Indian Economy, 5th edition (118 page)

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They have emerged safe hubs for parking money earned in India.

•
As there are such parking centres, the black money individuals and corporates generate in India are easily hidden there with no risk of getting caught.

•
Many Indian corporates have their operations in such places which they use for ‘transfer pricing’.

•
The parked funds get back to India in the form of ‘hedge funds’ destabilizing the economy.

•
As corruption is supposed to be very high in India, even politicians are believed to park their black money there.

•
They accelerate hawala, bribery, etc. in India.

Recently, we have seen some effective action being taken by the victims nations to unearth their funds parked in these havens such as the USA, Germany and many of the OECD nations. Recently, the Government of India has also started such initiatives.

Q. 47 Write a note on the restructuring of the Centrally Sponsored Schemes into the new Additional Central Assistance implemented from the financial year 2013-14.

Ans.
The Planning Commission (PC), with the commencement of 12th Plan, proposed ‘rationalisation’ and ‘restructuring’ of the 16 Centrally Sponsored Schemes (CSS) into Additional Central Assistance (ACA) Schemes. The proposal has been accepted by the Cabinet and the ACA will become effective from 2013-14. As per the PC, together with the government this will ‘improve the efficiency’ of the Schemes. After the restructuring, the situation will be as below.

•
It will give more flexibility to the states to utilise the funds,

•
It will also give the Planning Commission ‘absolute control’ over the quantity of money to be released.

•
The CSS funds till now were routed through the concerned Central ministries,

•
Under the new set up the Planning Commission will release the funds
directly
to the states on the recommendation of the Ministry of Finance.

•
The concerned ministries will now only
monitor
the implementation of the schemes, which would be evaluated by an external agency.

•
The schemes to be restructured include
flagship programmes
such as the Integrated Child Development Scheme, the Mid Day Meal Scheme, the Sarva Shiksha Abhiyan, the Mahatma Gandhi National Rural Employment Guarantee Scheme, the Indira Awas Yojana, the Pradhan Mantri Gram Sadak Yojana, and the yet-to-be launched National Health Mission.

•
Some other important schemes to be restructured are – the Rashtriya Krishi Vikas Yojana, the Rajiv Gandhi Drinking Water Mission and Sanitation Mission, the Backward Regions Grant Fund, and the National Rural Livelihood Mission.

Though states would welcome the
flexibility
in using the funds if based on a normative formula, experts point out that the Planning Commission would have total discretion over funding to the states and each could be treated differently. The present funding structure of ACA varies from one scheme to another.

The point to be noted here is that most of the states of India since the last many years are fiscally broke and they have to tow the lines of the PC to get developmental funds from the Centre. All developmental funds accruing to the states are being ‘monitored’ by the PC on the ‘guidelines’ of the ‘Monitorable Targets’ set by the states themselves. In such a situation, for greater efficiency, accountability and outcome, the restructuring looks logical.

Meanwhile, the political parties. Communist Party) have been demanding ICDS and Midday meal to be made
statutory rights
of the people Experts fear the new funding pattern could be used as a ‘political tool’ by the Centre to discriminate between states on the basis of the party in power.

Q. 48 Write a short note on recent steps taken by the GoI to make the public sector banks compliant to the Basel III norms.

Ans.
As capital is a key measure of banks’ capacity for generating loan assets, and is essential for balance sheet expansion, the GoI has regularly invested additional capital in the PSBs to support their growth and keep them financially sound so as to ensure that the growing credit needs of the economy are adequately met. A sum of Rs. 12,000 crore was infused in seven PSBs during 2011-12 to enable them to maintain a minimum Tier-I CRAR of 8 per cent and also to increase shareholding of the GoI in them.

In
2012-13
also, the government has infused capital in PSBs to augment their Tier-I capital so that they maintain their Tier-I CRAR at a comfortable level and remain compliant with the stricter capital adequacy norms under Basel III . This will also support internationally active PSBs in their national and international banking operations undertaken through their subsidiaries and associates. An amount of Rs. 12,517 crore was allocated by the GoI for the year 2012-13 on
January 10, 2013
. The
High Level Committee
to assess the capitalisation of PSBs in the next 10 years, headed by the Finance Secretary has recommended various options for funding of PSBs. Given the budgetary constraints, it may not be feasible for the government to infuse huge sums into the PSBs. This is why the committee has recommended the formation of a
‘non-operating financial holding company’
(HoldCo)
under a special
act of Parliament
with the following key objectives –

(i)
To act as an investment company for the GoI;

(ii)
To hold a major portion of the GoI’s holdings in all PSBs;

(iii)
To raise long-term debt from domestic and international markets to infuse equity into PSBs; and

(iv)
To service the debt from within its sources.

Due to weakening of the RRBs, their sponsor banks have been incurring huge NPAs. RRBs have played a pivotal role in credit delivery in rural areas, particularly to the agriculture sector – to enhance their outreach and provide banking services more effectively to rural masses, RRBs need to undertake a continuous process of technology and capital upgradation. With a view to bringing the CRAR of RRBs up to at least 9 per cent,
K. C. Chakrabarty Committee
recommended recapitalization support to the extent of Rs. 2,200 crore to 40 RRBs in 21 States. Pursuant to the recommendation of the Committee, recapitalization amount is to be shared by the stakeholders in proportion to their shareholding in RRBs, i.e. 50 per cent central government, 15 per cent concerned state government, and 35 per cent the concerned sponsor banks. The re-capitalisation will continue upto March 2014.
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Q. 49 Write a brief note on the recently released FSLRC Report.

Ans.
The
Justice B. N. Srikrishna
headed Financial Sector Legislative Reforms Commission (FSLRC) handed over its report
end-March 2013
– it was set up March 2011
for examining
the regulatory structure and the laws governing the financial sector. The 10-member committee had a broad mandate covering all financial services as well as everything currently overseen by any financial regulator. Broadly, the commission has recommended what can be called a changeover from an ‘area-based’ division of regulators to a ‘task-based’ division. Major highlights of the recommendations are as follows:

(i)
Today, each agency like the Sebi or the IRDA or the FMC looks after one type of financial service or one area – this would be replaced by a horizontal structure whereby the basic regulatory and monitoring functions of all areas would be done by a Unified Financial Agency (UFA).

(ii)
All consumer complaints, regardless of the area will be handled by a Financial Redressal Agency (FRA).

(iii)
There will be a single tribunal, the Financial Sector Appellate Tribunal (FSAT) which will hear appeals regarding the entire sector.

(iv)
There are also three other agencies in the recommendations, along with the Reserve Bank of India which will continue to oversee banking.

The horizontal structure will serve the interests of the consumers of financial services (of individuals and businesses, both) much better. For one, it should
eliminate regulatory arbitrage
– the recent IRDA vs SEBI spat on ULIPs happened because the two agencies’ views on the characteristics of investment products were very different. Another advantage of the horizontal structure would be that consumer complaints about a sector would get separated from the regulator. This is important because a certain class of consumer complaints have mistakes or oversights by the regulator at their root. Recognising this root cause means admitting to its own flaw, something that is hard for any organisation.

Q. 50 Analyse the reasons why inflation Continues to Persist.

Ans.
As per the
Economic Survey 2012-13
, inflation in protein foods, particularly eggs, meat and fish, and in fruits & vegetables has persisted because of
changes in dietary habits
and
supply constraints
:

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Long time series data from National Accounts on
PFCE
(private final consumption expenditure) indicate a structural shift in per capita consumption.

The share of food consumption in total consumption has declined over time, from an average of 51.34 per cent during 1950-60 to an average of 27.17 per cent during 2007-12.

•
Average annual growth in per capita food consumption at 0.94 per cent during 1950-2012 has been significantly lower than the overall growth in consumption averaging 1.84 per cent. The consumption of protein foods, though increasing more slowly than the increase in PFCE, had a growth of 1.50 per cent during 1950-2012, higher than the growth of overall expenditure on food. Therefore, the share of protein foods within overall food expenditure increased from 26.28 per cent during 1950-60 to 33.71 per cent during 2007-12.

•
A similar decline in expenditure on food, relative to that in other commodities and services has been as expected, associated with rising income levels.

•
Average annual growth of per capita expenditure during 1950-2011 was 2.40 per cent for non-food group. Within non-food commodities and services, average annual growth was 5.53 per cent, 3.97 per cent, 3.60 per cent and 3.42 per cent for transport and communication; recreation and education; medical and health care; and miscellaneous goods and services, respectively. Growth in expenditure for these sub sectors significantly exceeded the growth in expenditure on food.
Post reform
period (1992-93 to 2010-11) has shown a faster shift in consumption expenditure.

•
An
increase in income
made this desirable shift in consumption feasible. At national level, per capita income, adjusted for inflation continued to rise.

•
There was also a significant increase in rural wages. Rural wages in nominal terms went up by an average of over 18 per cent from 2008-09. Inflation-adjusted rural wages also went up by 7.5 per cent during this period.

•
The
input costs
for producers in both the food and non-food segments, as reflected in the prices of feed, fodder and other inputs also increased. An increase in Minimum Support Price (MSP), while necessary to ensure remunerative returns to farmers, raised the floor prices and also contributed to the rise in input prices.

Q. 51 Briefly describe the recent steps taken by the GoI in the area of sugar sector reforms.

Ans.
India is the largest consumer and second largest producer of sugar after Brazil. Sugar and Sugarcane are notified as essential commodities under the Essential Commodities Act 1955. The production of sugarcane during 2012-13 is estimated at 334.54 million tonnes. However, the Indian sugar sector suffers from policy inconsistency and unpredictability. The Sugar industry in India is over-regulated and prone to
cyclicality
due to price interventions. Deregulation of the sugar industry has been widely debated for a long time. From a purely economic point of view, greater play of market forces would provide better prices and serve the interests of all stakeholders. The government should come into the picture only in situations where absolutely necessary. Export bans and controls could be replaced with small variable external tariffs to stabilise prices.

A report on
‘Regulation of the Sugar Sector in India: The Way Forward’
has been submitted by the Committee under the chairmanship of Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister – the measures suggested are as follows –

(i)
phasing out cane reservation area;

(ii)
dispensing with minimum distance criteria;

(iii)
dispensing with the levy sugar system;

(iv)
states that want to provide sugar under the PDS may procure it from the market according to their requirement, fix the issue price and subsidize from their own budgets (Till April 4, 2013, when the GoI ‘decontrolled’ the sugar industry from the burden of ‘levy’ to the tune of 10 per cent of their total production, there was an implicit cross-subsidy on account of the levy as sugar mills were under a transition). The Report suggested some level of central support to help states meet the cost to be incurred on this account may be provided for a transitory period (which has been announced on April 4, 2013);

(v)
dispensing with the regulated release mechanism (of non-levy) sugar;

(vi)
stable trade policy;

(vii)
no quantitative or movement restrictions on byproduct like molasses and ethanol and dispensing with compulsory jute packing.

(viii)
a stable, predictable, and consistent policy reforms to be brought about in a fiscally neutral manner and issues considered for implementation in a phased manner.