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Subject: Economics

  • Rythu Bandhu: Telangana DBT scheme for farmers’ assistance

    The total funds disbursed under Rythu Bandhu, Telangana government’s direct benefit transfer scheme for farmers, will soon touch Rs 50,000 crore in the coming days.

    What is Rythu Bandhu?

    • Rythu Bandhu is a scheme under which the state government extends financial support to land-owning farmers at the beginning of the crop season through direct benefit transfer.
    • The scheme aims to take care of the initial investment needs and do not fall into a debt trap.
    • This in turn instills confidence in farmers, enhances productivity and income, and breaks the cycle of rural indebtedness.

    DBT under the Scheme

    • Each farmer gets Rs 5,000 per acre per crop season without any ceiling on the number of acres held.
    • So, a farmer who owns two acres of land would receive Rs 20,000 a year, whereas a farmer who owns 10 acres would receive Rs 1 lakh a year from the government.
    • The grant helps them cover the expenses on input requirements such as seeds, fertilizers, pesticides, and labour.

    How much does it cost the state exchequer?

    • Since the Kharif season of 2018, the state government has been crediting Rythu Bandhu assistance to farmers.
    • As of date, it has credited Rs 43,036.64 crore into the bank accounts of beneficiaries.
    • This season, the state government will disburse another Rs 7638.99 crore, taking the total sum disbursed so far to over Rs 50,000 crore.

    Comparing with the PM-KISAN scheme

    • The state government has often said that the Centre’s PM-KISAN (Pradhan Mantri Kisan Samman Nidhi) scheme is a “copy” of Rythu Bandhu.
    • Under PM-KISAN, a land-holding family receives an income support of 6,000 per year in three equal installments.
    • Rythu Bandhu is based on anticipated input expenditure for each acre of land and there is no restriction on the number of acres owned by a farmer.
    • PM-KISAN only provides support to the family and not to the farm units.

    Criticisms of the Rythu Bandhu Scheme

    • The scheme does not cover the landless or tenant farmers.
    • Farmer bodies have been demanding that the state government should extend the agriculture assistance to tenant farmers as well.
    • They have pointed out that those who work on lands taken on lease from landowners also need government assistance at the beginning of a crop season.
    • It is difficult to bring tenant farmers under the ambit of the scheme because of the informal nature of the agreements they enter into.

     

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  • What are Blockchain Funds?

    The Securities and Exchange Board of India (SEBI) has ruled that Indian mutual funds (MFs) cannot invest in crypto-related products until government regulations on are clear.

    What are Blockchain Funds?

    • Blockchain is a digital ledger system that facilitates the process of recording transactions and tracking assets in a network.
    • It is possible to have blockchain without crypto, but in practice the two are highly interlinked.
    • Cryptocurrency tends to power the resources needed for a public blockchain network.
    • Unlike specific crypto-based investments, blockchain funds invest in multiple companies that are driving sustainable earnings from blockchain businesses.
    • Some key companies in this ecosystem are US-based Coinbase Global Inc and Advanced Micro Devices Inc, and Japan’s GMO internet Inc.

    Why has SEBI blocked Blockchain funds?

    • Absence of regulations: SEBI concerns stem from unclear regulations around cryptocurrencies in India.
    • Unclear future: While investing, trading and holding crypto assets are allowed in India as of now, the laws are still not clear as to how they are regulated and taxed.
    • Possible ban: There is a possibility that the government may ban trading in crypto altogether or come up with stringent thresholds for investors to delve into this new asset.
    • Taxing the gains: For taxation purposes, short-term capital gains from individual crypto investing are taxed at personal taxation rates, however, there are no clear guidelines for fund investing.

    Are blockchain funds good investments?

    • The technology is creating value by revolutionizing the way assets and digital records are managed and transferred.
    • Many companies, particularly in financial services, are investing millions of dollars in researching and building Blockchain infrastructure.
    • Although the technology is still in the nascent phase in India, its potential across the board is huge.

    Back2Basics: Mutual Funds

    • A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt.
    • The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds.
    • Each share represents an investor’s part ownership in the fund and the income it generates.

    Mutual funds are a popular choice among investors because they generally offer the following features:

    • Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.
    • Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.
    • Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.
    • Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

    Risks with MFs

    • With mutual funds, one may lose some or all of the money invested because the securities held by a fund can go down in value.
    • Dividends or interest payments may also change as market conditions change.
    • The more volatile the fund, the higher the investment risk.

     

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  • What is the Regression Theorem?

    This newscard is an excerpt from the original article published in the TH e-paper edition.

    Regression Theorem

    • The regression theorem refers to a theory of the origin of money.
    • It states that money must have originated as a commodity with intrinsic value in the marketplace.
    • The idea was first proposed by Austrian economist Carl Menger in his 1892 work “On the Origins of Money.”
    • This theory is offered as an alternative to the state theory of money which states that money (fiat money) can come into existence only when it is backed by the government.

    Evolution of Money

    • The regression theory argues that money comes into existence through a gradual process of evolution in the marketplace, without the need for any government sanction.
    • Economists who try to explain the regression theory generally start with the question of why money, particularly fiat money which is simply just a piece of paper, has any value at all in the marketplace.
    • The most common answer to this question is that fiat money can be used to buy other useful goods such as houses, cars etc.
    • But this answer is insufficient —it tries to tackle the question of why fiat money can buy other useful goods by simply saying that it can buy other useful goods.

    Why is fiat money, which has little intrinsic value, considered valuable?

    • In real life, people accept money in exchange for goods in the present because they are aware that money was accepted as a medium in exchange for other goods in the past.
    • For example, people accept wages in the US dollar today because they are aware that the dollar was used to buy cars, groceries and other goods in the market yesterday.
    • This gives them confidence in the value of their money.

    What made people accept money in exchange for other useful goods in the past?

    Ans. Intrinsic Value

    • Economists who advocate the regression theory of money argue that money must have originated as a useful commodity like gold or silver or the barter system.
    • This is the only way, they argue, it could have possibly been accepted by people in exchange for other useful goods at some point in the past.
    • If a thing did not possess any intrinsic value, it is unlikely that people in the marketplace would have accepted it in exchange for other goods and services.
    • So, commodities like gold and silver must have been traded in exchange for other goods and services at some point in history purely because they offered some kind of personal utility to people.
    • For example, these precious metals could have been used to make ornaments, to fill teeth, etc., which gives them intrinsic value.
    • They maintain value over time because their supply cannot be easily ramped up as mining gold involves significant production costs.

     

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  • Places in news: Deucha Pachami Coal Mines

    Thousands of Tribals fear displacement following the implementation of the project to mine coals and basalts from the Deucha-Pachami coal block in West Bengal’s Birbhoom district.

    Deucha-Pachami Mines

    • Deucha-Pachami-Dewanganj-Harinsinga coal block is the second-largest coal block in the world; it is the largest in India.
    • It is located in Deucha and Panchamati area under Mohamad bazar community Development Block of Birbhum district, West Bengal.
    • The block has a thick coal seam trapped between equally thick layers of rocks, mostly basalt. It has a great economic value.
    • The existence of these thick basalt layers, however, makes mining of coal difficult; foreign investment and technology will be hence needed for mining.

     

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  • SEBI tweaks share sale norms for IPOs

    The Securities & Exchange Board of India (SEBI) has approved amendments to a slew of regulations to tighten the Initial Public Offering (IPO) process and norms governing the utilization of IPO proceeds by promoters.

    What is an IPO?

    • Every company needs money to grow and expand.
    • They do this by borrowing or by issuing shares.
    • If the company decides to opt for the second route of issuing shares, it must invite public investors to buy its shares.
    • This is its first public invitation in the stock market and is called the Initial Public Offering (IPO).

    What does it mean for investors to buy shares?

    • When one buys such shares, he/she makes an IPO investment.
    • He/she gets ownership in the company, proportionate to the value of your shares.
    • These shares then get listed on the stock exchange.
    • The stock exchange is where you can sell your existing shares in the company or buy more.

    How does an IPO work?

    • The Securities and Exchange Board of India (SEBI) regulates the entire process of investment via an IPO in India.
    • A company intending to issue shares through IPOs first registers with SEBI.
    • SEBI scrutinizes the documents submitted, and only then approves them.

    Who can hold IPOs?

    • It could be a new, young company or an old company that decides to be listed on an exchange and hence goes public.

    What are the recent regulations?

    • In its board meeting, SEBI approved conditions for sale of shares by significant shareholders in the Offer-For-Sale (OFS) process via an IPO and has extended the lock-in period for anchor investors to 90 days.
    • Shares offered for sale by shareholders with more than 20% of pre-issue shareholding of the issuer, should not exceed 50% of their holding.
    • If they hold less than 20%, then the offer for sale should not exceed 10% of their holding of the issue.
    • These changes are as per proposals recommended by SEBI’s Primary Market Advisory Committee.

    Also read:

    [Sansad TV] The IPO Boom

     

    Try this question from CSP 2019:

    Q.In India, which of the following review the independent regulators in sectors like telecommunications, insurance, electricity, etc.?

    1. Ad Hoc Committees set up by the Parliament
    2. Parliamentary Department Related Standing Committees
    3. Finance Commission
    4. Financial Sector Legislative Reforms Commission
    5. NITI Aayog

    Select the correct answer using the code given below:

    (a) 1 and 2

    (b) 1, 3 and 4

    (c) 3, 4 and 5

    (d) 2 and 5

     

    [wpdiscuz-feedback id=”tmup8r61ul” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

     

     

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  • Plea seeks GI tag for Arunachal Apatani textile product

    An application seeking a Geographical Indication (GI) tag for the Arunachal Pradesh Apatani textile product has been filed by a firm.

    Apatani textile

    • The Apatani weave comes from the Apatani tribe of Arunachal Pradesh living at Ziro, the headquarters of lower Subansiri district.
    • The woven fabric of this tribe is known for its geometric and zigzag patterns and also for its angular designs.
    • The community weaves its own textiles for various occasions, including rituals and cultural festivals.
    • The tribe predominantly weaves shawls known as jig-jiro and jilan or jackets called supuntarii.
    • The traditional handloom of this tribe is a type of loin loom, which is called Chichin, and is similar to the traditional handloom of the Nyishi tribe.

    What makes it special?

    • The people here use different leaves and plant resources for organic dying the cotton yarns in their traditional ways.
    • Only women folk are engaged in weaving.

     

    Answer this PYQ in the comment box:

     

    Q.Which of the following has/have been accorded ‘Geographical Indication’ status?

    1. Banaras Brocades and Sarees
    2. Rajasthani Daal-Bati-Churma
    3. Tirupathi Laddu

    Select the correct answer using the code given below:

    (a) 1 only

    (b) 2 and 3 only

    (c) 1 and 3 only

    (d) 1, 2 and 3

     

    [wpdiscuz-feedback id=”3krodtowqp” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

    About Geographical Indication

    • A GI is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin.
    • Nodal Agency: Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry
    • India, as a member of the World Trade Organization (WTO), enacted the Geographical Indications of Goods (Registration and Protection) Act, 1999 w.e.f. September 2003.
    • GIs have been defined under Article 22 (1) of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
    • GI is granted for a term of 10 years in India. As of today, more than 300 GI tags has been allocated so far in India (*Wikipedia).
    • The tag stands valid for 10 years.

     

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  • All you need to know about the New  Labour Codes

    India is likely to implement four new labour codes on wages, social security, industrial relations, and occupational safety by the next fiscal year beginning 2022.

    Must read:

    [Burning Issue] New Labour Laws

    New Labour Codes

    The four codes likely to be implemented in FY23 are:

    1. Code on Wages
    2. Industrial Relations Code
    3. Social Security Code, and
    4. Occupational Safety, Health and Working Conditions Code

    Objectives of the Labour Code

    • The new labor codes are aimed at facilitating ease of doing business in the country and seek to replace 29 cumbersome laws.
    • The objective is to encompass over 500 million organized and unorganized sector workers—90% of the workforce which has been outside labour laws.
    • The idea is to ensure that they receive wage security, social security and health security, gender equality in terms of remuneration, a minimum floor wage, make the lives of inter-state migrant workers easier.

    What is the current status of the codes?

    • The central government has completed the process of finalizing the draft rules, state governments are in the process of drafting the same.
    • With labor being a concurrent subject, states are in the process of pre-publishing draft rules for these reforms.

    How many labour laws do Indian states have?

    • The simplification of 29 labour laws into the four labour codes is expected be a watershed moment for labour reforms.
    • India currently has a web of multiple labour legislations, over 40 central laws and 100 state laws involving labour.
    • The Second National Commission on Labour (2002) recommended simplification to bring about transparency and uniformity.

    What are the major goals in these codes?

    • Social security benefits: With organized sector workers being approximately 10% of the total workforce, the new codes may ensure that social security benefits are for all.
    • Take-home salary: As per the proposed labour codes, total allowances such as house rent, leave, travel etc. are to be capped at 50% of the salary, while basic pay should account for the remaining 50%.
    • Four days work: There could also be a permissible four-day work week of 12 hours per day.

    How will it affect ease of doing business?

    • Labour productivity: It is likely to improve with both employees and employers developing a sense of being partners in wealth creation.
    • Labour reform: A transparent environment in terms of workers’ compensation, clear definition of employee rights and employer duties.
    • Compliance un-burdening: Simplified labour codes making compliance easier are likely to attract investments.
    • Formalization of the economy: With more workers in the organized sector, leakage in terms of direct as well as indirect taxes may be plugged.

     

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  • India needs thoughtful legislation on digital currency

    Context

    The dramatic changes in technology have created new challenges for the law, lawmakers, courts and lawyers to confront.

    Challenges posed by technological transformation

    • Technology has outpaced the law, and lawmakers are being challenged by how quickly “we the people” have embraced technological transformations.
    • Challenges of regulation: Challenges include regulation of digital media platforms, censorship of Over The Top (OTT) streaming services, fixing accountability for procuring and deploying spyware like Pegasus, dealing with the bias within artificial intelligence etc.
    • Regulation of cryptocurrencies: In probably no other area are lawmakers required to appreciate science and technology than in cryptocurrency.
    • With 10 crore users of cryptocurrency and crypto assets in India, this ever-expanding market is almost entirely unregulated.

    Practices or legislative models that have been adopted the other countries for regulation of cryptocurrencies

    • KYC, AML and CFT: Countries where cryptocurrencies and crypto-assets are legal have frameworks that mandate KYC (know your customer), AML (Anti-Money Laundering) mechanisms and demand adherence to CFT (Combating Financing of Terrorism) requirements.

    [1] How Singapore regulates crypto-currencies?

    • Singapore adopted the approach which favours strong regulation rather than ban.
    • Common law to regulate traditional and cryptocurrencies: Singapore has the Payments Services Act, 2020 that has streamlined both traditional and cryptocurrencies under one law.
    • Provision for licences: The law also provides a framework to obtain licences to operate crypto businesses.

    [2] How Switzerland regulates cryptocurrencies?

    • Switzerland has also favoured the strong regulation model overseen by an already established financial regulator.
    • Provision for licences: The Swiss Financial Market Supervisory Authority (FINMA) that oversees the country’s financial markets mandates that all virtual asset service providers, including cryptocurrency exchanges must be licenced.
    • KYC, AML and CFT procedures must be strictly complied with. These are the checks on the use of cryptocurrencies and crypto assets that could facilitate criminal enterprise.

    [3] Approach adopted by the US

    • Crypto exchanges to be transmitters: The US does not consider cryptocurrency to be legal tender but defines cryptocurrency exchanges to be money transmitters.
    • Cryptocurrencies as property: The Internal Revenue Service (IRS) treats cryptocurrency as property for US federal taxation purposes.
    • Exchanges must obtain requisite licences from the Financial Crimes Enforcement Network and implement the standard AML and CFT requirements that have become the norm in most jurisdictions that regulate cryptocurrencies.
    • Revenue potential: One of the most important lessons to absorb from the US is the revenue potential of cryptocurrencies and crypto assets.

    Conclusion

    In India, the need of the times is thoughtful legislation and rigorous regulation of cryptocurrencies and crypto-assets that are already here and being used.

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  • What is Tokenization of Debit and Credit Cards?

    The Reserve Bank of India (RBI) has decided to defer the implementation of tokenization of debit and credit cards for online transactions by a further six months following representations from stakeholders.

    RBI decision

    • RBI has also extended tokenization of Card-on-File (CoF) transactions where card details are saved by merchants — and directed the merchants not to store card details in their systems from January 1, 2022.
    • A CoF transaction is one in which a cardholder has authorized a merchant to store his or her Mastercard or Visa payment details, and to bill the stored account.
    • E-commerce companies and airlines and supermarket chains often store card details.

    What is Tokenisation?

    • Tokenisation refers to the replacement of credit and debit card details with an alternative code called a ‘token’.
    • This token is unique for a combination of card, token requestor (the entity that accepts a request from the customer for tokenisation of a card and passes it on to the card network to issue a token) and the device.

    Benefits of Tokenization

    • Transaction safety: Tokenization reduces the chances of fraud arising from sharing card details.
    • Easy payments: The token is used to perform contactless card transactions at point-of-sale (PoS) terminals and QR code payments.
    • Data storage: Only card networks and card-issuing banks will have access to and can store any card data.

    How are the transactions currently processed?

    • There are many players involved in processing one card transaction today:
    1. Merchant
    2. Payment aggregator
    3. Issuing bank
    4. Card network
    • When a transaction happens on a merchant platform, the data is sent to the payment aggregator (PA).
    • The PA next sends the details to either the issuing bank or the card network.
    • Then issuing bank sends an OTP and the transaction flows back.

    Which companies dominate card transactions in India?

    Is the industry ready to implement this?

    • Not fully, that is why the RBI had to extend the deadline.
    • The industry currently can convert CoF into a tokenized number. However, the readiness to process the token is negligible.
    • About 90% of banks are ready with provisioning of token on Visa. Only 25-30% banks are ready on Mastercard.

    Impact on businesses

    If the industry isn’t ready, several business models would be impacted.

    • E-mandates (recurring payments) will stand ineffective from 1 July.
    • Card EMIs account for 25% of online e-commerce sales. That option will no longer be available.
    • Cashbacks/discount offers by banks will be impacted, too.
    • A user may not be able to use Mastercard saved cards on a merchant platform to make a transaction and will have to enter the card details every time a transaction is made.
    • This could be the same for some Visa cards.

    Way forward

    • The new system is a much bigger disruption to the way digital payments will henceforth be processed.
    • Integration of systems and the ability to process is one part.
    • The industry also needs to test the performance and success rate of the tokenization solution.

     

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  • RBI proposes new norms for Capital Requirement for Banks

    The Reserve Bank of India (RBI) has proposed to replace existing approaches for measuring minimum operational risk capital requirements of banks with a new Basel-III standardized approach.

    What are Capital Requirements of a Bank?

    • Capital requirements are standardized regulations in place for banks and other depository institutions that determine how much liquid capital must be held of a certain level of their assets.
    • They are set to ensure that banks and depository institutions’ holdings are not dominated by investments that increase the risk of default.
    • They also ensure that banks and depository institutions have enough capital to sustain operating losses (OL) while still honoring withdrawals.

    Why need such a requirement?

    • An angry public and uneasy investment climate usually prove to be the catalysts for capital requirements provisions.
    • This is essential when irresponsible financial behavior by large institutions is seen as the culprit behind a financial crisis, market crash, or recession.

    What are the risks for a Bank?

    There are many types of risks that banks face.

    • Credit risk
    • Market risk
    • Operational risk
    • Liquidity risk
    • Business risk
    • Reputational risk
    • Systemic risk
    • Moral hazard

     What is Operational Risk?

    • ‘Operational risk’ refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
    • This has been defined by the Basel Committee on Banking Supervision I as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
    • This definition includes legal risk, but excludes strategic and reputational risk.

    Pros of Capital Requirements

    • Ensure banks stay solvent, avoid default
    • Ensure depositors have access to funds
    • Set industry standards
    • Provide way to compare, evaluate institutions

    Unwanted consequences of such move

    • Raise costs for banks and eventually consumers
    • Inhibit banks’ ability to invest
    • Reduce availability of credit, loans

    Back2Basics: Basel Accords

    • They refer to the banking supervision Accords (recommendations on banking regulations)—Basel I, Basel II and Basel III—issued by the Basel Committee on Banking Supervision (BCBS).
    • They are called the Basel Accords as the BCBS maintains its secretariat at the Bank for International Settlements in Basel, Switzerland and the committee normally meets there.
    • These are a set of recommendations for regulations in the banking industry.
    • India has accepted Basel accords for the banking system.

    Let’s revise them:

    [1] Basel I

    • In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1.
    • It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks.
    • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
    • RWA means assets with different risk profiles.
    • For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1999.

    [2] Basel II

    • In June ’04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord.
    • The guidelines were based on three parameters, which the committee calls it as pillars:
    • Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
    • Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks.
    • Market Discipline: This need increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

    [3] Basel III

    • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
    • A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
    • Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk.
    • Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
    • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

     

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