Blog

Finance (India 2018)

 

Public Debt of India is classified into three categories of Union Government liabilities into internal debt, external debt and other liabilities.

Internal debt includes market loans (dated securities), treasury bills (91, 182 and 364 days) and 14 day treasury bills (issued to state governments only), special securities issued to the Reserve Bank of India (RBI), etc.

External debt represents loans received from foreign governments and multilateral institutions. The Union Government does not borrow directly for international capital markets. Its foreign currency borrowing takes place from multilateral agencies and bilateral sources, and is a part of official development assistance (ODA). At present, the Government of India does not borrow in the international capital markets.

“Other” liabilities category,not a part of public debt, includes other interest bearing obligations of the government, such as post office saving deposits, deposits under small savings schemes, loans raised through post office cash certificates, provident funds and certain other deposits.

The Reserve Bank manages the public debt of the Central and the State Governments and also acts as a banker to them under the provisions of the Reserve Bank of India Act, 1934. The Reserve Bank also undertakes similar functions for the State Governments by agreement with the Government of the respective State.

• Budget for 2017-18 contained three major reforms.
  • First, the presentation of the Budget was advanced to 1^st February to enable the Parliament to avoid a Vote on Account and pass a single Appropriation Bill for 2017-18, before the close of the current financial year. This enabled the ministries and departments to operationalise all schemes and projects, including the new schemes, right from the commencement of the next financial year. They would be able to fully utilise the available working season before the onset of the monsoon.
  • Second, the merger of the Railways Budget with the General Budget was a historic step. The colonial practice prevalent since 1924 was discontinued.
  • Third, the plan and non-plan classification of expenditure has been done away with. This will give a holistic view of allocations for sectors and ministries and would facilitate optimal allocation of resources.
• Direct Benefit Transfer
  • Direct Benefit Transfer (DBT) is a major reform initiative launched by Government of India in 2013 to provide an overarching vision and direction to enable direct cash transfer of benefits under various government schemes and programmes to individuals.
  • Leveraging the gains in the Aadhaar Project, DBT was conceived with the objective of accurately targeting the intended beneficiaries and enhancing efficiency, transparency and accountability in delivery of benefits/services under government schemes.
  • The mandate of DBT was universalized and extended to cover all central sector schemes and centrally sponsored schemes that have any component of cash benefit transfer to individual beneficiaries.
  • Further, the scope of DBT has been further expanded to include in kind transfers to beneficiaries as well as transfers/ honorariums given to various enablers of Government schemes like ASHA, Aanganwadi workers, etc., and not limited to cash transfers to beneficiaries only.

India recorded a growth of 7.1 per cent in 2016-17. The growth of Gross Value Added (GVA) for the economy was 6.6 per cent in 2016-17.

India’s growth has been mainly consumption-driven.The share of final consumption in GDP in 2016-17 was 70.4 per cent

The saving rate (gross saving to GDP) for the year 2015-16 was 32 per cent.The investment rate (gross capital formation to GDP) in 2015-16 was 33 per cent.

Inflation based on Consumer Price Index, remained persistently high at around 9-10 per cent during 2012-14.

Inflation measured in terms of Wholesale Price Index (WPI) remained persistently high at around 7 per cent during 2011-14.

• The Government has taken a number of measures to control inflation. The steps taken, inter alia, include,
  • increased allocation for price stabilization fund in the budget 2017-18 to check volatility of prices of essential commodities, in particular of pulses;
  • approved creation of a dynamic buffer of upto 20 lakh tonnes of pulses for appropriate market intervention;
  • states/UTs empowered to impose stock limits in respect of pulses, onion, edible oils and edible oil seeds under the Essential Commodities Act and
  • announced higher Minimum Support Prices so as to incentivize production and thereby enhance availability of food items which may help moderate prices

India ratified the Paris Agreement in 2016. India’s comprehensive NDC target is to lower the emissions intensity of GDP by 33 to 35 per cent by 2030 from 2005 levels, to increase the share of non-fossil fuels based power generation capacity to 40 per cent of installed electric power capacity by 2030, and to create an additional (cumulative) carbon sink of 2.5-3 GtCO2e through additional forest and tree cover by 2030.

The Green Climate Fund (GCF) is a multilateral fund created to support the efforts of developing countries to respond to the challenge of climate change. Under, GEF, India also has one project approved by the Board with NABARD on “Ground water recharge and Solar Micro Irrigation to ensure food security and enhance resilience in vulnerable tribal areas of Odisha.

India’s foreign exchange reserves comprise foreign currency assets (FCAs), gold, SDRs and reserve tranche position (RTP) in the IMF.

The US dollar denominated debt continued to be the largest component of India’s external debt with a share of 52.1 per cent, followed by Indian rupee (33.6 percent), SDR (5.8 per cent), Japanese Yen (4.6 per cent) and Euro (2.9 per cent.

The eight core infrastructure supportive industries, namely, coal, crude oil, natural gas, refinery products, fertilizers, steel, cement and electricity with a total weight of 40.27 per cent in the Index of Industrial Production (IIP).

The services sector remains the key driver of India’s economic growth, contributing almost 62 per cent of its gross value added growth in 2016-17.

The industrial sector accounting for 31 per cent of the total Gross Value Added (GVA) in 2016-17.

To meet the skill requirements of the economy, the Government imparts short term skill training through Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and long term training largely through Industrial Training Institutes (ITIs).

The Financial Sector Legislative Reforms Commission (FSLRC) was set up in 2011 for re-writing the financial sector laws to bring them in harmony with the current requirements.

A Bankruptcy Law Reforms Committee was set up in 2014 for providing an entrepreneur friendly legal bankruptcy framework for India meeting global standards for improving the ease of doing business with necessary judicial capacity. Accordingly, the Insolvency and Bankruptcy Code, 2016 (IBC) became operational in 2016. The Code aims to promote entrepreneurship, availability of credit, and balance the interests of all the stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.

With a view to strengthening and institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development, the Financial Stability and Development Council (FSDC) was set up as the apex level forum in 2010. The Council, inter-alia, monitors functioning of large financial conglomerates, and addresses inter-regulatory coordination and financial sector development issues, including issues relating to financial literacy and financial inclusion. The FSDC Secretariat in Department of Economic Affairs provides secretarial support to the council.

Financial Stability Board (FSB) was established in 2009 under the aegis of G20 by bringing together the national authorities, standard setting bodies and international financial institutions for addressing vulnerabilities and developing and implementing strong regulatory, supervisory and other policies in the interest of financial stability.

The G20 was formed in 1999, as a forum of Finance Ministers and Central Bank Governors, in recognition of the fact that there was a major shift in the global economic weight from the advanced economies to emerging market economies. The gradually declining role of G8 as world’s economic coordinator and the increasing clout of EMEs in global deliberations on economic governance resulted in G20 replacing G8 in 1999. However, G20 rose into true prominence in 2008 when it was elevated from a forum of Finance Ministers and Central Bank Governors to that of the G20 Heads of Nations in order to effectively respond to the global financial crisis of 2007-2010.

The New Development Bank, established by the BRICS nations in 2015, marked its first imprints in India by signing a loan agreement for financing of the major district road project in Madhya Pradesh in 2017.

The United Nations Development Programme (UNDP) is the largest channel for development cooperation in the UN System. The overall mission of the UNDP is to assist the programme countries through capacity development in Sustainable Human Development (SHD) with priority on poverty alleviation, gender equity, women empowerment and environmental protection. All assistance provided by the UNDP is grant assistance. The UNDP derives its funds from voluntary contributions from various donor countries.

The South Asian Association for Regional Cooperation (SAARC), in existence since 1985 (founded in Dhaka), is a regional organisation that aims to promote economic, social, cultural, technical and scientific cooperation in South Asia. Its member states include Afghanistan, Bangladesh, Bhutan, India, Nepal, Maldives, Pakistan and Sri Lanka. Its secretariat is based in Kathmandu, Nepal.

It is a consensus-based forum for the exchange of ideas, development of regional programmes and projects.

The Framework for Currency Swap Arrangement for the SAARC countries was formulated with the intention to provide a line of funding for short term foreign exchange requirements or to meet balance of payments crises till longer term arrangements are made or the issue is resolved in the short-term itself. Under the facility, RBI offers swaps of varying sizes to each SAARC member country depending on their two months import requirement and not exceeding US$ 2 billion in total, in USD, Euro or INR. So far, the facility has been availed by Bhutan, Sri Lanka and Maldives.

SDF was established in 2008 by the SAARC countries to improve the livelihood of the people and to accelerate economic growth, social progress and poverty alleviation in the region. SDF is implementing many SAARC projects and programmes. Project funding in SDF is to be taken up under three windows (Social, Economic and Infrastructure).

India receives loan from Japan under Official Development Assistance (ODA).

The United Kingdom (UK) has been providing development assistance to India through its Department for International Development (DFID).

EU implements development cooperation programmes through Country Strategy Paper (CSP).

US assistance to India is mainly administered through the USAID.

India is a founder member of the International Monetary Fund (IMF) which was established to promote a cooperative and stable global monetary framework. At present, 188 nations are members of the IMF. The Board of Governors of the IMF consists of one Governor and one Alternate Governor from each member country. For India, the Finance Minister is the ex-officio Governor on the Board of Governors of the IMF. There are three other countries in India’s constituency at the IMF, viz. Bangladesh, Bhutan and Sri Lanka. Governor, Reserve Bank of India (RBI) is India’s Alternate Governor.

A Memorandum of Understanding was signed between India and International Monetary Fund for setting up of South Asia Regional Training and Technical Assistance Center (SARTTAC) in India by the International Monetary Fund in 2016. SARTTAC will serve six member countries of Bangladesh, Bhutan, India, Maldives, Nepal and Sri Lanka.

India has been borrowing from the World Bank through International Bank for Reconstruction and Development (IBRD) and International Development Association (lDA) for various development projects in the areas of poverty reduction, infrastructure, rural development, etc. IDA funds were one of the most concessional external loans for Government of India and were used largely in social sector projects that contribute to the achievement of Millennium Development Goals. However, India has graduated from IDA.

International Finance Corporation (lFC), a member of the World Bank Group, focuses exclusively on investing in the private sector in developing countries. Established in 1956, IFC has 184 members. India is founding member of IFC. IFC is an important development partner for India with its operations of financing and advising the private sector in the country.

Asian Infrastructure Investment Bank (AIIB) is a Multilateral Development Bank (MDB) set up in 2016 to foster sustainable economic development, create productive assets and improve infrastructure in Asia through financing of infrastructure projects. India is one of the founding Members and the second largest shareholder. AIIB is situated in Beijing.

The Global Environment Facility (GEF) operates as a mechanism for international cooperation for the purpose of providing new and additional grant and concessional funding to meet the agreed incremental costs of measures to achieve agreed global environmental benefits. GEF provides grants to eligible countries in its five focal areas: biodiversity, climate change, land degradation, international waters, chemicals and waste. It also serves as financial mechanism for the Convention on Biological Diversity (CBD), United Nations Framework Convention on Climate Change (UNFCCC), Stockholm Convention on Persistent Organic Pollutants (POPs), UN Convention to Combat Desertification (UNCCD), Minamata Convention on Mercury and supports implementation of the Protocol in countries with economies in transition for the Montreal Protocol on Substances that Deplete the Ozone Layer (MP).

India is a founding member of the Asian Development Bank (ADB) which was established in 1966. ADB has 67 members (including 48 regional and 19 non-regional members), with its headquarters at Manila, Philippines. India is holding 6 per cent of shares in ADB with 5 per cent voting rights. The Bank is engaged in promoting economic and social progress of its developing member countries (DMCs) in the Asia Pacific Region.

The legal tender character of banknotes in the denominations of ₹ 500 and ₹ 1,000 in circulation i.e., ‘Specified Bank Notes’(SBN) was cancelled with effect from the expiry of the 8th November, 2016 to curb the problem of black money, FICN and various other subversive activities.

The Government of India has put investment in infrastructure as one of the core elements of its economic programme. India’s average investment in infrastructure was 4.7 per cent of GDP during 1992-2010. Moreover, there has been a slowdown in equity inflows into the infrastructure sectors over the past few years, constraining further investment. National Investment and Infrastructure Fund (NIIF) was created with the aim to attract equity investments from both domestic and international sources for infrastructure development in commercially viable projects, both greenfield and brownfield, including stalled projects.

The Public Financial Management System (PFMS) is a web-based online software application designed, developed, owned and implemented by the Controller General of Accounts with the aim to provide a sound public financial management system by establishing a comprehensive payment, receipt and accounting network. PFMS makes a direct and significant contribution to the Digital India initiative by enabling electronic payment and receipts for ministries/ departments in Government of India. Integration with financial IT systems of various state governments is one key objective of PFMS which will facilitate complete tracking of funds transferred for scheme implementation and provide more holistic view of finances available for welfare programmes.

The Regional Rural Banks (RRBs) were established to create an alternative channel to the cooperative credit structure and to ensure sufficient institutional credit for the rural and agriculture sector. RRBs are jointly owned by Government of India, concerned state government and sponsor banks with the issued capital shared in the proportion of 50 per cent, 15 per cent and 35 per cent, respectively.

The Kisan Credit Card (KCC) scheme was introduced in 1998-99, as an innovative credit delivery system aiming at adequate and timely credit support from the banking system to the farmers for their cultivation needs including purchase of inputs in a flexible, convenient and cost effective manner. The scheme is being implemented by all cooperative banks, RRBs and public sector commercial banks throughout the country. KCC is one of the most effective tools for delivering agriculture credit. NABARD monitors the scheme in respect of cooperative banks and RRBs and RBI in respect of commercial banks. A new scheme for KCC has been circulated by RBI and NABARD which provides for KCC as an ATM card which can be used at ATM/Point of Sale (POS) terminal.

The Central Government established a fund to be operationalised by NABARD namely, the Rural Infrastructure Development Fund (RIDF), which was set-up within NABARD by way of deposits from Scheduled Commercial Banks operating within the country from the shortfall in their agricultural/priority sector/weaker sections lending.

For the benefit of the weaker sections of the society, Government of India floated a highly subsidized insurance scheme, viz., Aam Aadmi Bima Yojana (AABY) which is administered through Life Insurance Corporation of India. Under this social security scheme below poverty line (BPL) and marginally above poverty line citizens are covered under 48 identified occupations. The scheme provides death cover of ₹ 30,000/- in case of natural death. In case of death or total disability (including loss of two eyes/two limbs) due to accident, a sum of ₹ 75,000/- and in case of partial permanent disability (loss of one eye/limb) due to accident, a sum of ₹ 37,500/- is payable to the nominee/ beneficiary. All these benefits are paid for a nominal premium of ₹ 200/- per member per annum, out of which ₹ 100/- is borne by the central government through Social Security Fund maintained through LIC of India, and the balance premium of ₹ 100/- is borne by the member and/or nodal agency and/or central/state government department which acts as the nodal agency. In addition, there is an add on benefit of scholarship at the rate of ₹ 1,200/- per annum per child for two children per family of the insured members studying from 9th to 12th standard.

The Atal Pension Yojana (APY) was launched in 2015, to address the longevity risks among the workers in unorganised sector who are not covered under any statutory social security scheme. The APY is focussed on all citizens in the unorganised sector, who join the National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA). Any Indian citizen between 18-40 years of age can join through their savings bank account/post office savings account. Minimum pension of ₹ 1,000 or ₹ 2,000 or ₹ 3,000 or ₹ 4,000 or ₹ 5,000 is guaranteed by the Government of India to the subscriber at the age of 60 years, with a minimum monthly contribution . After the subscriber’s demise, the spouse of the subscriber shall be entitled to receive the same pension amount as that of the subscriber until the death of the spouse. After the demise of both the subscriber and the spouse, the nominee of the subscriber shall be entitled to receive the pension wealth, as accumulated till age 60 of the subscriber.

• Government announced three ambitious social security schemes pertaining to the insurance and pension sectors, namely Pradhan Mantri Jeevan Jyoti BimaYojana (PMJJBY), Pradhan Mantri Suraksha BimaYojana (PMSBY) and the Atal Pension Yojana (APY) to move towards creating a universal social security system, targeted especially for the poor and the under-privileged.
  • PMJJBY is a one year life insurance scheme, renewable from year to year, offering coverage of two lakhs rupees for death due to any reason and is available to people in the age group of 18 to 50 years having a bank account who give their consent to join and enable autodebit.
  • The Pradhan Mantri Suraksha Bima Yojana (PMSBY) is a one year personal accident insurance scheme, renewable from year to year, offering coverage for death/disability due to an accident and is available to people in the age group of 18 to 70 years having a bank account. Under the said scheme, risk coverage available will be ₹ 2 lakh for accidental death and permanent total disability and ₹ 1 lakh for permanent partial disability.
  • With a view to increasing banking penetration and promoting financial inclusion and with the main objective of covering all households with at least one bank account per household across the country, a National Mission on financial inclusion named as (PMJDY) was announced in 2014.

With a view to providing adequate retirement income, the National Pension System (NPS) was introduced. It has been made mandatory for all new recruits to the Government (except armed forces) and has also been rolled out for all citizens on a voluntary basis. The NPS architecture is transparent and web enabled. It allows a subscriber to monitor his/ her investments and returns. Pension Fund Regulatory and Development Authority (PFRDA), set-up as a regulatory body for the pension sector, is engaged in consolidating the initiatives taken so far regarding the full NPS architecture and expanding the reach of NPS distribution network. The Department of Posts has also been appointed in addition to other financial institutions to expand the network.

To encourage the workers in the unorganized sector to save voluntarily for their old age, an initiative called Swavalamban Scheme was launched in 2010. It is a co-contributory pension scheme whereby the Central Government contributes a sum of ₹ 1,000 per annum in each NPS account opened having a saving of ₹ 1,000 to ₹ 12,000 per annum. Government co-contribution is available to eligible subscribers up to the year 2016-17.

Micro Units Development and Refinance Agency Limited (MUDRA), is a refinance institution set-up by the Government of India for development of micro units by extending funding support to encourage entrepreneurship in India, mostly from non-corporate small business sector. Under the guidelines of Pradhan Mantri MUDRA Yojana (PMMY), MUDRA has launched three innovative products namely Shishu, Kishor, and Tarun, which signifies the stage of growth and funding needs of the micro units or entrepreneur. MUDRA shall refinance through state level institutions, NBFCs, MFIs, Regional Rural Banks, Nationalized Banks, Private Banks and other intermediaries. Any Indian citizen who is involved in income generating activity such as manufacturing, processing, trading and service sector and whose credit need is less than 10 lakh can approach either banks, MFIs, financial institutions or NBFC for availing of MUDRA loans under PMMY. It has been since decided to extend funding support under PMMY for activities allied to agriculture also.

The Department of Disinvestment is one of the departments under the Ministry of Finance. The Department of Disinvestment has been renamed as Department of investment and Public Asset Management (DIPAM) from 2016. The mandate of the Department includes all matters related to management of Central Government investments in equity including disinvestment of equity in Central Public Sector Undertakings. The proceeds of disinvestment are channelized into the National Investment Fund.

• The policy on disinvestment has evolved considerably. The salient features of the policy include:
  • public sector undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs;
  • while pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51 per cent of the shareholding and management control of the Public Sector Undertakings; and
  • strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50 per cent or more, alongwith transfer of management control.

Government constituted the National Investment Fund (NIF) in 2005 into which the proceeds from disinvestment of Central Public Sector Enterprises were to be channelized. The corpus of NIF was to be of a permanent nature and NIF was to be professionally managed to provide sustainable returns to the Government, without depleting the corpus. As per this Scheme, 75 percent of the annual income of the NIF was to be used for financing selected social sector schemes which promote education, health and employment. The residual 25 per cent of the annual income of NIF was to be used to meet the capital investment requirements of profitable and revivable PSUs.

In view of the difficult economic situation caused by the global slowdown of 2008-09 and a severe drought in 2009-10, Government approved a change in the policy for utilization of Disinvestment proceeds by granting a one-time exemption to utilize the disinvestment proceeds directly for selected social sector schemes allocated by Department of Expenditure/Planning Commission.