Test: Current Affairs Polity January 2021

• Bound rate is the maximum rate of duty (tariff) that can be imposed by the importing country on an imported commodity. Here, each country commits itself to a ceiling on customs duties (tariff) on a certain number of products.
• These rates vary from country to country and commodity to commodity. But no country can raise duties above the bound rate it has committed, and the rate of customs duty actually applied may be lower than the bound rate.

• The Incremental Capital-Output Ratio (ICOR) is the ratio of investment to growth which is equal to the reciprocal of the marginal product of capital. The higher the ICOR, the lower the productivity of capital or the marginal efficiency of capital. The ICOR can be thought of as a measure of the inefficiency with which capital is used.
• In FY19 (2018-19), the implicit incremental capital-output ratio (ICOR) was 4.6. This is relatively high because of deficient capacity utilisation.
• Historically, India's average ICOR during the three-year period from FY17 to FY19 has averaged 4.23.

• Since an overwhelming majority of Indians do not pay income taxes, Indian tax revenues remain largely dependent on indirect tax collections, which include all taxes on spending (such as GST). These indirect taxesaccount for over two-thirds of total tax revenue in India.
• Over half of the government's expenditure in India goes towards subsidies and other programmes.
• India also spends a substantial amount on interest payments. At 2017 levels of expenditure, 6% of GDP went towards interest payments.
• Higher proportion of interest payments are a direct outcome of the debt levels accumulated by the Indian government.

• Post-pandemic, the global economy could spiral into two extreme ways — the more probable scenario resembling the Great Depression and a rather slim chance of a repeat of the post-World War-1 Roaring Twenties in the US, the NITI Aayog told the Parliamentary Standing Committee
• The Roaring Twenties refers to the decade of the 1920s in Western society and Western culture. It was a period of economic prosperity with a distinctive cultural edge in the United States and Europe.

• In macroeconomics and finance, a transfer payment is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. 
• These payments are considered to be non-exhaustive because they do not directly absorb resources or create output. Examples of transfer payments include welfare, financial aid, social security, and government subsidies for certain businesses.
   

What is a share buyback?

• A share repurchase or buyback is a decision by a company to purchase its own stock from the market. Such a move reduces the number of outstanding shares of the company and tend to push up their price and is often undertaken when management considers the company's shares undervalued.
• It is also a key way to transfer surplus earnings to shareholders and tends to lead to an increase in share prices.

India's average tariff increased to 14.3% in FY21 from 13% in FY15 with the country's policymakers frequently using trade policy measures to encourage domestic production and curb inflation, the World Trade Organization (WTO) said in its latest Trade Policy Review for Asia's third-largest economy.

• Off-budget financing by its nature isn't taken into account when calculating fiscal indicators. This refers to expenditure that's not funded through the budget.
• Off-budget financing by its nature isn't taken into account when calculating fiscal indicators. But the cost is borne by the budget through some mechanism or the other. Such financing tends to hide the actual extent of government spending, borrowings and debt and increase the interest burden.
• The government's began harnessing funds from outside the Budget to service its Budget commitments since 2016-17. The size of this initiative has grown more than two-fold in a few years, and now nears 1% of grossdomestic product. What began with food security, off-Budget financing now caters heavily to a range of core spending areas.
• Off-Budget spending may remain high, or rise, in 2021-22. The reason: theNational Small Savings Fund, which is the biggest source for such spending, is growing faster than ever this year. In a year when average incomes have not grown much, people have poured money into savings for social security.

REVENUE SPENDING:

1. Deferred fertilizer arrears/bills through special banking arrangements
2. Food subsidy bills/arrears of Food Corp. of India through borrowings.
3. Accelerated Irrigation Benefit Program through National Bank for Agriculture and Rural Development borrowing

CAPITAL SPENDING

1. Indian Railway Finance Corp. borrowing for railway projects
2. Power Finance Corp funding of power projects

• The idea of setting up a bad bank to resolve the growing problem of non-performing assets (NPAs), or loans on which borrowers have defaulted, is back on the table.
• Technically, a bad bank is an asset reconstruction company (ARC) or an asset management company that takes over the bad loans of commercial banks, manages them and finally recovers the money over a period of time.
• The bad bank is not involved in lending and taking deposits, but helps commercial banks clean up their balance sheets and resolve bad loans. The takeover of bad loans is normally below the book value of the loan and the bad bank tries to recover as much as possible subsequently.
   

A big part of the Union government spending comes from outside the budget which is referred as extra-budgetary resources.
IEBR constitutes the resources raised by the PSUs through profits, loans and equity. 

• The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries.
• The SDR is based on a basket of international currencies comprising the U.S. dollar, Japanese yen, euro, pound sterling and Chinese Renminbi. It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies of IMF members. The value of the SDR is not directly determined by supply and demand in the market, but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket.
• It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it cannot be held, for example, by private entities or individuals. Its status as a reserve asset derives from the commitments of members to hold, accept, and honor obligations denominated in SDR. The SDR also serves as the unit of account of the IMF and some other international organizations.

How can MSP be made legally binding?
There are two ways it can be done.

• The first is to force private buyers to pay it. In this case, no crop can be purchased below the MSP, which would also act as the floor price for bidding in mandi auctions.
• The second route is, of course, the government itself buying the entire crop that farmers offer at the MSP.
• Commercial crops like cotton, copra and raw jute are covered under MSP.
• The marketed surplus ratio for different crops is estimated to range from below 50% for ragi and 65-70% for bajra (pearl-millet) and jowar (sorghum) to 75% for wheat, 80% for paddy, 85% for sugarcane, 90% for most pulses, and 95%-plus for cotton, jute, soyabean and sunflower.

• Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to achieve the goals specified in the Act.
• The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.
• The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
• In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
• The amended RBI Act also provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once in every five years. Accordingly, the Central Government has notified in the Official Gazette 4 per cent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.

• The Z-shaped recovery is the most-optimistic scenario in which the economy quickly rises like a phoenix after a crash. It more than makes up for lost ground (think revenge-buying after the lockdowns are lifted) before settling back to the normal trend-line, thus forming a Z-shaped chart.
• In V-shaped recovery the economy quickly recoups lost ground and gets back to the normal growth trend-line.
• A U-shaped recovery is a scenario in which the economy, after falling, struggles and muddles around a low growth rate for some time, before rising gradually to usual levels.
• A W-shaped recovery is a dangerous creature — growth falls and rises, but falls again before recovering yet again, thus forming a W-like chart.
• The L-shaped recovery is the worst-case scenario, in which growth after falling, stagnates at low levels and does not recover for a long, long time.

• Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government. Such borrowings are used to fulfil the government's expenditure needs.
• But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the country's fiscal deficit within acceptable limits.
• Comptroller and Auditor General report of 2019 points out, this route of financing puts major sources of funds outside the control of Parliament. "Such off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications," said the report.
• The government can ask an implementing agency to raise the required funds from the market through loans or by issuing bonds. In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund.
• Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertiliser subsidy.

• In addition to the borrowings by PSUs, the actual liabilities of the government would include loans taken for the recapitalisation of banks.
• Capital expenditure creates assets for the government and causes reduction in liabilities for the government.

Does the Reserve Bank regulate all financial companies?

No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain condition.

What are systemically important NBFCs?

NBFCs whose asset size is of 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India. Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.

What is disinvestment?

• The Union government invests in several public sector undertakings (PSUs) such as Air India, Bharat Petroleum, Delhi Metro Rail Corporation etc. Since it is the majority shareholder (meaning that it owns more than 51% of the shares), the Centre can raise money through the liquidation of its shareholding in these PSUs.
• Such asset sales can either reduce the government's share — like when it attempted to do with the public listing of Life Insurance Corporation in 2020 — or it can also transfer the ownership of the firm altogether to the highest bidder — as it did with Bharat Aluminium Company, which was sold to the Vedanta group in 2001.
• All PSUs work under different departments and ministries within the government. However, the Department of Investment and Public Asset Management (DIPAM) under the Ministry of Finance is tasked with managing the
• Centre's investments in the PSUs. Sale of the Centre's assets falls within the mandate of DIPAM.

RBI primarily factors in retail inflation while making its bi-monthly monetary policy.
A broad-based domestic and global economic recovery should improve aggregate demand, posing an upside risk to inflation. On the other hand, favorable base effect, appreciating rupee and any risk of second or third wave of covid led slowdown, will be a tailwind for CPI inflation.