17th Aug, 2021

Bank for International Settlements (BIS)

• Bank for International Settlements (BIS) – is an intergovernmental organization of central banks which “fosters international monetary and financial cooperation and serves as a bank for central banks.”
• It is not accountable to any national government.
• The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
• The Basel Committee for Banking Supervision (BCBS), while technically separate from the BIS, is a closely associated international forum for financial regulation that is housed in the BIS’ offices in Basel, Switzerland
• The BCBS is responsible for the Basel Accords, which recommend capital requirements and other banking regulations that are widely implemented by national governments.
• The BIS also conducts research on economic issues and publishes reports.

European Central Bank (ECB)

• The European Central Bank (ECB) is the central bank responsible for monetary policy of those European Union (EU) member countries which have adopted the euro currency.
• This region is known as the eurozone and currently comprises 19 members.
  The principal goal of the ECB is to maintain price stability in the euro area, thus helping preserve the purchasing power of the euro.
• The European Central Bank (ECB) is headquartered in Frankfurt am Main, Germany. It has been responsible for monetary policy in the Euro area since January 1, 1999.

Key Takeaways

• The European Central Bank (ECB) is the central bank of the combined Eurozone.
• The ECB coordinates EU monetary policy, including setting the region’s target interest rates and controlling the supply of the Euro common currency.
• The ECB’s primary mandate is to achieve price stability through low inflation.

International Monetary Fund (IMF)

• The International Monetary Fund (IMF) is the inter-governmental organisation established to stabilize the exchange rate in the international trade.
• It helps the member countries to improve their Balance of Payment (BOP) condition thorough the adequate liquidity in the international market, promote the growth of global monetary cooperation, secure financial stability, facilitate international trade.
• It is one of the Bretton woods twins, which came into existence in 1945, is governed by and accountable to the 189 countries that make up its near-global membership.

Objectives of IMF:

• To promote international monetary co-operation.
• To ensure balanced international trade
• To ensure exchange rate stability
• To eliminate or to minimize exchange restrictions by promoting the system of multilateral payments.
• To grant economic assistance to members countries for eliminating the adverse balance of payment
• To minimize the imbalances in quantum and duration of international trade.

IMF Quota & Voting Rights

• Quotas was assigned to member countries reflecting their relative economic power & credit deposit to IMF
• Subscription was to be paid 25% in gold or currency convertible into gold (effectively the dollar, which was the only currency then, still directly gold convertible for central banks) and 75% in the member’s own currency
• Members were provided voting rights in proportion to their quota, hence member countries with higher quota have a higher say at IMF

Special Drawing Rights

• Special drawing rights (SDRs) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF)
• SDR is not a currency, instead represents a claim to currency held by IMF member countries for which they may be exchanged.
• The value of an SDR is defined by a weighted currency basket of four major currencies: the US dollar, the euro, the British pound, the Chinese Yuan and the Japanese yen
• The central bank of member countries held SDR with IMF which can be used by them to access funds from IMF in case of financial crises in their domestic market

Reverse Transche

• A certain proportion of a member country’s quota is specified as its reserve tranche.
• The member country can access its reserve tranche funds at its discretion and is not under an immediate obligation to repay those funds to the IMF.
• Member nation reserve tranches are typically 25% of the member’s quota.

Organization for Economic Cooperation and Development (OECD)

• Organisation for Economic Co-operation and Development (OECD) is an inter-governmental organization founded in 1961 to accelerate economic progress and world trade.
• It is a very unique organization where 34 Democracies work together with market economies and 70 non-member economies promote economic growth, prosperity, and sustainable development.
• The setting of the OECD reflects the peripheral discussion forum based on the policy research and analysis that helps governments in order to shape their policies that may lead to a formal agreement among member governments or be acted on in domestic or other international stages.
• Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries.
• The OECD headquarters at Paris, France. The OECD is funded by contributions from member states.

United Nations Conference on Trade and Development (UNCTAD)

• The United Nations Conference on Trade and Development (UNCTAD) was established in 1964. It is an intergovernmental body of the United Nations Generally Assembly for promoting the development-friendly integration of developing countries into the world economy.
• UNCTAD grew from the view that existing institutions like GATT (now WTO), the International Monetary Fund (IMF), and World Bank were not properly organized to handle the particular problems of developing countries.

Functions of UNCTAD

• UNCTAD Objective is to maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis.
• It functions as a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building.
• It undertakes research, policy analysis and data collection for the debates of government representatives and experts.
• It provides technical assistance tailored to the specific requirements of developing countries, with special attention to the needs of the least developed countries and of economies in transition.

United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP)

• The Economic and Social Commission for Asia and the Pacific (ESCAP) serves as the United Nations’ regional hub promoting cooperation among countries to achieve inclusive and sustainable development.
• Established in 1947 with its headquarters in Bangkok, Thailand.
• The largest regional intergovernmental platform with 53 Member States and 9 associate members, ESCAP has emerged as a strong regional think-tank offering countries sound analytical products that shed insight into the evolving economic, social and environmental dynamics of the region.
• The Commission’s strategic focus is to deliver on the 2030 Agenda for Sustainable Development, which is reinforced and deepened by promoting regional cooperation and integration to advance responses to shared vulnerabilities, connectivity, financial cooperation and market integration.
• ESCAP’s research and analysis coupled with its policy advisory services, capacity building and technical assistance to governments aims to support countries’ sustainable and inclusive development ambitions

UN-ESCAP providing results-oriented projects, technical assistance and capacity building to member States in the following areas:

• Macroeconomic Policy, Poverty Reduction and Financing for Development
• Trade, Investment and Innovation
• Transport
• Environment and Development
• Information and Communications Technology and Disaster Risk Reduction
• Social Development
• Statistics
• Subregional activities for development
• Energy

United Nations Economic Commission for Africa (UNECA)

• United Nations Economic Commission for Africa (UNECA) was established by the Economic and Social Council (ECOSOC) of the United Nations (UN) in 1958 as one of the UN’s five regional commissions, ECA’s mandate is to promote the economic and social development of its member States, foster intra-regional integration, and promote international cooperation for Africa’s development.
• Made up of 54 member States, and playing a dual role as a regional arm of the UN and as a key component of the African institutional landscape, ECA is well-positioned to make unique contributions to address the Continent’s development challenges.
• ECA’s strength derives from its role as the only UN agency mandated to operate at the regional and subregional levels to harness resources and bring them to bear on Africa’s priorities. T
• o enhance its impact, ECA places a special focus on collecting up to date and original regional statistics in order to ground its policy research and advocacy on clear objective evidence; promoting policy consensus; providing meaningful capacity development; and providing advisory services in key thematic fields.

ECA’s thematic areas of focus are as follows:

1. Macroeconomic Policy
2. Regional Integration and Trade
3. Social Development
4. Natural Resources
5. Innovation and Technology
6. Gender
7. Governance
8. Statistic

United Nations Economic Commission for Europe (UNECE)

• The United Nations Economic Commission for Europe (UNECE) was set up in 1947 by ECOSOC. It is one of five regional commissions of the United Nations.
• UNECE’s major aim is to promote pan-European economic integration. UNECE includes 56 member States in Europe, North America and Asia. However, all interested United Nations member States may participate in the work of UNECE. Over 70 international professional organizations and other non-governmental organizations take part in UNECE activities.
• Providing legal frameworks and assistance activities through instruments like the UNECE Multilateral Environmental Agreements.
• Developing expertise and policy solutions in areas such as resource efficiency, environmental performance, environmental democracy, sustainable transport, sustainable energy, sustainable housing, green real estate markets, and sustainable forest products.
• Measuring sustainable development and improving capacities for environmental monitoring and assessment.
• Encouraging eco-innovations and green investment.
• Raising awareness to change behavioral patterns towards sustainable consumption and production, for example through the UNECE Strategy for
• Education for Sustainable Development.
• Developing green standards, for example the standards for cleaner and smarter vehicles developed by the World Forum for the Harmonization of Vehicle Regulations.
• The Customs Convention on International Transport of Goods under Cover of TIR Carnets, 1975 (TIR Convention) is an international customs transit system under the auspices of the United Nations Economic Commission for Europe (UNECE)
• India has become the 71st nation to join the United Nations TIR (Transports Internationaux Routiers) Convention.

World Bank Group

• The World Bank Group (WBG) is a family of five international organizations that make leveraged loans to developing countries.
• It is the largest and most famous development bank in the world and is an observer at the United Nations Development Group.
• Its five organizations are the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA) and the International Centre for Settlement of Investment Disputes (ICSID).

The World Bank (IBRD)

• IBRD provides loans and other assistance primarily to middle income and poor but creditworthy countries at interest rates slightly lower than that offered by other financial institutions but with long term maturity<countries which have the capacity to repay the loan amount with interest>

Origins: IBRD, as the name suggests, was created in 1944 to help Europe reconstruct/ rebuild after World War II. To be a member of IBRD, a country has t join IMF first.

Main function:

• Long-term capital assistance to its member-countries for their reconstruction and development
• It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity.

Other functions of IBRD Bank –

• Supports long-term human and social development that private creditors do not finance.
• Preserves borrowers’ financial strength by providing support in times of crisis, when poor people are most adversely affected
• Promotes policy and institutional reforms (such as safety net or anti-corruption reforms)
• Creates a favourable investment climate to catalyze the provision of private capital
• Facilitates access to financial markets often at more favorable terms than members can achieve on their own
• Resources of the Bank consist of the capital and borrowings.

International Development Association

• The International Development Association (IDA) is the part of the World Bank group that helps the world’s poorest countries.
• Overseen by 173 shareholder nations, IDA aims to reduce poverty by providing loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.
• IDA complements the World Bank’s original lending arm—the International Bank for Reconstruction and Development (IBRD). IBRD was established to function as a self-sustaining business and provides loans and advice to middle-income and credit-worthy poor countries.
• IBRD and IDA share the same staff and headquarters and evaluate projects with the same rigorous standards.
• IDA is one of the largest sources of assistance for the world’s 771 poorest countries, 39 of which are in Africa, and is the single largest source of donor funds for basic social services in these countries.
• IDA lends money on concessional terms. This means that IDA credits have a zero or very low-interest charge and repayments are stretched over 25 to 40 years, including a 5- to 10-year grace period. IDA also provides grants to countries at risk of debt distress.
• In addition to concessional loans and grants, IDA provides significant levels of debt relief through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI).
• IDA’s work covers primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms.

IFC

Largest global development institution focused exclusively on the private sector in developing countries established in 1956

Objectives of the IFC

• To further economic development by encouraging the growth of private enterprise in member-countries
• Invests in private enterprise in member-countries in association with private investors and without a Government guarantee, in cases where sufficient private capital is not available on reasonable terms
• Seeks to bring together investment opportunities, private capital of both foreign and domestic origin, and experienced management
• Stimulates conditions conducive to the flow of private capital – domestic and foreign – into productive investments in member-countries
• IFC investment normally does not exceed 40% of the total investment of the enterprise.
• In case of its investment by equity participation, it does not exceed 25% of the share capital.

IFC and India

• IFC makes strategic investments and advisory interventions to promote inclusive growth, help address climate change impacts, and encourage global and regional integration
• In India, IFC is sharpening its focus on increasing access to energy, finance and healthcare; providing the sustainable infrastructure; and boosting regional linkages

Focus Areas –

Building infrastructure
Facilitating renewable energy generation
Promoting cleaner production, energy and water efficiency
Supporting agriculture for improved food security
Creating growth opportunities for small businesses
Helping reform investment climate

The Multilateral Investment Guarantee Agency (MIGA)

• It is an international financial institution which offers political risk insurance and credit enhancement guarantees. Such guarantees help investors protect foreign direct investments against political and non-commercial risks in developing countries.
• MIGA is a member of the World Bank Group and is headquartered in Washington, D.C., United States. It was established in 1988 as an investment insurance facility to encourage confident investment in developing countries.
• MIGA’s stated mission is “to promote foreign direct investment into developing countries to support economic growth, reduce poverty, and improve people’s lives”. It targets projects that endeavour to create new jobs, develop infrastructure, generate new tax revenues, and take advantage of natural resources through sustainable policies and programs.
• MIGA is owned and governed by its member states, but has its own executive leadership and staff which carry out its daily operations. Its shareholders are member governments which provide paid-in capital and have the right to vote on its matters.
• It ensures long-term debt and equity investments as well as other assets and contracts with long-term periods. The agency is assessed by the World Bank’s Independent Evaluation Group each year.

International Centre for the Settlement of Investment Disputes (ICSID)

• It encourages the flow of foreign investment to develop countries through arbitration and conciliation facilities
• Except for ICSID, India is a member of the other four groups <We don’t like external interference such as arbitration in our decision-making process, hence not the member of ICSID>

Let’s revise World Bank in brief

Name	Main Function	Comment
IBRD (WB)	Infrastructure loan to poor middle income but creditworthy countries at just below market rates	India founder member, the largest recipient of the loan
IDA	Soft loan at virtually zero rates for poverty eradication to poorest countries	India founder largest recipient has crossed the per capita threshold for funding but will continue to receive IDA funds
IFC	The private sector arm of the WB group supports private enterprises in developing countries	India founder, IFC launched India’s offshore masala bond
MIGA	Provide a guarantee to investors against non-commercial political risk	India is not a founding member
ICSID	Resolve disputes through arbitration and conciliation	India is not a member

World Trade Organization (WTO)

• The WTO is an intergovernmental organization that is concerned with the regulation of international trade between nations.
• The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123 nations on 15 April 1994.
• It replaced the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
• It is the largest international economic organization in the world.

Functions of WTO

• The WTO deals with regulation of trade in goods, services and intellectual property between participating countries.
• It provides a framework for negotiating trade agreements and a dispute resolution process aimed at enforcing participants’ adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments.

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Importance of this initiative will cover the various aspects of particular news , i.e., how you are going to approach that piece of news from Prelims & Mains perspective.

Linkage from UPSC syllabus.

Mapping – Geography (Mains).

Questions for the Day:

Streak – Most Important Current Economic Edition for Prelims 2021 – Sukanya

Q1) Select the correct statement/s in context to National Infrastructure Pipeline (NIP).

1. It includes economic as well as social infrastructure projects.

2. It aims to improve infrastructure project preparation and attract new investments both foreign and domestic.

A. 1 only

B. 2 only

C. Both 1 and 2

D. Neither 1 nor 2

Q2) Identify the correct statement/s in context to Engineering, Procurement and Construction (EPC) Model.

1. Under this model, the cost is completely borne by the government.

2. The private sector’s participation is limited to the provision of engineering expertise.

A. 1 only

B. 2 only

C. Both 1 and 2

D. Neither 1 nor 2

Q3) Select the correct statement/s regarding Government Owned Contractor Operated (GOCO) model.

1. This model was recommended by the Shekatkar committee.

2. Under the model, the private companies will make investments on land, machinery and other support systems.

A. 1 only

B. 2 only

C. Both 1 and 2

D. Neither 1 nor 2

Q4) Which among the following subsides is/are considered to be part of Amber Box Subsidies under the Agreement on Agriculture (AoA)?

1. Minimum Support Price (MSP)

2. Income support through PM-KISAN(Pradhan Mantri Kisan Samman Nidhi)

3. Financial Support for Agricultural Universities to enhance R&D.

Select the correct answer using the code given below:

A. 1 only

B. 1 and 2 only

C. 1 and 3 only

D. 1, 2 and 3

Q5) Which among the following agencies has recently published the “Digital Payments Index”?

A. National Payment Corporation of India (NPCI)

B. Reserve Bank of India

C. Ministry of Finance

D. Indian Banks Association

Streak – Most Important Economic Edition for Prelims 2021 -Santosh

Q1) Which of the following given below are the cost push factors of inflation?
1. Rise in population.
2. Black money.
3. Rise in income.
4. Excessive government expenditure.
Select the correct answer using the codes given below:

A. 1, 2 and 3 only

B. 2, 3 and 4 only

C. 1, 2 and 4 only

D. None of the above 

Q2) Which of the statements given below is/are correct?
1. Deflationary gap is a situation which arises when Aggregate demand in an economy exceeds the Aggregate supply at the full employment level.
2. Inflationary Gap is a situation which arises when Aggregate demand in the economy falls short of Aggregate Supply at the full employment level.
Select the correct answer using the codes given below 

A. 1 only

B. 2 only

C. 1 and 2 both

D. None of them

Q3) Which of the statements given below is/are correct?
1. Stagflation is a situation in which there is a high inflation rate along with a high rate of unemployment.
2. The Phillips curve highlights the directly proportional relationship between inflation and unemployment.
Select the correct answer using the codes given below 

A. 1 only

B. 2 only

C. 1 and 2 both

D. None of them

Q4) Consider the following statements
1. Contractionary Fiscal policy involves cutting taxes or raising government spending to reduce the inflationary pressures in the economy.
2. Expansionary Fiscal Policy is adopted during the period of boom.
Which of the statements given above is/are correct?

A. 1 only

B. 2 only

C. 1 and 2 both

D. None of them

Q5) Consider the following statements
1. Fiscal drag is a concept where inflation and earnings growth bring taxpayers out of the higher tax brackets.
2. Tax buoyancy is result of fiscal drag.
Which of the statements given above is/are correct?

A. 1 only

B. 2 only

C. 1 and 2 both

D. None of them

16th Aug, 2021

Key Highlights of Economic Survey 2020-21

Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman presented the Economic Survey 2020-21 in the Parliament today. The key highlights of Economic Survey 2020-21, which is dedicated to the COVID Warriors, are as follows:

Saving Lives and Livelihoods amidst a Once-in-a-Century Crisis

• India focused on saving lives and livelihoods by its willingness to take short-term pain for long-term gain, at the onset of the COVID-19 pandemic
• Response stemmed from the humane principle that: Human lives lost cannot be brought back
• GDP growth will recover from the temporary shock caused by the pandemic
• An early, intense lockdown provided a win-win strategy to save lives, and preserve livelihoods via economic recovery in the medium to long-term
• Strategy also motivated by the Nobel-Prize winning research by Hansen & Sargent (2001): a policy focused on minimizing losses in a worst-case scenario when uncertainty is very high
• India’s strategy flattened the curve,pushed the peak to September, 2020
• After the September peak, India has been unique in experiencing declining daily cases despite increasing mobility
• V-shaped recovery, as seen in 7.5% decline in GDP in Q2 and recovery across all key economic indicators vis-à-vis the 23.9% GDP contraction in Q1
• COVID pandemic affected both demand and supply:
  • India was the only country to announce structural reforms to expand supply in the medium-long term and avoid long-term damage to productive capacities
  • Calibrated demand side policies to ensure that the accelerator is slowly pushed down only when the brakes on economic activities are being removed
  • A public investment programme centered around the National Infrastructure Pipeline to accelerate the demand push and further the recovery

• Upturn in the economy, avoiding a second wave of infections – a sui generis case in strategic policymaking amidst a once-in-a-century pandemic

State of the Economy in 2020-21: A Macro View

• COVID-19 pandemic ensued global economic downturn, the most severe one since the Global Financial Crisis
• The lockdowns and social distancing norms brought the already slowing global economy to a standstill
• Global economic output estimated to fall by 3.5% in 2020 (IMF January 2021 estimates)
• Governments and central banks across the globe deployed various policy tools to support their economies such as lowering policy rates, quantitative easing measures, etc.
• India adopted a four-pillar strategy of containment, fiscal, financial, and long-term structural reforms:
  • Calibrated fiscal and monetary support was provided, cushioning the vulnerable during the lockdown and boosting consumption and investment while unlocking
  • A favourable monetary policy ensured abundant liquidity and immediate relief to debtors while unclogging monetary policy transmission
• As per the advance estimates by NSO, India’s GDP is estimated to grow by (-) 7.7% in FY21 – a robust sequential growth of 23.9% in H2: FY21 over H1: FY21
• India’s real GDP to record a 11.0% growth in FY2021-22 and nominal GDP to grow by 15.4% – the highest since independence:
  • Rebound to be led by low base and continued normalization in economic activities as the rollout of COVID-19 vaccines gathers traction
• Government consumption and net exports cushioned the growth from diving further down, whereas investment and private consumption pulled it down
• The recovery in second half of FY2020-21 is expected to be powered by government consumption, estimated to grow at 17% YoY
• Exports expected to decline by 5.8% and imports by 11.3% in the second half of FY21
• India expected to have a Current Account Surplus of 2% of GDP in FY21, a historic high after 17 years
• On supply side, Gross Value Added (GVA) growth pegged at -7.2% in FY21 as against 3.9% in FY20:
  • Agriculture set to cushion the shock of the COVID-19 pandemic on the Indian economy in FY21 with a growth of 3.4%
  • Industry and services estimated to contract by 9.6% and 8.8% respectively during FY21
• Agriculture remained the silver lining while contact-based services, manufacturing, construction were hit hardest, and recovering steadily
• India remained a preferred investment destination in FY 2020-21 with FDI pouring in amidst global asset shifts towards equities and prospects of quicker recovery in emerging economies:
  • Net FPI inflows recorded an all-time monthly high of US$ 9.8 billion in November 2020, as investors’ risk appetite returned
  • India was the only country among emerging markets to receive equity FII inflows in 2020
• Buoyant SENSEX and NIFTY resulted in India’s market-cap to GDP ratio crossing 100% for the first time since October 2010
• Softening of CPI inflation recently reflects easing of supply side constraints that affected food inflation
• Mild contraction of 0.8% in investment (as measured by Gross Fixed Capital Formation) in 2^nd half of FY21, as against 29% drop in 1^st half of FY21
• Reignited inter and intra state movement and record-high monthly GST collections have marked the unlocking of industrial and commercial activity
• The external sector provided an effective cushion to growth with India recording a Current Account Surplus of 3.1% of GDP in the first half of FY21:
  • Strong services exports and weak demand leading to a sharper contraction in imports (merchandise imports contracted by 39.7%) than exports (merchandise exports contracted by 21.2%)
  • Forex reserves increased to a level so as to cover 18 months worth of imports in December 2020
  • External debt as a ratio to GDP increased to 21.6% at end-September 2020 from 20.6% at end-March 2020
  • Ratio of forex reserves to total and short-term debt improved because of the sizable accretion in reserves
• V-shaped recovery is underway, as demonstrated by a sustained resurgence in high frequency indicators such as power demand, e-way bills, GST collection, steel consumption, etc.
• India became the fastest country to roll-out 10 lakh vaccines in 6 days and also emerged as a leading supplier of the vaccine to neighbouring countries and Brazil
• Economy’s homecoming to normalcy brought closer by the initiation of a mega vaccination drive:
  • Hopes of a robust recovery in services sector, consumption, and investment have been rekindled
  • Reforms must go on to enable India realize its potential growth and erase the adverse impact of the pandemic
• India’s mature policy response to the ‘once-in-a-century’ crisis provides important lessons for democracies to avoid myopic policy-making and demonstrates benefits of focusing on long-term gains

Does Growth lead to Debt Sustainability? Yes, But Not Vice- Versa!

• Growth leads to debt sustainability in the Indian context but not necessarily vice-versa:
• Debt sustainability depends on the ‘Interest Rate Growth Rate Differential’ (IRGD), i.e., the difference between the interest rate and the growth rate
  • In India, interest rate on debt is less than growth rate – by norm, not by exception
• Negative IRGD in India – not due to lower interest rates but much higher growth rates – prompts a debate on fiscal policy, especially during growth slowdowns and economic crises
• Growth causes debt to become sustainable in countries with higher growth rates; such clarity about the causal direction is not witnessed in countries with lower growth rates
• Fiscal multipliers are disproportionately higher during economic crises than during economic booms        
• Active fiscal policy can ensure that the full benefit of reforms is reaped by limiting potential damage to productive capacity
• Fiscal policy that provides an impetus to growth will lead to lower debt-to-GDP ratio
• Given India’s growth potential, debt sustainability is unlikely to be a problem even in the worst scenarios
• Desirable to use counter-cyclical fiscal policy to enable growth during economic downturns
• Active, counter-cyclical fiscal policy – not a call for fiscal irresponsibility, but to break the intellectual anchoring that has created an asymmetric bias against fiscal policy

Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No!

• The fifth largest economy in the world has never been rated as the lowest rung of the investment grade (BBB-/Baa3) in sovereign credit ratings:
• Reflecting the economic size and thereby the ability to repay debt, the fifth largest economy has been predominantly rated AAA

• China and India are the only exceptions to this rule – China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3

• India’s sovereign credit ratings do not reflect its fundamentals:
• A clear outlier amongst countries rated between A+/A1 and BBB-/Baa3 for S&P/ Moody’s, on several parameters

• Rated significantly lower than mandated by the effect on the sovereign rating of the parameter

• Credit ratings map the probability of default and therefore reflect the willingness and ability of borrower to meet its obligations:
• India’s willingness to pay is unquestionably demonstrated through its zero sovereign default history

• India’s ability to pay can be gauged by low foreign currency denominated debt and forex reserves

• Sovereign credit rating changes for India have no or weak correlation with macroeconomic indicators
• India’s fiscal policy should reflect Gurudev Rabindranath Tagore’s sentiment of ‘a mind without fear’
• Sovereign credit ratings methodology should be made more transparent, less subjective and better attuned to reflect economies’ fundamentals

Inequality and Growth: Conflict or Convergence?

• The relationship between inequality and socio-economic outcomes vis-à-vis economic growth and socio-economic outcomes, is different in India from that in advanced economies.
• Both inequality and per-capita income (growth) have similar relationships with socio-economic indicators in India, unlike in advanced economies
• Economic growth has a greater impact on poverty alleviation than inequality
• India must continue to focus on economic growth to lift the poor out of poverty
• Expanding the overall pie – redistribution in a developing economy is feasible only if the size of the economic pie grows

Healthcare takes center stage, finally!

• COVID-19 pandemic emphasized the importance of healthcare sector and its inter-linkages with other sectors – showcased how a health crisis transformed into an economic and social crisis
• India’s health infrastructure must be agile so as to respond to pandemics – healthcare policy must not become beholden to ‘saliency bias’
• National Health Mission (NHM) played a critical role in mitigating inequity as the access of the poorest to pre-natal/post-natal care and institutional deliveries increased significantly
• Emphasis on NHM in conjunction with Ayushman Bharat should continue
• An increase in public healthcare spending from 1% to 2.5-3% of GDP can decrease the out-of-pocket expenditure from 65% to 35% of overall healthcare spending
• A regulator for the healthcare sector must be considered given the market failures stemming from information asymmetry
  • Mitigation of information asymmetry will help lower insurance premiums, enable the offering of better products and increase insurance penetration
• Information utilities that help mitigate the information asymmetry in healthcare sector will be useful in enhancing overall welfare
• Telemedicine needs to be harnessed to the fullest by investing in internet connectivity and health infrastructure

Process Reforms

• India over-regulates the economy resulting in regulations being ineffective even with relatively good compliance with process        
• The root cause of the problem of overregulation is an approach that attempts to account for every possible outcome
• Increase in complexity of regulations, intended to reduce discretion, results in even more non-transparent discretion
• The solution is to simplify regulations and invest in greater supervision which, by definition, implies greater discretion
• Discretion, however, needs to be balanced with transparency, systems of ex-ante accountability and ex-post resolution mechanisms
• The above intellectual framework has already informed reforms ranging from labour codes to removal of onerous regulations on the BPO sector

Regulatory Forbearance is an emergency medicine, not a staple diet!

• During the Global Financial Crisis, regulatory forbearance helped borrowers tide over temporary hardship
• Forbearance continued long after the economic recovery, resulting in unintended consequences for the economy
• Banks exploited the forbearance window for window-dressing their books and misallocated credit, thereby damaging the quality of investment in the economy
• Forbearance represents emergency medicine that should be discontinued at the first opportunity when the economy exhibits recovery, not a staple diet that gets continued for years
• To promote judgment amidst uncertainty, ex-post inquests must recognize the role of hindsight bias and not equate unfavorable outcomes to bad judgment or  malafide intent
• An Asset Quality Review exercise must be conducted immediately after the forbearance is withdrawn
• The legal infrastructure for the recovery of loans needs to be strengthened de facto

Innovation: Trending Up but Needs Thrust, Especially from the Private Sector

• India entered the top-50 innovating countries for the first time in 2020 since the inception of the Global Innovation Index in 2007, ranking first in Central and South Asia, and third amongst lower middle-income group economies
• India’s gross domestic expenditure on R&D (GERD) is lowest amongst top ten economies
• India’s aspiration must be to compete on innovation with the top ten economies
• The government sector contributes a disproportionately large share in total GERD at three times the average of top ten economies
• The business sector’s contribution to GERD, total R&D personnel and researchers is amongst the lowest when compared to top ten economies
• This situation has prevailed despite higher tax incentives for innovation and access to equity capital
• India’s business sector needs to significantly ramp up investments in R&D
• Indian resident’s share in total patents filed in the country must rise from the current 36% which is much below the average of 62% in top ten economies
• For achieving higher improvement in innovation output, India must focus on improving its performance on institutions and business sophistication innovation inputs

JAY Ho! PM‘JAY’ Adoption and Health outcomes

• Pradhan Mantri Jan Arogya Yojana (PM-JAY) – the ambitious program launched by Government of India in 2018 to provide healthcare access to the most vulnerable sections demonstrates strong positive effects on healthcare outcomes in a short time
• PM-JAY is being used significantly for high frequency, low cost care such as dialysis and continued during the Covid pandemic and the lockdown.
• Causal impact of PM-JAY on health outcomes by undertaking a Difference-in-Difference analysis based on National Family Health Survey (NFHS)-4 (2015-16) and NFHS-5 (2019-20) is following:

1. Enhanced health insurance coverage: The proportion of households that had health insurance increased in Bihar, Assam and Sikkim from 2015-16 to 2019-20 by 89% while it decreased by 12% over the same period in West Bengal
2. Decline in  Infant Mortality rate: from 2015-16 to 2019-20, infant mortality rates declined by 20% for West Bengal and by 28% for the three neighbouring states
3. Decline in under-5 mortality rate: Bengal saw a fall of 20% while, the neighbours witnessed a 27% reduction
4. Modern methods of contraception, female sterilization and pill usage went up by 36%, 22% and 28% respectively in the three neighbouring states while the respective changes for West Bengal were negligible
5. While West Bengal did not witness any significant decline in unmet need for spacing between consecutive kids, the neighbouring three states recorded a 37% fall
6. Various metrics for mother and child care improved more in the three neighbouring states than in West Bengal.
7. Each of these health effects manifested similarly when we compare all states that implemented PM-JAY versus the states that did not
8. Overall, the comparison reflects significant improvements in several health outcomes in states that implemented PM-JAY versus those that did not

Bare Necessities

• Access to the ‘bare necessities’ has improved across all States in the country in 2018 as compared to 2012
  • It is highest in States such as Kerala, Punjab, Haryana and Gujarat while lowest in Odisha, Jharkhand, West Bengal and Tripura
  • Improvement in each of the five dimensions viz., access to water, housing, sanitation, micro-environment and other facilities
  • Inter-State disparities declined across rural and urban areas as the laggard states have gained relatively more between 2012 and 2018
  • Improved disproportionately more for the poorest households when compared to the richest households across rural and urban areas
• Improved access to the ‘bare necessities’ has led to improvements in health indicators such as infant mortality and under-5 mortality rate and also correlates with future improvements in education indicators
• Thrust should be given to reduce variation in the access to bare necessities across states, between rural and urban and between income groups
• The schemes such as Jal Jeevan Mission, SBM-G, PMAY-G, etc. may design appropriate strategy to reduce these gaps
• A Bare Necessities Index (BNI) based on the large annual household survey data can be constructed using suitable indicators and methodology at district level for all/targeted districts to assess the progress on access to bare necessities.

Fiscal Developments

• India adopted a calibrated approach best suited for a resilient recovery of its economy from COVID-19 pandemic impact, in contrast with a front-loaded large stimulus package adopted by many countries
• Expenditure policy in 2020-21 initially aimed at supporting the vulnerable sections but was re-oriented to boost overall demand and capital spending, once the lockdown was unwound
• Monthly GST collections have crossed the Rs. 1 lakh crore mark consecutively for the last 3 months, reaching its highest levels in December 2020 ever since the introduction of GST
• Reforms in tax administration have begun a process of transparency and accountability and have incentivized tax compliance by enhancing honest tax-payers’ experience
• Central Government has also taken consistent steps to impart support to the States in the challenging times of the pandemic

External Sector

• COVID-19 pandemic led to a sharp decline in global trade, lower commodity prices and tighter external financing conditions with implications for current account balances and currencies of different countries
• India’s forex reserves at an all-time high of US$ 586.1 billion as on January 08, 2021, covering about 18 months worth of imports
• India experiencing a Current Account Surplus along with robust capital inflows leading to a BoP surplus since Q4 of FY2019-20
• Balance on the capital account is buttressed by robust FDI and FPI inflows:
  • Net FDI inflows of US$ 27.5 billion during April-October, 2020: 14.8% higher as compared to first seven months of FY2019-20
  • Net FPI inflows of US$ 28.5 billion during April-December, 2020 as against US$ 12.3 billion in corresponding period of last year
• In H1: FY21, steep contraction in merchandise imports and lower outgo for travel services led to:
  • Sharper fall in current payments (by 30.8%) than current receipts (15.1%)
  • Current Account Surplus of US$ 34.7 billion (3.1% of GDP)
• India to end with an Annual Current Account Surplus after a period of 17 years
• India’s merchandise trade deficit was lower at US$ 57.5 billion in April-December, 2020 as compared to US$ 125.9 billion in the corresponding period last year
• In April-December, 2020, merchandise exports contracted by 15.7% to US$ 200.8 billion from US$ 238.3 billion in April-December, 2019:
  • Petroleum, Oil and Lubricants (POL) exports have contributed negatively to export performance during the period under review
  • Non-POL exports turned positive and helped in improving export performance in Q3 of 2020-21
  • Within Non-POL exports, agriculture & allied products, drugs & pharmaceutical and ores & minerals recorded expansion
• Total merchandise imports declined by (-) 29.1% to US$ 258.3 billion during April-December, 2020 from US$ 364.2 billion during the same period last year:
  • Sharp decline in POL imports pulled down the overall import growth
  • Imports contracted sharply in Q1 of 2020-21; the pace of contraction eased in subsequent quarters, due to the accelerated positive growth in Gold and Silver imports and narrowing contraction in non-POL, non-Gold & non-Silver imports
  • Fertilizers, vegetable oil, drugs & pharmaceuticals and computer hardware & peripherals have contributed positively to the growth of non-POL, non-Gold & non-Silver imports
• Trade balance with China and the US improved as imports slowed
• Net services receipts amounting to US$ 41.7 billion remained stable in April-September 2020 as compared with US$ 40.5 billion in corresponding period a year ago.
• Resilience of the services sector was primarily driven by software services, which accounted for 49% of total services exports
• Net private transfer receipts, mainly representing remittances by Indians employed overseas, totaling US$ 35.8 billion in H1: FY21 declined by 6.7% over the corresponding period of previous year
• At end-September 2020, India’s external debt placed at US$ 556.2 billion – a decrease of US$ 2.0 billion (0.4%) as compared to end-March 2020.
• Improvement in debt vulnerability indicators:
  • Ratio of forex reserves to total and short-term debt (original and residual)
  • Ratio of short-term debt (original maturity) to the total stock of external debt.
  • Debt service ratio (principal repayment plus interest payment) increased to 9.7% as at end-September 2020, compared to 6.5% as at end-March 2020
• Rupee appreciation/depreciation:
  • In terms of 6-currency nominal effective exchange rate (NEER) (trade-based weights), Rupee depreciated by 4.1% in December 2020 over March 2020; appreciated by 2.9% in terms of real effective exchange rate (REER)
  • In terms of 36-currency NEER (trade-based weights), Rupee depreciated by 2.9% in December 2020 over March 2020; appreciated by 2.2% in terms of REER
• RBI’s interventions in forex markets ensured financial stability and orderly conditions, controlling the volatility and one-sided appreciation of the Rupee
• Initiatives undertaken to promote exports:
  • Production Linked Incentive (PLI) Scheme
  • Remission of Duties and Taxes on Exported Products (RoDTEP)
  • Improvement in logistics infrastructure and digital initiatives

Money Management and Financial Intermediation

• Accommodative monetary policy during 2020: repo ratecut by 115 bpssince March 2020
• Systemic liquidity in FY2020-21 has remained in surplus so far. RBI undertook various conventional and unconventional measures like:
  • Open Market Operations
  • Long Term Repo Operations
  • Targeted Long Term Repo Operations
• Gross Non-Performing Assets ratio of Scheduled Commercial Banks decreased from 8.21% at end-March, 2020 to 7.49% at end-September, 2020
• The monetary transmission of lower policy rates to deposit and lending rates improved during FY2020-21
• NIFTY-50 and BSE SENSEX reached record high closing of 14,644.7 and 49,792.12 respectively on January 20, 2021
• The recovery rate for the Scheduled Commercial Banks through IBC (since its inception) has been over 45%

Prices and Inflation

• Headline CPI inflation:
  • Averaged 6.6% during April-December, 2020 and stood at 4.6% in December, 2020, mainly driven by rise in food inflation (from 6.7% in 2019-20 to 9.1% during April-December, 2020, owing to build up in vegetable prices)
  • CPI headline and its sub groups witnessed inflation during April-October 2020, driven by substantial increase in price momentum – due to the initial disruptions caused by COVID-19 lockdown
  • Moderated price momentum by November 2020 for most sub groups, coupled with positive base effect helped ease inflation
• Rural-urban difference in CPI inflation saw a decline in 2020:
  • Since November 2019, CPI-Urban inflation has closed the gap with CPI-Rural inflation
  • Food inflation has almost converged now
  • Divergence in rural-urban inflation observed in other components of CPI like fuel and light, clothing and footwear, miscellaneous etc.
• During April-December, 2019 as well as April-December, 2020-21, the major driver of CPI-C inflation was the food and beverages group:
  • Contribution increased to 59% during April-December, 2020, compared to 53.7% during April-December, 2019  
• Thali cost increased between June 2020 and November 2020, however a sharp fall in the month of December reflecting the fall in the prices of many essential food commodities
• State-wise trend:
  • CPI-C inflation increased in most of the states in the current year
  • Regional variation persists
  • Inflation ranged from 3.2% to 11% across States/UTs during June-December 2020 compared to (-) 0.3% to 7.6% during the same period last year.
• Food inflation driving overall CPI-C inflation due to the relatively more weight of food items in the index.
• Steps taken to stabilize prices of food items:
  • Banning of export of onions
  • Imposition of stock limit on onions
  • Easing of restriction on imports of pulses
• Gold prices:
  • Sharp spike as investors turned to gold as a safe haven investment amid COVID-19 induced economic uncertainties
  • Compared to other assets, gold had considerably higher returns during FY2020-21
• Consistency in import policy warrants attention:
  • Increased dependence on imports of edible oils poses risk of fluctuations in import prices
  • Imports impacting production and prices of domestic edible oil market, coupled with frequent changes in import policy of pulses and edible oils, add to confusion among farmers/producers and delay imports

Sustainable Development and Climate Change

• India has taken several proactive steps to mainstream the SDGs into the policies, schemes and programmes
• Voluntary National Review (VNR) presented to the United Nations High-Level Political Forum (HLPF) on Sustainable Development
• Localisation of SDGs is crucial to any strategy aimed at achieving the goals under the 2030 Agenda
  • Several States/UTs have created institutional structures for implementation of SDGs and also nodal mechanisms within every department and at the district levels for better coordination and convergence
• Sustainable development remains core to the development strategy despite the unprecedented COVID-19 pandemic crisis
• Eight National Missions under National Action Plan on Climate Change (NAPCC) focussed on the objectives of adaptation, mitigation and preparedness on climate risks
• India’s Nationally Determined Contributions (NDC) states that finance is a critical enabler of climate change action
• The financing considerations will therefore remain critical especially as the country steps up the targets substantially
• The goal of jointly mobilizing US$ 100 billion a year by 2020 for climate financing by the developed countries has remained elusive
• The postponement of COP26 to 2021 also gives less time for negotiations and other evidence-based work to inform the post-2025 goal
• Despite overall growth in the global bond markets, green bond issuance in the first half of 2020 slowed down from 2019, possibly as a result of the on-going COVID-19 pandemic
• International Solar Alliance (ISA) launched two new initiatives – ‘World Solar Bank’ and ‘One Sun One World One Grid Initiative’ – poised to bring about solar energy revolution globally

Agriculture and Food Management

• India’s Agricultural (and Allied Activities) sector has shown its resilience amid the adversities of COVID-19 induced lockdowns with a growth of 3.4% at constant prices during 2020-21 (first advance estimate)
• The share of Agriculture and Allied Sectors in Gross Value Added (GVA) of the country at current prices is 17.8% for the year 2019-20 (CSO-Provisional Estimates of National Income, 29^th May, 2020)
• Gross Capital Formation (GCF) relative to GVA showing a fluctuating trend from 17.7 % in 2013-14 to 16.4 % in 2018-19, with a dip to 14.7 % in 2015-16
• Total food grain production in the country in the agriculture year 2019-20 (as per Fourth Advance Estimates), is 11.44 million tonnes more than than during 2018-19
• The actual agricultural credit flow was ₹13,92,469.81 crores against the target of ₹13,50,000 crores in 2019-20. The target for 2020-21 was ₹15,00,000 crores and a sum of ₹ 9,73,517.80 crores was disbursed till 30th November, 2020:
  • 1.5 crore dairy farmers of milk cooperatives and milk producer companies’ were targeted to provide Kisan Credit Cards (KCC) as part of Prime Minister’s AatmaNirbhar Bharat Package after the budget announcement of  February 2020
  • As of mid January 2021, a total of 44,673 Kisan Credit Cards (KCCs) have been issued to fishers and fish farmers and an additional 4.04 lakh applications from fishers and fish farmers are with the banks at various stages of issuance
• The Pradhan Mantri Fasal Bima Yojana covers over 5.5 crore farmer applications year on year
  • Claims worth Rs. 90,000 crore paid, as on 12^th January, 2021
  • Speedy claim settlement directly into the farmer accounts through Aadhar linkage
  • 70 lakh farmers benefitted and claims worth Rs. 8741.30 crores were transferred during COVID-19 lock down period
• An amount of Rs. 18000 crore have been deposited directly in the bank accounts of 9 crore farmer families of the country in December, 2020 in the 7^th installment of financial benefit under the PM-KISAN scheme
• Fish production reached an all-time high of 14.16 million metric tons during 2019-20:
  • GVA by the Fisheries sector to the national economy stood at ₹2,12,915 crores constituting 1.24% of the total national GVA and 7.28 % of the agricultural GVA
• Food Processing Industries (FPI) sector growing at an Average Annual Growth Rate (AAGR) of around 9.99 % as compared to around 3.12 % in Agriculture and 8.25 % in Manufacturing at 2011-12 prices during the last 5 years ending 2018-19
• Pradhan Mantri Garib Kalyan Anna Yojana:
  • 80.96 crore beneficiaries were provided foodgrains above NFSA mandated requirement free of cost till November, 2020.
  • Over 200 LMT of foodgrains were provided amounting to a fiscal outgo of over Rs. 75000 Crores
• AatmaNirbhar Bharat Package: 5 kg per person per month for four months (May to August) to approximately 8 crores migrants (excluded under NFSA or state ration card) entailing subsidy of  Rs. 3109 crores approximately

Industry and Infrastructure

• A strong V-shaped recovery of economic activity further confirmed by IIP data
• The IIP & eight-core index further inched up to pre-COVID levels
• The broad-based recovery in the IIP resulted in a growth of (-) 1.9 % in Nov-2020 as compared to a growth of 2.1 % in Nov-2019 and a nadir of (-) 57.3 % in Apr-2020
• Further improvement and firming up in industrial activities are foreseen with the Government enhancing capital expenditure, the vaccination drive and the resolute push forward on long pending reform measures
• AatmaNirbhar Bharat Abhiyan with a stimulus package worth 15 % of India’s GDP announced
• India’s rank in the Ease of Doing Business (EoDB) Index for 2019 has moved upwards to the 63^rd position in 2020 from 77^th in 2018 as per the Doing Business Report (DBR):
  • India has improved its position in 7 out of 10 indicators
  • Acknowledges India as one of the top 10 improvers, the third time in a row, with an improvement of 67 ranks in three years
  • It is also the highest jump by any large country since 2011
• FDI equity inflows were US$49.98 billion in FY20 as compared to US$44.37 billion during FY19:
  • It is US$30.0 billion for FY21 (up to September-2020)
  • The bulk of FDI equity flow is in the non-manufacturing sector
  • Within the manufacturing sector, industries like automobile, telecommunication, metallurgical, non-conventional energy, chemical (other than fertilizers), food processing, petroleum & natural gas got the bulk of FDI
• Government has announced a Production-Linked Incentive (PLI) Scheme in the 10 key sectors under the aegis of AatmaNirbhar Bharat for enhancing India’s manufacturing capabilities and exports:
  • To be implemented by the concerned ministries with an overall expenditure estimated at Rs.1.46 lakh crores and with sector specific financial limits

Services Sector

• India’s services sector contracted by nearly 16 % during H1: FY2020-21, during the COVID-19 pandemic mandated lockdown, owing to its contact-intensive nature
• Key indicators such as Services Purchasing Managers’ Index, rail freight traffic, and port traffic, are all displaying a V-shaped recovery after a sharp decline during the lockdown
• Despite the disruptions being witnessed globally, FDI inflows into India’s services sector grew robustly by 34% Y-o-Y during April-September 2020 to reach US$ 23.6 billion
• The services sector accounts for over 54 % of India’s GVA and nearly four-fifths of total FDI inflow into India
• The sector’s share in GVA exceeds 50% in 15 out of 33 States and UTs, and is particularly more pronounced (greater than 85%) in Delhi and Chandigarh
• Services sector accounts for 48% of total exports, outperforming goods exports in the recent years
• The shipping turnaround time at ports has almost halved from 4.67 days in 2010-11 to 2.62 days in 2019-20
• The Indian start-up ecosystem has been progressing well amidst the COVID-19 pandemic, being home to 38 unicorns – adding a record number of 12 start-ups to the unicorn list last year
• India’s space sector has grown exponentially in the past six decades:
  • Spent about US$ 1.8 billion on space programmes in 2019-20
  • Space ecosystem is undergoing several policy reforms to engage private players and attract innovation and investment

Social Infrastructure, Employment and Human Development

• The combined (Centre and States) social sector expenditure as % of GDP has increased in 2020-21 compared to last year.
• India’s rank in HDI 2019 was recorded at 131, out of a total 189 countries:
  • India’s GNI per capita (2017 PPP $) has increased from US$ 6,427 in 2018 to US$ 6,681 in 2019
  • Life expectancy at birth improved from 69.4 years in 2018 to 69.7 years in 2019
• The access to data network, electronic devices such as computer, laptop, smart phone etc. gained importance due to online learning and remote working during the pandemic
• Major proportion of workforce engaged as regular wage/salaried in the urban sector during the period of January 2019-March 2020 (quarterly survey of PLFS)
• Government’s incentive to boost employment through AatmaNirbhar Bharat Rozgar Yojana and rationalization and simplification of existing labour codes into 4 codes
• Low level of female LFPR in India:
  • Females spending disproportionately more time on unpaid domestic and care giving services to household members as compared to their male counterparts (Time Use Survey, 2019)
  • Need to promote non-discriminatory practices at the workplace like pay and career progression, improve work incentives, including other medical and social security benefits for female workers
• Under PMGKP announced in March, 2020, cash transfers of upto Rs.1000 to existing old aged, widowed and disabled beneficiaries under the National Social Assistance Programme (NSAP)
• An amount of Rs. 500 each was transferred for three months digitally into bank accounts of the women beneficiaries under PM Jan Dhan Yojana, totalling about Rs. 20.64 crores
• Free distribution of gas cylinders to about 8 crore families for three months
• Limit of collateral free lending increased from Rs. 10 lakhs to Rs. 20 lakhs for 63 lakh women SHGs which would support 6.85 crore households
• Wages under Mahatma Gandhi NREGA increased by Rs.20 from Rs.182 to Rs.202 w.e.f. 1^st April, 2020

India’s fight against COVID-19:

• Initial measures of lockdown, social distancing, travel advisories, practicing hand wash, wearing masks reduced the spread of the disease
• Country also acquired self-reliance in essential medicines, hand sanitizers, protective equipment including masks, PPE Kits, ventilators, COVID-19 testing and treatment facilities
• World’s largest COVID-19 vaccination drive commenced on 16^th January, 2021 using two indigenously manufactured vaccines

Key Highlights of Union Budget 2021-22

Rupee Dynamics

The Union Minister for Finance has finally presented the Union Budget 2021-22 in Parliament, which is the first budget of this new decade and also a digital one in the backdrop of unprecedented COVID-19 crisis.

It was been increasingly seen as a financial vaccine for the infected economy.

Part: A

The Budget proposals for 2021-22 rest on 6 pillars.

1. Health and Wellbeing
2. Physical & Financial Capital, and Infrastructure
3. Inclusive Development for Aspirational India
4. Reinvigorating Human Capital
5. Innovation and R&D
6. Minimum Government and Maximum Governance

[I]  Health and Wellbeing

• There is substantial increase in investment in Health Infrastructure and the Budget outlay for Health and Wellbeing is Rs 2,23,846 crore in BE 2021-22 as against this year’s BE of Rs 94,452 crore.
• This is an increase of 137 %.

PM Aatmanirbhar Swasth Bharat Yojana

• FM announced this new centrally sponsored scheme, which will be launched with an outlay of about Rs 64, 180 crore over 6 years.
• This will develop capacities of primary, secondary, and tertiary care Health Systems, strengthen existing national institutions, and create new institutions, to cater to detection and cure of new and emerging diseases.
• This will be in addition to the National Health Mission. 

Vaccines

• Provision of Rs 35,000 crore made for Covid-19 vaccine in BE 2021-22.
• The Pneumococcal Vaccine, a Made in India product, presently limited to only 5 states, will be rolled out across the country aimed at averting 50,000 child deaths annually.

Nutrition

• To strengthen nutritional content, delivery, outreach, and outcome, Government will merge the Supplementary Nutrition Programme and the Poshan Abhiyan and launch the Mission Poshan 2.0.
• Government will adopt an intensified strategy to improve nutritional outcomes across 112 Aspirational Districts.

Universal Coverage of Water Supply

• The FM announced that the Jal Jeevan Mission (Urban), will be launched for universal water supply in all Urban Local Bodies with crore household tap connections.

Vehicle scrapping

• A voluntary vehicle scrapping policy to phase out old and unfit vehicles was also announced.
• Fitness tests have been proposed in automated fitness centres after 20 years in case of personal vehicles and after 15 years in case of commercial vehicles

[II] Physical and Financial Capital and Infrastructure

Aatmanirbhar Bharat-Production Linked Incentive Scheme

• FM said that for a USD 5 trillion economy, our manufacturing sector has to grow in double digits on a sustained basis.
• Our manufacturing companies need to become an integral part of global supply chains, possess core competence and cutting-edge technology.
• To achieve all of the above, PLI schemes to create manufacturing global champions for an Aatmanirbhar Bharat have been announced for 13 sectors.

Textiles

• Similarly, to enable the textile industry to become globally competitive, attract large investments and boost employment generation, a scheme of Mega Investment Textiles Parks (MITRA) will be launched in addition to the PLI scheme.
• This will create world class infrastructure with plug and play facilities to enable create global champions in exports. 7 Textile Parks will be established over 3 years.

Infrastructure

• The National Infrastructure Pipeline (NIP) which the FM announced in December 2019 is the first-of-its-kind, whole-of-government exercise ever undertaken.
• The NIP was launched with 6835 projects; the project pipeline has now expanded to 7,400 projects.
• Around 217 projects worth Rs 1.10 lakh crore under some key infrastructure Ministries have been completed.

Infrastructure financing – Development Financial Institution (DFI)

• Dwelling on the infrastructure sector, FM has said that infrastructure needs long term debt financing.
• A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing. Accordingly, a Bill to set up a DFI will be introduced.

Asset Monetisation

• Monetizing operating public infrastructure assets is a very important financing option for new infrastructure construction.
• A “National Monetization Pipeline” of potential Brownfield infrastructure assets will be launched.
• An Asset Monetization dashboard will also be created for tracking the progress and to provide visibility to investors.

Roads and Highways Infrastructure

• FM announced that more than 13,000 km length of roads, at a cost of Rs 3.3 lakh crore, has already been awarded under the Rs. 5.35 lakh crore Bharatmala Pariyojana project.
• Of this 3,800 km have been constructed.
• By March 2022, govt. would be awarded another 8,500 km and complete an additional 11,000 km of national highway corridors.
• To further augment road infrastructure, more economic corridors are also being planned.

Railway Infrastructure

• Indian Railways have prepared a National Rail Plan for India – 2030.
• The Plan is to create a ‘future ready’ Railway system by 2030. Bringing down the logistic costs for our industry is at the core of our strategy to enable ‘Make in India’.
• It is expected that Western Dedicated Freight Corridor (DFC) and Eastern DFC will be commissioned by June 2022.

Power Infrastructure

• The past 6 years have seen a number of reforms and achievements in the power sector with the addition of 139 Giga Watts of installed capacity.
• We have almost achieved last mile connectivity, connecting an additional 2.8 crore households and addition of 1.41 lakh circuit km of transmission lines.
• Expressing a serious concern over the viability of Distribution Companies, the FM proposed to launch a revamped reforms-based result-linked power distribution sector scheme.
• The scheme will provide assistance to DISCOMS for Infrastructure creation including pre-paid smart metering and feeder separation, upgradation of systems, etc., tied to financial improvements.

Ports, Shipping, Waterways

• Major Ports will be moving from managing their operational services on their own to a model where a private partner will manage it for them.
• A scheme to promote flagging of merchant ships in India will be launched by providing subsidy support to Indian shipping companies in global tenders floated by Ministries and CPSEs.
• This initiative will enable greater training and employment opportunities for Indian seafarers besides enhancing Indian companies share in global shipping.

Petroleum & Natural Gas

• The government has kept fuel supplies running across the country without interruption during the COVID-19 lockdown period.
• Taking note of the crucial nature of this sector in people’s lives, the following key initiatives are being announced:
• Ujjwala Scheme which has benefited 8 crore households will be extended to cover 1 crore more beneficiaries.
• Government will add 100 more districts in next 3 years to the City Gas Distribution network.
• A gas pipeline project will be taken up in Union Territory of Jammu & Kashmir.
• An independent Gas Transport System Operator will be set up for facilitation and coordination of booking of common carrier capacity in all-natural gas pipelines on a non-discriminatory open access basis.

Financial Capital

• The FM proposed to consolidate the provisions of SEBI Act, 1992, Depositories Act, 1996, Securities Contracts (Regulation) Act, 1956 and Government Securities Act, 2007 into a rationalized single Securities Markets Code.
• The Government would support the development of a world class Fin-Tech hub at the GIFT-IFSC.

Increasing FDI in Insurance Sector

• FM also proposed to amend the Insurance Act, 1938 to increase the permissible FDI limit from 49% to 74% and allow foreign ownership and control with safeguards. 

Disinvestment and Strategic Sale

• In spite of COVID-19, Government has kept working towards strategic disinvestment.
• The FM said a number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam limited among others would be completed in 2021-22.
• Other than IDBI Bank, Government propose to take up the privatization of two Public Sector Banks and one General Insurance company in the year 2021-22.

[III] Inclusive Development

Under the pillar of Inclusive Development for Aspirational India, the Finance Minister announced to cover Agriculture and Allied sectors, farmers’ welfare and rural India, migrant workers and labour, and financial inclusion.

Agriculture

• Dwelling on agriculture, FM has said that the Government is committed to the welfare of farmers.
• The MSP regime has undergone a sea change to assure price that is at least 1.5 times the cost of production across all commodities.
• The procurement has also continued to increase at a steady pace. This has resulted in increase in payment to farmers substantially.

Land ownership and mapping

• Early this year, PM had launched SWAMITVA Scheme.
• Under this, a record of rights is being given to property owners in villages.
• To provide adequate credit to our farmers, the Government has enhanced the agricultural credit target to Rs. 16.5 lakh crore in FY22.

Operation Green Scheme

• In an important announcement to boost value addition in agriculture and allied products and their exports is the scope of ‘Operation Green Scheme’.
• It is presently applicable to tomatoes, onions, and potatoes, will be enlarged to include 22 perishable products.

Fisheries

• FM proposed substantial investments in the development of modern fishing harbours and fish landing centres.
• To start with, 5 major fishing harbours – Kochi, Chennai, Visakhapatnam, Paradip, and Petuaghat – will be developed as hubs of economic activity.

Migrant Workers and Labourers

• Government has launched the One Nation One Ration Card scheme through which beneficiaries can claim their rations anywhere in the country. 
• ONORC plan is under implementation by 32 states and UTs, reaching about 69 crore beneficiaries – that’s a total of 86% beneficiaries covered.
• The remaining 4 states and UTs will be integrated in the next few months.
• Government proposes to conclude a process that began 20 years ago, with the implementation of the 4 labour codes.
• For the first time globally, social security benefits will extend to gig and platform workers.
• Minimum wages will apply to all categories of workers, and they will all be covered by the Employees State Insurance Corporation.
• Women will be allowed to work in all categories and also in the night-shifts with adequate protection.

Financial Inclusion

• To further facilitate credit flow under the scheme of Stand Up India for SCs, STs, and women, the FM proposed to reduce the margin money requirement from 25% to 15% and to also include loans for activities allied to agriculture.
• Moreover, a number of steps were taken to support the MSME sector and in this Budget, the Government has provided Rs. 15,700 crore to this sector – more than double of this year’s BE.

[IV] Reinvigorating Human Capital

Education

• The FM has said that the National Education Policy (NEP) announced recently has had good reception.
• More than 15,000 schools will be qualitatively strengthened to include all components of the National Education Policy.

Welfare of the SCs/STs

• Government has set a target of establishing 750 Eklavya model residential schools in tribal areas with an increase in the unit cost of each such school from Rs. 20 crore to Rs. 38 crore, and for hilly and difficult areas, to Rs. 48 crore.
• Similarly, under the revamped Post Matric Scholarship Scheme for the welfare of SCs will benefit 4 crore SC students till 2026.

[V] Innovation and R&D

Research

• The FM has announced the National Research Foundation and added that the NRF outlay will be of Rs. 50,000 crore, over 5 years.
• It will ensure that the overall research ecosystem of the country is strengthened with focus on identified national-priority thrust areas.

Knowledge

• Government will undertake a new initiative – National Language Translation Mission (NTLM).
• This will enable the wealth of governance-and-policy related knowledge on the Internet being made available in major Indian languages.

Space sector

• The New Space India Limited (NSIL) a PSU under the Department of Space will execute the PSLV-CS51 launch, carrying the Amazonia Satellite from Brazil, along with a few smaller Indian satellites.
• As part of the Gaganyaan mission activities, four Indian astronauts are being trained on Generic Space Flight aspects, in Russia. The first unmanned launch is slated for December 2021.

[VI] Minimum Government, Maximum Governance

• Tribunals: FM proposed to take a number of steps to bring reforms in Tribunals for speedy delivery of justice and proposes to take further measures to rationalized the functioning of Tribunals.
• Healthcare: Government has introduced the National Commission for Allied Healthcare Professionals Bill in Parliament, with a view to ensure transparent and efficient regulation of the 56 allied healthcare professions.
• Census: FM announced that the forthcoming Census could be the first digital census in the history of India and for this monumental and milestone-marking task, Rs. 3,768 crore allocated in the year 2021-2022.

Fiscal health

• On Fiscal position, FM underlined that the pandemic’s impact on the economy resulted in a weak revenue inflow.
• The FM said fiscal deficit in 2020-21 is pegged at 9.5% of GDP and it has been funded through Government borrowings, multilateral borrowings, Small Saving Funds and short term borrowings.
• The govt would need another Rs 80,000 crore for which it would be approaching the markets in these 2 months.

Deficit targets

• The fiscal deficit in BE 2021-2022 is estimated to be 6.8% of GDP. The gross borrowing from the market for the next year would be around 12 lakh crore.
• The FRBM Act mandates fiscal deficit of 3% of GDP to be achieved by 31st March 2020-2021.
• The govt plans to continue the path of fiscal consolidation, and intend to reach a fiscal deficit level below 4.5% of GDP by 2025-2026 with a fairly steady decline over the period.

Fiscal consolidation

• The govt hopes to achieve this by-

the consolidation by first, increasing the buoyancy of tax revenue through improved compliance, and secondly, by increased receipts from monetisation of assets, including Public Sector Enterprises and land etc.

Part: B

In Part B of the Budget Speech seeks to further simplify the Tax Administration, Litigation Management and ease the compliance of Direct Tax Administration.  The indirect proposal focuses on custom duty rationalization as well as rationalization of procedures and easing of compliance.

Direct Tax Proposals

• The FM provided relief to senior citizens in filing of income tax returns, reduced time limit for income tax proceedings announced setting up of the Dispute Resolution Committee, , relaxation to NRIs, increase in exemption limit from audit and relief for dividend income.
• FM also announced steps to attract foreign investment into infrastructure, relief to affordable housing and rental housing, tax incentives to IFSC, relief to small charitable trusts, and steps for incentivizing Start-ups in the country.
• The Budget proposes to make dividend payment to REIT/InvIT exempt from TDS.
• Stating the resolve of the Government to reduce litigation in the taxation system, the FM said that the Direct Tax Vivad se Vishwas Scheme announced by the Government has been received well.
• In order to allow funding of infrastructure by issue of zero coupon bonds, the Budget proposes to make notified infrastructure debt funds eligible to raise funds by issuing tax efficient zero coupon bonds.

Indirect Tax Proposals

• On the issue of Indirect Tax proposals, the Minister said that record GST collections have been made in the last few months.
• She said several measures have been taken to further simplify the GST.
• The capacity of GSTN system has been announced. Deep analytics and artificial intelligence have been deployed to identity tax evaders and fake billers, launching special drives against them.
• With respect to the custom duty policy, the FM has said that it has the twin objectives of promoting domestic manufacturing and helping India get on to global value change and export better.

Export promotion

• The Budget proposes certain changes to benefit MSMEs which include increasing duty on steel screws, plastic builder wares and prawn feed.
• It also provide for rationalizing exemption on import of duty free items as an incentives to exporters of garments leather and handicraft items.
• It also provides withdrawing exemption on imports of certain kind of leather and raising custom duty on finished synthetic gem stones.
• To benefit farmers, the FM announced raising custom duty on cotton, raw silk and silk yarn.
• She also proposed an Agriculture Infrastructure and Development Cess on a small number of items.
• The Minister said that the Turant Custom Initiative rolled out in 2020 has helped in putting a check of misuse of Free Trade Agreements.

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14th Aug, 2021

Since 1951, eight Finance Commissions have so far been appointed.

First Finance Commission

The President of India appointed a Finance Commission on 1st December 1951.

Important recommendations of this commission:

• The States’ share in the proceeds of the income tax should be 55 percent of the net proceeds.
• As regards the distribution among states, the basis should be as follows: 20 percent should be distributed on the basis of the relative collection of states and 80 percent on the basis of the relative population according to the census of 1951.
• Of the net proceeds of the duty levied on tobacco, matches, and vegetable products, 40 percent should be distributed to the states.
• The Centre should make conditional and unconditional grants to the states. Considerations in fixing the amounts of these grants should be the budgetary needs of the states, the standard of social services, and special burdens, which are due to floods and famines.

Second Finance Commission

The Second Finance Commission was set up in June 1956.

Important recommendations of this commission:

• The share of the states in the net proceeds of income tax should be increased to 60 percent.
• The actual distribution of shares assigned to the states should be on the basis of population. Thus, 90 percent of the amount of the divisible pool should be distributed on the basis of population and only 10 percent on the criterion of sources of collection.
• The number of excise duties to be shared by the Union with the states is increased from 3 to 8, but the shares of the states in these duties are reduced from 40 percent to 25 percent. Even then, there was an increase in the absolute amount of revenue accruing to the states.
• Unlike the First Finance Commission, the Second Finance Commission recommended unconditional grants.
• On the whole, the distribution made by the Second Commission was fair and just.

Third Finance Commission

The Third Finance Commission was set up in December 1960.

Important recommendations of this commission:

• Of the net proceeds of income tax, 66 ²/₃ percent should be distributed among the states.
• The distribution of the states’ share should be to the extent of 80 percent on the basis of population and 20 percent on the basis of the collection.
• The number of excisable commodities in the divisible pool of proceeds is raised from 8 to 35. However, the percentage of states’ shares is reduced from 25 to 20.
• In order to remove the wide disparity in the development of the different regions, Special Purpose Grants for the improvement of communication should be given to the backward states.
• Grants-in-aid should be given for meeting the planned revenue expenditure of the states.
• It was however felt that in view of the rapid increase in the expenditures of state governments the commission did not properly adjust their requirements. Nevertheless, the commission was more generous and quite fair.

Fourth Finance Commission

The Fourth Finance Commission was constituted by the President in 1964.

Important recommendations of this commission:

• Of the net proceeds of income tax, 75 percent should be distributed among the states.
• For the Union Territories, 2.5 percent of the net proceeds of the income tax should be allocated.
• The excise duties on all commodities should be shared by the Union with the states. The share of the individual states should be determined on the basis of 80% on population and 20% on relative economic backwardness.
• Liberal grants-in-aid of Rs. 140 crores per annum (as against Rs. 64 crores in the Third Finance Commission) should be made to the state governments.
• A competent body should be formed to study in detail the entire problem of indebtedness of states and allied matters.

• The Planning Commission should be made a statutory body independent of the government and the relative scope and the function of the Finance Commission and the Planning Commission should be clearly defined by amending the Constitution.
• The Government of India has accepted the recommendations of the Commission with some modifications.

Fifth Finance Commission

The Fifth Finance Commission was appointed in February 1968 under Article 280 of the Indian Constitution. Shri Mahavir Tyagi was its chairman. The financial report of the Commission was submitted on 31st July 1969.

Important recommendations of this commission:

• Of the net proceeds from income tax, 75 percent should be distributed among the states. But 90 percent is to be distributed on the basis of population and the rest on the basis of the collection. It thus revived the scheme suggested by the Second Finance Commission.
• The states’ share in the Union excise should be continued at 20 percent of the actual collection. The criterion of distribution should be 80 percent on the basis of population and 20 percent on the basis of social and economic backwardness.
• In considering the question of grants, emphasis should be shifted from budgetary needs to the broad fiscal needs of the state.
• A tax on newspaper advertisements should be imposed.
• There should be resource mobilization in the agricultural sector through the imposition of agricultural income tax.
• The state should not indulge in deficit financing.
• Balanced budgets and expenditure control should be the basis of fiscal policy.
• The Centre should urge the states to clear their overdrafts and achieve fiscal discipline.
• In this way, the Fifth Finance Commission tried to make keen efforts to solve the problem of allocation of financial resources between the center and the states.

But, it could not make an appreciable headway because:

• The role of the Finance Commission vis-a-vis the Planning Commission was not clearly defined;
• The Finance Commission could not pay due attention and devote sufficient time to the issue of the use of Centre- state transfer of resources in an optimum manner.
• Moreover, the commission assigned less importance to grants vis- a-vis devolution of taxes.
• While rewarding backwardness, the Commission overlooked the obstacles in the way of progress and improvement of advanced regions.
• It has unduly shifted large resources from the more developed states to the less developed ones.

Sixth Finance Commission

On 28th June 1972, the Sixth Finance Commission was appointed.

Apart from the usual terms of reference regarding the distribution and allocation of tax proceeds and grants-in-aid, it had the following additional terms of reference:

1. To assess the non-plan capital gap of the various states for the period 1974-79.

2. To review the policy and arrangement relating to the financing of relief expenditure by the states.

3. To examine the possibility of establishing a national fund for financing relief expenditure.

4. To review the indebtedness of the state governments to the Centre, and suggest a suitable debt relief scheme.

By the end of 1973, the commission submitted its report. Its recommendations have been fully accepted by the government.

Important recommendations of this commission:

• The share of states in the divisible pool of revenue from income tax should be revised to 80 percent. (The Fifth Finance Commission had suggested 75 percent).
• While allocating the share of each state in this pool of income tax proceeds, 90 per should be distributed on the basis of population and 10 percent on the basis of the collection. It, thus, retained the scheme as suggested by the Fifth Commission.
• Seven rich states — Maharashtra, Gujarat, Haryana, Punjab, M.P., Karnataka, and Tamil Nadu — were not recommended for grants-in-aid by the Commission.
• In its recommendations, the Commission had adopted fair play and tried to reduce the regional imbalances in state finance to some extent.
• Further, the commission in its report also chalked out the norms for improving the standard of administration and social services,
• The commission estimated that the aggregate indebtedness of the states to the Centre will be to the tune of Rs. 8,400 crores by March 1974. It, thus, suggested that the repayment process should be consolidated and spread out over 15 years to 30 years.
• The Commission, however, did not favor the establishment of the national funds for financing the relief outlays. It suggested that instead of providing an ad hoc relief fund, provision must be made on a wide scale for the development of drought and flood-prone areas under the plan scheme.
• Compared to the previous commission, the Sixth Commission appeared to be more fair and just, though it has been criticized for having discouraged the states to be self-reliant, by enhancing the transfer of resources from the Centre to the states.

The Seventh Finance Commission

The Seventh Finance Commission was appointed in 1977, under the chairmanship of Shri J.M. Shelat, with the following terms of reference:

1. To consider the requirements of resources for upgrading the administration in the non-developmental sectors in the backward states on par with the levels of advanced states.

2. To ensure a reasonable return on investments in capital projects such as irrigation and power works, transport undertakings, industrial and business enterprises.

In specific terms, the Commission’s task was to examine:

• The share and allocation of income-tax and central excise duties;
• The distribution of additional excise duties;
• The distribution of estate duty;
• Sanctioning of grants in view of the Railway Passenger Fares Act of 1957, and on account of wealth tax on agricultural property;
• The assessment of the debt position of the states, and suggestions for appropriate measures to lighten their burden;
• The financing of relief expenditures.
• The Seventh Finance Commission has to make the recommendations in view of a clamor for autonomy and fiscal sovereignty from the states.

Important recommendations of this commission:

• It coincided with the states’ demand for a larger share, raising it from 10 percent to 15 percent of the proceeds of the non-sharable surcharge on the income- tax.
• The Commission states that the surcharge should be treated as additional income tax which should be sharable along with income-tax revenue.
• The Commission also held that population is the indicator of the needs of a state; hence, for inter-state distribution of the states’ share, the 90:10 ratio should be retained.
• The Commission also subscribed to the states’ view that the corporation tax should be distributed in the same fashion as the income tax.
• With regard to the distribution of the proceeds from excise duties, the Commission doubled the share of the states from 20 percent to 40 percent. This 40 percent share of the states must have inter-state distribution, by giving equal weightage to four factors, namely,

(i) population;

(ii) the inverse of the per capita State Domestic Product;

(iii) the poverty ratio; and

(iv) a revenue equalization formula.

• As regards grants-in-aid, the Commission recommended that:

(a) General grants can be given to the states to cover their budgetary deficits,

(b) To upgrade the administration and basic service standards of a state up to a minimum national standard and conditional grants may be given,

(c) For some specific reason of national concern, such as loss of revenue due to implementation of prohibition, special grants may be given.

• Regarding debt relief, the commission suggested that:

(i) loans for productive purposes should be repaid over 15 years and unproductive loans are repaid over 30 years;

(ii) There should be consolidation of the small savings loans in perpetuity. Thus, only interest be paid, with no repayment of the principal;

(iii) There should be consolidation of the rest of the central loans into one loan, which is to be recovered over 15 to 30 installments paid yearly;

(iv) Interest rate charged should be around 4.75 to 5 percent.

• The Commission turned down the demand for a permanent Finance Commission, stating that “it would be unhealthy from the point of view of the Commission’s function vis-a-vis the state governments.” Instead, it suggested instituting an ‘expert non-political agency’ as an advisory body that will play the role of a watchdog.

The Eighth Finance Commission

• The Eighth Finance Commission was appointed in 1982 under the chairmanship of Shri Chavan. Its Final Report was placed in 1984.
• The 8th FC, despite realizing the increasing fiscal needs of the states, did not increase their shares in the divisible pool of income tax. It, however, increased the share of states in excise revenue from 40% to 45%.
• The 8th FC’s approach was to reduce the inter­state disparities through progressive distribution/allocation of resources. It also favored tax sharing rather than grants as the mode of resource transfer.
• It laid down that grants should reflect the states’ efforts in their fiscal/financial management and should not merely be a gap-filling phenomenon.

Ninth Finance Commission

• The Ninth Finance Commission was constituted in June 1987. It was chaired by Shri Salve. It submitted the first report in July 1988 and the second report in December 1989.
• The Commission was asked to adopt a normative approach and look into the desirability of expenditure and also to deal with the problem of revenue deficits.
• The 9th FC suggested that the fiscal needs of the states showed be judged through tax efforts and expenditure economy. Secondly, there should be equalization of the standards of social services provided by the states.
• In short, it recommended grants on the basis of normative gaps rather than fiscal gaps in state finance.

Tenth Finance Commission

• The Tenth Finance Commission was appointed in June 1992 under the chairmanship of Shri К. C. Pant, Its report was submitted in November 1994, covering the period 1995-2000.
• There was no binding on the 10th FC to adopt a normative approach. It was, however, to look into the targets for additional resource mobilization by the states, the potential for raising additional tax revenue, and strives for better fiscal management.
• The 10th FC took note of the growing revenue expenditure and deficit on revenue account as well as growing inter-regional disparities in the country’s finance both at the Centre and State levels.
• The Commission recommended that the share of State in the divisible pool income-tax revenue should be 77.5% and that of Union Territories should be 0.927%.
• It enhanced the States’ share in excise revenue to 47.5% of the net divisible pool.
• Regarding the debt problem of the States’ the 10th FC opined that states should make prudent use of borrowed money and loans should not be written off. Incentives for better fiscal management should be provided.
• The commission provided a broader definition to the pool of divisible tax revenue covering income-tax, Corporation Tax, Union excise duties, additional duties on excise on excise, and grants in lieu of tax on railway passenger fares.
• 10th FC laid down that fiscal discipline requires avoiding deficit on revenue account and expenditure control.
• Table 1 entails a nutshell review of the shares of states in net proceeds from income tax provided under different finance commissions.

Table 1 Finance Commissions Division for Shares of States in Net Proceeds for Income Tax:

Finance Commission	Share (in %)
First	55
Second	60
Third	66.6
Fourth	75
Fifth	75
Sixth	80
Seventh	85
Eighth	85
Ninth	85
Tenth	77.5

Eleventh Finance Commission

• It was appointed in July 1998 with A. M. Khusro as the chairman. Its report was submitted in July 2000, covering the period 2000-2005.
• Its term of reference is confined to:

i. Distribution of tax proceeds between the Centre and the states.

ii. Grants-in-aid principles.

iii. Measures towards consolidation of funds.

• 11th FC recommended that the share of states in the net proceeds of all central taxes, and duties be fixed at 28 percent. Besides, 1.5 percent of all taxed revenue be allocated to the states separately.
• This means the states’ share is totally up to 29.5 percent.

Twelfth Finance Commission

• The 12th FC was appointed in November 2002 under the chairmanship of C. Rangarajan. Its report was submitted in 2004, covering the period 2005-2010.
• Its specific terms of references pertained to:

i. Balancing the revenue accounts of the Centre as well as states with a view to reduce fiscal deficits.

ii. Taxation efforts.

iii. Commercial viability of various projects undertaken by the states.

• The 12th FC suggested increasing the share of the states to 30.5 percent in the pool of central taxes.
• The commission claimed to have followed the principles of equity and fiscal efficiency in assigning the criteria and relative weight for determining the interest rate of states. The commission recommended the continuation of the scheme of calamity relief fund established at the suggestion of the 11th FC.
• The Commission blamed the Centre’s fiscal policy for the increasing indebtedness of the states over the years.
• The commission observed that the Fiscal Reform Facility introduced by the Centre failed to play any significant role in the improvement of the states’ finance.
• The fiscal federalism in India should evolve a flexible and efficient and equitable system of resource transfers from the Centre to states.
• The profligacy of pending should be stopped. Prudency and fiscal discipline should govern the mode of public finance in India at all levels of the government.

Thirteenth Finance Commission

The Thirteenth Finance Commission has submitted its report to President in December 2009. The report was submitted by the Chairman of Commission Dr.Vijay Kelkar.

The Thirteenth Finance Commission has submitted its report to President in December 2009. The main task of the Finance Commission is to make recommendations on sharing tax revenues between centre and states.

Important recommendations of this commission:

• The commission has made recommendations for the fiscal consolidation for a five year period from 2010 to 2015.
• The report additionally calls for climate linked fiscal incentive to states, calls for enhanced royalty for mineral resources of states and suggests framework for output at the state level.
• Broadly speaking, the report maintains the centre-state share of net tax proceeds.
• The commission has asked the government to stop changing tax and duty rates annually and switch to a three-year rolling budget.
• A rolling budget would mean tax and duty rates unchanged for a longer period, and thus help companies and individuals to plan their financial strategies in advance.
• The report has also assessed the impact of the proposed goods and services tax (GST) on trade.

Forteenth Finance commission

• The FFC has radically enhanced the share of the states in the central divisible pool from the current 32 percent to 42 per cent which is the biggest ever increase in vertical tax devolution.
• The last two Finance Commissions viz. Twelfth (period 2005-10) and Thirteenth (period 2010-15) had recommended a state share of 30.5 per cent (increase of 1 percent) and 32 per cent (increase of 1.5 percent), respectively in the central divisible pool.
• The FFC has also proposed a new horizontal formula for the distribution of the states’ share in divisible pool among the states. It has incorporated two new variables: 2011 population and forest cover; and excluded the fiscal discipline variable.
• The FFC has not made any recommendation concerning sector specific-grants unlike the Thirteenth Finance Commission.
• Grants: Should be distributed to states for local bodies on the basis of the 2011 population data; the grants be divided into two broad categories on the basis of rural and urban population — constituting gram panchayats, and constituting municipal bodies respectively.
• Types of grants: A basic grant and a performance grant — the ratio of basic to performance grant be 90:10, with respect to panchayats; and 80:20 in the case of municipalities.
• Delinking of schemes: Eight centrally sponsored schemes (CSS) will be delinked from support from the Centre; various CSS will now see a change in sharing pattern, with states sharing a higher fiscal responsibility.

Fifteenth Finance commission

The final report with recommendations for the 2021-26 period was tabled in Parliament on February 1, 2021.

Important recommendations of this commission:

1. Share of states in central taxes

• Vertical devolution: The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
• This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 periods.
• The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.

2.  Criteria for devolution

• The criteria for distribution of central taxes among states for 2021-26 period is same as that for 2020-21.
• However, the reference period for computing income distance and tax efforts are different (2015-18 for 2020-21 and 2016-19 for 2021-26), hence, the individual share of states may still change.
• Income distance: Income distance is the distance of a state’s income from the state with the highest income.
• Demographic performance: The Commission was required to use the population data of 2011 while making recommendations. States with a lower fertility ratio will be scored higher on this criterion.
• Forest and ecology: This criterion has been arrived at by calculating the share of the dense forest of each state in the total dense forest of all the states.
• Tax and fiscal efforts: This criterion has been used to reward states with higher tax collection efficiency.  It is measured as the ratio of the average per capita own tax revenue and the average per capita state GDP during the three years between 2016-17 and 2018-19.

3.  Grants

• Sector-specific grants: Sector-specific grants of Rs 1.3 lakh crore will be given to states for eight sectors. A portion of these grants will be performance-linked. The sectors are: (i) health, (ii) school education, (iii) higher education, (iv) implementation of agricultural reforms, (v) maintenance of PMGSY roads, (vi) judiciary, (vii) statistics, and (viii) aspirational districts and blocks.
• State-specific grants: These will be given in the areas of: (i) social needs, (ii) administrative governance and infrastructure, (iii) water and sanitation, (iv) preservation of culture and historical monuments, (v) high-cost physical infrastructure, and (vi) tourism
• Grants to local bodies: Grants to local bodies (other than health grants) will be distributed among states based on population and area, with 90% and 10% weightage, respectively. No grants will be released to local bodies of a state after March 2024 if the state does not constitute State Finance Commission and act upon its recommendations by then.
• Disaster risk management: The Commission recommended retaining the existing cost-sharing patterns between the centre and states for disaster management funds. The cost-sharing pattern between centre and states is: (i) 90:10 for north-eastern and Himalayan states, and (ii) 75:25 for all other states.

4. Fiscal roadmap

• Fiscal deficit and debt levels: The Commission suggested that the centre bring down fiscal deficit to 4% of GDP by 2025-26. For states, it recommended the fiscal deficit limit (as % of GSDP) of: (i) 4% in 2021-22, (ii) 3.5% in 2022-23, and (iii) 3% during 2023-26.

It recommended forming a high-powered inter-governmental group to (i) review the Fiscal Responsibility and Budget Management Act (FRBM), (ii) recommend a new FRBM framework for centre as well as states, and oversee its implementation.

• Revenue mobilization: Income and asset-based taxation should be strengthened, recommended the commission. To reduce excessive dependence on income tax on salaried incomes, the coverage of provisions related to tax deduction and collection at source (TDS/TCS) should be expanded.
• GST: Revenue neutrality of GST rate should be restored which has been compromised by multiple rate structure and several downward adjustments. Rate structure should be rationalized by merging the rates of 12% and 18%.  States need to step up field efforts for expanding the GST base and for ensuring compliance.
• Financial management practices: A comprehensive framework for public financial management should be developed. An independent Fiscal Council should be established with powers to assess records from the centre as well as states. The Council will only have an advisory role.

5. Other recommendations

• Health: States should increase spending on health to more than 8% of their budget by 2022. Primary healthcare expenditure should be two-thirds of the total health expenditure by 2022. All India Medical and Health Service should be established.
• Defense and internal security: A dedicated non-lapsable fund called the Modernization Fund for Defense and Internal Security (MFDIS) should be established. It will primarily bridge the gap between budgetary requirements and allocation for capital outlay in defense and internal security.
• Centrally sponsored schemes (CSS): A threshold should be fixed for annual allocation to CSS below which the funding for a CSS should be stopped (to phase out CSS which outlived its utility or has insignificant outlay).

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