Economy: July 2021 Current Affair | Indian Economy for State PSC Exams - BPSC (Bihar) PDF Download

 Page 1


 
23                                                                                                                                                        
3. ECONOMY 
3.1. INDIA’S FOREX RESERVES 
Why in News? 
Recently, Indian Foreign Exchange reserves hit new lifetime high of 
around US$ 612 billion, making India the fourth largest Forex reserve 
holder after China, Japan and Switzerland. 
About Foreign Exchange Reserves 
• Foreign Exchange Reserves, also known as Forex Reserves, are 
assets held on reserve by a central bank in foreign currencies. 
• Mostly dominated by foreign currency assets, it can also include 
other instruments like bonds, treasury bills, Gold Reserves, Special 
Drawing Rights at IMF etc.  
• US dollar, Euro, British pound, Japanese Yen and Chinese Yuan are 
some of the common currency assets with US dollar as main 
currency due to its use in settlement of all international 
transactions. 
• Vital for International trade and commerce, Forex reserves serves 
a number of purposes like- 
Forex Reserves Management in India and recent rise 
• As central bank of India, the Reserve Bank of India is responsible for management of Forex reserves under: 
o Reserve Bank of India Act, 1934 and 
o Foreign Exchange Management Act, 1999  
• The Forex reserves of India include four components with share of each in its record level as given in table. 
Reasons for recent rise in Indian Forex Reserves 
• Though Indian reserves are rising since its 1991 Balance of Payment (BoP) crisis (left only with US$5.8billion 
of reserve), the speed of rise is significant in last 2-3 years. 
• Some of the major reasons for this sudden rise includes: 
o High Foreign Capital Flow in terms of Rising Foreign Direct Investment (FDI) and Foreign Portfolio 
Investment (FPI) due to its large market size, growing startups, corporate tax cut, higher returns etc. 
o Reduced Capital outflow due to reduced consumptions under Covid-19 and curbs on foreign travel. E.g. 
In 2020-21, India’s BoP was at record surplus of $87 billion. 
o Record remittances from its Diaspora in last two years (above US$ 80billion), and 
o Massive Liquidity Iinjection in USA through stimulus measures against economic impact of Covid-19 
pandemic. E.g. US$2.3 trillion lending support from Federal Reserve to households, financial markets, 
government etc. 
Arguments for maintaining High Forex Reserves 
Benefit of High Forex Provides Solution Against 
Reduced risk from 
External Vulnerabilities 
• Volatile Oil Prices,  
• Meet external obligations and liabilities on high outflow of hot money (FPIs) 
Exchange Rate 
Management 
• Though market-determined since 1993, high Forex allows occasional RBI intervention to 
curb excessive volatility in the foreign exchange market 
• Help in growth of currency market 
Generate Investors 
Confidence 
• Helping to finance India’s Current Account Deficit  
• Minimize impact of just above Junk Category rating and a net international investment 
position of -12.9% of GDP 
Emerge as Regional 
Leader 
• Expands India’s ability to open currency swap lines for others, especially our neighbors like 
SAARC nations for which India started currency swap mechanism in 2012 
Liquidity against 
Economic Risks 
• Overcome domestic financial system crisis like High NPAs, corporate bond market crisis 
due to IL&FS payment default, risks of telecom sector challenges due to AGR 
• Overcome Global economic crisis due to Covid-19 related uncertainties 
Page 2


 
23                                                                                                                                                        
3. ECONOMY 
3.1. INDIA’S FOREX RESERVES 
Why in News? 
Recently, Indian Foreign Exchange reserves hit new lifetime high of 
around US$ 612 billion, making India the fourth largest Forex reserve 
holder after China, Japan and Switzerland. 
About Foreign Exchange Reserves 
• Foreign Exchange Reserves, also known as Forex Reserves, are 
assets held on reserve by a central bank in foreign currencies. 
• Mostly dominated by foreign currency assets, it can also include 
other instruments like bonds, treasury bills, Gold Reserves, Special 
Drawing Rights at IMF etc.  
• US dollar, Euro, British pound, Japanese Yen and Chinese Yuan are 
some of the common currency assets with US dollar as main 
currency due to its use in settlement of all international 
transactions. 
• Vital for International trade and commerce, Forex reserves serves 
a number of purposes like- 
Forex Reserves Management in India and recent rise 
• As central bank of India, the Reserve Bank of India is responsible for management of Forex reserves under: 
o Reserve Bank of India Act, 1934 and 
o Foreign Exchange Management Act, 1999  
• The Forex reserves of India include four components with share of each in its record level as given in table. 
Reasons for recent rise in Indian Forex Reserves 
• Though Indian reserves are rising since its 1991 Balance of Payment (BoP) crisis (left only with US$5.8billion 
of reserve), the speed of rise is significant in last 2-3 years. 
• Some of the major reasons for this sudden rise includes: 
o High Foreign Capital Flow in terms of Rising Foreign Direct Investment (FDI) and Foreign Portfolio 
Investment (FPI) due to its large market size, growing startups, corporate tax cut, higher returns etc. 
o Reduced Capital outflow due to reduced consumptions under Covid-19 and curbs on foreign travel. E.g. 
In 2020-21, India’s BoP was at record surplus of $87 billion. 
o Record remittances from its Diaspora in last two years (above US$ 80billion), and 
o Massive Liquidity Iinjection in USA through stimulus measures against economic impact of Covid-19 
pandemic. E.g. US$2.3 trillion lending support from Federal Reserve to households, financial markets, 
government etc. 
Arguments for maintaining High Forex Reserves 
Benefit of High Forex Provides Solution Against 
Reduced risk from 
External Vulnerabilities 
• Volatile Oil Prices,  
• Meet external obligations and liabilities on high outflow of hot money (FPIs) 
Exchange Rate 
Management 
• Though market-determined since 1993, high Forex allows occasional RBI intervention to 
curb excessive volatility in the foreign exchange market 
• Help in growth of currency market 
Generate Investors 
Confidence 
• Helping to finance India’s Current Account Deficit  
• Minimize impact of just above Junk Category rating and a net international investment 
position of -12.9% of GDP 
Emerge as Regional 
Leader 
• Expands India’s ability to open currency swap lines for others, especially our neighbors like 
SAARC nations for which India started currency swap mechanism in 2012 
Liquidity against 
Economic Risks 
• Overcome domestic financial system crisis like High NPAs, corporate bond market crisis 
due to IL&FS payment default, risks of telecom sector challenges due to AGR 
• Overcome Global economic crisis due to Covid-19 related uncertainties 
 
24                                                                                                                                                        
Cushion against 
monetary stimulus 
withdrawal 
• In 2013, Fed tapering created external sector crisis with over 10% currency fluctuation 
and only Japan as help via currency swap 
• High Forex ensures liquidity against US monetary Stimulus withdrawal and subsequent 
capital outflows from developing nations like India 
Arguments against maintaining High Forex Reserves 
• If we talk in terms of our imports and capital repayments, present Indian Forex reserves are: 
o Enough to cover more than 15 months of our projected 2021-22 imports, 
o Higher than our external debt obligations (stand at US$ 570.0 billion at end-March 2021) and reducing 
short-term debt (maturity of up to 1 year) at only 17.7%. 
• Low returns on Forex reserves- usually around 1% or less due to near zero interest rates in advanced 
economies, 
• Large infrastructure financing needs of India to meet development aspirations and utilize young 
demography. 
• It may lead to several other issues like-  
o High opportunity and fiscal costs of sterilization of liquidity, i.e. unused excessive cash  despite 
development needs, poverty and large youth population, 
o High Forex reserves shows lack of confidence from government on  
? Resilience of its economy,  
? Measures to raise capital (e.g. Disinvestments) or exports (Atmanirbhar Bharat) and  
? Soundness of macroeconomic management 
Way Forward 
The level of Forex reserves should include not just present risks and exposures but India’s future aspirations and 
optimum utilization of resources as well. In that context, it is important that maintenance of forex reserves is 
looked at not only from financial security perspective but also from a broader macroeconomic perspective.  
3.2. INSOLVENCY AND 
BANKRUPTCY CODE (IBC) 
Why in News? 
This May, the Insolvency and Bankruptcy Code 
(IBC) completed five years since it was passed 
by Parliament in 2016. 
Assessment of Insolvency and Bankruptcy 
Code (IBC) 
Achievements 
• Reducing the bankruptcy resolution time: 
The average time taken for resolution was 
reduced from 4.3 years in 2017 to 1.6 
years in 2020. 
• Behavioural change for the wider lending 
ecosystem: The threat of promoters losing 
control of the company or protracted legal 
proceedings is forcing many corporate 
defaulters to pay off their debt even 
before the insolvency can be started. 
• Improvement in India’s ‘ease of doing 
business’ and ‘getting credit’ rank: India's 
rank in ease of doing business improved 
from 155 in 2017 to 63 in 2020, getting 
credit rank improved from 62 in 2017 to 
25 in 2020 and Starting a business rank 
improved from 151 in 2017 to 136 in 2020.  
Page 3


 
23                                                                                                                                                        
3. ECONOMY 
3.1. INDIA’S FOREX RESERVES 
Why in News? 
Recently, Indian Foreign Exchange reserves hit new lifetime high of 
around US$ 612 billion, making India the fourth largest Forex reserve 
holder after China, Japan and Switzerland. 
About Foreign Exchange Reserves 
• Foreign Exchange Reserves, also known as Forex Reserves, are 
assets held on reserve by a central bank in foreign currencies. 
• Mostly dominated by foreign currency assets, it can also include 
other instruments like bonds, treasury bills, Gold Reserves, Special 
Drawing Rights at IMF etc.  
• US dollar, Euro, British pound, Japanese Yen and Chinese Yuan are 
some of the common currency assets with US dollar as main 
currency due to its use in settlement of all international 
transactions. 
• Vital for International trade and commerce, Forex reserves serves 
a number of purposes like- 
Forex Reserves Management in India and recent rise 
• As central bank of India, the Reserve Bank of India is responsible for management of Forex reserves under: 
o Reserve Bank of India Act, 1934 and 
o Foreign Exchange Management Act, 1999  
• The Forex reserves of India include four components with share of each in its record level as given in table. 
Reasons for recent rise in Indian Forex Reserves 
• Though Indian reserves are rising since its 1991 Balance of Payment (BoP) crisis (left only with US$5.8billion 
of reserve), the speed of rise is significant in last 2-3 years. 
• Some of the major reasons for this sudden rise includes: 
o High Foreign Capital Flow in terms of Rising Foreign Direct Investment (FDI) and Foreign Portfolio 
Investment (FPI) due to its large market size, growing startups, corporate tax cut, higher returns etc. 
o Reduced Capital outflow due to reduced consumptions under Covid-19 and curbs on foreign travel. E.g. 
In 2020-21, India’s BoP was at record surplus of $87 billion. 
o Record remittances from its Diaspora in last two years (above US$ 80billion), and 
o Massive Liquidity Iinjection in USA through stimulus measures against economic impact of Covid-19 
pandemic. E.g. US$2.3 trillion lending support from Federal Reserve to households, financial markets, 
government etc. 
Arguments for maintaining High Forex Reserves 
Benefit of High Forex Provides Solution Against 
Reduced risk from 
External Vulnerabilities 
• Volatile Oil Prices,  
• Meet external obligations and liabilities on high outflow of hot money (FPIs) 
Exchange Rate 
Management 
• Though market-determined since 1993, high Forex allows occasional RBI intervention to 
curb excessive volatility in the foreign exchange market 
• Help in growth of currency market 
Generate Investors 
Confidence 
• Helping to finance India’s Current Account Deficit  
• Minimize impact of just above Junk Category rating and a net international investment 
position of -12.9% of GDP 
Emerge as Regional 
Leader 
• Expands India’s ability to open currency swap lines for others, especially our neighbors like 
SAARC nations for which India started currency swap mechanism in 2012 
Liquidity against 
Economic Risks 
• Overcome domestic financial system crisis like High NPAs, corporate bond market crisis 
due to IL&FS payment default, risks of telecom sector challenges due to AGR 
• Overcome Global economic crisis due to Covid-19 related uncertainties 
 
24                                                                                                                                                        
Cushion against 
monetary stimulus 
withdrawal 
• In 2013, Fed tapering created external sector crisis with over 10% currency fluctuation 
and only Japan as help via currency swap 
• High Forex ensures liquidity against US monetary Stimulus withdrawal and subsequent 
capital outflows from developing nations like India 
Arguments against maintaining High Forex Reserves 
• If we talk in terms of our imports and capital repayments, present Indian Forex reserves are: 
o Enough to cover more than 15 months of our projected 2021-22 imports, 
o Higher than our external debt obligations (stand at US$ 570.0 billion at end-March 2021) and reducing 
short-term debt (maturity of up to 1 year) at only 17.7%. 
• Low returns on Forex reserves- usually around 1% or less due to near zero interest rates in advanced 
economies, 
• Large infrastructure financing needs of India to meet development aspirations and utilize young 
demography. 
• It may lead to several other issues like-  
o High opportunity and fiscal costs of sterilization of liquidity, i.e. unused excessive cash  despite 
development needs, poverty and large youth population, 
o High Forex reserves shows lack of confidence from government on  
? Resilience of its economy,  
? Measures to raise capital (e.g. Disinvestments) or exports (Atmanirbhar Bharat) and  
? Soundness of macroeconomic management 
Way Forward 
The level of Forex reserves should include not just present risks and exposures but India’s future aspirations and 
optimum utilization of resources as well. In that context, it is important that maintenance of forex reserves is 
looked at not only from financial security perspective but also from a broader macroeconomic perspective.  
3.2. INSOLVENCY AND 
BANKRUPTCY CODE (IBC) 
Why in News? 
This May, the Insolvency and Bankruptcy Code 
(IBC) completed five years since it was passed 
by Parliament in 2016. 
Assessment of Insolvency and Bankruptcy 
Code (IBC) 
Achievements 
• Reducing the bankruptcy resolution time: 
The average time taken for resolution was 
reduced from 4.3 years in 2017 to 1.6 
years in 2020. 
• Behavioural change for the wider lending 
ecosystem: The threat of promoters losing 
control of the company or protracted legal 
proceedings is forcing many corporate 
defaulters to pay off their debt even 
before the insolvency can be started. 
• Improvement in India’s ‘ease of doing 
business’ and ‘getting credit’ rank: India's 
rank in ease of doing business improved 
from 155 in 2017 to 63 in 2020, getting 
credit rank improved from 62 in 2017 to 
25 in 2020 and Starting a business rank 
improved from 151 in 2017 to 136 in 2020.  
 
25                                                                                                                                                        
• Rescued corporate debtors in distress: The code has rescued 348 corporate debtors through resolution 
plans (21 percent of completed CIRPs). 
• Resolution of cases: Out of total 32,547 cases filed under IBC in the NCLT, 19,377 have been disposed of. 
• Continuous updation of the Code: IBC has undergone six amendments since its enactment introducing 
provisions such as clarifying the status of homebuyers as financial creditors; reducing the voting threshold of 
CoC from 75% to 66% etc. 
o Further, The IBC (Second Amendment) Act, 2020 was amended to provide relief to companies affected 
by COVID-19 pandemic and to recover from the financial stress without facing immediate threat of being 
pushed into insolvency proceedings by providing temporary suspension of initiation of CIRP. 
Challenges that remain 
• Low recovery rates:  Public and private sector banks, non-banking financial institutions, and other financial 
lenders to companies undergoing CIRP have taken a cumulative haircut of 61.2 per cent of their admitted 
claims, with some haircuts as high as 90-95% 
• Delays: Among the 13,170 IBC cases pending with the NCLT, 71% of these cases have been pending for more 
than 180 days. This happens to delays caused at various stages, which causes several issues like-  
o Delays in admission of cases in NCLT: During this time the company remains under the control of the 
defaulting owner enabling value shifting, funds diversion, and asset transfers. 
o Delays due to unsolicited, late bids: It creates tremendous procedural uncertainty which discourages 
genuine bidders from bidding at the right time.  
o Delays due to appeals: NCLT judgments are litigated continuously in the NCLAT and Supreme Court 
further delaying resolution and recovery.  
• Staffing and infrastructure issues in NCLT: More than 50% of the sanctioned strength in NCLT is lying vacant 
(vacancy of 34 members, including the President, against the total of 63). 
• Need for strengthening homebuyer rights: According to a 2018 amendment to the IBC, a minimum of 100 
homebuyers, or 10% of the total flat purchasers, are needed for initiating the process.  
o However, homebuyers are facing practical difficulties in gathering the required number of homebuyers 
to initiate insolvency Proceedings against the real estate owner. 
• Lack of flexibility: The resolution professional does not currently have the flexibility within the IBC to dispose 
of the corporate defaulter across multiple bidders. 
• Presence of multiple IPAs for regulating IPs which results in absence of appropriate standards for selection 
process and conduct of the resolution professionals. 
• Other issues:  
o Absence of provisions for cross-border insolvency resolutions  
o Lack of uniformity in decision making process of the CoC. 
o Need for data relating to IBC cases in granular form for researchers and analysts. 
Way forward: Recommendations for reforms 
The parliamentary standing committee on finance recommended following reforms for efficient functioning of 
IBC- 
• Setting benchmark for the quantum of haircuts allowed as per global standards. 
• Formulating a professional code for the CoC, who take over a company in distress. 
• A single professional self-regulatory body that functions like the Institute of Chartered Accountants of India 
(ICAI) may be established to oversee and regulate the functioning of RPs so that there are appropriate 
standards and fair self-regulation. 
• Adoption of UNCITRAL (United Nations Commission on International Trade Law) Model Law on Cross 
border insolvency: in Indian context to provide internationally competitive and comprehensive insolvency 
framework for corporate debtors under the Code. 
• Conducting an analysis of the requirement of capacity in dealing with projected cases in the next three-
four years to suitably plan recruitment process in advance. 
• NCLT and NCLAT should completely digitize their records and operations with provision for virtual hearings 
to get through the backlog and deal with the pending cases swiftly. 
• Strengthening home buyer rights: For instance, once a single homebuyer decides to initiate insolvency 
Proceedings in NCLT, the real estate owner should be obligated in the Rules/ Guidelines to provide details of 
Page 4


 
23                                                                                                                                                        
3. ECONOMY 
3.1. INDIA’S FOREX RESERVES 
Why in News? 
Recently, Indian Foreign Exchange reserves hit new lifetime high of 
around US$ 612 billion, making India the fourth largest Forex reserve 
holder after China, Japan and Switzerland. 
About Foreign Exchange Reserves 
• Foreign Exchange Reserves, also known as Forex Reserves, are 
assets held on reserve by a central bank in foreign currencies. 
• Mostly dominated by foreign currency assets, it can also include 
other instruments like bonds, treasury bills, Gold Reserves, Special 
Drawing Rights at IMF etc.  
• US dollar, Euro, British pound, Japanese Yen and Chinese Yuan are 
some of the common currency assets with US dollar as main 
currency due to its use in settlement of all international 
transactions. 
• Vital for International trade and commerce, Forex reserves serves 
a number of purposes like- 
Forex Reserves Management in India and recent rise 
• As central bank of India, the Reserve Bank of India is responsible for management of Forex reserves under: 
o Reserve Bank of India Act, 1934 and 
o Foreign Exchange Management Act, 1999  
• The Forex reserves of India include four components with share of each in its record level as given in table. 
Reasons for recent rise in Indian Forex Reserves 
• Though Indian reserves are rising since its 1991 Balance of Payment (BoP) crisis (left only with US$5.8billion 
of reserve), the speed of rise is significant in last 2-3 years. 
• Some of the major reasons for this sudden rise includes: 
o High Foreign Capital Flow in terms of Rising Foreign Direct Investment (FDI) and Foreign Portfolio 
Investment (FPI) due to its large market size, growing startups, corporate tax cut, higher returns etc. 
o Reduced Capital outflow due to reduced consumptions under Covid-19 and curbs on foreign travel. E.g. 
In 2020-21, India’s BoP was at record surplus of $87 billion. 
o Record remittances from its Diaspora in last two years (above US$ 80billion), and 
o Massive Liquidity Iinjection in USA through stimulus measures against economic impact of Covid-19 
pandemic. E.g. US$2.3 trillion lending support from Federal Reserve to households, financial markets, 
government etc. 
Arguments for maintaining High Forex Reserves 
Benefit of High Forex Provides Solution Against 
Reduced risk from 
External Vulnerabilities 
• Volatile Oil Prices,  
• Meet external obligations and liabilities on high outflow of hot money (FPIs) 
Exchange Rate 
Management 
• Though market-determined since 1993, high Forex allows occasional RBI intervention to 
curb excessive volatility in the foreign exchange market 
• Help in growth of currency market 
Generate Investors 
Confidence 
• Helping to finance India’s Current Account Deficit  
• Minimize impact of just above Junk Category rating and a net international investment 
position of -12.9% of GDP 
Emerge as Regional 
Leader 
• Expands India’s ability to open currency swap lines for others, especially our neighbors like 
SAARC nations for which India started currency swap mechanism in 2012 
Liquidity against 
Economic Risks 
• Overcome domestic financial system crisis like High NPAs, corporate bond market crisis 
due to IL&FS payment default, risks of telecom sector challenges due to AGR 
• Overcome Global economic crisis due to Covid-19 related uncertainties 
 
24                                                                                                                                                        
Cushion against 
monetary stimulus 
withdrawal 
• In 2013, Fed tapering created external sector crisis with over 10% currency fluctuation 
and only Japan as help via currency swap 
• High Forex ensures liquidity against US monetary Stimulus withdrawal and subsequent 
capital outflows from developing nations like India 
Arguments against maintaining High Forex Reserves 
• If we talk in terms of our imports and capital repayments, present Indian Forex reserves are: 
o Enough to cover more than 15 months of our projected 2021-22 imports, 
o Higher than our external debt obligations (stand at US$ 570.0 billion at end-March 2021) and reducing 
short-term debt (maturity of up to 1 year) at only 17.7%. 
• Low returns on Forex reserves- usually around 1% or less due to near zero interest rates in advanced 
economies, 
• Large infrastructure financing needs of India to meet development aspirations and utilize young 
demography. 
• It may lead to several other issues like-  
o High opportunity and fiscal costs of sterilization of liquidity, i.e. unused excessive cash  despite 
development needs, poverty and large youth population, 
o High Forex reserves shows lack of confidence from government on  
? Resilience of its economy,  
? Measures to raise capital (e.g. Disinvestments) or exports (Atmanirbhar Bharat) and  
? Soundness of macroeconomic management 
Way Forward 
The level of Forex reserves should include not just present risks and exposures but India’s future aspirations and 
optimum utilization of resources as well. In that context, it is important that maintenance of forex reserves is 
looked at not only from financial security perspective but also from a broader macroeconomic perspective.  
3.2. INSOLVENCY AND 
BANKRUPTCY CODE (IBC) 
Why in News? 
This May, the Insolvency and Bankruptcy Code 
(IBC) completed five years since it was passed 
by Parliament in 2016. 
Assessment of Insolvency and Bankruptcy 
Code (IBC) 
Achievements 
• Reducing the bankruptcy resolution time: 
The average time taken for resolution was 
reduced from 4.3 years in 2017 to 1.6 
years in 2020. 
• Behavioural change for the wider lending 
ecosystem: The threat of promoters losing 
control of the company or protracted legal 
proceedings is forcing many corporate 
defaulters to pay off their debt even 
before the insolvency can be started. 
• Improvement in India’s ‘ease of doing 
business’ and ‘getting credit’ rank: India's 
rank in ease of doing business improved 
from 155 in 2017 to 63 in 2020, getting 
credit rank improved from 62 in 2017 to 
25 in 2020 and Starting a business rank 
improved from 151 in 2017 to 136 in 2020.  
 
25                                                                                                                                                        
• Rescued corporate debtors in distress: The code has rescued 348 corporate debtors through resolution 
plans (21 percent of completed CIRPs). 
• Resolution of cases: Out of total 32,547 cases filed under IBC in the NCLT, 19,377 have been disposed of. 
• Continuous updation of the Code: IBC has undergone six amendments since its enactment introducing 
provisions such as clarifying the status of homebuyers as financial creditors; reducing the voting threshold of 
CoC from 75% to 66% etc. 
o Further, The IBC (Second Amendment) Act, 2020 was amended to provide relief to companies affected 
by COVID-19 pandemic and to recover from the financial stress without facing immediate threat of being 
pushed into insolvency proceedings by providing temporary suspension of initiation of CIRP. 
Challenges that remain 
• Low recovery rates:  Public and private sector banks, non-banking financial institutions, and other financial 
lenders to companies undergoing CIRP have taken a cumulative haircut of 61.2 per cent of their admitted 
claims, with some haircuts as high as 90-95% 
• Delays: Among the 13,170 IBC cases pending with the NCLT, 71% of these cases have been pending for more 
than 180 days. This happens to delays caused at various stages, which causes several issues like-  
o Delays in admission of cases in NCLT: During this time the company remains under the control of the 
defaulting owner enabling value shifting, funds diversion, and asset transfers. 
o Delays due to unsolicited, late bids: It creates tremendous procedural uncertainty which discourages 
genuine bidders from bidding at the right time.  
o Delays due to appeals: NCLT judgments are litigated continuously in the NCLAT and Supreme Court 
further delaying resolution and recovery.  
• Staffing and infrastructure issues in NCLT: More than 50% of the sanctioned strength in NCLT is lying vacant 
(vacancy of 34 members, including the President, against the total of 63). 
• Need for strengthening homebuyer rights: According to a 2018 amendment to the IBC, a minimum of 100 
homebuyers, or 10% of the total flat purchasers, are needed for initiating the process.  
o However, homebuyers are facing practical difficulties in gathering the required number of homebuyers 
to initiate insolvency Proceedings against the real estate owner. 
• Lack of flexibility: The resolution professional does not currently have the flexibility within the IBC to dispose 
of the corporate defaulter across multiple bidders. 
• Presence of multiple IPAs for regulating IPs which results in absence of appropriate standards for selection 
process and conduct of the resolution professionals. 
• Other issues:  
o Absence of provisions for cross-border insolvency resolutions  
o Lack of uniformity in decision making process of the CoC. 
o Need for data relating to IBC cases in granular form for researchers and analysts. 
Way forward: Recommendations for reforms 
The parliamentary standing committee on finance recommended following reforms for efficient functioning of 
IBC- 
• Setting benchmark for the quantum of haircuts allowed as per global standards. 
• Formulating a professional code for the CoC, who take over a company in distress. 
• A single professional self-regulatory body that functions like the Institute of Chartered Accountants of India 
(ICAI) may be established to oversee and regulate the functioning of RPs so that there are appropriate 
standards and fair self-regulation. 
• Adoption of UNCITRAL (United Nations Commission on International Trade Law) Model Law on Cross 
border insolvency: in Indian context to provide internationally competitive and comprehensive insolvency 
framework for corporate debtors under the Code. 
• Conducting an analysis of the requirement of capacity in dealing with projected cases in the next three-
four years to suitably plan recruitment process in advance. 
• NCLT and NCLAT should completely digitize their records and operations with provision for virtual hearings 
to get through the backlog and deal with the pending cases swiftly. 
• Strengthening home buyer rights: For instance, once a single homebuyer decides to initiate insolvency 
Proceedings in NCLT, the real estate owner should be obligated in the Rules/ Guidelines to provide details of 
 
26                                                                                                                                                        
other home buyers of the project to the concerned homebuyer so that the required 10% or 100 homebuyers 
can be mobilised. 
• National Law Schools should be involved in the NCLT system so that they can conduct academic research, 
develop suitable case-based training materials, and provide appropriate support through law clerks etc. 
Related news 
New curbs on insolvency resolution professionals 
• These norm changes are part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second 
Amendment) Regulations, 2021  
• New Norms 
o Any linkage of the insolvency professionals with the corporate debtor or any of the stakeholders is now not 
permitted. 
o IBBI has authorised Interim Resolution Professionals and Resolution Professionals (RPs) to appointany other 
professional that may be necessary to assist in discharge of RP’s duties.  
? This will be allowed only when certain conditions are met such as explicit prohibition on appointment of 
relatives of RPs, past (5 years) auditor of the corporate debtor, etc. 
• Significance 
o To ensure fair business dealings and transparency in the appointment of RPs. 
o Eliminates potential conflicts of interest in functioning of RPs. 
3.2.1. INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) BILL 2021 
Why in News? 
The Parliament recently passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021, allowing the use 
of “pre-packs” to resolve insolvency proceedings involving micro, small and medium-scale enterprises. 
More on news 
• The bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 that was promulgated 
by the President in April, 2021. 
• Key provisions of the bill include: 
o Inserting a new Chapter to facilitate pre-packaged insolvency resolution process (PIRP) for corporate 
persons that are Micro, Small and Medium Enterprises.  
o The central government may, by 
notification, set the minimum 
threshold of default to initiate PIRP up 
to one crore rupees. 
? Earlier, in April 2021, the 
government had set the 
minimum threshold at 10 
lakh rupees. 
o Disposal of simultaneous applications 
for initiation of corporate insolvency 
resolution process (CIRP) and PIRP, 
pending against the same corporate 
debtor. 
o Penalty for fraudulent or malicious 
initiation of PIRP or fraudulent 
management of corporate debtor 
during the insolvency resolution 
process. 
o Punishment for offences related to pre-
packaged insolvency resolution 
process. 
What is Pre-packaged insolvency resolution? 
• A pre-packed insolvency resolution mechanism is a process wherein a resolution arrangement is agreed 
upon between the distressed corporate debtor (CDs) and lender before approaching the National Company 
Law Tribunal (NCLT) for bankruptcy proceedings.  
Page 5


 
23                                                                                                                                                        
3. ECONOMY 
3.1. INDIA’S FOREX RESERVES 
Why in News? 
Recently, Indian Foreign Exchange reserves hit new lifetime high of 
around US$ 612 billion, making India the fourth largest Forex reserve 
holder after China, Japan and Switzerland. 
About Foreign Exchange Reserves 
• Foreign Exchange Reserves, also known as Forex Reserves, are 
assets held on reserve by a central bank in foreign currencies. 
• Mostly dominated by foreign currency assets, it can also include 
other instruments like bonds, treasury bills, Gold Reserves, Special 
Drawing Rights at IMF etc.  
• US dollar, Euro, British pound, Japanese Yen and Chinese Yuan are 
some of the common currency assets with US dollar as main 
currency due to its use in settlement of all international 
transactions. 
• Vital for International trade and commerce, Forex reserves serves 
a number of purposes like- 
Forex Reserves Management in India and recent rise 
• As central bank of India, the Reserve Bank of India is responsible for management of Forex reserves under: 
o Reserve Bank of India Act, 1934 and 
o Foreign Exchange Management Act, 1999  
• The Forex reserves of India include four components with share of each in its record level as given in table. 
Reasons for recent rise in Indian Forex Reserves 
• Though Indian reserves are rising since its 1991 Balance of Payment (BoP) crisis (left only with US$5.8billion 
of reserve), the speed of rise is significant in last 2-3 years. 
• Some of the major reasons for this sudden rise includes: 
o High Foreign Capital Flow in terms of Rising Foreign Direct Investment (FDI) and Foreign Portfolio 
Investment (FPI) due to its large market size, growing startups, corporate tax cut, higher returns etc. 
o Reduced Capital outflow due to reduced consumptions under Covid-19 and curbs on foreign travel. E.g. 
In 2020-21, India’s BoP was at record surplus of $87 billion. 
o Record remittances from its Diaspora in last two years (above US$ 80billion), and 
o Massive Liquidity Iinjection in USA through stimulus measures against economic impact of Covid-19 
pandemic. E.g. US$2.3 trillion lending support from Federal Reserve to households, financial markets, 
government etc. 
Arguments for maintaining High Forex Reserves 
Benefit of High Forex Provides Solution Against 
Reduced risk from 
External Vulnerabilities 
• Volatile Oil Prices,  
• Meet external obligations and liabilities on high outflow of hot money (FPIs) 
Exchange Rate 
Management 
• Though market-determined since 1993, high Forex allows occasional RBI intervention to 
curb excessive volatility in the foreign exchange market 
• Help in growth of currency market 
Generate Investors 
Confidence 
• Helping to finance India’s Current Account Deficit  
• Minimize impact of just above Junk Category rating and a net international investment 
position of -12.9% of GDP 
Emerge as Regional 
Leader 
• Expands India’s ability to open currency swap lines for others, especially our neighbors like 
SAARC nations for which India started currency swap mechanism in 2012 
Liquidity against 
Economic Risks 
• Overcome domestic financial system crisis like High NPAs, corporate bond market crisis 
due to IL&FS payment default, risks of telecom sector challenges due to AGR 
• Overcome Global economic crisis due to Covid-19 related uncertainties 
 
24                                                                                                                                                        
Cushion against 
monetary stimulus 
withdrawal 
• In 2013, Fed tapering created external sector crisis with over 10% currency fluctuation 
and only Japan as help via currency swap 
• High Forex ensures liquidity against US monetary Stimulus withdrawal and subsequent 
capital outflows from developing nations like India 
Arguments against maintaining High Forex Reserves 
• If we talk in terms of our imports and capital repayments, present Indian Forex reserves are: 
o Enough to cover more than 15 months of our projected 2021-22 imports, 
o Higher than our external debt obligations (stand at US$ 570.0 billion at end-March 2021) and reducing 
short-term debt (maturity of up to 1 year) at only 17.7%. 
• Low returns on Forex reserves- usually around 1% or less due to near zero interest rates in advanced 
economies, 
• Large infrastructure financing needs of India to meet development aspirations and utilize young 
demography. 
• It may lead to several other issues like-  
o High opportunity and fiscal costs of sterilization of liquidity, i.e. unused excessive cash  despite 
development needs, poverty and large youth population, 
o High Forex reserves shows lack of confidence from government on  
? Resilience of its economy,  
? Measures to raise capital (e.g. Disinvestments) or exports (Atmanirbhar Bharat) and  
? Soundness of macroeconomic management 
Way Forward 
The level of Forex reserves should include not just present risks and exposures but India’s future aspirations and 
optimum utilization of resources as well. In that context, it is important that maintenance of forex reserves is 
looked at not only from financial security perspective but also from a broader macroeconomic perspective.  
3.2. INSOLVENCY AND 
BANKRUPTCY CODE (IBC) 
Why in News? 
This May, the Insolvency and Bankruptcy Code 
(IBC) completed five years since it was passed 
by Parliament in 2016. 
Assessment of Insolvency and Bankruptcy 
Code (IBC) 
Achievements 
• Reducing the bankruptcy resolution time: 
The average time taken for resolution was 
reduced from 4.3 years in 2017 to 1.6 
years in 2020. 
• Behavioural change for the wider lending 
ecosystem: The threat of promoters losing 
control of the company or protracted legal 
proceedings is forcing many corporate 
defaulters to pay off their debt even 
before the insolvency can be started. 
• Improvement in India’s ‘ease of doing 
business’ and ‘getting credit’ rank: India's 
rank in ease of doing business improved 
from 155 in 2017 to 63 in 2020, getting 
credit rank improved from 62 in 2017 to 
25 in 2020 and Starting a business rank 
improved from 151 in 2017 to 136 in 2020.  
 
25                                                                                                                                                        
• Rescued corporate debtors in distress: The code has rescued 348 corporate debtors through resolution 
plans (21 percent of completed CIRPs). 
• Resolution of cases: Out of total 32,547 cases filed under IBC in the NCLT, 19,377 have been disposed of. 
• Continuous updation of the Code: IBC has undergone six amendments since its enactment introducing 
provisions such as clarifying the status of homebuyers as financial creditors; reducing the voting threshold of 
CoC from 75% to 66% etc. 
o Further, The IBC (Second Amendment) Act, 2020 was amended to provide relief to companies affected 
by COVID-19 pandemic and to recover from the financial stress without facing immediate threat of being 
pushed into insolvency proceedings by providing temporary suspension of initiation of CIRP. 
Challenges that remain 
• Low recovery rates:  Public and private sector banks, non-banking financial institutions, and other financial 
lenders to companies undergoing CIRP have taken a cumulative haircut of 61.2 per cent of their admitted 
claims, with some haircuts as high as 90-95% 
• Delays: Among the 13,170 IBC cases pending with the NCLT, 71% of these cases have been pending for more 
than 180 days. This happens to delays caused at various stages, which causes several issues like-  
o Delays in admission of cases in NCLT: During this time the company remains under the control of the 
defaulting owner enabling value shifting, funds diversion, and asset transfers. 
o Delays due to unsolicited, late bids: It creates tremendous procedural uncertainty which discourages 
genuine bidders from bidding at the right time.  
o Delays due to appeals: NCLT judgments are litigated continuously in the NCLAT and Supreme Court 
further delaying resolution and recovery.  
• Staffing and infrastructure issues in NCLT: More than 50% of the sanctioned strength in NCLT is lying vacant 
(vacancy of 34 members, including the President, against the total of 63). 
• Need for strengthening homebuyer rights: According to a 2018 amendment to the IBC, a minimum of 100 
homebuyers, or 10% of the total flat purchasers, are needed for initiating the process.  
o However, homebuyers are facing practical difficulties in gathering the required number of homebuyers 
to initiate insolvency Proceedings against the real estate owner. 
• Lack of flexibility: The resolution professional does not currently have the flexibility within the IBC to dispose 
of the corporate defaulter across multiple bidders. 
• Presence of multiple IPAs for regulating IPs which results in absence of appropriate standards for selection 
process and conduct of the resolution professionals. 
• Other issues:  
o Absence of provisions for cross-border insolvency resolutions  
o Lack of uniformity in decision making process of the CoC. 
o Need for data relating to IBC cases in granular form for researchers and analysts. 
Way forward: Recommendations for reforms 
The parliamentary standing committee on finance recommended following reforms for efficient functioning of 
IBC- 
• Setting benchmark for the quantum of haircuts allowed as per global standards. 
• Formulating a professional code for the CoC, who take over a company in distress. 
• A single professional self-regulatory body that functions like the Institute of Chartered Accountants of India 
(ICAI) may be established to oversee and regulate the functioning of RPs so that there are appropriate 
standards and fair self-regulation. 
• Adoption of UNCITRAL (United Nations Commission on International Trade Law) Model Law on Cross 
border insolvency: in Indian context to provide internationally competitive and comprehensive insolvency 
framework for corporate debtors under the Code. 
• Conducting an analysis of the requirement of capacity in dealing with projected cases in the next three-
four years to suitably plan recruitment process in advance. 
• NCLT and NCLAT should completely digitize their records and operations with provision for virtual hearings 
to get through the backlog and deal with the pending cases swiftly. 
• Strengthening home buyer rights: For instance, once a single homebuyer decides to initiate insolvency 
Proceedings in NCLT, the real estate owner should be obligated in the Rules/ Guidelines to provide details of 
 
26                                                                                                                                                        
other home buyers of the project to the concerned homebuyer so that the required 10% or 100 homebuyers 
can be mobilised. 
• National Law Schools should be involved in the NCLT system so that they can conduct academic research, 
develop suitable case-based training materials, and provide appropriate support through law clerks etc. 
Related news 
New curbs on insolvency resolution professionals 
• These norm changes are part of the IBBI (Insolvency Resolution Process for Corporate Persons) (Second 
Amendment) Regulations, 2021  
• New Norms 
o Any linkage of the insolvency professionals with the corporate debtor or any of the stakeholders is now not 
permitted. 
o IBBI has authorised Interim Resolution Professionals and Resolution Professionals (RPs) to appointany other 
professional that may be necessary to assist in discharge of RP’s duties.  
? This will be allowed only when certain conditions are met such as explicit prohibition on appointment of 
relatives of RPs, past (5 years) auditor of the corporate debtor, etc. 
• Significance 
o To ensure fair business dealings and transparency in the appointment of RPs. 
o Eliminates potential conflicts of interest in functioning of RPs. 
3.2.1. INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) BILL 2021 
Why in News? 
The Parliament recently passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021, allowing the use 
of “pre-packs” to resolve insolvency proceedings involving micro, small and medium-scale enterprises. 
More on news 
• The bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 that was promulgated 
by the President in April, 2021. 
• Key provisions of the bill include: 
o Inserting a new Chapter to facilitate pre-packaged insolvency resolution process (PIRP) for corporate 
persons that are Micro, Small and Medium Enterprises.  
o The central government may, by 
notification, set the minimum 
threshold of default to initiate PIRP up 
to one crore rupees. 
? Earlier, in April 2021, the 
government had set the 
minimum threshold at 10 
lakh rupees. 
o Disposal of simultaneous applications 
for initiation of corporate insolvency 
resolution process (CIRP) and PIRP, 
pending against the same corporate 
debtor. 
o Penalty for fraudulent or malicious 
initiation of PIRP or fraudulent 
management of corporate debtor 
during the insolvency resolution 
process. 
o Punishment for offences related to pre-
packaged insolvency resolution 
process. 
What is Pre-packaged insolvency resolution? 
• A pre-packed insolvency resolution mechanism is a process wherein a resolution arrangement is agreed 
upon between the distressed corporate debtor (CDs) and lender before approaching the National Company 
Law Tribunal (NCLT) for bankruptcy proceedings.  
 
27                                                                                                                                                        
• It gives legal sanction to a plan agreed among banks, promoters and the buyer. 
• It follows a debtor-in-possession model. 
• Protection against Fraudulent activities/mismanagement: The CoC can, with a 66 per cent vote share, make 
an application for change in the management of the company and pass control to the resolution 
professional. This can be done if CoC finds that the company is being run in a fraudulent manner or there has 
been gross mismanagement of company affairs by the promoter. 
o If the resolution plan submitted by the promoter provides for impairment (drastic reduction in 
recoverable amount) of any claims, the CoC can ask the promoters to dilute their shareholding or voting 
or control rights in the company. 
• It allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are 
not paid 100 per cent of their outstanding dues.  
o Under It, any third party would be permitted to submit a resolution plan for the distressed company and 
the original applicant would have to either match the improved resolution plan or forego the 
investment. 
Differences between PIRP and Corporate Insolvency Resolution Process (CIRP) 
Criteria PIRP CIRP 
Control of the firm during 
insolvency process 
Debtors remain in control of their 
distressed firm. 
Company is managed by the resolution 
professional. 
Deadlines To be completed within a period 
of 120 days of the 
commencement date. 
To be completed within a period of 270 days of 
the commencement date. 
Process of resolution of the 
debt 
Distressed company enters into 
direct agreement between 
secured creditors and the existing 
owners or outside investors. 
Resolution through open bidding system. 
Benefits of PIRP 
• Quicker, cost-effective insolvency resolution process: Being a debtor-initiated process, it is expected to 
involve less legal disputes, reduce the cost of bankruptcy proceedings in court and provide faster resolution 
than a CIRP.  
• Least disruptive to the businesses: The creditors and business owners along with interested buyers are 
better suited to make these crucial business decisions than resolution professionals in courts. 
• Reduced burden of benches of the National Company Law Tribunals: The new amendment could help 
bankruptcy courts, which were already struggling to deal with pending cases and a flood of new cases owing 
to the pandemic.  
Possible issues in implementation 
• Uncertainty: Initiation of PIRP can worsen in the behaviour of its suppliers, workers, creditors and so forth 
who begin to feel uncertain about the future. For instance, suppliers may stop sending supplies as the 
creditworthiness of the business becomes doubtful.  
• Challenging for CoC members to decide on the Base resolution Plan: within the prescribed short period 
without any broad parameters on which the Resolution Plan be approved. 
• CD may not raise additional capital or debt from Investors or Banks: Due to the risks involved, the 
Corporate Debtor may find it challenging to bring new investor and raise fresh equity at a level which can 
reduce the debt at a sustainable level. 
3.3. GOVERNMENT SECURITIES 
Why in news? 
Recently, Reserve Bank of India (RBI) allowed small retail investors to invest in government securities (G-Sec) by 
opening gilt accounts with the central bank under ‘RBI Retail Direct’ scheme. 
About G-Sec and Gilt Accounts  
• A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State 
Governments. It acknowledges the Government’s debt obligation.  
• Government Securities are of two types. (See Box)