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LECTURE-7:
-by Jayant Parikshit

CHAPTER-2: FISCAL DEVELOPMENTS

CHAPTER-4: MONETARY MANAGEMENT

& FINANCIAL INTERMEDIATION
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CHAPTER-2: FISCAL DEVELOPMENTS

TRANSFER TO STATES:
15th Finance Commission recommended grants in-aid to the States during 2021-22 for the
following purposes:

1. Post Devolution Revenue Deficit Grant: Article 275 of the Constitution è Based on
recommendation of FC è C.G. releases it to S.G. to meet the gap in Revenue Accounts of
the States post devolution of divisible tax pool of centre. For 2021-22: Target is Rs 1.18
lakh crore to 17 States (Rs 98,710 cr released till Jan 2022)

2. Grants to Local Bodies: It is given at two levels:

GRANTS

URBAN LOCAL BODY:

1. Category-1 Cities: >1 mn
RURAL LOCAL BODY
population
2. Category-2 Cities: Rest

§ For category-1 cities, 100% of the grants are performance-linked.

§ For Category-2 cities & Rural Local Bodies è 60% of the grants to be tied to supporting
and strengthening the delivery of two categories of basic services:
a. Sanitation, maintenance of 'Open Defecation Free' status (for Rural Local Bodies),
solid waste management & attainment of star ratings as developed by Ministry of
Housing and Urban Affairs (for Category-II Cities)
b. Drinking water, rain water harvesting and water recycling (both for Rural Local
Bodies and Urban Local Bodies)

3. Health sector grant: Grants for Health to be channelised through Local Governments,
esp to boost up primary health care.

4. Disaster Management grants: To be awarded to cover full disaster management cycle.

GENERAL GOVERNMENT FINANCES

It comprises of finances at two levels:
A. Central Government Finances
B. State Government Finances
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A. Central Government Debt: It is the total liability of the central government. It mainly
comprises of the following important elements:
1. Public Debt: It is amount borrowed by government which it has to repay. It can be
either internal debt or external debt.
a. India's internal debt comprises loans raised in the open market, bonds, and
more such instruments.
b. External debt is the money that a country borrows from a source external to
it and has to be repaid in the currency in which it was borrowed. Mainly such
money is borrowed from institutions like foreign commercial banks and
international financial institutions such as the International Monetary Fund
(IMF), World Bank, Asian Development Bank (ADB) and also from the
governments of foreign nations.

2. Other Liabilities: These are the liabilities in the Public Account. It includes National
Small Savings Fund (NSSF), State Provident Funds, Reserve Funds and Deposits and
other Accounts.

FEATURES OF INDIA’S PUBLIC DEBT: Stable + Sustainable

1. Public Debt > Other Liability
2. Internal Debt > External Debt
3. Low Risk Debt è due to low external debt + whatever external debt we have, they are
long term and concessional
4. Internal Debt = Mostly long term

NEW SCHEME TO HELP IN INCREASING GOVERNMENT BORROWING:

Retail Direct Scheme (RDS)-2021:
§ It was created by RBI to increase investment in government securities by retail
investors. Under the scheme, retail investors will be able to open a Retail Direct Gilt
(RDG) account using an online portal through which it can directly invest minimum of
Rs 10,000 and maximum of Rs 2 crore per security.
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§ The retail investors can not only bid in primary issuance of all Central & State
Government securities but also access Secondary market through Negotiated Dealing
System-Order Matching (NDS OM) - RBI’s trading system.
§ As of now, bulk of the G-Sec is held by few institutional investors like commercial
banks, insurance companies and mutual funds. Diversified investor base provides
flexibility to the Government in its borrowing program.
§ Also, it would enable stable demand for G-sec from different investor categories.

STATE FINANCES:

GENERAL GOVERNMENT FINANCES

The General Government finances give an overview of fiscal position of the Government
sector as a whole.
1. It went up due to increase in liability of both CG & SG due to fall in revenue & increase
in expenditure.
2. 2021-22: It was expected to be better.

BORROWINGS BY STATES:
Targets for borrowing by states are set as per Fiscal Responsibility Legislation (FRL). But due
to covid, when revenue was low and expenditure was high è Central Government provided
relaxation to State Governments during 2021-22 in borrowing limits:
1. The government fixed a net borrowing ceiling (NBC) of 4% of GSDP for the States for 2021-
22. Out of this 4%, 0.50% of GSDP was earmarked for the incremental capital expenditure
to be incurred by the States during 2021-22.

2. In lieu of GST compensation shortfall, the Government of India had set up a special
borrowing window in 2021-22 @ Rs 1.59 lakh crore.
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3. Scheme for special assistance for States for Capex:

a. For 8 North East States = Rs 2600 cr
b. For all other States = Rs 7400 cr
c. To incentivise State Government’s for privatisation/disinvestment/monetisation of
State PSEs =Rs 5000 cr

POLICY MEASURES TO ENHANCE THE EFFICIENCY OF GOVERNMENT SPENDING

Public procurement, which involves purchase of goods and services by the Government with
an aim to not only carry day-to-day tasks but to also create social and economic
infrastructure, is an important component of the Government expenditure. Government has
undertaken following reforms to boost the efficiency of public procurement policy:

1. Government e-Marketplace (GeM):

§ Digital Process for procurement
§ The General Financial Rules 2017 mandates all Ministries and Departments to procure
Goods and Services available on GeM from GeM.
§ It has resulted in substantial reduction in price wrt. earlier rates è average reduction
is 15-20% and max upto 56% reduction.

2. New guidelines for reforms in Public Procurement and Project Management:

Suppose government wants to construct highways, buildings, hiring of consultants etc. This is
done using the Central Public Procurement Portal as per the General Financial Rules (GFR)
2017. The GFR 2017 guidelines provide three methods for selection and evaluation of bidders
viz.
1. Least Cost System:
§ Bidders have to pass minimum technical evaluation.
§ Lowest bidder is selected.
§ Most commonly used method
§ It is a good method for routine work but not suitable for projects involving innovation,
quality and speed.

2. Quality-cum-Cost Based Selection (QCBS): A bidder is selected on the basis of both the
technical and financial proposals. A contract is granted to that bidder whose bid has
received the highest combined score.

3. Single Source Selection6 (SSS): Here, two or more vendors can supply the commodity,
technology and/or perform the services required, but the State agency selects one vendor
over the others for reasons such as expertise or previous experience with similar
contracts.

New Reforms:
Keeping in mind the limitations of the earlier procurement strategy, the Government issued
new guidelines for procurement and project management in October 2021. The key changes
in the procurement process are as follows:
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1. Earlier, QCBS was allowed for only Consultancy Services. The revised guidelines now
allow QCBS for the selection of bidders for non-consultancy services as well (where
estimated value of procurement does not exceed Rs10 crore).
2. Government department would have the freedom to amend specifications based on
requirement.

BUDGETARY DEFICIT
1. Revenue Deficit (RD)= Revenue Expenditure (RE) – Revenue Receipts (RR)
RD shows that government earnings is insufficient to meet normal functioning of
government departments.

2. Effective Revenue Deficit (ERD) = RD – Grant for creation of capital Assets

3. Fiscal Deficit (FD) = Total Expenditure (TE) – [Revenue Receipts (RR) + Non
Det Creating Capital receipts)

4. Primary Deficit (PD) = FD – Interest Payment on previous borrowings

SL.NO DEFICIT TYPES 2020-21(A) 2021-22 (RE) 2022-23(BE)

1 RD 7.3% 4.7% 3.8%
2 ERD 6.2% 3.7% 2.6%
3 FD 9.2% 6.9% 6.4%
4 PD 5.8% 3.3% 2.8%

NEW PUBLIC SECTOR EXTERPRISES (PSE) POLICY FOR ATMANIRBHAR BHARAT

(4th FEB 2021):
§ Released by Department of Investment and Public Asset Management (DIPAM)
§ Under the New PSE Policy, public sector commercial enterprises have been classified as
Strategic and Non-Strategic sectors. A bare minimum number of PSUs will be retained in
strategic sectors, while those in non-strategic sectors will be privatised, or shut down.
§ Niti Aayog is in charge of recommending the names of PSUs in strategic sectors which will
be privatised or retained within government control.
Strategic Sectors:
The strategic sectors have been delineated based on the criteria of national security, energy
security, critical infrastructure, provision of financial services and availability of important
minerals. There are 4 strategic sectors:
1. Atomic Energy, Space and Defense
2. Transport and Telecommunication
3. Power, Petroleum, Coal and other minerals
4. Banking, Insurance and Financial Services

Targets:
§ 2021-22: Rs 1,75,000 crore
§ Till Jan 2022: Rs 9,330 crores (as on 24 January 2022) from disinvestment of CPSEs through
Offer for Sale (OFS) route and sale of shares through the stock exchange.
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CHAPTER-4: MONETARY MANAGEMENT

& FINANCIAL INTERMEDIATION
MONETARY DEVELOPMENTS

LIQUIDITY CONDITIONS AND ITS MANAGEMENT

§ Since mid-2019: RBI eased monetary conditions è Liquidity has remained in surplus
§ Initial phases of 2021: Liquidity conditions were further eased after the covid pandemic
to support growth
§ Later phases of 2021: In a phased manner RBI engaged in rebalancing liquidity from
passive absorption under fixed rate reverse repo under its Liquidity Adjustment Facility
(LAF) to market based reverse repo auctions (like Variable Rate Reverse Repo (VRRR)). At
the same time it also ensured adequate liquidity in the system in consonance with the
accommodative monetary policy stance to support growth.

RBI MEASURES TO ENHANCE LIQUIDITY IN 2021-22:

1. Special refinance facilities of Rs 66,000 crore to all-India financial institutions, comprising
Rs 25,000 crore to the National Bank for Agriculture and Rural Development (NABARD);
Rs 10,000 crore to the National Housing Bank (NHB); and Rs 31,000 crore to the Small
Industries Development Bank of India (SIDBI)

2. Term liquidity facility of RS 50,000 crore to ramp up COVID-related healthcare

infrastructure and services in the country.

3. Special Long-Term Repo Operations (SLTRO) for small finance banks of Rs 10,000 crore to
support small business units, micro and small industries, and other unorganised sector
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entities adversely affected during the second wave of the pandemic. SLTRO scheme was
subsequently made on-tap and was extended till December 31, 2021.
4. The G-Sec Acquisition Programme (G-SAP) is basically an unconditional and a structured
Open Market Operation (OMO), of a much larger scale and size. RBI has called the G-SAP
as an OMO with a ‘distinct character’. By purchasing G-secs, the RBI infuses money supply
into the economy which in turn keeps the yield down and lower the borrowing cost of the
Government. RBI purchased G-secs (including state development loans) amounting to `1
lakh crore under G-SAP 1.0 and `1.2 lakh crore under G-SAP 2.0.

REVISED LIQUIDITY MANAGEMENT FRAMEWORK

§ The gradual normalisation of liquidity management operations.
§ The 14-day Variable Rate Reverse Repo (VRRR) auctions were deployed as the main
operation under the Liquidity Adjustment Facility (LAF). Further, the cash reserve ratio
(CRR) which was reduced by 100 basis points (bps) in March 2020, was gradually raised to
its pre-pandemic level of 4 per cent by May 2021.

BANKING SECTOR
1. Gross NPA: GNPA is the summation of all loan assets that are classified as NPA as per RBI
guidelines. When the NPA occurs, it is not just an interest income loss to the bank, but a
principal loss as well.
2. Net NPA: As per RBI guidelines, Banks are required to set aside a portion of their income
as provision for the loan assets so as to be prepared for any contingent losses that may
arise in the event of non-recovery of loans. So, from the gross amount, these amounts
and provisions provided are netted to arrive at Net NPA.
3. Capital to Risk weighted Asset Ratio (CRAR): Capital to Risk (Weighted) Asset Ratio (CRAR)
is a measure to ascertain the financial health of a bank. The CRAR is the ratio of a bank’s
capital in relation to its risk-weighted assets and current liabilities.
4. RoA Return on Assets (RoA) is a measure of how profitably a company is able to use its
assets. I
5. Return on Equity (ROE) measures the net profits generated by a company based on each
Rupee of equity investment contributed by shareholders.
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NATIONAL ASSET RECONSTRUCTION COMPANY LIMITED

§ In order to resolve the legacy NPAs and clean up the banking system, the Union budget
2021-22 announced, an Asset Reconstruction Company (ARC) Limited and Asset
Management Company (AMC) to be set up to consolidate and take over the existing
stressed debt and then manage and dispose of the assets to potential investors. In line
with this vision, two entities viz. National Asset Reconstruction Company Limited (NARCL),
and India Debt Resolution Company Limited (IDRCL) have been formed.
1. National Asset Reconstruction Company Limited (NARCL): It is an ARC. NARCL has
been set up by banks whereby the PSBs will maintain 51% ownership in NARCL. NARCL
will have a finite life of 5 years. It may acquire stressed assets of about Rs 2 lakh crore
appox in multiple phases within the extant regulations of RBI.
2. India Debt Resolution Company Limited (IDRCL): IDRCL has minimum of 51 per cent
ownership of Private sector Banks and balance will be held by Public Sector Banks.
IDRCL, will provide stressed assets management and resolution services to NARCL on
an exclusive basis.
DEPOSIT INSURANCE IN INDIA
§ DICGC is a fully owned subsidiary of the RBI. The functions of the Deposit Insurance and
Credit Guarantee Corporation (DICGC) are governed by the provisions of the DICGC Act,
1961 and the DICGC General Regulations, 1961.
§ DICGC registers a bank as insured immediately and automatically when a banking license
is issued to it. Henceforth, all insured banks have to pay the deposit insurance premium
is to DICGC and it is not recovered from the depositors.
Timeline in fixing insurance coverage:
§ The deposit insurance coverage that began with Rs 1500 in 1961. It was raised to Rs 30,000
in 1980 onwards. It was further raised to Rs 1 lakh in 1993 but had been static thereafter
till 2020.
Deposit Insurance And Credit Guarantee Corporation (Amendment) Act, 2021
§ Troubles for depositors in getting immediate access to their funds in banks in recent cases
such as Punjab & Maharashtra Co-operative (PMC) Bank, Yes Bank and Lakshmi Vilas
Bank had put spotlight on the subject of deposit insurance, after which the government
made changes to the deposit insurance laws in 2021.
§ Now, with the changes to the law, in an unlikely event of a bank failing in India, depositors
can get insurance
money i.e. Rs 5 Lakhs
within 90 days, without
waiting for eventual
liquidation of the
distressed banks.
BANK CREDIT
GROWTH
Trend in Credit Growth:
1. ↓ since 2019
2. ↑ sharply wef Dec
2021:
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a. Non-Food Bank Credit

b. Agriculture
c. MSMEs Industries
d. Personal Loan esp
Vehicle Loan
Scope of improvement:
a. Large Industries
b. Service Sector
NBFC CREDIT GROWTH
Credit growth of NBFCs
continued to remain sluggish in
2021-22 so far. The total credit of
NBFC sector increased
marginally from March 2021 to
September 2021.
Top Recipient of NBFC Credit:
1. Industry
2. Retail Loans
3. Services
4. Other non-food
5. Agriculture & Allied

Health of NBFCs (2020-2021):

§ GNPA= 6.65% (↑)
§ NNPA= static
§ CRAR= 26.64% (Norm = 15%)

FACTORING IN INDIA
§ Factoring is a transaction where an entity sells its receivables (dues from a customer) to a
third party (a ‘factor’ like a bank or NBFC) for immediate funds. All or part of invoice can
be sold to a factor for getting money immediately. The factor then collects payments from
the buyer of goods and earns a commission. Factoring is an important source of liquidity
worldwide, especially for MSMEs.
Factoring Regulation Act 2011:
§ RBI grants registration to only those NBFCs which do factoring as “principal business”, i.e.
whose financial assets in the factoring business constitute at least 50% of its total assets
and income derived from factoring business is not less than 50% of its gross income.
§ Under these provisions, only 7 NBFCs called ‘NBFC-Factors’ were in factoring business
(due to “principal business” condition).
Factoring Regulation (Amendment)Act, 2021:
§ As per U.K. Sinha-2019 recommendation, now along with some other measures, the
principal business criteria has been removed for NBFCs and this has significantly increased
the number of eligible NBFCs that can undertake factoring business.
§ Overall, this change would lead to widening of factoring ecosystem in the country and
help MSMEs significantly, by providing added avenues for availing credit facility.
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Morgan Stanley Capital International (MSCI) EMERGING MARKET INDEX

§ Launched in 2001
§ MSCI-EM tracks equity performance capturing large and mid-cap companies across 25
emerging market countries including India. MSCI EM index today covers 1420 listed
entities across 25 emerging market economies.
§ Companies must satisfy certain minimum criteria relating to full market capitalisation,
free-float market capitalisation, stock liquidity and foreign inclusion factor, among others
to be included in the index.
§ India’s weight in the MSCIEM Index plays an important role in attracting FPI investments
in its equity market.
§ Currently, India’s weight = 12.45%, Brazil =3.99%, South Korea= 12.81%

IBC and pre-packaged insolvency resolution process for corporate MSMEs

§ IBC-2016 è amended on April 4, 2021 to provide for a PPIRP for corporate MSMEs to
ensure quicker outcomes.
Features of PPIRP:
§ PPIRP is informal up to a point and formal thereafter.
§ Company è submits the base resolution plan
§ It safeguards the rights of stakeholdersè entails a limited role of the courts and
insolvency professionals (IPs).
§ Informality at the pre-initiation stage è offers flexibility for the CD and its creditors to
explore best way to resolve stress, while the later- stage drives value maximisation.
§ Timeframe = 120 days from the commencement date.
§ During the PPIRP, management vests in BoD of CD and the resolution happens under the
guidance of the creditors.
CROSS BORDER INSOLVENCY
§ Cross border insolvency: Insolvent debtor has assets and/or creditors in more >1 country.
§ IBC at present has no standard instrument to restructure the firms involving cross border
jurisdictions.
§ Insolvency Law Committee (ILC-October 2018) had recommended the adoption of the
United Nations Commission on International Trade Law (UNCITRAL) with certain
modifications to make it suitable to the Indian context.
§ UNICTRAL-1997: >49 countries are using it