 368 (i) of the Constitution empowers only Parliament to amend the Constitution. So did the President act outside his jurisdiction? Is Article 35A void because the Nehru government did not place it before Parliament for discussion? A five-judge Bench of the Supreme Court in its March 1961 judgment in Puranlal Lakhanpal vs. The President of India discusses the President’s powers under Article 370 to ‘modify’ the Constitution. Though the court observes that the President may modify an existing provision in the Constitution under Article 370, the judgment is silent as to whether the President can, without the Parliament’s knowledge, introduce a new Article. This question remains open.
3. A writ petition filed by NGO We the Citizens challenges the validity of both Article 35A and Article 370.
4. It argues that four representatives from Kashmir were part of the Constituent Assembly involved in the drafting of the Constitution and the State of Jammu and Kashmir was never accorded any special status in the Constitution.
5. Article 370 was only a ‘temporary provision’ to help bring normality in Jammu and Kashmir and strengthen democracy in that State, it contends. The Constitution-makers did not intend Article 370 to be a tool to bring permanent amendments, like Article 35A, in the Constitution.
6. The petition said Article 35 A is against the “very spirit of oneness of India” as it creates a “class within a class of Indian citizens”. Restricting citizens from other States from getting employment or buying property within Jammu and Kashmir is a violation of fundamental rights under Articles 14, 19 and 21 of the Constitution.
Issues Involved
1. The major political parties of the Kashmir Valley, NC and PDP have remained in support to the preservation and safeguarding of Article 370 and Article 35A.
2. In defense of Article 35-A, the Jammu and Kashmir state Government in November 2015, prepared a report which read, “though Article 368 has been applied to State of Jammu and Kashmir, that would not curtail power of President under Article 370 to amend any provision of Constitution of India in its application to Jammu and Kashmir”.
3. The constitutional validity of Article 35A is, therefore, well established as it protects legislation passed by the J&K legislature relating to benefits to Permanent Residents from challenge on the ground of violation of Fundamental Rights, while extending the chapter on Fundamental Rights of the Indian Constitution to J&K. Thus this provision is in the nature of a proviso to the extension of the chapter on Fundamental Rights in the Indian Constitution to J&K. In fact, the Fundamental Rights were extended to J&K through the 1954 Presidential Order.
4. The ruling party believes that the special status, certain rights and privileges are enjoyed only by the residents of the state which has given rise to alienation and separatist identity to the people of Jammu and Kashmir.
5. Scrapping the Article 35A is seen as an assault on the special status of the Jammu and Kashmir by the state government.
6. Article 35A cannot be challenged on the ground that they affect the fundamental rights of the other Indian Citizens.
7. The rights of the state legislature are not unlimited and can be given only in the case of – Employment, Property, Settlement and Scholarship.
8. Former chief minister Omar Abdullah also stated that this would create a bigger agitation as was witnessed in 2008 over the transfer of land to the Amarnath Shrine Board.
9. Any alteration to Article 35A may leave the government at the Centre with a hot mess in its hands, damaging the vestiges of goodwill that ordinary Kashmiris may still have towards the Union of India.
10. Any attempt to undermine, or dilute, these principles, already enshrined in the Constitution and wrenched after many decades of violence and bloodshed, can only serve to perpetuate the current cycle of unrest. In any case, it won’t act as a deterrent to terrorism in the valley.
Conclusion

Kashmir has been on the boil since last July, after Hizbul Mujahideen leader Burhan Wani was killed by the Indian Army. Since then, hundreds of ordinary people have been injured or killed in clashes with the armed forces and regular Internet shutdown has crippled normal life in the state. Taking a hasty step to deal with Article 35A under such dire circumstances, out of purely jingoistic or ideological concerns, may prove to be the last straw in the Centre’s relationship with the state.

Question

Article 35A undermines the unity of our nation. Critically analyse

What is article 35A. what are the issues involved in it??
September 13, 2017
100 Most Probable Topics + Q&A for IAS Mains 2017
Dear students,

One of the great advantages of having a tech platform which connects daily news and op-eds dynamically to its relevant newstrail is that over the time it helps us understand how a topic has evolved both qualitatively (facets of issues, complexity) and qualitatively (# of newscards, op-eds written and connected).

With that objectivity in hand and UPSC’s changing patterns in mind, we sat together to write down Explainers on some 100+ probable topics for this years’ IAS Mains.

Each explainer has an N4S and a parting question for you to attempt and review. All the blue links that you see here are LIVE hyperlinks where you can go and study. Rest will be up in no time.

Note: A PDF compilation of these 100+ issues is available to the subscribers of our MegaCombo99 subscription. (Click2buy). The PDF is available in the dropboDropboxr/ google drive along with the monthly magazines and prelims daily compilations.

Don’t have time to read links one by one? Get compilation PDF here, now FREE- http://imojo.in/5stnir

Read all the issues? Attempt 100 most important questions for Mains 2017 here- http://imojo.in/39qdux

Economy
Polity and Governance
Social Issues
International Relations
Science and tech
Security
Environment
September 13, 2017
Monetary Policy Committee
Note4Students

Recently the Government amended the RBI Act to hand over the job of monetary policy-making in India to a newly constituted Monetary Policy Committee (MPC). The new MPC is to be a six-member panel that is expected to bring “value and transparency” to rate-setting decisions. It has started to function recently.

Background/ Introduction
1. India’s central bank used to take its monetary policy decisions based on the multiple indicator approach. Its rate decisions were expected to take into account inflation, growth, employment, banking stability and the need for a stable exchange rate.
2. RBI would be subject to hectic lobbying ahead of each policy review and trenchant criticism after it. The Government would clamour for lower rates while consumers bemoaned high inflation. Bank chiefs would want rate cuts, but pensioners would want high rates.
3. The MPC is not new and traces back to 2002 when the Y. V. Reddy Committee recommended for a MPC to decide policy actions. Subsequently, suggestions were made to set up a MPC in 2006 by the Tarapore Committee, in 2007 by the Percy Mistry Committee, in 2009 by the Raghuram Rajan Committeeand then in 2013, both in the report of the Financial Sector Legislative Reforms Commission (FSLRC) and the Urjit R. Patel (URP) Committee.
4. According to the URP Committee, “Heightened public interest and scrutiny of monetary policy decisions and outcomes has propelled a worldwide movement towards a committee based approach to decision making with a view to bringing in greater transparency and accountability in India.”
5. It suggested that RBI abandon the ‘multiple indicator’ approach and make inflation targeting the primary objective of its monetary policy.
6. The erstwhile technical advisory committee (TAC) that earlier advised the RBI on interest rates. The TAC is made up of external academicians and members from within the RBI, including the governor, and it meets ahead of every monetary policy.
7. The TAC has no voting rights, while the MPC have them. TAC is an advisory committee and the RBI can disregard its advice, which governors have done in several instances.The members of the TAC, which was first constituted in 2005, have had tenures of two years.
Newly Created MPC
1. The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a statutory and institutionalised framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth.
2. The Monetary Policy Committee would be entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.
3. A Committee-based approach for determining the Monetary Policy will add lot of value and transparency to monetary policy decisions.
4. The meetings of the Monetary Policy Committee shall be held at least 4 times a year and it shall publish its decisions after each such meeting
Composition
1. Altogether, the MPC will have six members – the RBI Governor (Chairperson), the RBI Deputy Governor in charge of monetary policy, one official nominated by the RBI Board and the remaining three members would represent the Government of India.
2. These Government of India nominees are appointed by the Central Government based on the recommendations of a search cum selection committee consisting of the cabinet secretary (Chairperson), the RBI Governor, the secretary of the Department of Economic Affairs, Ministry of Finance, and three experts in the field of economics or banking as nominated by the central government.
3. The three central government nominees will hold office for a period of four years and will not be eligible for re-appointment. These three central government nominees in MPC are mandated to be persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.
4. RBI Act prohibits appointing any Member of Parliament or Legislature or public servant, or any employee / Board / committee member of RBI or anyone with a conflict of interest with RBI or anybody above the age of 70 to the MPC.
5. The Central government also retains powers to remove any of its nominated members from MPC subject to certain conditions.
Working and Functions of MPC
1. The proceedings of MPC are confidential and the quorum for a meeting shall be four Members, at least one of them shall be the Governor and in his/her absence, the Deputy Governor who is the Member of the MPC.
2. The MPC takes decisions based on majority vote (by those who are present and voting). In case of a tie, the RBI governor will have the second or casting vote. The decision of the Committee would be binding on the RBI.
3. As per the Act, RBI has to organise at least four meetings of the MPC in a year. (More meetings can be held if the RBI Governor is of that opinion)
4. The government may, if it considers necessary, convey its views, in writing, to the MPC from time to time.
5. RBI is mandated to furnish necessary information to the MPC to facilitate their decision making and if any Member of the MPC, at any time, requests the RBI for additional information, including any data, models or analysis, the same have to be provided, not just to that member but to all members.
International Comparisons:
1. With the introduction of the monetary policy committee, the RBI will follow a system similar to the one followed by most global central banks.
2. The US Federal Reserve sets its benchmark fund rate through the Federal Open Market Committee(FOMC). The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations.
3. Bank of England also has a MPCto decide the official interest rate in the United Kingdom . The MPC meets every month to set the interest rate and meets over three days. A representative from the Treasury also sits with the Committee at its meetings. The purpose is to ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the Government’s economic policies.
Conclusion
1. Till now RBI was having complete autonomy over monetary policy rates. But now the same will be decided by MPC, in which RBI as half member including presiding officer. Though to some extent autonomy of RBI reduced, but still RBI remains in charge of monetary policy decisions.
2. Monetary policy of Reserve Bank of India will go under review in October. This is the first time monetary policy review will held under the new regime of a monetary policy committee.
MODEL QUESTIONS

Q. Why a new institution named Monetary Policy Commission was given with the responsibility of monetary policy?

Q. The Monetary Policy is one of the most important decision in a country. The new institution will collectively decide and implement the monetary policy in a better manner. Comment.

References:
September 13, 2017
Abolition of FIPB
Note4Students

Creating employment opportunities is a challenge for every reigning government. Indian has ranked 130th in 2017 Ease of Doing Business index.it is important to take necessary actions to transform India into a business friendly destination. This will attract more FDI and create more job opportunities. So abolition of FIPB deserves deeper analysis.

Introduction

The Foreign Investment Promotion Board (FIPB) was a national agency of Government of India, with the remit to consider and recommend foreign direct investment (FDI) which does not come under the automatic route.

It acted as a single window clearance for proposals on foreign direct investment (FDI) in India. The Foreign Investment Promotion Board (FIPB) was housed in the Department of Economic Affairs, Ministry of Finance.

Recent Developments

The Union Cabinet approved phasing out of the 25-year-old Foreign Investment Promotion Board (FIPB)

Successor mechanism

The Department of Industrial Policy and Promotion (DIPP) under the Commerce ministry will be in charge of its successor mechanism.

This includes the old FIPB portal that has now been placed under the DIPP under a new name – the Foreign Investment Facilitation Portal

Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon under the extant FDI Policy and Foreign Exchange Management Act, shall now be handled by the concerned Ministries/Departments in consultation with the Department of Industrial Policy & Promotion (or the DIPP, in the) Ministry of Commerce, which will also issue the Standard Operating Procedure for processing of applications and decision of the Government under the extant FDI policy.

National Security
1. In cases of applications where there are security concerns, the home ministry’s approval will be required.
Analysis

Reasoning behind the abolition
1. ‘Maximum Governance and Minimum Government The move to phase out the FIPB is aimed at making India a more attractive FDI destination and increasing FDI inflows by providing greater ease of doing business and promoting the ‘Maximum Governance and Minimum Government’ principle.
Diminished Importance
1. FIPB was the epitome of license raj, where powerful bureaucrats decided the fate of a foreign investor willing to pump in precious foreign investment into India.
2. But in today’s more liberalised India, the FIPB’s role had already shrunk considerably, especially after the Narendra Modi government further relaxed FDI norms for many sectors last year.
3. Currently around 91-95% of FDI inflow happens through the automatic route, adding that there are only 11 sectors (including defence and retail) needing government approval.
4. The FIPB has successfully implemented e-filing and online processing of FDI applications.
Concerns And Challenges
1. The Office Memorandum made Department of Industrial Policy & Promotion (DIPP) as the nodal agency for coordinating FDI proposals requiring government approval and entrusted it with the task of preparing and issuing a standard operating procedure (SOP) for processing the FDI applications.
2. it is encouraging to see that SOP has explicitly provided timelines for all ministries/ departments involved at different stages, there still remains scope where these timelines are not strictly binding
3. While the cabinet’s decision is seen as a simplification of the existing procedure to seek clearance on FDI proposals, experts have also raised doubts whether line ministries are equipped to take such decisions on an expedited manner.
Liberising norms
1. Cumbersome rules, not the FIPB, have been responsible for a less than enthusiastic response from foreign investors in some sectors.
2. For instance, global insurers can hold up to 49% ownership in Indian ventures but only if Indians retain management and control over these entities — this is an onerous definition of control that has inhibited deal-making. Despite allowing 100% FDI in food retail, rules prohibit foreign players from using a small fraction of their shelf space for non-food items, affecting investment plans. This, in a sector that can create millions of jobs and boost farm incomes.
3. Archaic land acquisition and labour laws continue to make it difficult for large factories to come up.
4. If the government considers liberalising the norms for foreign investors in the wake of the recent Tata-Docomo dispute, it would go a long way towards creation of a far more stable investor-friendly taxation regime that will bolster investor confidence.
Conclusion
1. FIPB has been handling the task of approving and vetting FDI proposals for more than 25 years, it will be interesting to see how the new authorities fill its shoes under the new regime.
2. While initial glitches within the ministry or while coordinating between different designated authorities are expected, DIPP is expected to assume a pro-active approach and hand-holding them to settle down in the new set-up and deliver the expectations of the business community efficiently.
3. “Abolition of FIPB will propel the inflow of FD”I-comment
4. “India needs to create a business friendly eco system to reduce the unemployment.” Analyse the statement in the light of abolition of FIPB
September 13, 2017
Demonetization: An analysis
Note4Students

Demonetization was a bold step by the union government. It affected every walk of life. Demonetisation should be scrutinized to understand the impact. So understanding various macro-economic parameters pertain to demonetisation would help to realise the state of economy in general and goal achievements of demonetisation in particular.

Introduction

Every policy has a stated goal as well as secondary consequences, some of which are unintended. It is still quite possible that demonetisation will have positive consequences over a longer period—the growth in the direct tax base, the switch in the financial holdings of households from cash to bank deposits, the increased use of digital payments. That is what its supporters are now banking on. The question to be asked is whether the potential long-term benefits will be greater than the short-term costs that the Indian economy had to bear.

Fact sheet
1. The Annual Report of RBI shows that during the year 2016-’17, Rs 41.5 crores worth of fake currency notes in the form of old Rs 500 and Rs 1,000 notes were detected in the banking system.
2. This is well above the Rs 27.4 crores of fake currency detected in these denominations in 2015-’16.
3. The estimate of the total fake currency in the system was Rs 400 crores. It is safe to say that fake currency in Rs 500 and Rs 1,000 denominations was eliminated as those notes can no longer be used anywhere.
4. However, counterfeits of new Rs 500 and Rs 2,000 notes are already being intercepted, which suggests that the elimination of fake currency is not a lasting benefit and perhaps alternative approaches are required to address this problem.
5. 98.96% of the Rs15.44 trillion notes invalidated by demonetisation had been deposited with banks.
6. With limited fiscal and monetary space, any big bang stimulus is unlikely. Inflation is expected to breach 4% mark in January-March 2018. In order to match last fiscal’s growth performance (7.1%), the economy has to grow an average rate of 7.6% in next three-quarters, which presently appears to be difficult.
Analysis

Achievements
1. Increase in tax collection: As a result of demonetization drive, there is a substantial increase in the number of Income Tax Returns (ITRs) filed. The number of Returns filed as on August 5, 2017 registered an increase of 24.7% compared to a growth rate of 9.9% in the previous year.
2. Curb on Black money: Transactions of more than 3 lakh registered companies are under the radar of suspicion while one lakh companies were struck off the list. The government has already identified more than 37000 shell companies which were engaged in hiding black money and hawala transactions. Around 163 companies which were listed on the exchange platforms were suspended from trading, pending submission of proof documents.
3. Impact on terrorism and naxalism
  i. As a result of demonetization of SBNs, terrorist and naxalite financing stopped almost entirely.
  ii. No high quality FICN was found / seized by intelligence operations, including at the Indo-Bangladesh Border since demonetization.
  iii.Further, it also adversely affected the hawala operators and dabba trading venues.
4. Promoted Digital Payment: In 2015-16, the value of transactions for debit and credit cards was ₹1.6 lakh crore and ₹2.4 lakh crore, respectively; in 2016-17, it was ₹3.3 lakh crore for each. Also, in 2016, the National Electronic Funds Transfer handled 160 crore transactions valued at ₹120 lakh crore, up from around 130 crore transactions worth ₹83 lakh crore in the previous year. Note that the demonetisation impact would only have been registered in the final four to five of 2016-17. The gains in 2017-18 will be even more.
Drawbacks

FIGURE: growth slow down

Black money
1. . It was thought that if cash was squeezed out, the black economy would be eliminated.
2. But cash is only one component of black wealth: about 1% of it.
3. It has now been confirmed that 98.8% of demonetised currency has come back to the Reserve Bank of India.
4. Further, of the ₹16,000 crore that is still out, most of it is accounted for. In brief, not even 0.01% of black money has been extinguished.
5. Black money is a result of black income generation. This is produced by various means which are not affected by the one-shot squeezing out of cash. Any black cash squeezed out by demonetisation would then quickly get regenerated. So, there is little impact of demonetisation on the black economy, on either wealth or incomes
GDP growth
1. GDP growth in the first quarter of 2017-18, at 5.7 per cent, compared with 7.9% in the same quarter a year ago, was way lower than consensus estimates by Reuters (6.6%) and Bloomberg (6.5%). Both supply and demand were impacted due to a combination of demonetisation
2. The big failure of demonetisation is that it was carried out without preparation and caused big losses to the unorganised sector. This has not been factored into the recent data on growth rate, so the loss to the economy would be in lakhs of crores of rupees. Farmers, traders and the youth are all agitating.
Agriculture
1. Another factor that did not support growth as anticipated is agriculture, particularly in view of the record food grain production in 2016-17.
2. Agricultural growth declined to 2.3% from 5.2% in January-March 2017 and 2.5% in April-June 2016. In view of record foodgrain production, it appears the shortfall is mainly due to the underperformance of allied sectors, namely dairy, fisheries etc.
3. The main negative economic consequence of demonetisation has been the disruption of unorganized supply chains that are dependent on cash transactions; it is still not clear how smoothly they were being rebuilt as the economy was remonetized.
4. RBI annual report shows a rather dramatic spike in the number of suspicious transaction reports filed by banks, financial institutions and intermediaries in 2016-17—it was up from 61,361 in the previous year to a staggering 361,214.
Job Loss

Demonetization decision may have resulted in the loss of roughly 1.5 million jobs, according to survey data put out by the Centre for Monitoring Indian Economy (CMIE). CMIE’s data is based on the result of consecutive waves of household surveys performed from January 2016 to April 2017 .

Monetary policy
1. The RBI formally became an inflation targeting central bank in 2016 but the liquidity surge in the banking system that came about in the aftermath of demonetisation complicated the conduct of monetary policy.
2. In addition to the conventional reverse repo auctions (an exercise to remove excess cash from the banking system), the RBI introduced an array of instruments to absorb demonetisation induced liquidity from banks.
3. Chief among them was the hike in incremental Cash Reserve Ratio – the percentage of cash deposits that banks must keep with the RBI– at 100% on deposits accrued between September 16 and November 11, and the increase in ceiling on the issuance of securities under Market Stabilisation Bonds.
4. While the increase in incremental Cash Reserve Ratio dented banks’ earnings as banks do not earn interest on the cash reserve parked with the RBI,
5. The issuance of Market Stabilisation Bonds marked a departure from their traditional role. These bonds are generally issued to mop up the excess supply of rupees arising from the RBI’s intervention to purchase dollars.
6. While the increase in these bonds represent an increase in quasi-fiscal cost (the interest payments are made by the government and this shows up as fiscal costs instead of appearing as reduced RBI profits) to the government, the repeated auctioning of such bonds (as the RBI report acknowledges) tends to push up the yields which may be contrary to the stance of monetary policy, which may be accommodative or at best neutral in the present low growth and investment regime.
7. The mopping up of liquidity eroded the RBI’s earnings.
8. Additionally, its expenditure on printing of currency doubled from last year. Overall, while its income for the year decreased by 23.56%, its expenditure increased by 107.8% resulting in a sharp decline in the RBI’s surplus
Conclusion
1. Available data points to a lingering impact of demonetisation.
2. All economic data points are from the organised/corporate sector. The unorganised/informal sector was badly impacted by demonetisation and the present data set has not been able to capture its impact. The annual survey of industries will be able to capture the impact of demonetisation on the unorganised/informal sector, but this will come with a lag. The organised/corporate sector depends on the unorganised/informal sector for provision of intermediate goods and services, which are used in final production. The Central Statistical Office is using only the database of the Ministry of Corporate Affairs. The true picture may emerge only after the annual surveys of industries results are available.
3. Tax reforms and effective monitoring of suspicious transactions are a better alternative for addressing the issues that the policy-makers sought to fix through demonetisation.
Q.) Demonetisation succeeded in achieving its stated objectives. Critically comment
September 13, 2017
UDAN scheme : Opportunities and Challenges
Note4Student:

UDAN (‘Ude Desh ka Aam Naagrik’) is a first-of-its-kind scheme globally to stimulate regional connectivity through a market-based mechanism. It is also linked to UPSC mains Syllabus (Infrastructure). Every year UPSC is asking 1-2 questions on infrastructure related issues. Therefore, this scheme is important for the exam.

Need for schemes like Udan:
1. There are as many as 398 “unserved” airports which have no commercial flights and 18 “under-served” airports host less than seven flights per week.
2. Besides, a major reason for the poor regional air connectivity in India is that airlines do not find it lucrative to operate from small cities. The government has tried to address this concern by an adroit combination of subsidies and fare caps.
Key features of the UDAN scheme

Pros of the scheme
1. It could lead to development of smaller cities as faster air connectivity will attract infrastructure & investment
2. It could ease passenger pressure from Railways & Roads.
3. It may provide major boost to Tourism industry in India
4. Smaller Airlines could successfully compete with bigger airlines.
5. 5.Moreover, of the 35 crore middle class citizens, only 8 cr people fly. Capping of fares, enhancing connectivity will lead to an increase in the number of citizens who can fly and can take some burden off railways
6. It will give impetus to India’s ambition of becoming third largest aviation market by 2020
Challenges/issues in implementing this scheme
1. Administration of VGF would require scrutiny of airlines balance sheet which would be a messy process. It has the potential of becoming another hotbed for controversy
2. Vgf would result in additional subsidy burden at a time when economic survey argued in favour of removing subsidies for the rich
3. Subsidy based regime would be impacted by the vagaries of price changes in oil prices
4. Capping of fares (1200 for half hour, 2500 for an hour) is criticized as airlines argue that it should be a fn of demand/supply
5. Significantly, the success of RCS depends on the state lowering tax rates and providing security at airports. Each state has to agree to this – and it may not be as simple as the centre has envisioned it to be.
6. Airports in many Tier 2 and Tier 3 cities do not have big runways, so they can’t take regular aircraft. That means airlines will need to induct smaller aircraft for short take-offs and landings. Such aircraft needs specialised crew. India produces 200 to 300 pilots every year, and it’s safe to say that training specialised crew will take time.
7. There are 476 airstrips in the country out of which 90 are in usable state, among which 76 are operational currently. It can be challenging to develop so many ports in the span of 10 years.
Conclusion:

Analysts say even as the intent of the policy is good and the efforts laudable, its success will depend on proper implementation and traffic demand/load factors. It’ll be a while before the results are visible, and its success can be measured. Needless to say, if the scheme is successful, it will have a positive impact on travel- and hospitality-related sectors. Domestic air-travel demand could get a fillip, which will be positive for the aviation sector from a long-term perspective. Developing regional routes is expected to eventually feed into major routes, and that augurs well for the sector.

Questions:

Q.) Discuss the main features and significance of the Udan scheme.

Q.) It is commented that success of UDAN scheme will depend on proper implementation and traffic demand/load factors.
September 13, 2017
Should Agriculture be taxed
Note4Students

As the focus of the Government is on black money, looking at agriculture for enhanced tax collection appears a logical corollary. This issue is definitely politically sensitive with several vested interests involved. The Government has been bold enough to operate the National Agricultural Market which breaks the traditional stronghold. The next step would be to start reforms in the direction of taxes so as to bring about greater accountability in the system while plugging the lacuna.

Introduction
1. The recent discussion on taxing farm income is nothing new.
2. This kind of thinking was doing the rounds even in British India, when as early as 1925, a committee was set up to assess the feasibility of taxing agriculture income.
3. The most famous attempt in post-Independence India was the K.N. Raj committee report of 1972, which also examined feasibility and implementation issues.
4. The Kelkar task force report of 2002 estimated that 95% of the farmers were below the tax threshold.
5. The underlying argument in the current discussion is to bring more people under the tax net to expand the tax base and also curb tax evasion because income from other sources is usually shown as agricultural income and thus evasion is easy.
Fact and figure

Fig: growth of agriculture
1. The major problem is identifying the individuals given that many of them own small pieces of land or are landless labourers
2. 42 million-odd people in the organised sector around 17 million are salaried and pay taxes.
3. In the unorganised sector which has 56 million workers, another 18 million pay taxes. Hence, the strike rate for a population of 100 million workers is just 35 per cent. In the case of agriculture with 120 million potential assessees, it will be hard to identify them.
4. During the period 1991 to 2016, the share of agriculture decreased from 32% to 15%.
5. Compared with this, the workforce dependence on agriculture is still very high, at 49.7%
6. During the period of economic reforms, the gross capital formation of agriculture, which is the capacity to produce and an increase in productivity, has gone down tremendously
Key issues affecting agricultural productivity include
1. The decreasing sizes of agricultural land holdings.
2. Continued dependence on the monsoon.
3. Inadequate access to irrigation.
4. Imbalanced use of soil nutrients resulting in loss of fertility of soil.
5. Uneven access to modern technology indifferent parts of the country.
6. Lack of access to formal agricultural credit, limited procurement of food grains by government agencies.
7. Failure to provide remunerative prices to farmers.
Analysis

It should be taxed
1. 80 years ago Dr. B.R. Ambedkar said he favoured taxing agricultural income.He was of the view that tax should be levied on tax-paying capacity or income of the taxpayer, and that the rich must be taxed more and the poor less. Ambedkar criticised the land revenue system of the British but held the view that income from agriculture must attract tax.
2. Verified income tax returns provide credibility to the farmer which can be used to obtain adequate loans from formal credit channels.
3. Banks get easier access to reliable, valid and quantifiable data upon which the credit can be advanced without fear of default on loan.
4. Adequate formal documentation would help the Government to identify the difference between small and big farmers by which the targeted subsidy schemes in future can be rolled out to benefit the needy.
5. We can develop our GDP only when our agriculture income is taxed. We do not even have a sense of the extent of agricultural income right now
6. No taxes on Agriculture encourages laundering of non-agricultural income as agricultural income. e.g In 2014-15, a company made profits of Rs 215 crores, but claiming the agricultural income exemption, it paid no tax.
7. Have a slab of taxes like we have in other sectors and let each pay according to his income from agriculture.
8. The farmer with a small landholding of less than 2-3 hectares should be exempted from income tax.
9. If the small farmer is a reality, so also are the big agricultural farmers with their luxury cars and rich industrialists who own farmlands.
10. Here, if the government takes a decision to levy tax on their income earned from agriculture, the government revenue will not only rise but there will be an increase in the GDP ratio of agriculture.
Taxing agricultural income has not found favour mainly because of two factors.
1. A majority of farmers in India — nearly 60% — are small farmers, with small holdings and a small marketable surplus. Their incomes are erratic.
2. There is no climate insurance for them when the rains fail or in the event of floods. Droughts leave them reeling just as the fury of floods.
3. Very often, when we talk of farmers, we assume they are all men — 40% of these farmers are women who do not have patta (title deed to the land they till) and do not have Kisan Credit Cards either.
4. Given the technological and environmental constraints, the performance of the agriculture sector has not been encouraging, and consequently, the welfare of the population living in the countryside has not visibly improved.
5. The average per month income of a farm household in India in 2012-13 as per the National Sample Survey Office was just ₹6,491.
6. The income-expenditure gap for a majority of farmers is in the negative.
7. More than one-third of the farmers have expressed their choice to leave the non-remunerative occupation.
8. The agrarian distress has been deepening, and there has been a rise in farmer suicides. The agrarian sector is in deep crisis. Instead of finding a viable policy to solve the crisis, floating the idea of taxing farming income is a great disservice to the sector.
Concerns
1. The other issue is what can be taxed? Should it be value of output or the net income earned by farmers?
2. While the value of output sold can be gauged and tracked to the extent that it enters the market, this is not net income as there are expenses incurred in growing crops which include seeds, fertilisers, water, and so on. Also for those owning equipment a depreciation value has to be imputed.
3. This means farmers have to be treated on a par with companies or self-employed professionals and not income tax assessees. How can one draw up such a profit and loss account?
4. There is a lot of produce that does not enter the market and the marketable surplus can range from anywhere between 65 to 100 per cent depending on whether it is a food crop or a commercial product such as cotton and jute.
5. Hence, a large part of the value will be hard to fathom on this score. Also there is a lot of under-reporting given the state of logistics in the country.
Way Forward
1. A bold and dynamic approach is needed in India whereby all the political parties and all the Chief Ministers of India organize a conclave to debate and discuss the issues concerning taxation of agricultural income in India.
2. The discussion should be held primarily with reference to the national outlook and not personal gain or otherwise to a political party.
3. If this type of debate or discussion takes place in the country, then surely the policy makers may be able to come to the conclusion that after decades of exemption of agricultural income now is the time that agricultural income be put to tax like any other normal income of the tax payer.
4. A way out is to tax the product which is presently also being done in some States through a mandi tax or something else.
5. This tax will be finally passed on to the consumer who will then have to pay a higher price for the product.
6. Such a move will ensure that the tax does not come in the way of the farmer’s income. Strictly speaking this would be an indirect tax on commodities, like an excise or sales tax, which will get subsumed under GST. The income of the farmer will still be outside the ambit of income tax.
7. The procurement policy plus pricing policy and the public distribution system have to be factored in before there is any talk of bringing the sector in the income tax net.
8. Need to devise a method that takes into account agricultural income beyond a certain threshold
9. Don’t give subsidies after a certain threshold.
10. We can devise methods to tax agricultural income.
11. have differential subsidies. Remove subsidies in the case of irrigated farming as opposed to rain-fed farming. A majority of the farmers are dependent on monsoons.
September 13, 2017
Merger of Banks: Need & Challenges
Note4Students:

The talk of bank mergers is thicker in the air now, than never before. Government has started with merger of SBI and its subsidiaries. This merger has initiated a debate with some economist calling it a landmark decision while others believe that it will make the financial system more risky.

Context:

Recently The boards of State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT), the unlisted State Bank of Hyderabad (SBH), State Bank of Patiala (SBP) and Bharatiya Mahila Bank approved the scheme of merger with State Bank of India.

Background
1. The various committees appointed by the Government of India have advocated consolidation They argue that we need to have three to four large nationalized banks in order to improve the operational efficiency and distribution efficiency. The Narsimhan committee ii has specifically emphasized the need to have Indian Banks which are comparable in size with global leading banks.. The Narsimhan committee proposed a three-tier banking structure in India with around 3-4 large banks to take a stand in global scenario,8-10 banks to provide national coverage and rest to take care of local coverage.
2. Most of the mergers in the pre-reform period have been forced ones. The post-reform era has witnessed both forced and voluntary mergers. The forced mergers have been caused by the financial ill health of the acquired banks. Banks witnessing erosion in net worth, huge NPAs and decline in capital adequacy ratio have been forced by the regulatory authority to undergo merger. Oriental Bank of Commerce’s acquisition of Global Trust Bank is an example of forced merger. Voluntary mergers have expansion, diversification and growth as the main motives. HDFC’s acquisition of Times Bank and ICICI’s acquisition of Madura Bank are a few examples of voluntary mergers. India has also witnessed cross- border acquisitions in the recent past. SBI’s acquisition of a Mauritian bank is one such example.
What is bank consolidation?
1. Bank consolidation occurs when two or more banks become one bank. Bank consolidation can lead to expansion for the newly merged institution. Banks consolidate for multiple reasons, including to mitigate competition, gain capital power both domestically and internationally, to compete with larger banking institutions or to expand the services that the newly merged bank can provide both internally and geographically by decreasing overall operating costs.
Why do we need Consolidation of Banks?
1. Economies of scale: Assocham Survey has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the GDP unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of GDP.
2. Indian Banks are too small: Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the ASSOCHAM Chief said, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital – a core measure of a bank’s financial strength that consists largely of shareholders’ capital.
3. Similarly, in terms of assets, India’s largest bank, SBI is now the world’s 70th largest bank. On the other hand, ICICI Bank Ltd, the largest private sector lender has attained the 148th position. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets.
4. Many experts in Banking field feels that hampered by the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilisation, credit disbursal, investment and rendering of financial services. The balance sheets of top 10 Indian banks suggest the greater scope of consolidation to reap the benefits of large sized globally competitive Indian banks
5. Merger will increase Capital efficiency: Consolidation will also increase capital efficiency. Merged entity will have more leg room to raise capital.
6. Would decrease NPA: At a time when NPAs are high, and banks are putting more effort in recovery, the ability to recover by smaller number of banks will be higher though a individual bank’s exposure may go up. This is because there are smaller number of voices … in the joint lenders’ forum today there are too many voices and each lender has a differential right with the borrower and they often not agree to a common recovery programme. With consolidation the recovery will be far more focused. Thus consolidation could decrease NPA in India.
Advantages of merger of SBI with associate banks
1. SBI will have global presence among top 50 Banks, bringing confidence, investment and greater lending.
2. SBI can become one of the anchor banks to finance large infrastructure projects like dedicated freight corridor, solar energy, Sagarmala etc.
3. It will increase networking of SBI all over India, thus better services of SBI compared to its associate branches will be able to reach remote locations.
4. It will reduce duplication as SBI and its associates target the same clients with similar products.
5. It will consolidate resources and infrastructure, reducing the cost on operations, human resource and technological solutions, overlapping bank branches, reduce inter-bank transaction cost etc.
Disadvantages of merger
1. Presently these banks have huge NPAs thus merger should be planned after sufficient capital is injected.
2. Banking competition may be affected, as SBI is likely to be five times larger than its nearest competitor.
3. RBI has declared SBI as Domestic Systemically Important Bank (D-SIBs) and its failure can shock other parts of financial system.
4. Past example of large banks and their failure with financial crisis in Japan, USA, etc.
5. Workers resistance from associations like AIBEA calling for strikes
6. India has poor financial inclusion, thus needs variety of banks and differentiated services.
Suggestions
1. The govt should not rush through the process – all stakeholders must be involved in the process
2. In the event of further divestment, the govt. share shall not fall below 51% in any case
3. Acquiring bank shall not dominate the smaller ones- good practices of both should be combined; conscious and organized efforts to synthesize the differences must be made.
Conclusion

Bank consolidation is a tricky issue. While it is said that the long-term benefits of consolidation outweigh the short-term concerns, it must not be made a general policy. It is only to be done with right banks for right purpose with proper safeguards.

(Q) What do You Understand by Bank consolidation? Do Indian Banking sector need banking consolidation? Highlight Pros and cons.

(Q) Examine various implications of proposed merger of the State Bank of India with its five associate banks and the Bharatiya Mahila Bank.
September 13, 2017
Do India require High speed rail
Note4Students:

High speed rail is one of the most ambitious project of the Modi Government. It is also related to Infrastructure topic in the GS paper 3

Context

The government of India recently decided to build a high-speed rail (HSR) corridor between Mumbai and Ahmadabad at a cost of Rs 97,636 crore with Japanese financial and technical assistance.

What do we understand by High Speed Rail?

High-speed rail is a type of rail transport that operates significantly faster than traditional rail traffic, using an integrated system of specialized rolling stock and dedicated tracks.

India has one of the Largest rail Networks in the world, but as of now it does not consist of any line classed as (HSR), which allows an operational speed of 200 km/h or more. The current Fastest Train in India is the Gatimaan Express that runs with a top speed of 160 km/h, with average speed of above 100 km/hr between Delhi and Agra.

The first Proposed High speed Train in India would run some 500 kilometers (310 miles) between India’s financial capital Mumbai and the western city of Ahmadabad, at a top speed of 320 km/h. Under the Japanese proposal, construction is expected to begin in 2017 and be completed in 2023. It would cost about 980 billion (US$15 billion) and be financed by Low interest loan from Japan.

Recently Government has introduced Tejas Express which is India’s first semi-high speed full AC train fleet introduced by Indian Railways, featuring newer modern on-board facilities.

Points in Favour of High speed rail Corridor
1. Cheap: The negotiated terms — the rate of interest of 0.1 per cent per annum and tenure of 50 years with 15 years grace — is the best till now for any project financed through a bilateral/ multilateral agency in India.
2. Speed: High speed is one of the biggest reasons for the proposal of this idea when it was first initiated in India. Major cities connecting with towns of economic growth face the problem of fast transportation. This would save time and boost businesses amongst the connected cities. Reduction in commuting time is greatly required in Mumbai and other metro cities where a lot of time is consumed in the process.
3. Promote Make in India: Second, the assistance programme involves transfer of technology and a Make in India component, which will have long-term benefits for Indian manufacturing.
4. Stronger and eco-friendly: Not only these High speed trains are stronger enough to carry heavier weight but are also eco-friendly as they do not require deforestations to set tracks. It is a modern and technologically advanced means of transportation which can be a step towards growth and development in India.
5. Gestation period is long: Fifthly The bullet train between Mumbai and Ahmedabad will cost Rs 97,636 crore and will be built over seven years. Hence, the entire Rs 98,000 crore (approximately) will not be spent in one year.
6. Will have multiplier effect: Sixthly A growing economy like India needs investment in infrastructure and railways, which has a multiplier effect. The Indian Railways is not constrained by demand but by capacity, and any substantial investment in railways will enable economic growth.
7. Will enhance transport capacity: Seventhly The HSR will enhance transport capacity by four to five times of the normal capacity and facilitate the movement of a large number of people. Train passenger volume between Wuhan and Guangzhou in China rose by 40 per cent after the construction of the HSR. Similarly, passenger volume between Beijing-Tianjin increased by 86 per cent within one year of the operation of the HSR. The high cost of the project is offset by much higher utilisation rates of the network and rolling stock per km than conventional rail.
8. Highly Safe: Eighthly Since the HSR system is highly safe, they reduce external costs (accidents, air/ noise pollution, impact on climate, etc). There has been no casualty due to accidents on Japanese high-speed trains since they started in 1964 .
Challenges /Criticisms

The project looks ambitious but challenges are many
1. Land acquisition: Bullet trains require seamless straight tracks on a flat terrain. Though France managed it in the existing tracks itself, but if new lands needs to be acquired, it can come only at an expensive compensation in Mumbai-Ahmedabad industrial cluster. It will also demand huge political will.
2. Operation& maintenance: Considering the existing scenario of the quality of O&M in Indian railways, the maintenance of this new elephant will pose many challenges even if it is privatized. Fencing all along the track and over bridges at all the line crossings will cost too dearer. The power demand will be more too. It will require the infrastructure of existing railway stations from where bullet train will pass to be upgraded as per the specifications which again will cost enormously.
3. Utility: Indian Railways is the lifeline of a common man. Who is going to utilize this service which is meant to connect mega cities? People who have means prefer swift air services to reach megacities. Common man will find it expensive. In the era of multimodal integrated transportation, isn’t it wise to better utilize the existing infrastructure more wisely? Invest to improve all existing tracks to make them sustain 160+ speeds. An airport even 20-25 kms away from Common Business District but well connected to it by a dedicated link is still quite time efficient. Best example being Shanghai airport at a distance of 30km or 30 minutes from city centre. Instead we must focus on low cost air services at even class III level cities for decentralized development. Major part of the city population are middle and lower income household, who demand more capacity rather than ultra high speed.
4. Cost-Benefit: The bullet trains in china run in losses. China being an infrastructure driven economy could sustain it. We need to analyze can we bear such a loss. We need huge investment in infrastructure in coming 2 decades. With limited resources we must ensure that cost benefit ratio is most efficient. A person earning 1000 rs a day cannot afford saving a day by spending 2000 on regular basis. And for emergencies Airways offer a good choice
Conclusion:

Bullet train has sets of pros and cons under India’s present situations and they need to be properly handled so that it brings prosperity and development in the country and not debacles. Every factor must be considered wisely and safeguarding of people’s living should not be compromised. There are risks in this project but without risks nothing big can be acquired

(Q) What do we understand by High speed rail? Does India need high speed rail? Give Pros and cons.

(Q) The government of India recently decided to build a high-speed rail (HSR) corridor between Mumbai and Ahmedabad at a cost of Rs 97,636 crore with Japanese financial and technical assistance. Does India need projects such as this at such a high cost? Comment.

Source:

http://indianexpress.com/article/opinion/columns/mumbai-ahmedabad-high-speed-rail-india-2773376/

http://www.bbc.com/news/world-asia-india-35099426
September 13, 2017
All about Cashless Economy
Note4Students:

Cashless Economy has been in news frequently since Government has taken number of initiatives in last few years to promote cashless transaction. This makes it a probable topic for mains 2017

Introduction
1. India continues to be driven by the use of cash; less than 5% of all payments happen electronically however the finance minister, in 2016 budget speech, talked about the idea of making India a cashless society, with the aim of curbing the flow of black money.
2. Even the RBI has also recently unveiled unveiled a document — “Payments and Settlement Systems in India: Vision 2018” — setting out a plan to encourage electronic payments and to enable India to move towards a cashless society or economy in the medium and long term.
What is a cashless economy and where does India stand?
1. A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.
2. India uses too much cash for transactions. The ratio of cash to gross domestic product is one of the highest in the world—12.42% in 2014, compared with 9.47% in China or 4% in Brazil.
3. Less than 5% of all payments happen electronically
4. The number of currency notes in circulation is also far higher than in other large economies. India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US.
5. Some studies show that cash dominates even in malls, which are visited by people who are likely to have credit cards, so it is no surprise that cash dominates in other markets as well.
source

Benefits of Cashless economy
1. Reduced instances of tax avoidance because it is financial institutions based economy where transaction trails are left.
2. It will curb generation of black money
3. Will reduce real estate prices because of curbs on black money as most of black money is invested in Real estate prices which inflates the prices of Real estate markets
4. In Financial year 2015, RBI spent Rs 27 billion on just the activity of currency issuance and management. This could be avoided if we become cashless society.
5. It will pave way for universal availability of banking services to all as no physical infrastructure is needed other than digital.
6. There will be greater efficiency in welfare programmes as money is wired directly into the accounts of recipients. Thus once money is transferred directly into a beneficiary’s bank account, the entire process becomes transparent. Payments can be easily traced and collected, and corruption will automatically drop, so people will no longer have to pay to collect what is rightfully theirs.
7. There will be efficiency gains as transaction costs across the economy should also come down.
8. 1 in 7 notes is supposed to be fake, which has a huge negative impact on economy, by going cashless, that can be avoided.
9. Hygiene – Soiled, tobacco stained notes full of germs are a norm in India. There are many such incidents in our life where we knowingly or unknowingly give and take germs in the form of rupee notes. This could be avoided if we move towards Cashless economy.
10. In a cashless economy there will be no problem of soiled notes or counterfeit currency
11. Reduced costs of operating ATMs.
12. Speed and satisfaction of operations for customers, no delays and queues, no interactions with bank staff required.
13. A Moody’s report pegged the impact of electronic transactions to 0.8% increase in GDP for emerging markets and 0.3% increase for developed markets because of increased velocity of money
14. An increased use of credit cards instead of cash would primarily enable a more detailed record of all the transactions which take place in the society, allowing more transparency in business operations and money transfers.
This will eventually have the following chain effect:
1. Improvement in credit access and financial inclusion, which will benefit the growth of SMEs in the medium/long run.
2. Reduce tax avoidance and money laundering thanks to the higher traceability of all the transactions.
3. The increased use of credit cards will definitely reduce the amount of cash that people will carry and as a consequence, reduce the risk and the cost associated with that.
Challenges in making India a cashless economy
1. Availability of internet connection and financial literacy.
2. Though bank accounts have been opened through Jan Dhan Yojana, most of them are lying un operational. Unless people start operating bank accounts cashless economy is not possible.
3. There is also vested interest in not moving towards cashless economy.
4. India is dominated by small retailers. They don’t have enough resources to invest in electronic payment infrastructure.
5. The perception of consumers also sometimes acts a barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. It is universally believed that having cash helps you negotiate better.
6. Most card and cash users fear that they will be charged more if they use cards. Further, non-users of credit cards are not aware of the benefits of credit cards.
7. Indian banks are making it difficult for digital wallets issued by private sector companies to be used on the respective bank websites. It could be restrictions on using bank accounts to refill digital wallets or a lack of access to payment gateways. Regulators will have to take a tough stand against such rent-seeking behaviour by the banks.
Steps taken by RBI and Government to discourage use of cash
1. Licensing of Payment banks
2. Government is also promoting mobile wallets.Mobile wallet allows users to instantly send money, pay bills, recharge mobiles, book movie tickets, send physical and e-gifts both online and offline. Recently, the RBI had issued certain guidelines that allow the users to increase their limit to Rs 1,00,000 based on a certain KYC verification
3. Promotion of e-commerce by liberalizing the FDI norms for this sector.
4. Government has also launched UPI which will make Electronic transaction much simpler and faster.
5. Government has also withdrawn surcharge, service charge on cards and digital payments
6. Launch of BHIM APP
7. A discount of 0.75 per cent will be offered on purchase of petrol and diesel through either credit/debit cards, e-wallets and mobile wallets.
8. Credit/debit card transactions up to Rs 2,000 will be exempt from service tax.
9. Online booking of railway tickets will get Rs 10-lakh accident insurance.
10. 1 lakh villages with population less than 10,000 will get 2 PoS machines (swipe machines) each, free of cost supported through financial inclusion fund.
11. Demonetization (Will be dealt in a separate article)
What else needs to be done?
1. Open Bank accounts and ensure they are operationalized.
2. Abolishment of government fees on credit card transactions; reduction of interchange fee on card transactions; increase in taxes on ATM withdrawals.
3. Tax rebates for consumers and for merchants who adopt electronic payments.
4. Making Electronic payment infrastructure completely safe and secure so that incidents of Cyber crimes could be minimized and people develop faith in electronic payment system.
5. Create a culture of saving and faith in financial system among the rural poor.
6. The Reserve Bank of India too will have to come to terms with a few issues, from figuring out what digital payments across borders means for its capital controls to how the new modes of payment affect key monetary variables such as the velocity of money.
7. RBI will also have to shed some of its conservatism, part of which is because it has often seen itself as the protector of banking interests rather than overall financial development.
8. The regulators also need to keep a sharp eye on any potential restrictive practices that banks may indulge in to maintain their current dominance over the lucrative payments business.
Though it will take time for moving towards a complete cashless economy, efforts should be made to convert urban areas as cashless areas. As 70% of India’s GDP comes from urban areas if government can convert that into cashless it will be a huge gain. Therefore different trajectories need to be planned for migration to cashless for those having bank account and for those not having.

Source: http://www.dailymail.co.uk/indiahome/indianews/article-3300738/Why-India-banking-cashless-economy.html

http://www.business-standard.com/article/economy-policy/demonetisation-steps-taken-by-govt-to-promote-cashless-transactions-116112300967_1.html

http://www.livemint.com/Opinion/UPu9N5gINQpmk0j1QpkA9K/Moving-to-a-cashless-economy.html

Questions:

Q.1) What hurdles exist in making India a cashless economy? Discuss benefits of becoming a cashless economy and suggest how government can speed of this transformation.

Q.2) What challenges does government face in rural areas in its efforts towards a cashless economy? How these challenges could be overcome?
September 13, 2017

More posts