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Subject: Economics

  • Liberalized Drone Rules, 2021

    The central government has notified the Drone Rules 2021, a much more liberalised regime for unmanned aircraft systems than what existed previously.

    Key features of Drone Rules 2021

    These rules are built on a premise of trust, self-certification and non-intrusive monitoring. The policy is designed to usher in an era of super-normal growth while balancing safety and security considerations.

    • Several approvals abolished: Unique authorisation number, unique prototype identification number, certificate of manufacturing and airworthiness, certificate of conformance, certificate of maintenance, import clearance, acceptance of existing drones, operator permit, authorisation of R&D organisation, student remote pilot licence, remote pilot instructor authorisation, drone port authorisation etc.
    • Number of forms reduced: from 25 to 5.
    • Types of fees: reduced from 72 to 4.
    • Quantum of fee: reduced to nominal levels and delinked with size of drone. For instance, the fee for a remote pilot license fee has been reduced from INR 3000 (for large drone) to INR 100 for all categories of drones; and is valid for 10 years.
    • Digital sky platform: It shall be developed as a user-friendly single-window system. There will be minimal human interface and most permissions will be self-generated.
    • Interactive airspace map: with green, yellow and red zones shall be displayed on the digital sky platform within 30 days of publication of these rules.
    • No permission required in green zones: Green zone means the airspace upto a vertical distance of 400 feet or 120 metre that has not been designated as a red zone or yellow zone in the airspace map; and the airspace upto a vertical distance of 200 feet or 60 metre above the area located between a lateral distance of 8 and 12 kilometre from the perimeter of an operational airport.
    • De-licensing: No remote pilot licence required for micro drones (for non-commercial use) and nano drones. No requirement for security clearance before issuance of any registration or licence. Nano and model drones (made for research or recreation purposes) are exempt from type certification.
    • Foreign ownership: No restriction on foreign ownership in Indian drone companies.
    • Import: Import of drones to be regulated by DGFT. Requirement of import clearance from DGCA abolished.
    • Size of drones: Coverage of drones under Drone Rules, 2021 increased from 300 kg to 500 kg. This will cover drone taxis also.
    • Testing of drones: for issuance of Type Certificate to be carried out by Quality Council of India or authorised testing entities.
    • UID: Manufacturers and importers may generate their drones’ unique identification number on the digital sky platform through the self-certification route. Drones present in India on or before 30 Nov 2021 will be issued a unique identification number through the digital sky platform provided, they have a DAN, a GST-paid invoice and are part of the list of DGCA-approved drones.
    • Penalties: Maximum penalty for violations reduced to INR 1 lakh.
    • Permission: Safety and security features like ‘No permission – no takeoff’ (NPNT), real-time tracking beacon, geo-fencing etc. to be notified in future. A six-month lead time will be provided to the industry for compliance.
    • Drone corridors: will be developed for cargo deliveries.
    • Drone promotion council: to be set up by Government with participation from academia, startups and other stakeholders to facilitate a growth-oriented regulatory regime.

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  • A way of diluting credit discipline

    Context

    Some bank borrowers have gone to court demanding that it quash the Reserve Bank of India (RBI) circular dated August 6, 2020 on opening current accounts.

    Background

    • Current accounts with non-lending banks are an important channel for diversion.
    • Diversion of funds is a major reason for large non-performing assets (NPAs).
    • Internal diversion is for non-priority purposes and funds can also be diverted to other firms, owned or controlled by the same group, friends or relatives.
    • To prevent this, the RBI mandates a No-Objection Certificate (NOC) from lending banks before opening such accounts.
    • Banks should verify with CRILC, the RBI credit database, and inform lenders. Banks should also obtain a NOC from the drawee bank when an account is opened through cheques.
    • Widespread non-compliance with mandated safeguards forced the RBI to bar non-lending banks from opening current accounts for large borrowers.
    • Thus, if borrowing is through a cash credit or overdraft account, no bank can open a current account.

    What are the current regulations?

    • If a borrower has no cash credit or overdraft account, a current account can be opened subject to restrictions.
    • If the bank’s exposure is less than 10% of total borrowings, debits to the account can only be for transfers to accounts with a designated bank.
    • If total borrowing is ₹50 crore or more, there should be an escrow mechanism managed by one bank which alone can open a current account.
    • Other lending banks can open ‘collection accounts’ from which funds will be periodically transferred to the escrow account.
    • If the borrowing is between ₹5 crore and ₹50 crore, lending banks can open current accounts.
    • Non-lending banks can open collection accounts.
    • If borrowing is below ₹5 crore, even non-lending banks can open current accounts.
    • The working capital credit should be bifurcated into loan and cash credit components at individual bank levels.

    Issues with regulations

    • If a borrower has an overdraft, how can there not be a current account?
    • An overdraft is the right to overdraw in a current account up to a limit.
    • The second issue is that the circular forecloses such operational flexibility.
    • Third, why should a bank with low exposure transfer funds to another bank when it can use it to adjust other dues with it?
    • Fourth, share in borrowing is not static. Crossing the threshold both ways could happen often.
    • Fifth, there is a mismatch between what a borrower needs and the regulations allow.
    • Support of non-lending banks through current accounts in other banks is required for large accounts.
    • Sixth, transactions in an active current account enables a bank to monitor a borrower’s account, however small.
    • The lack of such control was why large development financial institutions of yesteryear built up huge NPAs.
    • Seventh, the regulation mandates splitting working capital into loan and cash credit components across all banks.
    • Such a one-size-fits-all regulation does not factor in the purpose of the different facilities.
    • A large company might avail itself of loans in Mumbai, but require current accounts with another bank in Assam where it might have a factory.
    • Lack of flexibility: Rules are not flexible, do not provide for unforeseen circumstances, and can be easily circumvented.
    • Use more generic terms: Regulation needs to use more generic terms. Terms such as Working Capital Term Loan might mean different things in different banks.
    • Diversion of fund is risk better dealt by banks: Is it not better to leave management of exceptional risks such as diversion of funds to the banks?
    • The cost of regulation: the costs of regulation be justified by the benefits.

    Conclusion

    When regulation ignores market practices, it lacks legitimacy, a construct from neo-institutionalist literature. When legitimacy is wanting, compliance suffers.

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  • Mandatory rice fortification policy should be re-examined

    Context

    To deal with the high prevalence of anaemia, the government has been pursuing the policy of food fortification with iron. This policy needs a rethink.

    Rice-fortification policy

    • There are high levels of anaemia in India, affecting women and children equally.
    • This is despite the corrective measures like mandatory supplementation of iron tablets through Anaemia Mukt Bharat programme of pharmaceutical iron supplementation.
    • To deal with the issue, the government has decided on compulsory rice fortification in safety-net feeding programmes like the ICDS, PDS and school mid-day meals.
    • This was announced by the Prime Minister in his recent Independence Day address to the nation.
    • The mandatory rice fortification programme is being piloted in some districts already.
    • Food fortification is considered attractive as it requires no behavioural modification by the beneficiary.

    Why iron fortification policy needs re-examination?

    1) Over-estimation of anaemia burden

    • High WHO cutoff for Hg levels: WHO haemoglobin cut-offs are used to diagnose anaemia in India.
    • There is a growing global consensus that these may be too high.
    • A recent Lancet paper suggested a lower haemoglobin cut-off level to diagnose anaemia in Indian children.
    • Using this will actually reduce the anaemia burden by two-thirds.
    • Capillary Vs venous blood sample: Haemoglobin level can be falsely low when a capillary blood sample (taken by finger-prick) is used for measurement, instead of the more reliable venous blood sample (taken with a syringe from an arm vein). The anaemia burden in India is estimated from capillary blood, which inflates the anaemia burden substantially.
    • If the recommended venous blood sample is used, it would halve this burden.
    • There is, thus, a significant overestimation of anaemia burden.

    2) Other nutrients and protein intake

    • A MoHFW national survey (Comprehensive National Nutrition Survey) of Indian children showed that iron deficiency was related to less than half the anaemia cases.
    • Many other nutrients and adequate protein intake are also important, for which a good diverse diet is required.

    3) Iron requirement over-estimated

    • The idea for iron fortification comes from the premise that a normal Indian diet cannot possibly meet an individual’s daily iron requirement.
    • This is wrong thinking, and is based on older iron requirements (as per National Institute of Nutrition [NIN] 2010), which were much too high.
    • The latest corrected iron requirements (NIN 2020) are 30-40 per cent lower.
    • The iron density of the Indian vegetarian diet, about 9 mg/1000 kCal, can thus meet most requirements.

    4) Challenges in rice fortification

    • Rice fortification is very complex.
    • It requires a fortified rice “kernel” or grain that is composed of rice flour paste, along with the required concentration of micronutrients and binders, extruded into a grain that exactly matches the shape of the rice it is intended to fortify.
    • The problem lies in making “matching” kernels for each rice cultivar that is distributed in the food safety-net programmes from year to year and state to state.
    • If it does not match, the instinct of a home cook will be to pick out and discard the odd grains, thereby defeating the purpose of fortification.

    Risks involved

    • Ingesting fortified salt (two teaspoons, 10 g/day) or rice (quarter kilo/day) will deliver an additional 10 mg iron/day each to the diet.
    • When the iron intake exceeds 40 mg/day, the risk of toxicity goes up.
    • The unabsorbed iron that remains in the gut can wreak havoc among the beneficial bacteria in the large intestine.
    • Iron causes oxidative stress, and more seriously, is implicated in diabetes and cancer risk. Men will also be more at risk.

    Way forward

    • We just need to absorb the existing dietary iron better and complement this with all the other nutrients that are required, by eating a diverse diet (with fruits and vegetables, for example), and improving our environment.
    • Indeed, it is well-known that the benefits derived from the nutrients in whole foods are greater than the sum of their parts.

     Conclusion

    We need to rethink our reductionist strategies if we are to deliver food and nutrition security to our people.

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  • The dangers of India’s palm oil push

    Context

    On August 15, Prime Minister Narendra Modi announced a support of Rs 11,000 crore to incentivise oil palm production.

    National Mission on Edible Oils and Oil Palm (NMEO-OP)

    • Under NMEO-OP, the government intends to bring an additional 6.5 lakh hectares under oil palm cultivation.
    • The agro-business industry has said the move will help its growth and reduce the country’s dependence on palm oil imports, especially from Indonesia and Malaysia.
    • Indonesia has emerged as a significant palm oil hub in the last decade and has overtaken Malaysia.
    • The two countries produce 80 per cent of global oil palm.
    • Indonesia exports more than 80 per cent of its production.

    Reducing the import dependence

    • India imported 18.41 million tonnes of vegetable oil in 2018.
    • The National Mission on Oilseeds and Oil Palm are part of the government’s efforts to reduce the dependence on vegetable oil production.
    • The Yellow Revolution of the 1990s led to a rise in oilseeds production.
    • Though there has been a continuous increase in the production of diverse oilseeds — groundnut, rapeseed and mustard, soybean — that has not matched the increasing demand.
    • Most of these oilseeds are grown in rain-fed agriculture areas of Gujarat, Andhra Pradesh, Haryana, Karnataka, Rajasthan, Madhya Pradesh, Tamil Nadu and Uttar Pradesh.

    Issues with oil palm cultivation in India

    • Impact on biodiversity: Studies on agrarian change in Southeast Asia have shown that increasing oil palm plantations is a major reason for the region’s declining biodiversity. 
    • The Northeast is recognised as the home of around 850 bird species, it is also home to citrus fruits, it is rich in medicinal plants and harbours rare plants and herbs.
    • Above all, it has 51 types of forests.
    • Studies conducted by the government have also highlighted the Northeast’s rich biodiversity.
    • The palm oil policy could destroy this richness of the region.
    • To preserve the environment and biodiversity, Indonesia and Sri Lanka have already started putting restrictions on palm tree plantation.
    • Water pollution: Along with adversely impacting the country’s biodiversity, it has led to increasing water pollution.
    • Climate change: The decreasing forest cover has significant implications with respect to increasing carbon emission levels and contributing to climate change.
    • Against the notion of self-reliance: Such initiatives are also against the notion of community self-reliance:
    • The initial state support for such a crop results in a major and quick shift in the existing cropping pattern that are not always in sync with the agro-ecological conditions and food requirements of the region.
    • Against commitment to sustainable agriculture: The policy also contradicts the government’s commitments under the National Mission for Sustainable Agriculture.
    • The mission aims at “Making agriculture more productive, sustainable, remunerative and climate resilient by promoting location specific integrated/composite farming systems.”
    • The palm oil mission, instead, aims at achieving complete transformation of the farming system of Northeast India.
    • Studies also show that in case of variations in global palm oil prices, households dependent on palm oil cultivation become vulnerable.

    Consider the question “India depend on import for its vegetable oil requirements to a larger extent. What are the steps taken by the government to reduce the dependence? Can oil palm cultivation in India be a solution?”

    Conclusion

    Similar environmental and political outcomes cannot be ruled out in India. Apart from the possible hazardous impacts in Northeast India, such trends could have negative implications on farmer incomes, health, and food security in other parts of the country in the long run.

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  • National Monetization Pipeline

    The Union Finance Minister has launched the National Monetization Pipeline for the brownfield infrastructure assets.

    What is Asset Monetization?

    • Asset Monetization involves the creation of new sources of revenue by unlocking of the value of hitherto unutilized or underutilized public assets.
    • Internationally, it is recognized that public assets are a significant resource for all economies.
    • Many public sector assets are sub-optimally utilized and could be appropriately monetized to create greater financial leverage and value for the companies and of the equity that the government has invested in them.
    • This helps in the accurate estimation of public assets which would help in the better financial management of government/public resources over time.

    National Monetization Pipeline (NMP)

    • The NMP comprises a four-year pipeline of the Central Government’s brownfield infrastructure assets.
    • It will serve as a medium-term roadmap for the Asset Monetization initiative of the government, apart from providing visibility for the investors.
    • Incidentally, the 2021-22 Union Budget, laid a lot of emphasis on Asset Monetization as a means to raise innovative and alternative financing for infrastructure.
    • It has to be noted that the government views asset monetization as a strategy for the augmentation and maintenance of infrastructure, and not just a funding mechanism.

    What is the plan?

    • NMP is envisaged to serve as a medium-term roadmap for identifying potential monetization-ready projects, across various infrastructure sectors.
    • It estimates aggregate monetization potential of Rs 6.0 lakh crores through core assets of the Central Government, over a four-year period, from FY 2022 to FY 2025.

    Objectives of the program

    • NMP aims for universal access to high-quality and affordable infrastructure to the common citizen of India.
    • Asset monetization, based on the philosophy of Creation through Monetization, is aimed at tapping private sector investment for new infrastructure creation.
    • This is necessary for creating employment opportunities, thereby enabling high economic growth and seamlessly integrating the rural and semi-urban areas for overall public welfare.
    • The strategic objective of the programme is to unlock the value of investments in brownfield public sector assets by tapping institutional and long-term patient capital.

    Framework

    The framework for core asset monetization has three key imperatives:

    • The pipeline has been prepared based on inputs and consultations from respective line ministries and departments, along with the assessment of total asset base available therein.
    • Monetization through disinvestment and monetization of non-core assets have not been included in the NMP.
    • Further, currently, only assets of central government line ministries and CPSEs in infrastructure sectors have been included.
    • Process of coordination and collation of asset pipeline from states is currently ongoing and the same is envisaged to be included in due course.

    Estimated Potential

    • The aggregate asset pipeline under NMP over the four-year period, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
    • The estimated value corresponds to ~14% of the proposed outlay for Centre under NIP (Rs 43 lakh crore). This includes more than 12-line ministries and more than 20 asset classes.
    • The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
    • The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%).

    Implementation & Monitoring Mechanism

    • As an overall strategy, significant share of the asset base will remain with the government.
    • The programme is envisaged to be supported through necessary policy and regulatory interventions by the Government in order to ensure an efficient and effective process of asset monetisation.
    • These will include streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency, among others.
    • Real time monitoring will be undertaken through the a separate dashboard.

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  • Account aggregators

    Context

    Account Aggregators will enable the use and enrich the quality of information needed for lenders to extend loans without collateral back-up.

    Issue of preference for a collateralised loan in India

    • Demand for credit in India far outstrips institutional supply.
    • Financial Service Providers (FSPs) are well aware of this demand.
    • And they have been looking for ways to provide credit without collateral back-up.
    • Historically, financial service providers (FSPs) like banks and non-bank finance companies (NBFCs) have relied on collateral while making lending decisions.
    • In the absence of collateral pledges, the only way to assess a consumer’s willingness and ability to repay is by examining the prospective borrower’s cash flows.
    • Your bank account statement is a digital representation of your financial life.
    • However, this bank account statement-driven process is highly manual, time-consuming, expensive and fraught with potential for abuse.
    • These shortcomings have held back cash-flow based lending for too long in India.
    •  Borrowers in the country have been underserved because of the preference for collateralized loans.
    • Both FSPs and consumers are in dire need of a seamless digital way of sharing account information.

    Account Aggregator (AA) framework

    • The account aggregator framework announced by the Reserve Bank of India (RBI) promises to solve these problems.
    • It aims to make financial data sharing as easy as making a Unified Payments Interface (UPI) transfer.
    • This is the promise of account aggregation, as envisaged by RBI.
    • Account aggregators (AAs), with their user interface, will play a pivotal role in closing the trust deficit between FSPs and consumers.

    Fenefits of Account Aggregator would work

    • User control over data: They permit users to control who gets access to their data, track and log its movement and reduce the potential risk of leakage in transit.
    • A single-window format allows user-friendly data movement and reduces the need for physical transfers and post-facto attestations.
    • Industry-standard for consent: AAs create a default industry standard for consent that cuts through the dense fine print buried in most privacy policies.
    • Wider data points to rely on: With the security of this data as a given, AAs allow lenders (or other FSPs for that matter) to rely on a wider selection of data points to determine the trustworthiness of a borrower.
    • Through AAs, FSPs have a chance to provide cash-flow based credit, personalized financial management tools, robo-advisory services and many more innovative financial products and services to a wider cross-section of people.

    Conclusion

    By incorporating security, transparency and agility into data sharing, AAs could usher in the most significant transformation of India’s fintech landscape yet.

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  • AERA Bill, 2021

    In the recent monsoon session, Parliament passed the Airports Economic Regulatory Authority of India (Amendment) Bill, 2021.

    Key features of the AERA Bill, 2021

    • It seeks to amend the Airports Economic Regulatory Authority of India Act, 2008.
    • The 2008 Act established the Airport Economic Regulatory Authority (AERA).
    • AERA regulates tariffs and other charges (such as airport development fees) for aeronautical services rendered at major airports in India.
    • The 2008 Act designates an airport as a major airport if it has an annual passenger traffic of at least 35 lakh.
    • The central government may also designate any airport as a major airport by a notification.
    • The Bill adds that the central government may group airports and notify the group as a major airport.

    Why has the definition of a major airport been amended?

    • The Amendment has changed the definition of a major airport to include “a group of airports” after the words “any other airport”.
    • The government hopes the move will encourage the development of smaller airports and make bidding for airports with less passenger traffic attractive.
    • It plans to club profitable airports with non-profitable ones and offer them as a package for development in public-private partnership mode to expand connectivity.

    Was there a need to amend the AERA Act?

    • The Airports Authority of India (AAI) awarded six airports — Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati — for operations, management and development in public-private partnership mode in February 2019.
    • In 2020 too, the AAI has approved leasing of another six airports — Bhubaneswar, Varanasi, Amritsar, Raipur, Indore and Tiruchi.
    • The Ministry of Civil Aviation plans to club each of these airports with nearby smaller airports for joint development.
    • The move follows FM’s Budget Speech this year, in which she said the government planned to monetize airports in tier-2 and tier-3 cities.

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  • [pib] Simhadri PV Project: Largest floating Solar Project in the country

    The National Thermal Power Corporation (NTPC) has commissioned the largest floating solar PV project of 25MW on the reservoir of its Simhadri thermal station in Visakhapatnam, Andhra Pradesh.

    Simhadri PV Project

    • The 2000MW coal-based Simhadri Station is the first power project to implement an open sea intake from the Bay of Bengal which has been functional for more than 20 years.
    • This is the first solar project to be set up under the flexibilization scheme of coal-powered plant, notified in 2018.
    • The floating solar installation which has a unique anchoring design is spread over 75 acres in an RW reservoir.
    • This floating solar project has the potential to generate electricity from more than 1 lakh solar PV modules.
    • This would not only help to light around 7,000 households but also ensure at least 46,000 tons of CO2e are kept at arm’s length every year during the lifespan of this project.
    • The project is also expected to save 1,364 million litres of water per annum. This would be adequate to meet the yearly water requirements of 6,700 households.

    Other important facts you must know

    • As of May 2021, India has 95.7 GW of renewable energy capacity, and represents ~ 25% of the overall installed power capacity.
    • The government plans to establish renewable energy capacity of 523 GW (including 73 GW from Hydro) by 2030.
    • India was the world’s 3rd largest renewable energy producer with 38% (136 GW out of 373 GW) of total installed energy capacity in 2020 from renewable sources.
    • Tamil Nadu has the highest installed solar power capacity in India. Kamuthi Solar Power Project near Madurai is the world’s second-largest solar park.

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    Back2Basics: NTPC

    • NTPC is an Indian statutory corporation engaged in the generation of electricity and allied activities.
    • It is incorporated under the Companies Act 1956 and is under the jurisdiction of the Ministry of Power.
    • NTPC’s core function is the generation and distribution of electricity to State Electricity Boards in India.
    • It is the largest power company in India with an electric power generating capacity of 62,086 MW.
    • It has also ventured into oil and gas exploration and coal mining activities.
    • In May 2010, NTPC was conferred Maharatna status by GoI, one of the only four companies to be awarded this status.

  • [pib] HUID System in Jewellery Industry

    Hallmarking scheme is turning out to be a grand success with more than 1 crore pieces of Jewellery hallmarked in a quick time” with more than 90000 Jewelers registered in a same time period.

    What is Hallmark Gold?

    1. The process of certifying the purity and fineness of gold is called hallmarking.
    2. Bureau of Indian Standards, the National Standards Body of India, is responsible for hallmarking gold as well as silver jewellery under the BIS Act.
    3. If you see the BIS hallmark on the gold jewellery/gold coin, it means it conforms to a set of standards laid by the BIS. Hallmarking gives consumers assurance regarding the purity of the gold they bought.
    4. That is, if you are buying hallmarked 18K gold jewellery, it will actually mean that 18/24 parts are gold and the rest is alloy.
    5. At present, only 30% of Indian Gold Jewellery is hallmarked.

    Here are the four components one must look at the time of buying gold (they are mentioned in the laser engraving of a hallmark seal):

    1. BIS Hallmark: Indicates that its purity is verified in one of its licensed laboratories
    2. Purity in carat and fineness (corresponding to given caratage KT)
    • 22K916 (91.6% Purity)
    • 18K750 (75% Purity)
    • 14K585 (58.5% Purity)

    What is HUID?

    • HUID is a unique code that will be given to every piece of jewellery at the time of hallmarking.
    • It will be helpful in identifying the jeweller or the Assaying and Hallmarking Centres (AHCs) which had hallmarked the jewellery.
    • It will be a six-digit alphanumeric code, with which every piece of jewellery will be tagged.
    • At the hallmarking centre, the jewellery is stamped with the unique number manually.

    What are the new hallmarking rules?

    • The government has made it mandatory for jewellers to hallmark gold jewellery, but with some relaxation.
    • Jewellers with an annual turnover of up to Rs 40 lakh will be exempted from mandatory hallmarking.
    • Similarly, jewellery for international exhibitions and government-approved business-to-business domestic exhibitions will also be exempted.
    • It will also allow hallmarking of additional carats — 20, 23, and 24.

    Issues with HUID

    • Jewellers say the HUID process has increased the time required to get the hallmarking on jewels and this has created huge backlogs at AHCs.
    • Since the process is being done manually, there are also chances of a mismatch of the code, he adds.
    • The inventory pile-up at the centres is also raising concerns about the security of the jewellery.
    • Several industry stakeholders point out the limited number of AHCs, which will not be enough to hallmark the large number of pieces that are sold in India every year.

    Answer this PYQ from CSP 2017

    Q.Consider the following statements:

    1. The Standard Mark of the Bureau of Indian Standards (BIS) is mandatory for automotive tyres and tubes.
    2. AGMARK is a quality Certification Mark issued by the Food and Agriculture Organisation (FAO).

    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

     

    [wpdiscuz-feedback id=”3yrxgg00qw” question=”Please leave a feedback on this” opened=”1″]Post your answers here.[/wpdiscuz-feedback]

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  • Indian bond trading is in need of better market making

    Context

    The Indian market for corporate debt needs buoyancy and this has been high on the agenda of our regulator

    Background

    • The Reserve Bank of India (RBI) stopped the automatic monetization of the fiscal deficit in 1997 and made the government borrow money from the market.
    • There are primary dealers or PDs, who pick up the Centre’s bond and provide buy and sell quotes in the secondary market for government bonds and thus help ensure sufficient liquidity.
    • The PDs came to be known as market makers and are paid a commission for playing that role.

    Liquidity challenge in the corporate bond market

    • Unlike the market for government bonds,  in the case of the country’s corporate bond market, the challenge is different.
    • It’s typically remunerative for a buyer to buy a security and hold on to it till its maturity.
    • Therefore, insurance companies, provident funds, and pension funds hold such long-term paper, as they can match the tenure of their assets with liabilities.
    • But this does not add liquidity to the market, and anyone buying a corporate bond today may not find someone to sell it to tomorrow as this market has little trading depth.
    •  Even in the G-Sec market, where we assume plenty of liquidity, it is a thinly-traded market, even though the perception is that it is very liquid.

    Why do we need market makers for the corporate bond market

    • To deal with the lack of depth and liquidity in the corporate debt market, the Securities and Exchange Board of India’s (Sebi) idea of creating market makers holds immense significance.
    • The fundamental problem here is that a bond is different from a share.
    • A company’s share can be exchanged seamlessly because every share in the market is the same slice of ownership.
    • Lack of quotes for different bonds of different tenure: In the case of bonds, however, there are several issuances of a company.
    • A single financial institution or non-bank financial company could have as many as 10 issuances a year of varying maturities and interest rates, making each of them a unique instrument.
    • Company XYZ may have issued in October 2015 a bond with a face value of ₹100 that pays 6% interest and is due for redemption in 2030, which will be quoted on exchanges for trading (if it’s being traded).
    • But, in 2021, it is no longer a 15-year bond, but a 9-year paper.
    • Therefore, the security loses importance, as the market normally uses benchmarks like 5 or 10 or 15 years; and every bond drops in the pecking order once it crosses these thresholds.
    • Therefore, we need to have market makers who will offer quotes for all major securities and thereby ensure that critical bonds are still available for trading.

    Suggestions

    • Provide waivers: Playing market maker will involve a cost and hence there should be certain waivers provided to them on trading fees.
    • Preferential access: They can be given preferential access to new issuances, so as to build up an inventory.
    • Waiver of mark-to-market: The mark-to-market (MTM) rules could be waived for a specified period, as valuation differences can affect their profit and loss accounts.
    • Capital at lower cost: Capital can be made available at a lower cost to market makers, as they require funding for the same.
    • Fifth, trade among market makers can be awarded benefits in terms of fees or easier taxes on gains made.
    • Create bond index: We need to have tradable-bond indices that reflect the price movements of a basket of bonds that they track.
    • Made public, such indices will provide appropriate arbitrage opportunities for investors to come in, and this should generate liquidity in the market for these bonds.

    Consider the question “Why bond market in India lacks the depth as compared to equity markets. What are the factors responsible for this? Suggest the way forward.”

    Conclusion

    Market makers are a way out. While success cannot be guaranteed, the idea should be adopted nonetheless, as with credit default swaps. It’s a work-in-progress. Let’s speed it up.

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    Back2Basics: Automatic monetization of deficit

    • The monetization of deficit was in practice in India till 1997, whereby the central bank automatically monetized government deficit through the issuance of ad-hoc treasury bills.
    • Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.
    • And later on, with the enactment of the FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1, 2006.