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Subject: Economics

  • Indian Government Bonds in JP Morgan index: how much funds could flow into India?   

    Why in the news?

    JP Morgan is including Indian Government Bonds in its emerging markets bond indices starting June 28. This move is expected to attract significant foreign investment, boosting India’s bond market and economic stability.

    What would be India’s weight in the index?

    • India is poised to achieve a maximum weighting of 10% in the GBI-EM Global Diversified Index. This increased allocation is anticipated to attract greater investment from global investors into Indian debt, with analysts projecting monthly inflows of $2-3 billion.

    Benefits of Higher Inflows from the Inclusion of Indian Government Bonds in JP Morgan’s Emerging Markets Bond Indices

    • Increase in Foreign Exchange Reserves: The inflows from foreign investments will directly boost India’s foreign exchange reserves, providing a stronger buffer against external economic shocks.
    • Strengthening the Rupee: The surge in foreign investment will enhance demand for the rupee, leading to its appreciation and contributing to a more stable and robust currency.
    • Enhanced External Financial Management: With increased foreign exchange reserves, India will have greater flexibility and resilience in managing its external financial obligations and mitigating balance of payment issues.
    • Reduction in Borrowing Costs: Higher reserves and a stronger rupee can lead to improved credit ratings and reduced risk premiums, lowering borrowing costs for the government and corporates.
    • Promotion of Economic Confidence: The inflows signify international investor confidence in India’s economic prospects, boosting overall economic sentiment and encouraging further investments.

    What about the impact on inflation as RBI mops up the dollars and releases an equivalent amount in rupees?

    • Liquidity Injection: When the RBI mops up dollars from the market, it releases an equivalent amount of rupees into the financial system. This injection of liquidity can potentially increase the supply of money circulating in the economy.
    • Demand-Pull Inflation: Increased liquidity can stimulate demand for goods and services, potentially leading to demand-pull inflation if the production capacity of the economy does not keep pace with the increased demand.
    • Asset Price Inflation: The influx of liquidity can also inflate asset prices such as real estate and stocks, impacting affordability and potentially creating asset price inflation.
    • Exchange Rate Stability: On the flip side, mopping up dollars can help stabilize the exchange rate by reducing downward pressure on the rupee due to excessive inflows.
    • RBI’s Policy Response: The RBI has various monetary policy tools, such as open market operations, repo rates, and reserve requirements, to manage liquidity and inflationary pressures arising from such inflows. It may use these tools to absorb excess liquidity and stabilize inflation.

    Way forward: 

    • Prudent Monetary Policy Management: The RBI should continue to employ effective monetary policy measures, such as open market operations and repo rate adjustments, to carefully manage liquidity and inflationary pressures stemming from increased foreign inflows.
    • Enhanced Economic Diversification: India should use the influx of foreign investment to diversify its economy further, focusing on infrastructure development, technological advancements, and sustainable growth initiatives to bolster long-term economic resilience and stability.

  • Why has SEBI accused Hindenburg of breaking Indian law?  

    Why in the news? 

    Hindenburg Research received a SEBI show cause notice for short-selling Adani Enterprises Ltd stock before and after their report accusing Adani of fraud.

    What is the Hindenburg Report on Adani?

    • On January 24, 2023, the New York-based Hindenburg Research accused the Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades.”
    • The report led to a significant drop in the shares of Adani companies and the calling off of Adani Enterprises Ltd’s Rs 20,000-crore follow-on Public Offer (FPO). Adani Group denied all allegations, claiming the report was a “calculated attack on India.”

    What is SEBI’s show cause notice about?

    • Hindenburg received a show-cause notice from SEBI on June 27, 2024.SEBI alleged that Hindenburg colluded with certain entities to use non-public information to short-sell Adani Enterprises Ltd (AEL) stock before and after the release of its report, making profits.
    • The notice named Hindenburg, its founder Nathan Anderson, investor Mark Kingdon, and related entities, accusing them of sharing the report draft and building short positions in AEL futures.

    How has Hindenburg responded to the show cause notice?

    • Hindenburg dismissed the notice as an attempt to silence those exposing corruption. They stated their investment stance was legal and disclosed, and criticized SEBI for targeting them instead of investigating the Adani Group’s alleged malpractices.
    • Accusations: Hindenburg accused SEBI of pressuring brokers to close short positions in Adani stocks to protect the stock prices.

    Where does Kotak come into this picture?

    • Involvement of Kotak: SEBI’s notice did not name Kotak Bank, which Hindenburg claims created the offshore fund structure used for shorting Adani stocks.
    • Response: Kotak Mahindra Bank stated that Hindenburg has never been a client and that their KYC procedures were followed with regard to clients, with investments made by Kingdon as a principal.

    How much profit did Hindenburg earn by short selling Adani stocks?

    • Revenue: Hindenburg earned approximately $4.1 million in gross revenue through gains related to Adani shorts from its investor relationship.
    • Own Short Position: Hindenburg made about $31,000 from their short of Adani US bonds.After legal and research expenses, Hindenburg indicated they might only slightly come out ahead of break-even on their Adani short.

    Way forward: 

    • Conduct Investigation: SEBI should initiate an independent, comprehensive investigation into the allegations against both Adani Group and Hindenburg Research. This investigation should be conducted by a neutral third party to ensure impartiality and transparency.
    • Policy Review: SEBI could review and possibly update its regulations on short-selling and market manipulation to prevent similar incidents in the future. This could include stricter disclosure requirements for short sellers and enhanced monitoring of market activities.

    Mains PYQ: 

    Q The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.(UPSC IAS/2013)

  • ICEA calls for reduction in Import Duties to Boost Mobile Phone Sector

    Why in the News?

    • The Indian Cellular & Electronics Association (ICEA), representing domestic electronics manufacturers, called for a reduction of import duties in the upcoming Union budget.
      • ICEA highlighted that the growth of the mobile phone sector now depends on demand in the global market rather than domestic demand, facilitated by supportive policies like the Production Linked Incentive (PLI) scheme.

    About India Cellular and Electronics Association (ICEA) 

    • The ICEA is the apex industry body representing the interests of the mobile and electronics sector in India.
    • It was established in 2017.
    • It plays a crucial role in shaping policies and promoting the growth of the industry through advocacy, policy formulation, and strategic initiatives.
    • Membership:
      • ICEA comprises leading mobile handset manufacturers, electronics companies, and industry stakeholders.
      • This includes both Indian and global companies operating in the electronics sector.
    • Collaborations:
      • ICEA works closely with government bodies, regulatory authorities, and other industry associations to align its initiatives with national economic goals.

    ICEA’s Key Demands

    • Reduction of Import Duties: ICEA is calling for a reduction in import duties on manufacturing inputs for electronics, particularly in the mobile phone sector.
      • Current high tariffs are increasing manufacturing costs in India by 7-7.5% on the bill of materials.
    • Alignment with Global Standards: The demand includes aligning tariffs with those of countries like China and Vietnam, which have lower tariffs on fewer components.
    • Improvement of Customs Procedures: ICEA is urging for streamlined customs procedures to prevent delays in the shipment of key components.

    Significance of ICEA’s Demands

    • Reducing import duties enhances competitiveness, boosts exports, stimulates investment and job creation, reduces trade deficit, and fosters long-term growth in India’s electronics and mobile phone manufacturing sectors.

    Key Initiatives and Programs by ICEA

    • Electronics Manufacturing Clusters: ICEA promotes the development of electronics manufacturing clusters to create a robust supply chain and manufacturing base in India.
    • Skill Development: The association emphasizes the need for skill development in the electronics sector to ensure a skilled workforce capable of supporting industry growth.
    • R&D and Innovation: ICEA encourages research and development (R&D) and innovation within the sector to maintain competitiveness and technological advancement.

    Boost in Mobile Phone Exports from India

    • ICEA Report: According to ICEA, mobile phone exports from India have doubled to surpass Rs 90,000 crore (about USD 11.12 billion) in FY 2022-23 from Rs 45,000 crore in FY22.
    • Government Targets: The government has set a target of USD 10 billion worth of mobile phone exports, with an ambitious goal of achieving USD 300 billion worth of electronics manufacturing by 2025-26, of which USD 120 billion is expected from exports.

    Major Contributors to Export Growth:

    • Apple’s Contribution: Apple is estimated to have a 50% share of mobile phone exports from India, contributing USD 5.5 billion (about Rs 45,000 crore).
    • Samsung’s Contribution: Samsung accounts for approximately 40% of exports, worth Rs 36,000 crore.
    • Third-Party Exports: Third-party exports contributed around USD 1.1 billion to the total export, comprising phones of various brands made in India.

    Future Projections:

    • Export Contribution: Mobile phones are anticipated to contribute more than USD 50 billion worth of exports by 2025-26.
    • Overall Contribution: Mobile phone exports now account for 46% of the overall electronic goods exports, according to ICEA.

     

    PYQ:

    [2016] Recently, India’s first ‘National Investment and Manufacturing Zone’ was proposed to be set up in:

    (a) Andhra Pradesh

    (b) Gujarat

    (c) Maharashtra

    (d) Uttar Pradesh

  • RBI proposes rationalising regulations on Export-Import Transactions

    Why in the News?

    Reserve Bank of India (RBI) has proposed to rationalise regulations governing export and import transactions. The aim is to promote ease of doing business and empower banks to provide more efficient service to their foreign exchange customers.

    RBI Proposal and Directions

    • The RBI issued ‘Regulation of Foreign Trade under Foreign Exchange Management Act (FEMA), 1999 – Draft Regulations and Directions.’
    • Key propositions include:
      • Repatriation Timeline: The full export value of goods and services must be realised and repatriated to India within 9 months from the date of shipment for goods and the date of invoice for services.
      • Caution Listing: Exporters who fail to realise the full value within the specified time may be caution-listed by the authorised dealer.
      • Caution-Listed Exporters: Caution-listed exporters can undertake exports only against receipt of advance payment in full or an irrecoverable letter of credit, to the satisfaction of the authorised dealer.
      • Advance Remittance Restrictions: No advance remittance for the import of gold and silver is permitted unless specifically approved by the RBI.

    Expected Benefits 

    • Ease of Doing Business: The proposed regulations are intended to promote ease of doing business, especially for small exporters and importers.
    • Empowerment of Banks: The regulations aim to empower authorised dealer banks to provide quicker and more efficient service to their foreign exchange customers.

    About Foreign Exchange Management Act (FEMA), 1999

    • The FEMA, 1999, regulates foreign exchange and trade in India.
    • FEMA replaced the older Foreign Exchange Regulation Act (FERA), 1973.

    How does FEMA regulate EXIM Transaction?

    Regulation under FEMA
    Resident Indian Criteria Defined in Section 2(v) of FEMA;

    A person residing in India for more than 182 days during the course of the preceding financial year.
    Current Account Transactions Permitted freely for EXIM activities, including trade payments and remittances.
    Capital Account Transactions Regulated by RBI, includes FDI in export-oriented units and overseas investments by Indian entities.
    Documentation and Declarations Exporters and importers must furnish declarations to RBI to ensure compliance and monitor foreign exchange.
    Export Declarations Declare the value of goods/services exported, expected earnings, and timeframe for realization.
    Import Declarations Provide details of goods/services imported, and foreign exchange spent, and ensure payments through authorized channels.
    Authorized Dealers Only RBI-approved dealers (banks/financial institutions) can handle foreign exchange transactions for EXIM.
    Import Payment Regulations Payments must be made through authorized channels within prescribed time limits, complying with DGFT terms.
    Foreign Currency Accounts Entities can maintain foreign currency accounts for efficient handling of foreign exchange for EXIM activities.

    Significance of FEMA in Regulating EXIM Transactions

    • Facilitates Trade: By providing a clear regulatory framework, FEMA facilitates smoother and more efficient EXIM transactions, contributing to the growth of international trade.
    • Economic Stability: Ensures that foreign exchange earnings and expenditures are monitored and regulated, maintaining economic stability and preventing illegal outflows.
    • Investor Confidence: A transparent and regulated foreign exchange environment boosts investor confidence, attracting more foreign investment.
    • Liberalization: Replaces the stringent controls of FERA with a more liberal approach, encouraging businesses to engage in global trade.

    PYQ:

    [2013] Which of the following constitutes Capital Account?

    1. Foreign Loans

    2. Foreign Direct Investment

    3. Private Remittances

    4. Portfolio Investment

    Select the correct answer using the codes given below.

    (a) 1, 2 and 3

    (b) 1, 2 and 4

    (c) 2, 3 and 4

    (d) 1, 3 and 4

  • What is on the agenda for the 16th Finance Commission?  

    Why in the news? 

    The 16th Finance Commission, under Article 280, focuses on devolving funds. Amendments like 73rd and 74th mandate it to bolster state funds for panchayats and municipalities.

    About 16th Finance Commission

    • The 16th Finance Commission of India was constituted on December 31, 2023, with Dr. Arvind Panagariya as its Chairman.
    • The President of India appointed the Commission in pursuance of Article 280(1) of the Constitution

    How do other countries devolve funds to their local governments?

    • International Comparison: Countries like South Africa, Mexico, the Philippines, and Brazil allocate significantly higher percentages of their GDP (1.6% to 5.1%) to urban local bodies compared to India’s 0.5%.
    • Importance of Intergovernmental Transfers (IGTs): IGTs make up about 40% of Urban Local Bodies (ULBs) revenue in India but suffer from unpredictability, lack of earmarking for vulnerable groups, and horizontal equity.
    • Financial Health of ULBs: Despite efforts by multiple Finance Commissions, financial devolution to cities in India remains inadequate, affecting city productivity and quality of life.

    Why is the Census significant?

    • Data Dependence: The absence of the 2021 Census data makes it challenging to accurately assess urban growth and demographic changes crucial for evidence-based fiscal devolution.
    • Urban Dynamics: India has approximately 4,000 statutory towns, an equal number of Census towns, and a large number of effectively urban villages, which need accurate enumeration for effective planning and resource allocation.
    • Migration Impact: The Census data is essential to capture the significant migration to Tier-2 and Tier-3 cities, impacting their infrastructure and service needs.

    What about cities and the Taxation system?

    • Impact of GST: The introduction of GST has reduced ULBs’ tax revenue (excluding property tax) significantly, impacting their financial autonomy.
    • Low IGTs: Intergovernmental transfers from States to ULBs in India are minimal (around 0.5% of GDP), much lower than other developing nations, exacerbating fiscal challenges.
    • Constitutional Provisions: Despite the 74th constitutional amendment aimed at empowering ULBs, progress has been limited over three decades, hampering urban development.
    • Parallel Agencies: The growth of parallel agencies and schemes like MP/MLA Local Area Development Schemes distort the federal structure and weaken ULBs’ financial and operational autonomy.

    Way forward: 

    • Enhanced Intergovernmental Transfers (IGTs): Increase IGTs from States to Urban Local Bodies (ULBs) to at least 2% of GDP, ensuring predictability and earmarking for vulnerable groups.
    • Reform in Urban Governance and Fiscal Autonomy: Strengthen constitutional provisions to empower ULBs further, reducing dependence on parallel agencies like MP/MLA Local Area Development Schemes.

    Mains PYQ: 

    Q How is the Finance Commission of India constituted? What do you know about the terms of reference of the recently constituted Finance Commission? Discuss. (UPSC IAS/2018)

  • What is Project Nexus that RBI has signed up for?

    Why in the news? 

    The Reserve Bank of India (RBI) has become a part of Project Nexus, a global initiative aimed at facilitating instant cross-border retail payments by connecting domestic Fast Payments Systems (FPSs).

    What is Project Nexus?

    • Project Nexus is conceptualized by the Innovation Hub of the Bank for International Settlements (BIS).
    • It is the first BIS Innovation Hub project in the payments area moving towards live implementation.
    • Aim: To enhance cross-border payments by connecting multiple domestic instant payment systems (IPS) globally.
    • The Reserve Bank of India (RBI) has joined Project Nexus, aiming to interlink India’s Unified Payments Interface (UPI) with the Fast Payments Systems (FPSs) of Malaysia, the Philippines, Singapore, and Thailand.
    • The platform is designed to be extended to more countries in the future.

    About Fast Payments Systems (FPSs):

    Fast payment systems (FPSs) are real-time payment systems that enable the immediate transfer of funds between accounts. Some key points about FPSs:

    • FPSs allow for the fast, secure, and low-cost processing of retail transactions, ensuring funds are immediately available to the recipient.
    • FPSs are becoming increasingly popular globally, with over 100 jurisdictions now having access to fast payment systems. They foster competition among payment service providers and serve as a gateway to additional financial services.
    • The design of FPSs is important, as they have public good characteristics. Factors that contribute to greater adoption of FPSs include central bank involvement, inclusion of non-bank providers, more use cases, and more cross-border connections.
    • The Payment and Settlement Systems Act, of 2007 regulates and supervises payment systems in India. It designates the Reserve Bank of India has the authority for that purpose and all related matters.

    What are the benefits of the platform?

    • Standardization: Project Nexus standardizes the way IPS connect to each other, simplifying the process.
    • Single Connection: Payment system operators can connect to the Nexus platform once, allowing them to reach all other countries on the network without building custom connections for each.
    • Instant Payments: Enables cross-border payments from sender to recipient within 60 seconds in most cases.
    • Cost Efficiency: Provides near-zero cost for sending and receiving payments.
    • Growth Acceleration: Significantly accelerates the growth of instant cross-border payments by leveraging existing instant payment systems.

    Way forward: 

    • Expand Membership: Actively encourage more countries to join Project Nexus, thereby increasing the global reach and impact of the platform. (Indonesia is joining in the near future)
    • Enhance Technological Infrastructure: Invest in robust and scalable technological infrastructure to support seamless integration and interoperability among different FPSs.

    Mains PYQ:

    Q What is Cryptocurrency? How does it affect global society? Has it been affecting Indian society also? (UPSC IAS/2021)

  • Why govt must create a buffer stock of all main food items? 

    Why in the news? 

    Sales of wheat and chana in the open market have effectively curbed soaring inflation in cereals and pulses.

    What is an Open Market?

    • An open market is an economic system with little to no barriers to free-market activity. An open market is characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization, and any other regulations or practices that interfere with free-market activity. Open markets may have competitive barriers to entry, but never any regulatory barriers to entry.

    Present State of Inflation:

    • Overall CPI Inflation: Stood at 4.75% year-on-year in May, the lowest in 12 months, but food inflation remained elevated at 8.69%.
    • Cereals and Pulses: Inflation rates were 8.69% for cereals and 17.14% for pulses in May 2024.
    • Impact of Buffer Stocks: Buffer stocks of wheat and chana moderated inflation by ensuring sufficient supply during periods of price volatility.

    How Buffer in Gram(Chana) Helped:

    • NAFED Procurements: Procured large quantities of chana during surplus years at MSP, preventing prices from soaring during crop failures.
    • Distribution: Sold chana through various channels including open market e-auctions and ‘Bharat Dal’ at subsidized rates, stabilizing prices for consumers.
    • Current Stock Levels: Despite recent sales, NAFED still maintains a buffer stock of 4.01 lakh tonnes of chana as of now.

    Significant Role Played by FCI:

    • Wheat Offloading: FCI offloaded a record 100.88 lakh tonnes of wheat in fiscal 2023-24 through open market sales, stabilizing prices and reducing inflation.
    • Retail Price Management: Sales under schemes like ‘Bharat Atta’ ensured wheat and cereal inflation was reduced from peak levels earlier in 2023.
    • Buffer Management: Despite reduced stocks from previous years, FCI’s interventions have been crucial in managing price volatility in essential commodities.

    Need to Adopt Buffer Policy and Better Procurement:

    • Buffer Stock Strategy: Proposal to expand buffer stocks beyond rice, wheat, and select pulses to include oilseeds, vegetables, and even milk powder to mitigate price spikes.
    • Enhanced Procurement: Advocates for increased procurement during surplus years to build adequate buffer stocks for future market stabilization.
    • Policy Impact: Buffer stocking can moderate price volatility influenced by climate change-induced agricultural uncertainties, benefiting both consumers and producers.

    Way forward: 

    • Enhanced Diversification of Buffer Stocks: There is a need to diversify buffer stocks beyond traditional items like rice and wheat to include a broader range of essential commodities such as oilseeds, vegetables, and milk powder. This expansion would help in better managing price spikes and supply shocks across various sectors.
    • Strengthened Procurement Mechanisms: Improving procurement strategies during surplus production years is crucial. This involves proactive measures to purchase larger quantities of commodities at minimum support prices (MSPs), ensuring adequate buffer stocks for future market stabilization and price moderation during scarcity periods.

    Mains PYQ: 

    Q Food Security Bill is expected to eliminate hunger and malnutrition in India. Critically discuss various apprehensions in its effective implementation along with the concerns it has generated in WTO. (UPSC IAS/2013)

  • Interest rates on small savings schemes like PPF, SCSS, and NSC are under review by Modi 3.0 government 

    Why in the news? 

    The central government of India is set to announce the interest rates for various small savings schemes, including the Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Sukanya Samriddhi Yojana (SSY), and Post Office Monthly Income Scheme (POMIS), for the July-September 2024 quarter by June 30, 2024.

    Current Interest Rates and Expected Changes

    1. Public Provident Fund (PPF)
    • Current Rate: 7.1%
    • Expected Rate: Despite the benchmark 10-year bond yield averaging 7.02% from March to May 2024, which would suggest a rate of 7.27% according to the formula, experts believe the government will likely maintain the status quo.
    • Reason: Factors such as controlled inflation, stable 10-year G-Sec yields, and historical precedence of the government not strictly following the recommended formula indicate a low probability of rate hikes.

    2. Senior Citizen Savings Scheme (SCSS)

    • Current Rate: 8.2%
    • Expected Rate: Unlikely to see significant changes.
    • Reason: With a spread of 100 basis points, the SCSS offers a substantial return, and experts predict the government will maintain existing rates to manage fiscal policies effectively.

    3. Sukanya Samriddhi Yojana (SSY)

    • Current Rate: 8.0%
    • Expected Rate: Expected to remain stable.
    • Reason: The SSY enjoys a spread of 75 basis points. Given the controlled inflation and fiscal policies, a rate hike is not anticipated.

    Factors Influencing Interest Rates

    • Benchmark Yields: The interest rates for small savings schemes are linked to the yields of 10-year government securities.
    • Market Conditions: Prevailing market yields and inflation rates play a crucial role in determining these rates.
    • Government Policy: The central government’s fiscal strategy and policies, such as those outlined in the Union Budget, impact decisions on interest rates.

    Impact of Stable Interest Rates on Small Savings Schemes

    • Investor Sentiment and Returns
      • PPF: Investors in PPF may feel disappointed due to the stagnation in interest rates despite a slight uptick in benchmark yields. However, PPF still offers tax-free returns under the Exempt-Exempt-Exempt (EEE) status, making it an attractive long-term investment.
      • SCSS and SSY: Stability in interest rates ensures a predictable income stream for senior citizens and parents of girl children, maintaining their trust in these schemes.
    • Government Fiscal Management: Maintaining the current interest rates helps the government manage its fiscal deficit more effectively. Higher rates would increase the interest burden on the government, especially for widely subscribed schemes like PPF.
    • Inflation Control: Stable interest rates reflect the government’s confidence in managing inflation. By not increasing rates, the government signals that it sees inflation as under control, thus aiming to keep borrowing costs stable for both the government and the public.
    • Market Stability: Consistent interest rates contribute to market stability. Predictable returns on small savings schemes help in the planning of household finances, ensuring steady savings and investments. This stability can also foster overall economic stability by maintaining consumer confidence.

    Conclusion: Investors in PPF, SCSS, and SSY should prepare for the possibility that interest rates will remain unchanged for the July-September 2024 quarter. While the formula indicates room for an increase in PPF rates, historical trends and expert opinions suggest that the government may maintain the current rates to balance fiscal control and market stability.

    Mains PYQ:

    Q Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing the unbanked to the institutional fiancé fold. Do you agree with this for the financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (UPSC IAS/2016)

  • RBI releases the 29th Financial Stability Report, 2024

    Why in the News?

    The Reserve Bank of India has released the 29th issue of the Financial Stability Report (FSR).

    About Financial Stability Report:

    • The FSR is published biannually by the RBI.
    • It reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC – headed by the Governor of RBI) on risks to financial stability and the resilience of the financial system.
    • The Report also discusses issues relating to the development and regulation of the financial sector.

    Key Highlights of the FSR

    [1] Global Economic Context

    • Heightened Global Risks: The global economy faces significant challenges, such as:
      • Geopolitical Tensions: Conflicts or political disagreements between countries that can affect global stability.
      • Elevated Public Debt: Many countries owe large amounts of money, which can be risky if they struggle to repay it.
      • Slow Progress in Disinflation: Prices of goods and services are not decreasing quickly, which can affect economic stability.
    • Resilience: Despite these challenges, the global financial system (how money moves around the world) remains strong and stable.

    [2] Indian Economy and Financial System

    • Robust and Resilient: India’s economy and financial system are strong and able to handle shocks or problems.
    • Banking Sector Support: Banks and financial institutions (like insurance companies) are in good health and are lending money to support economic activities.

    [3] Financial Metrics for Scheduled Commercial Banks (SCBs)

    • Capital Ratios:
      • Capital to Risk-Weighted Assets Ratio (CRAR): This is a measure of a bank’s financial strength. A CRAR of 16.8% means that for every 100 units of risk, the bank has 16.8 units of capital to cover potential losses.
      • Common Equity Tier 1 (CET1) Ratio: This is a stricter measure of a bank’s core capital. A CET1 ratio of 13.9% means the bank has a strong base of high-quality capital.
    • Asset Quality:
      • Gross Non-Performing Assets (GNPA) Ratio: This measures the percentage of a bank’s loans that are not being repaid. A GNPA ratio of 2.8% means that 2.8% of the total loans are in trouble.
      • Net Non-Performing Assets (NNPA) Ratio: This is similar to GNPA but considers the money the bank has already set aside to cover bad loans. An NNPA ratio of 0.6% means that 0.6% of the total loans, after accounting for provisions, are in trouble.

    [4] Macro Stress Tests for Credit Risk

    • Stress Scenarios and Projections:
      • Baseline Scenario: Under normal conditions, banks are expected to have a CRAR of 16.1% by March 2025.
      • Medium Stress Scenario: Under moderate stress, banks are expected to have a CRAR of 14.4% by March 2025.
      • Severe Stress Scenario: Under severe stress, banks are expected to have a CRAR of 13.0% by March 2025.
    • Interpretation: These tests show how banks might perform under different levels of economic stress. They are hypothetical scenarios to ensure banks are prepared for tough times.

    [5] Health of Non-Banking Financial Companies (NBFCs)

    • CRAR: NBFCs have a CRAR of 26.6%, indicating they are financially strong.
    • GNPA Ratio: NBFCs have a GNPA ratio of 4.0%, meaning 4% of their loans are not being repaid.
    • Return on Assets (RoA): NBFCs have a RoA of 3.3%, indicating they are making good profits from their assets.

    PYQ:

    [2016] With reference to ‘Financial Stability and Development Council’, consider the following statements:

    1. It is an organ of NITI Aayog.

    2. It is headed by the Union Finance Minister.

    3. It monitors macroprudential supervision of the economy.

    Which of the statements given above is/are correct?

    (a) 1 and 2 only

    (b) 3 only

    (c) 2 and 3 only

    (d) 1, 2 and 3

  • Prolonged exposure to coal mining causes respiratory, skin diseases in workers: study  

    Why in the News?

    A new study by the National Foundation of India (NFI) reveals that 75% of focus group participants have chronic respiratory and skin ailments due to prolonged exposure to coal mining pollutants.

    • The study report titled, “At the Crossroads: Marginalised Communities and the Just Transition Dilemma”, is a sequel to the 2021 study by NFI on the socio-economic impact of coal transitions in India.
    Key Highlights of the reports by the National Foundation for India:

      • The study covered two districts each from three central Indian states—Chhattisgarh, Jharkhand, and Odisha surveying 1209 households and conducting 20 Focused Group Discussions (FDGs).
    • Other key findings of the study are: 
      • Health Concerns: Prolonged exposure to coal mining pollutants has resulted in widespread respiratory and skin diseases among the local populations. At least 75% of participants in Focus Group Discussions (FGDs) reported issues such as chronic bronchitis, asthma, and various skin conditions.
      • Economic Impact/ Economic Dependency on Coal: The phasing down of coal is expected to result in significant job losses and economic downturns in coal-dependent regions. This will not only impact the coal miners and workers directly but also the broader local economy.
      • Caste-Based Inequities: Access to resources and opportunities is significantly skewed, with marginalized communities such as Scheduled Castes (SCs), Scheduled Tribes (STs), and Other Backward Classes (OBCs) being disproportionately affected.
    • The report identifies several challenges in achieving a just transition, including the need to upskill a largely under-educated workforce and the lack of alternative livelihoods. 
    • It underscores the importance of community-specific policies, robust institutional mechanisms, and coordinated efforts between government bodies.
    • The study offers a potential framework for safeguarding the interests of these communities through:
      • Alternative Livelihoods: Emphasizing the development of new economic opportunities beyond coal.
      • Ecological Restoration: Promoting environmental recovery to mitigate the health impacts of coal mining.
      • Inclusive Policies: Ensuring that the transition policies are inclusive and consider the needs of marginalized communities.

     

    Present Challenges of Medical Expenses and Shift from Coal:

    • Health Concerns: People living closer to coal mines face higher medical expenses due to increased incidence of lung and breathing-related diseases and skin infections.
    • Economic concerns: The global shift away from coal is expected to result in job losses and economic downturns in coal-dependent regions, affecting both coal miners and the broader local economy.
      • Economic disparities exist with varying income levels and irregular wage receipt patterns in coal-dependent districts.
      • Dhanbad and Koriya, solely reliant on coal production, reported lower incomes compared to diversified industrial districts.

    Way Forward:

    • Diversification of Local Economies: Develop alternative industries and economic activities in coal-dependent regions to reduce reliance on coal mining. Promote skill development programs to help coal workers transition to new employment opportunities in emerging sectors such as renewable energy, manufacturing, and services.
    • Investment in Health Infrastructure: Enhance healthcare facilities in coal mining regions to address the higher incidence of lung, and breathing-related diseases, and skin infections. Implement comprehensive health monitoring and support programs for communities living near coal mines.
    • Promotion of Renewable Energy: Accelerate the shift towards renewable energy sources, building on the recent trend of increased capacity addition in renewable energy. Invest in renewable energy infrastructure and create job opportunities in the renewable sector to offset job losses in coal mining.
    • Government and Policy Support: Implement policies and provide financial support for a ‘just transition’ to ensure that workers and communities dependent on coal mining are not left behind.
    • Community Engagement and Participation: Involve local communities in planning and decision-making processes related to the transition from coal.

    Mains question for practice : 

    Q Analyse the health and socioeconomic impacts of prolonged coal mining in India, as highlighted by the National Foundation for India’s survey. 10M

    Mains PYQ: 

    Q In spite of adverse environmental impact, coal mining is still inevitable for Development”. Discuss. (UPSC IAS/2017)