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Subject: Economics

  • What is the outlook on the global economy? | Explained

    Why in the news? 

    The International Monetary Fund (IMF) released its latest Global Financial Stability Report warning about the risks to the Global Financial System.

    What is the IMF’s worry about Inflation?

    • Premature Investor Enthusiasm: The IMF believes that investors may be overly optimistic about the end of high inflation and the subsequent lowering of interest rates by central banks. This enthusiasm could be premature.
    • Stalled Inflation: The IMF highlights that inflation may have stalled in some major advanced and emerging economies. Core inflation in the most recent three months has been higher than in the previous three months, indicating a potential slowdown in the decline of inflation.
    • Geopolitical Risks: The IMF warns that geopolitical risks, such as ongoing conflicts in West Asia and Ukraine, could disrupt aggregate supply and lead to higher prices. This could counteract efforts to lower inflation and deter central banks from lowering interest rates.
    • Potential Impact on Central Bank Action: The IMF suggests that if these risks persist, central banks may delay or refrain from lowering interest rates as expected by investors, which could have consequences for asset prices and investor losses.

    How it will impact the Indian Market?

    • Strong Fund Flows: Emerging markets like India have experienced strong inflows of foreign capital, driven by optimism surrounding potential interest rate cuts by central banks.
    • Vulnerability: If central banks in Western countries signal a prolonged period of high interest rates, investors may withdraw funds from emerging markets like India, putting pressure on their currencies.
    • Depreciation of the Indian Rupee: The Indian rupee has already been depreciating, reaching a new low against the U.S. dollar. This trend could continue if capital outflows accelerate.
      • In response to currency depreciation and capital outflows, the RBI may intervene by curbing liquidity and raising interest rates. However, this could slow down the economy.
    • Potential Effects on Financial System: A severe outflow of capital could have implications for India’s financial system, potentially exacerbating the depreciation of the rupee and causing instability.

    Private Credit Market Scenario:

    • The private credit market globally grew to $2.1 trillion last year, indicating its significant size and importance in the financial landscape.
    • The IMF is concerned about the unregulated private credit market, where non-bank financial institutions lend to corporate borrowers. Troubles in this market could potentially affect the broader financial system.
    • India has also witnessed the growth of a small private credit market, particularly with the rise of Alternative Investment Funds (AIFs).

    Conclusion: The IMF’s concerns over premature investor optimism on inflation and risks from geopolitical tensions highlight potential challenges for India’s financial stability. Vigilance over capital flows and regulation of the private credit market are essential safeguards.

    Mains PYQ:

    Q The World Bank and the IMF, collectively known as the Bretton Woods Institutions, are the two inter-governmental pillars supporting the structure of the world’s economic and financial order. Superficially, the World Bank and the IMF exhibit many common characteristics, yet their role, functions and mandate are distinctly different. Elucidate.

  • What are the new Green Credit Programme rules? | Explained

    Why in the news? 

    On April 12, the Environment Ministry issued further guidelines on its Green Credit Programme (GCP)

    What is the Green Credit Programme?

    • The Green Credit Programme is a new market-based instrument in India designed to incentivize individuals, industries, and local bodies for their voluntary environmental actions across different sectors.
    • It is included under the government’s ‘Lifestyle for Environment’ or ‘LiFE’ movement and is a domestic voluntary market mechanism where green credit serves as a singular unit of credit provided for each specified activity.

    Features of the Green Credit Programme:

    • Open-Platform: Participants, including individuals, organizations, and both public and private companies, can invest in these environmental initiatives and receive ‘green credits’ in return. These credits are earned based on the environmental impact of the invested activities.
      • Public sector companies such as Indian Oil, Power Grid Corporation of India, National Thermal Power Corporation, Oil India, Coal India, and National Hydropower Corporation have reportedly registered to invest in the GCP.
    • Set with Priority: The Ministry has prescribed rules for the first initiative under the GCP, focusing on afforestation. Participants can pay for afforestation projects in degraded forest and wasteland areas, with tree planting conducted by State forest departments.
      • The Indian Council of Forestry Research and Education (ICFRE), an autonomous body of the Environment Ministry, is responsible for administering the GCP. They define methodologies to calculate green credits and manage a trading platform for credit exchange.
    • Regional Participation: Thirteen state forest departments have offered 387 land parcels totaling nearly 10,983 hectares of degraded forest land for afforestation projects under the GCP.
    • Enhanced Decision-Making: Successful participants will receive estimates of the costs involved in their chosen afforestation projects, facilitating informed decision-making and planning.

    Why has the GCP stoked controversy?

    • Commodification of Environmental Conservation: Critics argue that the GCP turns environmental conservation into a commodity, potentially undermining the spirit of India’s forest conservation laws.
    • Forest Diversion Concerns: The GCP’s provision for companies to “exchange” green credits for complying with compensatory afforestation requirements raises concerns that it could be exploited by industries seeking to ease forest diversion requirements, particularly in sectors like mining and infrastructure.
    • Ecological Impact: Planting trees as a part of afforestation efforts does not guarantee ecosystem improvement. India’s diverse forest types require specific approaches, and planting the wrong types of trees could lead to the proliferation of invasive species or disrupt sustainable ecosystems.
    • Monoculture Threat: There’s a risk that the GCP may promote the replacement of natural forests with invasive monocultures, potentially harming biodiversity and ecological balance.
    • Carbon Trading Controversy: The GCP allows green credits resulting from carbon storage (e.g., tree planting) to be used for carbon trading. However, the methodology for equating these activities is unclear, raising doubts about the effectiveness and legitimacy of such carbon trading schemes.

    Conclusion: The Green Credit Programme in India, faces criticism for potentially commodifying conservation, raising forest diversion concerns, posing ecological risks like monoculture, and lacking clarity in carbon trading methodologies. So there is a need for rigorous oversight and adaptation.

    Mains PYQ 

    Q Explain the purpose of the Green Grid Initiative launched at World Leaders Summit of the COP26 UN Climate Change Conference in Glasgow in November, 2021. When was this idea first floated in the International Solar Alliance (ISA)?

  • On the fall in Household Savings

    Why in the news? 

    The sharp reduction in Household Net Financial Savings and the rise in Household Debt burden are a cause for concern for growth and economic stability.

    BACK2BASICS:

    What are household financial savings?

    • Household financial savings refer to currency, bank deposits, debt securities, mutual funds, pension funds, insurance, and investments in small savings schemes. The total of these savings is referred to as gross household financial savings.

    What is Household Debt?

    • Household debt is all household liabilities (including non-profit institutions serving households) that require payments of interest or principal by households to creditors at a fixed date in the future.
    • Debt is calculated as the sum of the following liability categories: loans (primarily mortgage loans and consumer credit) and other accounts payable.

     

    What are the present reasons behind the Lower Financial savings?

    • Increased borrowing or reduced gross financial savings are the primary drivers of lower net financial savings.
    • Lower net financial savings due to increased borrowing for consumption or investment can stimulate aggregate demand and output.
    • Higher interest rates can lead to increased interest payments by households, reducing their net financial savings.

    Implication of Higher Debt Burden on the Indian Market: The rise in household debt burden has two concerns for the macroeconomy. 

    • Debt Repayment and Financial Fragility: Household debt sustainability depends on the gap between the interest rate and income growth rate. 
      • Suppose households fail to meet their debt repayment commitments. In that case, it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy.
    • Scheduled Commercial Banks Lending vs. Growth Rate of GNS: The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.
    • Impact on Consumption Demand: Reducing household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth by increasing their savings.

    • Reduced Higher household debt: Higher household debt can also reduce consumption expenditure in at least two ways.
      • If higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption.
      • Higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.
    • Low household Financial wealth: Recent trends in the Indian economy indicate a decline in household financial wealth relative to GDP, alongside an increase in household leverage (debt to net worth ratio). 
      • The financial wealth/net worth of the household is the difference between the stock of financial assets and liabilities.

    Macroeconomic Implication:

    • Implications of the Procyclical Leverage: Given that both the flow indicator of liabilities to disposable income and the debt to net worth show an increasing trend, where households are vulnerable.
    • Fall in the Household Savings: The policy mantra of higher interest rates to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap.
      • The implications of high-interest rates on debt burden can hurt the consumption of the households and consequently aggregate demand.

    Suggestive measures:

    • Promote sustainable borrowing: Policymakers need to address the growing vulnerabilities of households by implementing measures to promote sustainable borrowing practices and reduce reliance on debt.
    • Prioritizes production and employment: Additionally, the policies aimed at fostering a more balanced economy that prioritizes production and employment alongside financial activities may be necessary to ensure long-term economic stability and growth.

    Conclusion: The change in the composition of the asset side of the household balance sheet towards financial assets indicates some degree of financialization of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the 5 trillion dollar economy both jobless and fragile. 

    Mains PYQ:

    Q The public expenditure management is a challenge to the Government of India in the context of budgetmaking during the post-liberalization period. Clarify it.(UPSC IAS/2019)

  • [pib] Net Direct Tax collections exceed 2023-24 target

    Why in the news?

    • India’s net direct tax collections witnessed a remarkable growth of 17.7% in the fiscal year 2023-24, reaching ₹19.58 lakh crore.
      • This performance indicates a strong revenue stream for the government.

    Direct Tax Collections Trends in this Fiscal

    • Notably, Personal Income Taxes (PIT) played a pivotal role in driving the surge, accounting for 53.3% of the total tax kitty, up from 50.06% in the previous year.
    • Conversely, the contribution of corporate taxes dipped to 46.5% from 49.6% in the preceding fiscal.
    • While gross corporate tax collections increased, net tax receipts from Corporates, adjusted for refunds, experienced a slight decline.

    What Is Net of Tax?

    The term net of tax refers to the amount left after adjusting for the effects of taxes. Net of tax can be a consideration in any situation where taxation is involved. In the financial industry, ‘gross’ and ‘net’ are two key terms that refer to before and after paying certain expenses.

    It’s Significance:

    • Individuals and businesses often analyze before and after-tax values to make investment and purchasing decisions.
    • Net tax is also an important part of expense analysis when reviewing annual tax filings and the net income of businesses.

    Types of Direct Taxes:

    • Income Tax: Depending on an individual’s age and earnings, income tax must be paid. Various tax slabs are determined by the Government of India which determines the amount of Income Tax that must be paid.
      • The taxpayer must file Income Tax Returns (ITR) on a yearly basis. Individuals may receive a refund or might have to pay a tax depending on their ITR. Huge penalties are levied in case individuals do not file ITR.
    • Wealth Tax: The tax must be paid on a yearly basis and depends on the ownership of properties and the market value of the property. In case an individual owns a property, wealth tax must be paid and does not depend on whether the property generates an income or not.
      • Corporate taxpayers, Hindu Undivided Families (HUFs), and individuals must pay wealth tax depending on their residential status.
      • Payment of wealth tax is exempt for assets like gold deposit bonds, stock holdings, house property, commercial property that have been rented for more than 300 days, and if the house property is owned for business and professional use.
    • Estate Tax: It is also called an Inheritance Tax and is paid based on the value of the estate or the money that an individual has left after his/her death.
    • Corporate Tax: Domestic companies, apart from shareholders, will have to pay corporate tax. Foreign corporations who make an income in India will also have to pay corporate tax. Income earned via selling assets, technical service fees, dividends, royalties, or interest that is based in India are taxable. The below-mentioned taxes are also included under Corporate Tax:
      • Securities Transaction Tax (STT): The tax must be paid for any income that is earned via taxable security transactions.
      • Dividend Distribution Tax (DDT): In case any domestic companies declare, distribute, or are paid any amounts as dividends by shareholders, DDT is levied on them. However, DDT is not levied on foreign companies.
      • Fringe Benefits Tax: Companies that provide fringe benefits for maids, drivers, etc., Fringe Benefits Tax is levied on them.
      • Minimum Alternate Tax (MAT): For zero-tax companies that have accounts prepared according to the Companies Act, MAT is levied on them.
    • Capital Gains Tax: It is a form of direct tax that is paid due to the income that is earned from the sale of assets or investments. Investments in farms, bonds, shares, businesses, art, and home come under capital assets.
      • Based on its holding period, tax can be classified into long-term and short-term. Any assets, apart from securities, that are sold within 36 months from the time they were acquired come under short-term gains.
      • Long-term assets are levied if any income is generated from the sale of properties that have been held for a duration of more than 36 months.

    PYQ:

    [2014] The sales tax you pay while purchasing a toothpaste is a

    (a) Tax imposed by the Central Government

    (b) Tax imposed by the Central Government but collected by the State Government

    (c) Tax imposed by the State Government but collected by the Central Government

    (d) Tax imposed and collected by the State Government

  • Bengaluru Airport bags 2024 Skytrax World Airport Awards

    Why in the news?

    • The Kempegowda International Airport (KIA) in Bengaluru has been honored as the Best Regional Airport in India and South Asia at the esteemed 2024 Skytrax World Airport Awards.
    • Since its inauguration in 2023, KIA Terminal-2 has garnered multiple accolades, including the UNESCO Prix Versailles World’s Most Beautiful Airport

    About Skytrax World Airport Awards

    • The Skytrax World Airport Awards are annual awards, established in 1999 presented by Skytrax, a UK-based consultancy specializing in airline and airport research.
    • Since then, it has become a globally recognized authority in airline and airport research, known for its comprehensive passenger surveys and prestigious awards.
    • These awards are considered one of the most prestigious recognitions in the aviation industry and are often referred to as the “Oscars of the aviation industry.”
      • Various categories of Award: Best Airport, Best Regional Airport, Best Airport Terminal, and Best Airport Staff, among others.

    Evaluation Criteria:

    • Rigorous evaluations of various aspects, including check-in procedures, arrivals, transfers, shopping facilities, security, immigration processes, and departures.
    • Feedback from airport customers of over 100 nationalities across 550 airports worldwide during a seven-month survey period contributed to the assessment.

    Winners of the 2024 Awards

    • Doha’s Hamad International Airport clinched the top spot, dethroning Singapore Changi Airport, which had held the title for 12 consecutive years.
    • Hamad International Airport is praised for its architectural significance and luxurious amenities, covering an area equivalent to 75 football fields.
    • Seoul Incheon Airport secured third place overall and was recognized as the most family-friendly airport.

    Performance of key Indian Airports:

    • Delhi Airport retained its position at 36th place in the overall rankings.
    • Mumbai Airport saw a slight decline, dropping to 95th place from its previous rank of 84.
    • Bengaluru Airport experienced a notable improvement, climbing 10 ranks to 59th place compared to last year’s 69th position.
    • Hyderabad Airport also showed improvement, rising to 61st place from its previous rank of 65th.
    • Goa’s Manohar International Airport secured the 92nd spot in the overall rankings.

  • Why have private investments dropped? | Explained

    Why in the news? 

    The failure of private investment, as measured by private Gross Fixed Capital Formation (GFCF) as a percentage of gross domestic product (GDP) at current prices, to pick up pace has been one of the major issues plaguing the Indian economy.

    What is GFCF?

    • GFCF refers to the growth in the size of fixed capital in an economy.
    • Fixed capital refers to things such as buildings and machinery, for instance, which require investment to be created.
    • So private GFCF can serve as a rough indicator of how much the private sector in an economy is willing to invest.
    • Overall GFCF also includes capital formation as a result of investment by the government.

    Why does it matter?

    • GFCF matters because fixed capital, by helping workers produce a greater amount of goods and services each year, helps to boost economic growth and improve living standards.
    • In other words, fixed capital is what largely determines the overall output of an economy.

    What is the trend seen in private investment in India?

    • Pre-liberalization (1950s to early 1990s): Private investment remained relatively stable, hovering around or slightly above 10% of GDP. Public investment, however, steadily increased during this period.
    • Liberalization (early 1990s onwards): Economic reforms in the early 1990s improved private sector confidence, leading to a significant uptick in private investment. Public investment, although still significant, began to decline relative to private investment.
    • Post-global financial crisis (late 2000s to present): Private investment continued to grow until the global financial crisis of 2007-08, reaching around 27% of GDP. However, from around 2011-12 onwards, private investment began to decline, hitting a low of 19.6% of GDP in 2020-21.

    Why has private investment fallen?

    • Low private consumption expenditure: Some economists attribute the decline in private investment to low private consumption expenditure. They argue that businesses need confidence in future demand to invest in fixed capital, and boosting consumption expenditure can help stimulate private investment.
    • Structural problems and policy uncertainty: Other economists argue that structural issues and policy uncertainty are core reasons behind the fall in private investment. They point to unfavourable government policies and policy uncertainty as major factors affecting private investment.

    Conclusion: To address the decline in private investment, India needs policies promoting consumer confidence and stable, conducive business environments. Balancing pro-growth fiscal measures with structural reforms can stimulate investment, fostering economic growth and prosperity.

    Mains PYQ 

    Q Explain the meaning of investment in an economy in terms of capital formation. Discuss the factors to be considered while designing a concession agreement between a public entity and private entity.(UPSC IAS/2020)

  • India’s Surge in Pulses Imports: A Six-Year High

    Why in the news?

    • India’s pulses imports in fiscal 2024 witnessed a remarkable surge, soaring by 84% year-on-year to their highest level in six years.
    • Lower production levels prompted India to permit duty-free imports of red lentils (Masoor) and yellow peas (Tur/Arhar), further driving the increase in imports.

    Pulses Cultivation in India

    Details
    Seasons Cultivated in both ‘Kharif’ and ‘Rabi’ seasons. ‘Rabi’ pulses contribute more than 60% of production.

    Kharif Season Pulses:

    1. Pigeon Peas (Arhar/Toor/Red Gram)
    2. Green Beans (Moong Beans)
    3. Black Matpe (Urad/Mah/Black Gram)
    4. Black Eyed Peas (Lobia)
    5. Chick Peas (Kabuli Chana)
    6. Red Kidney Beans (Rajmash)

    Rabi Season Pulses:

    1. Bengal Gram (Desi Chick Pea/Desi Chana)
    2. Lentils (Masoor)
    3. White Peas (Matar)
    Production (2023)  Approximately 27.5 million metric tonnes

    Reported as 7.6 quintals per hectare
    Area under Cultivation Pulses account for around 20% of the area under food grains in India.
    Top Producing States Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh, Karnataka
    Government Initiatives National Food Security Mission (NFSM) for Pulses, Pradhan Mantri Annadata Aay Sanrakshan Abhiyan (PM-AASHA) Scheme
    Research and Development Conducted by Indian Council of Agricultural Research (ICAR) in collaboration with State Agricultural Universities
    Goal Aim for self-sufficiency in pulse production by 2027

     

    Pulses Import: Figures and Value

    • India imported a total of 4.65 million metric tons of pulses in the fiscal year ending March 31, 2024, marking the highest volume since fiscal 2018.
    • In terms of value, imports surged by 93% to reach $3.75 billion in the same period.

     

    Pulses Production in India: Key Facts

    • India is the largest producer (25% of global production), consumer (27% of world consumption) and importer (14%) of pulses in the world (as per FAO).
    • Pulses account for around 20% of the area under foodgrains and contribute around 7-10% of the total foodgrains production in the country (as per Vikaspedia).
    • Gram (Chana) is the most dominant pulse having a share of around 40 per cent in the total production followed by Tur/Arhar at 15 to 20 per cent and Urad and Moong at around 8-10 per cent each. (Reference)
    • Madhya Pradesh, Maharashtra, Rajasthan, Uttar Pradesh and Karnataka are the top five pulses producing States. (Reference)

     

    Global Impact of Higher Imports

    • The surge in imports by India, the world’s largest importer, producer, and consumer of protein-rich pulses, has been bolstering global prices.
    • It has also contributed to reducing stocks in exporting countries such as Canada, Australia, and Myanmar.

    Significance of Pulses Consumption

    1. Nutritional Value:
      • Pulses are considered to be ‘poor man’s protein’.
      • They contain 20-25% of protein by weight, with twice the protein available in wheat and thrice that present in rice.
      • WHO recommends 80gm/day of Pulses in the diet.
    2. Environmental Sustainability:
      • Pulses have low carbon and water footprints, making them integral to sustainable farming.
      • Water footprints for producing one kilogram of meat are five times higher than that of pulses.
      • Pulses emit 0.5 kilogram in CO2 equivalent per kilogram, while meat produces 9.5 kilograms in CO2 equivalent.

    PYQ:

    [2019] Among the agricultural commodities imported by India, which one of the following accounts for the highest imports in terms of value in the last five years ?

    (a) Spices

    (b) Fresh fruits

    (c) Pulses

    (d) Vegetable oils

    [2020] With reference to pulse production in India, consider the following statements:

    1. Black gram can be cultivated as both kharif and rabi crop.
    2. Green-gram alone accounts for nearly half of pulse production.
    3. In the last three decades, while the production of kharif pulses has increased, the production of rabi pulses has decreased.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 and 3 only

    (c) 2 only

    (d) 1, 2 and 3

  • KAVACH Anti-Collision System

    The Supreme Court has acknowledged and appreciated the implementation of the indigenous anti-collision system KAVACH.

    What is KAVACH?

    • Kavach, an automatic train protection (ATP) system, was initially named Train Collision Avoidance System (TCAS).
      • Development commenced in 2011 as Indian Railways and Research Designs & Standards Organisation (RDSO) sought a domestically developed ATP system.
      • B. Rajaram, credited with developing the Skybus Metro system, played a key role in Kavach’s development.
      • Field trials began in 2014, refining the system’s specification.
    • Final approval was granted in 2019, certifying Kavach for compliance with Safety Integrity level 4 (SIL-4) operations.

    Working Mechanism:

    • Kavach comprises trackside Radio Frequency Identification (RFID) tags, onboard locomotive equipment, and radio infrastructure.
    • It communicates via radio, enabling real-time train monitoring.
    • Drivers receive alerts, and automatic braking is triggered to prevent collisions.
    • Kavach uses various data inputs like location, direction, and time to ensure safety.
    • Event recorders retain records of interactions and incidents for analysis.
    • Alerts and automatic braking ensure an immediate response to hazardous situations.

    How does it help prevent collision?

    • Kavach is designed to alert the locomotive pilot if they fail to notice a ‘red signal’ and continue at a speed that would surpass the signal.
    • If the pilot does not slow down below 15 kmph, Kavach automatically applies the brakes, bringing the train to a halt.

    Issues with KAVACH

    • High Deployment Cost: Implementing Kavach costs ₹50 lakh per kilometer for the Indian Railways.
    • Low Coverage: Currently, Kavach covers only 1,500 kilometers of rail routes, a small fraction of the total 68,000-kilometer network (as of November 2023).
      • Expanding its coverage, particularly on high-density routes, remains a formidable challenge.

    PYQ:

    [2015] With reference to bio-toilets used by the Indian Railways, consider the following statements:

    1. The decomposition of human waste in the biotoilets is initiated by a fungal inoculum.
    2. Ammonia and water vapour are the only end products in this decomposition which are released into the atmosphere.

    Which of the statements given above is/are correct?

    (a) 1 only
    (b) 2 only
    (c) Both 1 and 2
    (d) Neither 1 nor 2

  • Special Rupee Vostro Account (SRVA)

    Why in the news?

    India has simplified the payment mechanism for traders importing pulses from Myanmar, requiring them to use the Rupee/Kyat direct payment system through the Special Rupee Vostro Account (SRVA) through the Punjab National Bank.

    International Transactions Settlement Mechanism:

    [1] Vostro Accounts:

    • Named from the Latin word “vostro,” meaning “yours.”
    • Represents a domestic bank’s account held by a foreign bank in the local currency (e.g., INR in India).
    • Allows foreign banks to manage local currency transactions on behalf of their clients.
    • For example, a foreign bank holding an account in an Indian bank in Indian Rupees (INR) for facilitating transactions within India.

    [2] Nostro Accounts:

    • Derived from the Latin word “nostro,” meaning “ours.”
    • Refers to a foreign bank’s account held by a domestic bank in the foreign currency (e.g., USD in the United States).
    • Enables domestic banks to handle foreign currency transactions for their clients.
    • For instance, an Indian bank holding an account in a U.S. bank in U.S. Dollars (USD) to facilitate international transactions in the U.S. currency.

    [3] Loro Accounts:

    • From the Italian word “loro,” meaning “their.”
    • Represents an account held by one foreign bank in another foreign bank’s currency.
    • Facilitates interbank transactions between two foreign banks without converting currencies into a domestic currency.
    • For example, if a bank in India holds an account in a bank in the United States in USD (U.S. Dollars) to facilitate transactions between those two banks.

    What is Special Rupee Vostro Account (SRVA)?

    Information
    Definition Domestic banks hold INR accounts for foreign banks, promoting direct trade in rupees.
    Purpose
    • Complements existing currency systems, allowing INR-based settlements.
    • Reduces reliance on foreign currencies, mitigating economic shocks.
    • Aims to elevate INR’s global status and facilitates trade with sanctioned countries.
    Framework Components
    • All exports and imports invoiced in INR.
    • Exchange Rate is Market-determined.
    • Final trade settlements takes place in INR.
    Functioning
    • Indian banks open SRVA accounts for foreign banks.
    • INR used for import payments and export receipts.
    Compliance
    • Enables advance payments for Indian exporters, complying with Foreign Exchange Management Act (FEMA), 1999.
    • Correspondent bank should not from a country mentioned in the updated Financial Action Task Force (FATF) Public Statement on High Risk & Non-Co-operative jurisdictions
    Purpose of the Arrangement
    • Reduces demand for foreign currencies, increasing INR use in trade.
    • Mitigates economic shocks by minimizing reliance on foreign exchange.
    • Aims to boost INR’s global acceptance and facilitates trade with sanctioned nations.

     

    How are the SRVA different from the already existing Rupee Vostro Account?

    • The settlement of International trade through Indian Rupees (INR) is an additional arrangement to the existing system of settlement.
    • SRVA requires prior approval (of RBI) before opening unlike Rupee Vostro account.

    PYQ:

    [2015] Convertibility of rupee implies:

    (a) being able to convert rupee notes into gold

    (b) allowing the value of rupee to be fixed by market forces

    (c) freely permitting the conversion of rupee to other currencies and vice versa

    (d) developing an international market for currencies in India

  • Centre Directs Gas-Based Power Plants To Begin Operations Amid Rising Summer Demand

    Why in the News? 

    • The Central government has issued directives under Section 11 of the Electricity Act, of 2003 to all gas-based generating stations to ensure Maximum Power Generation.
      • This section empowers the Central/state government to specify the operation of generating stations in extraordinary circumstances.

    Why India Needs Gas-based Plants?

    • Electricity Demand in India: India faces a surge in electricity demand, especially during the upcoming summer season. The government has instructed gas-based power plants to commence operations to address this demand surge.
    • Optimizing Power Availability: The directive aims to optimize power availability from gas-based generating stations during the anticipated high-demand period, similar to measures taken for imported-coal-based power plants.
    • Ideal Transitioning Fuel: Gas-based power plants can be an ideal transition fuel for the shift from coal-based generation to renewable energy in the Indian power sector. They can provide the necessary flexibility and reliability to the grid as the share of renewable energy increases.
    • Targets: The Indian government has set a target of increasing the share of non-fossil fuel, especially renewables, in power generation to 50% by 2030, and gas-based power plants can play a crucial role in achieving this target.

     

    Challenges in building Gas-based Infrastructure:

    • Underutilized Capacity: Despite having considerable capacity, gas-based generating stations remain underutilized, primarily due to commercial considerations.
    • Non-availability of Affordable Fuel: India’s gas-based power plants are either stranded or operating at sub-optimal levels due to the non-availability of affordable fuel
    • Lack of Domestic Gas Supply: The limited domestic gas supply has forced gas-based power producers to depend on LNG to meet their fuel needs, but the high cost of LNG has increased the variable cost of power, making it difficult to schedule in merit order dispatch
    • Dependence on Imports: With barely half of the current gas consumption coming from local production, dependence on gas-based power plants can only be interim and not a long-term solution.

    Initiatives taken by the Government:

    • Setting up biogas plants: The Ministry of New and Renewable Energy, Government of India, launched the Biogas program to set up biogas plants for various applications, including power generation.
    • Use of gas-based power for peaking and balancing: The government will use some gas-based power to meet the country’s peaking and balancing needs during the summer of 2024.
    • Increasing gas-based power generation: The government wants the share of gas-based power to rise to 15% of India’s total installed power generation capacity.

    Way forward:

    • Diversification of fuel sources: Encourage the exploration and development of domestic gas reserves to reduce reliance on imported gas and mitigate price volatility.
    • Investment in infrastructure: Develop infrastructure for transporting gas efficiently across the country to ensure a steady and reliable supply to power plants.
    • Policy support: Provide long-term policy certainty and incentives for investment in gas-based power generation, including tax breaks, subsidies, and assured purchase agreements.

    Mains PYQ 

    Q  Environmental Impact Assessment studies are increasingly undertaken before a project is cleared by the Government. Discuss the environmental impacts of coal-fired thermal plants located at coal pitheads. (UPSC IAS/2014)