OVERSEAS INVESTMENT

Importance for UPSC Prelims:

• Salient Features of Overseas Investment
• Concept of Net International Investment Position (NIIP)
 Practice MCQ N0. 17
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
Practice MCQ No. 19
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
Practice MCQ NO. 18
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
Practice MCQ No. 20
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
 STATUS OF EXTERNAL DEBT
Importance for UPSC Prelims:
External Debt: Components, features and Trends

Prelims 2019
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
 Prelims Pointers on India’s External Debt
Categorisation of Duration of loan- Short-term (less than 1 year) and long-term (more than 1 year)
External Debt Sovereign Debt (Government) and Non-Sovereign Debt (Other than Government, including private sector)
Components of • Loans received by Government in the form of multilateral Debt and Bilateral debt.
Sovereign Debt • FPI Investment in G-Secs
Components of Non- External Commercial Borrowings (ECBs) + Trade Credits + NRI Deposits
Sovereign Debt
Multilateral Debt: Debt from the multilateral institutions such as World Bank, IMF, ADB etc.
Bilateral Debt: Debt from sovereign countries such as Japan, Germany etc.
Major Heads under Trade Credits: Loans and credits extended for imports directly by overseas supplier, bank and financial
External Debt institutions
External Commercial Borrowings: loans from commercial banks, other commercial financial institutions
Non-Resident Deposits in Banks and Financial Institutions
Cumulative External Debt: US$ 620 billion (20% of the GDP). Non-Sovereign Debt higher than Sovereign
Debt
Present status of
Components of Debt: ECBs followed by NRI Deposits
External Debt
Duration of Debt: Long term debt (80%); Short-term debt (20%).
Denomination of Debt: US dollar (53%); remaining in Rupee, Yen, SDR and Euro.
Rupee Denominated Rupee denominated NRI Deposits + FPI Investment in G-Secs + FPI Investment in Corporate Bonds + Masala
External Debt Bonds
Calculated as (Annual Principal Repayments + Interest Payments) divided by Current Account Receipts in
Debt Service Ratio
BoP. Measure of strain on BoP due to servicing of debt service obligations
 Practice MCQ N0. 21 Practice MCQ NO. 22
The Rupee denominated External Debt of India includes which Which among the following is/are included in the Sovereign Debt in
among the following? India?
1. Rupee Denominated NRI Deposits 1. Internal borrowings of Government
2. Masala Bonds 2. Government borrowings from International Institutions and
3. FPI Investment in G-Secs foreign countries
3. FPI Investment in G-Secs
Select the correct answer using the code given below: 4. NRI Deposits
(a) 1 only
(b) 1 and 2 only Select the correct answer using the code given below:
(c) 3 only (a) 1 only
(d) 1, 2 and 3 (b) 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4

Practice MCQ No. 23 Practice MCQ No. 24

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
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.
NATIONAL LIST OF ESSENTIAL MEDICINES
Importance for UPSC Prelims:
Drug Pricing Regime in India
 Practice MCQ No. 25
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.
Practice MCQ No. 26
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? Which of the statements given above is/are correct?
(a) 1 only (a) 1 only
(b) 2 only (b) 2 only
(c ) Both 1 and 2 (c ) Both 1 and 2
(d) Neither 1 nor 2 (d) Neither 1 nor 2

Practice MCQ No. 27

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
 CORPORATE BOND MARKET
Importance for UPSC Mains
Corporate Bond Market: Present Status, Need, Challenges and Strategies

Mains Question for Practice:

1. A Well-developed Corporate Bond Market can cater to the needs of $ 5 trillion economy. Explain the statement. Also,
enumerate the steps taken to deepen the Bond Market in India. (250 Words)

2. The Development of Corporate Bond Market is a sine qua non to reduce pressure on the Government and Banks for
increasing investment in Economy. In this context, discuss various constraints and challenges in deepening Bond market
in India. (250 Words)
 Criteria Shares Bonds
Relationship with • Part of the ownership • Lender to the company (Financial Creditor)
Company • Enjoy voting rights • No Voting rights
Earnings from Dividend paid by company Interest paid by the company
Investment Capital Appreciation (Increase in Share Prices) Capital Appreciation (Increase in Bond Prices)
Risk Involved Relatively More Risky Relatively Less Risky
Preference in case of Lower preference in comparison to Bond Higher preference in comparison to Share
liquidation Holders holders
Liquidity Relatively more liquid Relatively less liquid
(Ease of Converting into
Cash)
Guarantee on No Guarantee No Guarantee
Investment
 Factsheet on India’s Corporate Bond Market
• Outstanding stock of corporate bonds has increased four-fold from Rs 10 lakh crores (2012)
to Rs 40 lakh core (2022).
Present Status of Bond • Annual issuances: Rs 6 lakh crores.
Market • 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%).
• Average size of an outstanding corporate bond instrument is quite lower at around Rs 130
crores.
Committees associated • H.R. Khan Committee
with Bond Market • Percy Mistry Committee
• R.H. Patil Committee
The Development of Corporate Bond Market is a sine qua non to reduce pressure on the Government and Banks for increasing
investment in Economy. In this context, discuss various constraints and challenges in deepening Bond market in India.
The Development of Corporate Bond Market is a sine qua non to reduce pressure on the Government and Banks for increasing
investment in Economy. In this context, discuss various constraints and challenges in deepening Bond market in India.

Suggested Answer Structure

Introduction: Importance of Corporate Bond Market
Body:
 Present Status of Bond Market
 Constraints and Challenges
 Impact of Underdeveloped Bond Market
Conclusion: Strategies to deepen Bond Market
The Development of Corporate Bond Market is a sine qua non to reduce pressure on the Government and Banks for increasing
investment in Economy. In this context, discuss various constraints and challenges in deepening Bond market in India.

Introduction
According to Economic Survey 2018-19, India needs to shift gears from consumption-driven to investment-led economy wherein the private
sector investment must become the key driver. The corporate bond market can meet investment needs of private sector and hence reduce the
burden on Government and Banks.
 Body
However, unlike in advanced economies, the Bond market in India remains comparatively under-developed. Corporate debt to GDP ratio in India
stood at 17% (2017) in comparison to Korea (80%), Malaysia (60%) and China (40%).

Constraints and Challenges:

Narrow Investor Base as retail investors account for only 3 per cent of the outstanding issuances.
Dominance of G-Secs which account for more than half of the total Bonds.
Constraints on Foreign Investors: Limits on the investment for FPIs in the corporate bond.
Higher rated Companies dominate Bond market as they account for 70% of the bonds.
Domination of Private Placement: Over 95% of Bonds are issued through private placements and hence not open for investment by all.
Absence of Longer maturity Bonds which in turn disincentives long term investors such as pension and insurance fund companies.
Absence of well-developed Credit Default Swap Mechanism (CDS) which in turn increases the investment risk.
Taxation Structure: Stamp duties on corporate bonds across various states have not been standardised.

The under-developed Bond market has led to over-reliance on Banks leading to Asset-Liability Mismatch (ALM) and higher NPAs. Similarly, the
higher burden on the Government also leads to higher fiscal deficit.

Conclusion
Hence, going forward, recommendations of R. H. Patil Committee (2005), Percy Mistry Committee (2007), H.R Khan Committee (2016) need to
be implemented at the earliest. Some of these recommendations include centralised database of bonds, Debt Market Index, Credit
enhancement of Bonds etc.
 Practice MCQ No. 28
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.
Practice MCQ No. 29
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? Which among the statements given above is/are correct?
(a) 1 only (a) 1 only
(b) 1 and 3 only (b) 2 only
(c) 3 only (c) Both 1 and 2
(d) 2 and 3 only (d) Neither 1 nor 2
INTERNATIONAL TRADE SETTLEMENT IN RUPEES

Importance for UPSC Exam

• Trade Invoicing in Rupees: Need, Mechanism
• Concept of Internationalization of Rupee
• Vehicle Currency
 Percentage share of Currencies in India’s Trade Invoicing (2014)
Other foreign currencies
5%
Euro
8%

In 1992, 20% of India’s trade was

invoiced in Rupees. In 2014, it dropped
to almost 0%.
Dollar
87%

Dollar Euro Other foreign currencies

 Characteristics of International Currency
Functions of Money Governments Private Actors
Store of value Part of Forex Reserves Freedom to invest in capital markets
Medium of Exchange Vehicle Currency Vehicle Currency

Unit of account Anchor for local currency pegging Denominating Trade and Financial
Transactions

Present Status: International Currency

Functions of Money Governments Private Actors
Store of value Part of Forex Reserves Freedom to invest in capital markets
• 93% of Forex Reserves in Dollars, • Full Capital Account convertibility in
Euro, Pound and Yen developed economies
• Only 0.01% of International Forex • Partial Capital Account Convertibility in
Reserves in Rupees. India
Medium of Exchange Vehicle Currency Vehicle Currency
• 95% of Trade invoiced in “Big 4” • 95% of Trade invoiced in “Big 4”
Currencies Currencies
• Almost 0% Trade invoiced in Rupees • Almost 0% Trade invoiced in Rupees
Unit of account Anchor for local currency pegging Denominating Trade and Financial
Transactions
 Practice MCQ No. 30 Practice MCQ No. 31
Which among the following is/are the features associated with an Which among the following best describes the concept of “Vehicle
International Currency? Currency”?
1. Used as Vehicle Currency for International Trade (a) Currency in which trade is invoiced and is usually the currency
2. Higher share in International Forex Reserves of either the importing country or exporting country.
3. Used as an anchor for local currency pegging (b) Currency in which trade is invoiced and is usually the currency
of dominant trade partner.
Select the correct answer using the code given below: (c) Currency in which trade is invoiced and is usually the currency
(a) 1 only chosen by the WTO
(b) 1 and 2 only (d) Currency in which trade is invoiced and is usually the currency
(c) 1 and 3 only which is different from the domestic currencies of importing
(d) 1, 2 and 3 and exporting countries.