Current Affairs Focus

Classes
Indian Economy
Class-6
SL.
TOPICS
NO.

1 Overseas Investment Rules

2 Status of External Debt

3 National List of Essential Medicines 2022

4 Corporate Bond Market

5 Trade Invoicing in Rupees

Topic 1: Overseas Investment Rules

To enhance the ease of doing business and to bring more clarity and transparency in undertaking Overseas Investments, the
Government, in consultation with RBI has issued revised guidelines.
Details
Legal Framework: The overseas investment by a person resident in India is governed by Foreign Exchange Management Act
(FEMA), 1999.
Components: Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI)
Overseas Direct Investment (ODI): Overseas investment in
● Unlisted foreign company
● Investment of 10% or more in shares of foreign company
● Investment of less than 10% shares of foreign company but accompanied by management control in foreign company.
Overseas Portfolio Investment (OPI): Investment in shares and Bonds issued by foreign companies, provided it does not fulfil the
criteria of Overseas Direct Investment).
Route:
● Automatic Route: No prior approval of RBI for investments up to $ 1 billion in a year.
● Approval Route: Prior approval of RBI for investments of more than $ 1 billion in a year.

Note: The Investment made in International Financial Services Centre (IFSC) by Indian Resident is considered as Overseas
Investment.

Topic 2: Status of External Debt

The External debt includes the total money owed by the Government, Corporations, or Indian Citizens to foreign creditors. The
Foreign Creditors could be Foreign Government, Multilateral Institutions (World Bank, IMF etc), private commercial banks etc.

Categorisation of External ● Duration of loan- Short-term (less than 1 year) and long-term (more than 1 year)
Debt ● Sovereign Debt (Government) and Non-Sovereign Debt ( Other than Government,
including private sector)

Major Heads under External ● Multilateral Debt: Debt from the multilateral institutions such as World Bank, IMF, ADB
Debt etc.
● Bilateral Debt: Debt from sovereign countries such as Japan, Germany etc.
● Trade Credits/Export Credits: Loans and credits extended for imports directly by overseas
supplier, bank and financial institutions
● External Commercial Borrowings: loans from commercial banks, other commercial
financial institutions
● Non-Resident Deposits in Banks and Financial Institutions

Present status of External
Debt
Cumulative External Debt: At end of March 2022, India’s external debt was placed at US$ 620
billion (20% of the GDP).
Composition of Debt: Non-Sovereign Debt (Non-Government Debt) : 17.1% of the GDP;
Sovereign Debt (Government Debt): 4% of the GDP.
Components of Debt: External Commercial Borrowings (ECBs) accounting for 40% of external
debt remains the largest source of External Debt followed by Non-resident deposits.
Duration of Debt: Long term debt (maturity of more than 1 year) accounts for 80% of external
debt; Short-term debt ( (maturity of less than 1 year) accounts for 20% of external debt
Denomination of Debt: US dollar (53%); remaining in Rupee, Yen, SDR and Euro.

Topic 3: National List of Essential Medicines 2022

About National List of Essential Medicines
Essential Commodities Act, 1955: Empowers the Government to regulate prices of Goods declared as essential under the act.
Presently, goods such as Food, Fertilisers, Drugs, Petroleum products, Jute etc. are covered under EC Act. Further, commodities
can be added or removed from the act by the Centre in consultation with state Government.
Framework for Drug Pricing in India: Drug Price Control Orders (DPCO) are issued by the Government under the Essential
Commodities Act, 1955, to declare ceiling price for lifesaving medicines
Price controls are applicable to “Scheduled drugs” or “Scheduled formulations” i.e. those medicines which are listed out in the
Schedule I of DPCO, also referred to as National List of Essential Medicines (NLEM).
National List of Essential Medicines (NLEM): NLEM is a dynamic document and is revised on a regular basis. First formulated in
1996 and was revised thrice in 2003, 2011 and 2015, before 2022. “Essential medicines” are those that satisfy the priority health
care needs, based on efficacy, safety, quality and total cost of the treatment. The primary purpose of NLEM is to promote rational
use of medicines considering the three important aspects i.e., cost, safety and efficacy.
Pricing of Drugs placed under NLEM
Who fixes the prices? National Pharmaceutical Pricing Authority (NPPA) fixes the prices of controlled drugs and formulations and
enforces prices and availability of the medicines in the country. NPPA has been set up through an executive resolution of
Government and presently functions under the Ministry of Chemicals and fertilisers.
Who recommends the prices? Standing Committee on Affordable Medicines and Health Products (SCAMHP) led by Member
(Health), NITI Aayog. The committee functions under NITI Aayog.

Note: As per the Drugs (Prices) Control Order 2013, the prices of scheduled drugs are allowed an increase as per the WPI while
the prices of non-scheduled drugs are allowed an automatic increase of 10% every year.
Exceptional Powers of NPPA
Under Paragraph 19 of DPCO, the NPPA has been given the following exceptional powers:
● Fix the prices of even those drugs that are not listed under NLEM. Example: In pursuance of these powers, the NPPA has fixed
the ceiling prices of Cardiac Stents and Knee implants.
● Increase or decrease the prices of the drugs listed under NLEM. In pursuance of these powers, the NPPA has recently
increased the prices of the 21 essential medicines by almost 50%.
Amendments to DPCO, 2013 in 209-20
● The new drugs patented under the Indian law will be exempted from price control for five years from the date of
commencement of its commercial marketing in India.
● The drugs for treating rare or “orphan” diseases too would be exempted from price control.

Topic 4: Deepening Corporate Bond Market

Need for Developing Corporate Bond Market in India
Meet Investment needs to shift gears from consumption-driven economy to investment-led economy wherein the private sector
investment must become the key driver of Indian Economy.
Reduce pressure on the Government and Banks for financing infrastructure projects such as roads, ports, and airports.
Reduce Asset-Liability Mismatch in financial sector as corporate bond market helps in the diversification of risks in the financial
system.
Reduce Foreign currency exposures: The corporate bond market enables the firms to borrow for longer maturity periods in local
currency to meet their investment needs and avoid foreign currency exposures.
Provide long term financial assets: An active corporate bond market could also provide institutional investors such as insurance
companies and provident and pension funds with quality long term financial assets, helping them in matching their assets and
liabilities.
Present Status of Corporate Bond Market
The outstanding stock of corporate bonds has increased four-fold from Rs 10 lakh crores (2012) to Rs 40 lakh core (2022). The
annual issuances during this period have increased to Rs 6 lakh crores. However, the size of the corporate bond market in India
remains small (17% of GDP) compared to other countries such as Korea (80%), Malaysia (60%) and China (40%).
Reasons for underdeveloped Bond Market Strategies needed
Higher rated Companies dominate Corporate issuance R. H. Patil Committee (2005), Percy Mistry Committee (2007), H.R
(80%): This indicates that the number of sub investment Khan Committee (2016), . Important Recommendations:
grade issues is minimal and the proportion below AAA is ● Enhancing Issuer Base by reducing time and cost for public
small. issuance
Narrow Investor Base as demand for corporate bond is ● Enhancing Investor Base:
mostly confined to institutional investors such as insurance, o Scope of investment by Insurance, pension and insurance
mutual fund, pension fund companies etc. The retail companies in corporate bonds should be enhanced
investors account for only 3 per cent of the outstanding o Retail investors should be encouraged to participate in the
issuances. market through stock exchanges.
Dominance of Government securities: The Central and ● Bonds Primary Issuance Database: A centralized database of
State Government securities constituted almost half of the all bonds issued by corporates should be made available free of
total investment in Bond Market. cost to all the investors.
Constraints on Foreign Investors for investing in Bonds. ● Acceptance of corporate bonds under LAF repo of RBI:
Private Placement issues: In India, over 95% of issuances Encourage Banks to invest in Corporate Bonds and then use
are through private placements. them to borrow loans from RBI through Repos.
Absence of Longer maturity Bonds: The Corporate Bond ● Credit enhancements of bonds by setting up of Credit
market is basically dominated by the bonds with average Guarantee Enhancement corporation.
maturity period of 2-5 years. ● Strengthening of Credit Default Swaps (CDS): A credit default
swap (CDS) is a financial swap agreement that the seller of
the CDS will compensate the buyer in the event of a debt
default (by the debtor)
● Municipal Bond Market: Municipal bonds may be given some
fiscal support in the form of bond insurance or providing credit
enhancement so that municipalities are encouraged to issue
such bonds.

Topic 5: Trade Invoicing in Rupees

Need for International Trade Settlement in Rupees
Bypass Economic sanctions: Imposition of sanctions on Russia and Iran has made it difficult for India to buy crude oil at lower
prices. Trade in rupees would enable India to bypass sanctions and continue to trade with these countries.
Internationalisation of Rupee: Increased demand for Rupees in the exporting countries for the settlement of trade can help Rupee
to become internationally acceptable.
Less volatility in Exchange rate: India's trade remains highly susceptible to US Fed Bank's policies. For example, the adoption of Fed
Tapering has led to large scale Rupee Depreciation leading to costly imports and higher trade deficit. Trade in Rupees can enable
India to become immune to the US Fed Bank's policies.
Save Forex Reserves: India runs a trade deficit wherein its imports are greater than exports leading to trade deficit and higher dollar
outflows. The settlement of trades in rupees will save India's forex Reserves.

RBI's System for International Trade Settlement in Rupees

The framework of FEMA, 1999 Act has been modified to permit Indian Banks to open Special Rupee Vostro Accounts of
correspondent bank/s of the partner trading country. Such accounts can be used for the settlements of international trade
transactions with any country. Broad features of such an international trade mechanism are outlined below:
1. Invoicing of goods and services: any export or import may be invoiced and denominated in the Indian Rupee (INR).
2. Exchange Rate between the two trading partner countries may be market determined.
3. Settlement currency: The settlement of international trade transactions shall take place in Indian Rupees (INR).

Indian exporters shall be paid the export proceeds in INR from the balances in the designated Special Vostro account of the
correspondent bank of the partner country. Similarly, Indian importers shall make their payments in INR, which shall be credited
into the Special Vostro account of the correspondent bank of the partner country.

Prelims MCQ
1. Which among the following can be considered as Overseas Direct Investment by Indian entities?
1. Investment in unlisted foreign company without any threshold
2. Investment of 10% or more in listed foreign company
3. Investment of less than 10% in listed foreign company but accompanied by management control.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: d

2. Consider the following statements:

1. An increase in FDI inflows into India accompanied by decrease in Overseas direct Investment (ODI) from India
leads to increase in Net International Investment Position (NIIP).
2. A positive NIIP denotes higher foreign investment in India as compared to overseas investment made by Indian
Entities.
Which among the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: d

3. Which among the following can worsen India's Net International Investment Position (NIIP)?
1. Increase in External Commercial Borrowings (ECBs)
2. Increase in FDI Outflows from India
3. Decrease in NRI Deposits into India

Select the correct answer using the code given below:

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: a

4. If the Net International Investment Position (NIIP) of particular country is positive, what does it done?
(a) Higher value of Net FDI into India
(b) Net Creditor in terms of financial assets and liabilities
(c) Net Debtor in terms of financial assets and liabilities
(d) Higher value of Gross Foreign Investment into India

Answer: b

5. Consider the following statements:

1. Most of India’s external debt is owed by governmental entities
2. All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Answer: d
6. The Rupee denominated External Debt of India includes which among the following?
1. Rupee Denominated NRI Deposits
2. Masala Bonds
3. FPI Investment in G-Secs
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3

Answer: d

7. Which among the following is/are included in the Sovereign Debt in India?
1. Internal borrowings of Government
2. Government borrowings from International Institutions and foreign countries
3. FPI Investment in G-Secs
4. NRI Deposits
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Answer: b

8. Which among the following accounts for highest share of external debt in India?
(a) Debt from multilateral institutions such as World Bank, IMF etc.
(b) Bilateral Debt from other countries
(c) External Commercial borrowings (ECBs)
(d) Non-Resident Deposits

Answer: c

9. Which among the following best describes the concept of Debt Service Ratio?
(a) Total External Debt to GDP ratio
(b) Total external debt service payments to current account receipts under Balance of Payments (BoP).
(c) Total external debt service payments to Total receipts under Balance of Payments (BoP)
(d) Total Internal and External debt service payments to GDP ratio.

Answer: b

10. With reference to Drug Pricing in India, consider the following statements:
1. The National Pharmaceutical Pricing Authority (NPPA) can fix the prices of only those medicines which are listed
under National List of Essential Medicines (NLEM).
2. The NPPA cannot reduce the prices of the medicines which are listed under NLEM.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c ) Both 1 and 2
(d) Neither 1 nor 2

Answer: d

11. With reference to Drug Pricing regime in India, consider the following statements:
1. The Drug Price Control Orders (DPCO) are issued under the Essential Commodities Act, 1955.
 2. The Patented drugs cannot be brought under the Price control regime for the initial period of 5 years.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c ) Both 1 and 2
(d) Neither 1 nor 2

Answer: c

12. With respect to Drug Pricing regime in India, consider the following statements:
1. The National Pharmaceutical Pricing Authority (NPPA) functions under the Ministry of Health and Family Welfare.
2. The NPPA can fix the ceiling prices on the non-scheduled drugs under certain exceptional circumstances.
3. NPPA has included more than 50% of the Drugs sold in India under the National List of Essential Medicines (NLEM).

Which among the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 only
(c) 2 and 3 only
(d) 1, 2 and 3

Answer: b

13. With respect to Tri-party Repos, consider the following statements:

1. In case of Tri-party Repos, only the G-Secs can be used as collateral
2. Only Banks can participate in Tri-party transactions.
3. The tenor of Tri-party repos can be up to 1 year.
Which among the statements given above is/are correct?
(a) 1 only
(b) 1 and 3 only
(c) 3 only
(d) 2 and 3 only

Answer: c

14. With respect to Debt-to-Equity Ratio, consider the following statements:

1. Higher Debt-to-Equity Ratio of a company denotes higher borrowings in comparison to money raised through
shares.
2. Lower Debt-to-Equity ratio denotes sound financial position of the company
Which among the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: c

15. Which among the following is/are the features associated with an International Currency?
1. Used as Vehicle Currency for International Trade
2. Higher share in International Forex Reserves
3. Used as an anchor for local currency pegging
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
Answer: d
16. Which among the following best describes the concept of “Vehicle Currency”?
(a) Currency in which trade is invoiced and is usually the currency of either the importing country or exporting
country.
(b) Currency in which trade is invoiced and is usually the currency of dominant trade partner.
(c) Currency in which trade is invoiced and is usually the currency chosen by the WTO
(d) Currency in which trade is invoiced and is usually the currency which is different from the domestic currencies of
importing and exporting countries.

Answer: d