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Subject: Economics

  • Welcome Policy On APIs, Devices

    Context

    It is most welcome that the Centre has announced a `14,000-crore incentive package to boost the manufacture of drugs, especially active pharmaceutical ingredients (API).

    What should be the immediate policy focus?

    • Focus on protective gear: The immediate policy focus must be to swiftly overcome shortages of critical protective gear like gowns and face masks, diverting production lines if required.
    • We also need to anticipate and step-up production of vital devices like ventilators.
    •  Provisions in the package: What is proposed now are industrial parks for bulk drugs and APIs, together with a policy for multi-year fiscal benefits. And ditto for parks for the manufacture of medical devices and attendant fiscal incentives.
    • The state governments need to identify 1,000 acres for the parks that are well-integrated with knowledge centres and nationally accredited labs.

    What additions need to be made in the package?

    • Public-private partnership: In tandem, the pharmaceuticals package issued on Saturday needs to be followed through, with a forward-looking public-private partnership, to avoid import-dependency in this critical sector.
    • What is envisaged is a set of schemes to reap economies of scale and ready availability of inputs in the production of APIs and medical devices via the cluster approach.

    How India became uncompetitive in API?

    • Policy rigidities and price controls: APIs are, of course, bulk drugs that provide medicines with their therapeutic value, and it is unfortunate that since circa 1995, India has become steadily uncompetitive in API production, thanks to a panoply of policy rigidities such as onerous price controls.
    • Export competition from China: Opaque export competition from China has been game-changing indeed: APIs for most medicines are mostly imported.
    • This needs to change, fast. We do need to competitively and efficiently boost output of pharmaceuticals right across the value chain.

    Conclusion

    The government must understand that manufacture by itself is not enough. The policy must ensure competition and quality, keep prices down.

  • Govt. has raised excise duty cap on fuel

    In a move which would help the government to raise excise duty on fuel further in future, the government has raised the cap on special additional excise duty on petrol and diesel. These changes are as per the amendments in the Finance Bill passed in the Parliament.

    Why such move?

    • Government is increasing duties on petrol and diesel to raise revenues in view of a tight fiscal situation.
    • Slump in global crude oil prices, alongside possibility of a global economic recession, has forced the government to look for avenues to raise revenues to support growth.
    • With major companies going for production shut downs, industry players have suggested the government to boost fiscal stimulus in the wake of demand collapse triggered by the coronavirus.
    • Earlier, Saudi Arabia had triggered the crash in prices by announcing a sharp increase in oil production after Russia declined to reduce oil supply to contain a fall in oil prices due to declining demand in a meeting of petroleum exporting countries.

    Impact of the move

    • Every rupee hike in excise duty is expected to yield roughly Rs 13,000-14,000 crore annually.
    • The slump in global crude oil prices enables the government to raise these duties substantially without immediately putting the burden on the consumer.
    • But there is expected to be a demand slowdown for fuels with a nearly country wide lockdown in the wake of coronavirus.
    • With airlines, railways, trucks and passenger cars going off the roads, petrol, diesel and ATF (aviation turbine fuel) consumption is expected to fall drastically.

    Back2Basics

    What is Excise Duty?

    • Excise duty is a form of tax imposed on goods for their production, licensing and sale.
    • It is the opposite of Customs duty in sense that it applies to goods manufactured domestically in the country, while Customs is levied on those coming from outside of the country.
    • At the central level, excise duty earlier used to be levied as Central Excise Duty, Additional Excise Duty, etc.
    • Excise duty was levied on manufactured goods and levied at the time of removal of goods, while GST is levied on the supply of goods and services.

    Purview of excise duty

    • The GST introduction in July 2017 subsumed many types of excise duty.
    • Today, excise duty applies only on petroleum and liquor.
    • Alcohol does not come under the purview of GST as exclusion mandated by constitutional provision.
    • States levy taxes on alcohol according to the same practice as was prevalent before the rollout of GST.
    • After GST was introduced, excise duty was replaced by central GST because excise was levied by the central government. The revenue generated from CGST goes to the central government.

    Types of excise duty in India

    Before GST kicked in, there were three kinds of excise duties in India.

    Basic Excise Duty

    • Basic excise duty is also known as the Central Value Added Tax (CENVAT). This category of excise duty was levied on goods that were classified under the first schedule of the Central Excise Tariff Act, 1985.
    • This duty was levied under Section 3 (1) (a) of the Central Excise Act, 1944. This duty applied on all goods except salt.

    Additional Excise Duty

    • Additional excise duty was levied on goods of high importance, under the Additional Excise under Additional Duties of Excise (Goods of Special Importance) Act, 1957.
    • This duty was levied on some special category of goods.

    Special Excise Duty

    • This type of excise duty was levied on special goods classified under the Second Schedule to the Central Excise Tariff Act, 1985.
    • Presently the central excise duty comprises of a Basic Excise Duty, Special Additional Excise Duty and Additional Excise Duty (Road and Infrastructure Cess) on auto fuels.

  • How policy can bridge the gap

    Context

    India must use the windfall from oil to provide assistance to the most vulnerable to mitigate the impact due to COIVD-19 outbreak.

    Estimates of impact

    • Impact on major economies: Minus 40 per cent, -30 per cent, -22 per cent, and -14 per cent. These are the estimated impacts (at an annualised rate) on the quarterly growth rates of China, the UK, Eurozone, and the US because of the Covid-19 virus.
    • Even excluding China and those that are closely tied to its supply chain — Korea and Taiwan — emerging markets (EM) are expected to go into recession in the first half of 2020, with the second quarter taking the biggest hit at over an 8 per cent quarterly decline.
    • Impact on India: India will not be spared this growth shock. In fact, the economic impact could be deeper and longer in emerging markets where the capacity of public health systems is limited at the best of times.

    Prospects of recovery

    • Sudden stop to economic activity: We also know from the experiences of the countries already infected that the way to control the spread of the virus is through aggressive containment and social distancing that inevitably brings economic activity to a sudden stop.
    • There doesn’t seem to be a middle path. We also know that unlike natural catastrophes like earthquakes, capital stock is not destroyed by the virus.
    • Sharp recovery and conditions: Once the containment period is over and social interaction normalises, there is every reason to believe that activity can recover very sharply.
    • Unless the containment period is long because of capacity constraints in the healthcare system which could turn supply chain disruptions into a long-term problem, or the credit stress created by the lack of earning by households and firms during the sudden stop stymies the recovery.

    India needs to brace itself

    • Unfortunately, India, where the virus still appears to be in the early stage, needs to brace for such a sudden stop.
    • The lockdown could be for an extended period given the already stretched public health system.
    • Impact on urban economy: The swathe of the economy that depends on social interaction — retail sales, entertainment, restaurants, and importantly construction and manufacturing — is very large.
    • Even if one believes that rural areas with relatively low population densities will not be affected much, the impact on urban economic activity could be very large.

    Role of economic policy

    • What is the role of economic policy in such circumstances? It needs to “bridge the gap” between the brutal downturn and the eventual recovery.
    • While public health policies force a sudden stop in the economy to save lives, economic policies need to ensure that the impact from the shutdown is cushioned, incomes of households and firms supported, credit stress is contained, and the recovery is not hamstrung by policy headwinds.
    • This requires policy support to be operated on various fronts.
    • Role of the Central bank: Central banks not only need to cut rates but also need to provide adequate liquidity and extend regulatory forbearance to prevent credit stress and non-performing loans from clogging up the already strained financial system when the economy starts to recover.
    • Role of fiscal policy: The role of fiscal policy is even larger, from direct and indirect tax cuts or postponement to targeted credit support for sectors that are likely to be most affected such as airlines and retail trade.
    • Support to the vulnerable: The key is income support to the most vulnerable: From daily wage earners to SMEs (small and medium enterprises).
    • Using JAM trinity for cash transfer: It is here that the government’s efforts over the last five years make India one of the best-placed economies to deliver such cash transfers.
    • Since 2015, substantial time, effort, and resources have been expended to establish Jan Dhan (bank accounts), Aadhaar and mobile banking (JAM), and Mudra, the programme that dispenses loans to SMEs.
    • The objective of JAM and Mudra is to use Aadhaar as a way of accurately identifying beneficiaries and use mobile banking to digitally and seamlessly transfer cash/subsidies directly to households’ bank accounts and provide loans to SMEs without any leakages.
    • According to government reports, the total number of Jan Dhan accounts stand at around 380 million and 59 million MUDRA loans were sanctioned last year.
    • For a country with a population of 1.3 billion and about 63 million SMEs, even if there are duplicate accounts, JAM and Mudra should be able to cover almost all households and SMEs.
    • With Aadhaar accurately targeting beneficiaries, leakages should be minimised. If there ever was a time that India needed JAM and Mudra it is now.

    Issue of fiscal space and solution

    • Some will argue that India doesn’t have the fiscal space. But it does.
    • Use oil windfall: In the last month or so, the crude oil price has dropped from around $60/bbl to around $30 and is likely to stay at this level given the breakdown in agreement among oil-producing countries and the massive collapse in global demand.
    • If the government simply taxed the oil windfall by raising excise duties, as it did during the 2014-15 oil price collapse, it could potentially raise almost 1 per cent of GDP or a staggering Rs 2.25 trillion.
    • If 50 million households have to be provided assistance because of the shutdown, it comes to about Rs 14,000 per month for three months or about Rs 24,000 a month to half of the 63 million SMEs.
    • And this without even having to increase this year’s budgeted deficit.

    Conclusion

    The government might have other uses for the oil windfall. But if India is forced into lockdown, the economic costs will be very large and the recovery will crucially depend on whether the pilot-light of the economy is kept lit through this period. This critically requires income transfers to vulnerable households and SMEs. India cannot complain that it does not have the fiscal space or the infrastructure to provide it.

  • Price Support Mechanism under MSP Operations

    The Centre will spend ₹1,061 crore to reimburse the Cotton Corporation of India (CCI) and its sub-agent in Maharashtra for procuring cotton at the minimum support price in that State since 2014.

    Why Centre reimburses to states?

    In the event of fall in market prices, the Centre intervenes through following schemes-

    Market Intervention Scheme

    • Similar to MSP, there is a Market Intervention Scheme (MIS), which is implemented on the request of State Governments for procurement of perishable and horticultural commodities in the event of fall in market prices.
    • The Scheme is implemented when there is at least 10% increase in production or 10% decrease in the ruling rates over the previous normal year.
    • Proposal of MIS is approved on the specific request of State/UT Government, if the State/UT Government is ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation.
    • Under MIS, funds are not allocated to the States.
    • Instead, central share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.

    Price Supports Scheme (PSS)

    • The Department of Agriculture & Cooperation implements the PSS for procurement of oil seeds, pulses and cotton, through NAFED which is the Central nodal agency, at the MSP declared by the government.
    • NAFED undertakes procurement as and when prices fall below the MSP. Procurement under PSS is continued till prices stabilize at or above the MSP.
    • Losses, if any incurred by NAFED in undertaking MSP operations are reimbursed by the central Government.
    • Profit, if any, earned in undertaking MSP operations is credited to the central government.

    Back2Basics

    Minimum Support Price (MSP)

    • MSP is a form of market intervention by the GoI to insure agricultural producers against any sharp fall in farm prices.
    • The MSP are announced at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
    • MSP is price fixed to protect the producer – farmers – against excessive fall in price during bumper production years.
    • In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, govt. agencies purchase the entire quantity offered by the farmers at the announced minimum price.
    • The minimum support prices are a guarantee price for their produce from the Government.
    • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution.

    Methods of calculation

    • In formulating the level of MSP and other non-price measures, the CACP takes into account a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities.
    • The CACP makes use of both micro-level data and aggregates at the level of district, state and the country.
    • Other factors include cost of production, changes in input prices, input-output price parity, trends in market prices, demand and supply, inter-crop price parity, effect on industrial cost structure, effect on cost of living, effect on general price level, international price situation, parity between prices paid and prices received by the farmers and effect on issue prices and implications for subsidy.

    Procurement agencies

    • Food Corporation of India (FCI) is the designated central nodal agency for price support operations for cereals, pulses and oilseeds.
    • Cotton Corporation of India (CCI) is the central nodal agency for undertaking price support operations for Cotton.

  • [pib] Desertification and Land Degradation Atlas of India

     

    The Union Minister for Agriculture and Farmers Welfare has provided useful information about land degradation in India citing the Desertification and Land Degradation Atlas.

    Desertification and Land Degradation Atlas of India

    • Space Applications Centre (SAC), ISRO has released out an inventory and monitoring of desertification of the entire country in 2016.
    • This Atlas presents state-wise desertification and land degradation status maps depicting land use, process of degradation and severity level.
    • This was prepared using IRS Advanced Wide Field Sensor (AWiFS) data of 2011-13 and 2003-05 time frames in GIS environment.
    • Area under desertification / land degradation for the both time frames and changes are reported state-wise as well as for the entire country.

    Degraded land in India

    • About 29.32% of the Total Geographical Area of the country is undergoing the process of desertification/land degradation.
    • Approximately 6.35% of land in Uttar Pradesh is undergoing desertification/degradation.

    Various move for land conservation

    • National Afforestation & Eco Development Board (NAEB) Division of the MoEFCC is implementing the “National Afforestation Programme (NAP)” for ecological restoration of degraded forest areas.
    • Various other schemes like Green India Mission, fund accumulated under Compensatory Afforestation Fund Management and Planning Authority (CAMPA), Nagar Van Yojana etc. also help in checking degradation and restoration of forest landscape.
    • MoEF&CC also promote tree outside forests realizing that the country has a huge potential for increasing its Trees Outside Forest (TOF) area primarily through expansion of agroforestry, optimum use of wastelands and vacant lands.

    Various institutions for land conservation

    • Indian Institute of Soil and Water Conservation (IISWC): Bio-engineering measures to check soil erosion due to run-off of rain water
    • Central Arid Zone Research Institute (CAZRI), Jodhpur: Sand dune stabilization and shelter belt technology to check wind erosion
    • Council through Central Soil Salinity Research Institute, Karnal: Reclamation technology, sub-surface drainage, bio-drainage, agroforestry interventions and salt tolerant crop varieties to improve the productivity of saline, sodic and waterlogged soils in the country

  • [pib] Scheme for Promotion of manufacturing of Electronic Components and Semiconductors (SPECS)

    The Union Cabinet has approved Scheme for Promotion of manufacturing of Electronic Components and Semiconductors.

    About SPECS

    • The scheme aims to offer the financial incentive of 25% of capital expenditure for the manufacturing of goods that constitute the supply chain of electronic products.
    • The scheme will help offset the disability for domestic manufacturing of electronic components and semiconductors in order to strengthen the electronic manufacturing ecosystem in the country.

    Benefits

    The proposal, when implemented, will lead to the development of electronic components manufacturing ecosystem in the country. Following are the expected outputs/outcomes in terms of measurable indicators for the scheme:

    • Development of electronic components manufacturing ecosystem in the country and deepening of Electronics value chain
    • New investments in Electronics Sector to the tune of at least Rs. 20,000 crore
    • Total employment potential of the scheme is approximately 6,00,000
    • Reducing dependence on import of components by large scale domestic manufacturing that will also enhance the digital security of the nation

  • [pib] Production Linked Incentive Scheme

    The Union Cabinet has approved the Production Incentive Scheme (PLI) for Large Scale Electronics Manufacturing.

    Production Incentive Scheme (PLI)

    • The scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in mobile phone manufacturing and specified electronic components including Assembly, Testing, Marking and Packaging (ATMP) units.
    • The scheme shall extend an incentive of 4% to 6% on incremental sales (over a base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five (5) years subsequent to the base year as defined.
    • The proposed scheme is likely to benefit 5-6 major global players and few domestic champions, in the field of mobile manufacturing and Specified Electronics Components and bring in large scale electronics manufacturing in India.

    Benefits

    • The scheme has a direct employment generation potential of over 2,00,000 jobs over 5 years.
    • It would lead to large scale electronics manufacturing in the country and open tremendous employment opportunities.  Indirect employment will be about 3 times of direct employment as per industry estimates.
    • Thus, the total employment potential of the scheme is approximately 8,00,000.

  • Schemes for Electronic Manufacturing

    The Union Cabinet has approved financial assistance to the Modified Electronics Manufacturing Clusters (EMC2.0) Scheme

    Background

    • To build and create requisite infrastructure ecosystem for electronics manufacturing; Ministry of Electronics and Information Technology notified Electronics Manufacturing Clusters (EMC) Scheme which was open for receipt of applications upto October, 2017.
    • A period of 5 years is available for disbursement of funds for the approved projects.
    • There was a need for continuation of such scheme in modified form for further strengthening the infrastructure base for electronics industry in the country and deepening the electronics value chain.

    EMC 2.0 Scheme

    • The Modified Electronics Manufacturing Clusters (EMC 2.0) Scheme would support setting up of both Electronics Manufacturing Clusters (EMCs) and Common Facility Centers (CFCs).
    • For the purpose of this Scheme an EMC would set up in geographical areas of certain minimum extent, preferably contiguous, where the focus is on development of basic infrastructure, amenities and other common facilities for the ESDM units.
    • For Common Facility Centre (CFC) there should be a significant number of existing ESDM units located in the area and the focus is on upgrading common technical infrastructure and providing common facilities for the ESDM units in such EMCs, Industrial Areas/Parks/industrial corridors.

    Aims and objectives

    • The scheme aims for development of world class infrastructure along with common facilities and amenities through Electronics Manufacturing Clusters (EMCs).
    • It is expected that these EMCs would aid the growth of the ESDM sector, help development of entrepreneurial ecosystem, drive innovation and catalyze the economic growth of the region by attracting investments in the sector, increasing employment opportunities and tax revenues.

    Benefits

    The Scheme will create a robust infrastructure base for electronic industry to attract flow of investment in ESDM sector and lead to greater employment opportunities.  Following are the expected outputs/outcomes for the Scheme:

    • Availability of ready infrastructure and Plug & Play facility for attracting investment in the electronics sector:
    • New investment in electronics sector
    • Jobs created by the manufacturing units;
    • Revenue in the form of taxes paid by the manufacturing units

  •  The double whammy that India’s economy now faces

    Context

    India is currently in the grip of dual shocks: Covid-19 and a financial one.

    The supply and demand shock

    • Containing outbreak at economic cost: Even as infection rates have tapered in China, they are rising elsewhere. Countries that have succeeded in containing it have done so at an economic cost, by quarantining people, implementing lockdowns and social distancing.
      • This has resulted in a plateauing of new infection cases in China and South Korea, but they are still rising exponentially across Europe and the US.
    • Supply shock: This is both a supply as well as demand shock. On the former, the impact is via disruptions in China-centred supply chains.
    • Demand shock: But there is also a hit to final demand as infections spread across the rest of the world, hurting travel, tourism, hotels and local retail activity.
    • Tightened financial condition: The correction in equity markets and wider credit spreads have tightened financial conditions, and both consumer and business confidence has faltered.
    • Rising infections in Europe a big concern: Rising infections in Europe and the US are a big concern as both are large services-driven economies. Any pullback in their consumption demand will likely result in a demand shock for the rest of the world.

    Global spillover of Covid-19

    • Hitting economies in waves: One uncertainty pertains to how long this shock will last. There are no definite answers as of now. Covid-19 shocks are hitting economies in waves and countries are imposing lockdowns, one by one.
      • Hence, instead of a synchronized global slump over one or two months, the economic impact is getting spread out.
      • For example, supply chain disruptions and lockdowns in China are gradually easing, and we estimate that factories should be operating at full capacity by mid-April.
    • Hit to travel and tourism to last till June: The hit to travel and tourism will last at least until June because even if the number of new infection cases eases, travellers will remain cautious initially.
    • Demand in the US and Europe to remain low until April: Curtailment in discretionary demand due to social distancing in the US and Europe only started in March and will likely continue until April, if not longer.
    • Global spillover to continue till May: The global spillovers of Covid-19 will likely be spread out over February and May, implying a weak first half of 2020.
      • Whether the shocks last longer will depend on whether countries successfully contain infections.
      • It also depends on the ability of countries to prevent spillover effects onto corporate balance sheets (more defaults) and the labour market (job losses).
    • Global GDP to remain low in the first half: Global gross domestic product (GDP) growth in the first half of 2020 is likely to be weaker than during the global financial crisis of 2008-09, due to a sharp first-quarter decline in China, and weaker  final demand in developed economies in the second.

    What will be the impact on India?

    • The economic hit to India will be felt through multiple channels.
    • First, India is not a part of China-centric global value chains, but China accounts for a significant share of India’s imports (14%) and its production halt will hit India’s imports of
      • primary and intermediate goods,
      • disrupting domestic production,
      • particularly in industries such as pharmaceuticals, auto, electronics, solar power and agriculture.
    • Second, there will be a slowdown in international and domestic travel and tourism. India earns over 1% of GDP as foreign exchange earnings from tourism annually.
    • Third, social distancing measures, along with the public fear factor will hit domestic retail activity as people avoid public places.
    • Fourth, India will face the indirect effects of weaker global demand, tighter financial conditions and low confidence.
      • Oil windfall offset: Even though lower oil prices are a boon, in the current environment any benefit from lower oil prices will be offset by other negatives.
    • Domestic financial sector risk: Another big challenge for India relates to domestic financial sector risks.
      • The spillover effect of Yes bank: Weak growth and financial stability concerns have been brewing for over a year now and the spillover effects of Yes Bank’s takeover are still reverberating through the system.
      • The fallout of the shadow banking slowdown via potential stress for real estate developers and small and medium-sized enterprises is a risk.
      • If the asset quality of both shadow banks and the banking sector deteriorate in the next few quarters, as is likely, then domestic credit conditions may stay tight, as the perceived risk premium could rise further.
    • GDP growth rate: In this backdrop, the real activity could suffer. The GDP growth is expected to average around 4% year-on-year in the first half of 2020, with risks skewed to the downside.
      • GDP growth in 2020-21 is unlikely to be more than 2019-20’s 5%.

    Way forward

    • An optimal policy response to Covid-19: The optimal policy response to is globally-coordinated public health safety and virus containment. India has taken some worthy decisions on this.
      • Since Covid-19 will adversely impact service sectors like retail, hospitality, travel and civil aviation, the government’s fiscal policy response should be aimed well through measures such as tax relief and interest-free loans, particularly for small and medium enterprises.
    • Liquidity easing and policy accommodation: On monetary policy, a combination of liquidity easing and policy accommodation would be needed beyond the moves already made.
      • Macro-prudential steps such as lowering the counter-cyclical capital buffer for banks could be announced.
      • Fixing the financial sector, though, would need a broader response, including a recognition of the full scale of the problem and then adequately recapitalising banks and shadow banks.
      • Else, credit risk premia may stay elevated and credit growth may not pick up.

    Conclusion

    In all, the economic impact on India due to shocks emanating from Covid-19 could get compounded due to weak domestic balance sheets. The coming quarters call for close vigilance of credit risks and the prioritizing of financial stability.

  • What are Open Market Operations (OMOs) ?

    The Reserve Bank of India (RBI) has decided to infuse ₹10,000 crore liquidity in the banking system by buying government securities through open market operations (OMO).

    What are Open Market Operations (OMOs)?

    • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
    • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
    • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

    How and in what form can government securities be held?

    • The public debt office (PDO) of RBI, acts as the registry and central depository for G-Secs.
    • They may be held by investors either as physical stock or in dematerialized (demat/electronic) form.
    • It is mandatory for all the RBI regulated entities to hold and transact in G-Secs only in dematerialized subsidiary general ledger or SGL form.

    Types:

    i) Physical form

    • G-Secs may be held in the form of stock certificates. A stock certificate is registered in the books of PDO.
    • Ownership in stock certificates cannot be transferred by way of endorsement and delivery.
    • They are transferred by executing a transfer form as the ownership and transfer details are recorded in the books of PDO.
    • The transfer of a stock certificate is final and valid only when the same is registered in the books of PDO.

    ii) Demat form:

    • Holding G-Secs in the electronic or scripless form is the safest and the most convenient alternative as it eliminates the problems relating to their custody, viz., loss of security.
    • Besides, transfers and servicing of securities in electronic form is hassle free.

    How are the G-Secs issued?

    • G-Secs are issued through auctions conducted by the RBI.
    • Auctions are conducted on the electronic platform called the E-Kuber, the Core Banking Solution (CBS) platform of RBI.
    • The RBI, in consultation with the Government of India, issues an indicative half-yearly auction calendar which contains information about the amount of borrowing, the range of the tenor of securities and the period during which auctions will be held.
    • The RBI conducts auctions usually every Wednesday to issue T-bills (Treasury Bills) of 91-day, 182-day and 364-day tenors.
    • Settlement for the T-bills auctioned is made on T+1 day i.e. on a working day following the trading day. Like T-bills, CMBs are also issued at a discount and redeemed at face value on maturity.
    • The tenor, notified amount and date of issue of the CMBs depend upon the temporary cash requirement of the Government. The tenors of CMBs are generally less than 91 days.

    What is meant by repurchase (buyback) of G-Secs?

    • Repurchase (buyback) of G-Secs is a process whereby the central government and state governments buy back their existing securities, by redeeming them prematurely, from the holders.
    • The objectives of buyback can be the reduction of cost (by buying back high coupon securities), reduction in the number of outstanding securities and improving liquidity in the G-Secs market (by buying back illiquid securities) and infusion of liquidity in the system.
    • The repurchase is also undertaken for effective cash management by utilising the surplus cash balances.
    • The state governments can also buy back their high coupon (high-cost debt) bearing securities to reduce their interest outflows in the times when interest rates show a falling trend.
    • States can also retire their high-cost debt pre-maturely in order to fulfil some of the conditions put by international lenders like Asian Development Bank, World Bank etc. to grant them low-cost loans.