PT-365

Economy
Capital Formation in India – The Role of States’

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• State governments have initiated various measures to augment
their own revenue sources.

• Kerala and Rajasthan adopted an amnesty scheme in

2020-21 to provide relief to taxpayers as well as to improve their
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duties, motor
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vehicle tax and excise duties, has f o r prbeen
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extended to 2022-23.
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Maharashtra has also introduced the scheme in 2022-23.
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• Punjab has proposed to set up a Tax Intelligence Unit to

improve tax compliance under GST.
• Chhattisgarh is planning to constitute a "Karai Vardhan
Cell“ for the augmentation of revenue by analysis/ review of
taxation acts/rules and tax rates on the basis of data available in
the revenue collection departments.

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• Other revenue-generating measures include Assam’s gm
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Haryana’s
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one-time scheme for settlement o r praof old VAT dues, and
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Assam and Kerala’s Green taxOn to discourage old vehicles.

• Haryana has taken measures for phased monetization of

assets.
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Municipal Finances
• Source of Local Government Revenues-

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• Pooled financing essentially involves creation of a State Pooled
Finance Entity (SPFE), which can be registered either as a trust
or a SPV.

• The SPFE issues bonds and debt servicing is financed through

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• Creating a SPFE lowers the cost
On ly f of bond issuance for individual
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local bodies and enhances the creditworthiness of the bond

issued, as the risk gets hedged over all participating municipal
bodies
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• Public Debt denotes liabilities payable by the Central
Government, which are contracted against the Consolidated
Fund of India, as provided under Article 292 of the
Constitution of India. It has been further classified under two
heads, i.e., Internal Debt and External Debt.
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• Internal debt of the Central Government n
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consists of marketable
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securities and non-marketable securities
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• Marketable securities include

• fixed tenor and fixed/floating rate dated securities,

• Short-term borrowings through Treasury Bills and Cash Management Bills.

• The non-marketable securities in internal debt are

• the special Central Government securities issued to National Small Savings

Fund (NSSF),

• securities issued to international financial institutions-

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• These securities are issued to IMF, IBRD, IDA, ADB,African gm Development Fund & Bank
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and International Fund for Agricultural Development. i n gh
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• These special securities are issued primarily
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f o towards India‟s subscriptions/contributions
to these institutions and certain transactions involving use of Special Drawing Rights
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(SDRs).

• These liabilities are non-interest bearing in nature

• 14-day Intermediate Treasury Bills

• special securities issued against securitisation of balances under
postal insurance and annuity funds (POLIF and RPOLIF)-Government
issued Special Securities to Directorate of Postal Life Insurance with a view
to convert part of the frozen corpus of Post Office Life Insurance Fund
(POLIF) and Rural Post Life Insurance Fund (RPOLIF) into market-linked
dated securities.

• compensation & other bonds (including outstanding . co

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Sovereign Gold Bond Scheme and Gold Monetisation
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• category includes various types of special purpose ha
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Bonds, bonds issued under Sovereign Gold for
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Central Government, etc. On

• These bonds carry fixed rates of interest and are generally launched for retail
subscription

• special securities issued to public sector banks/ EXIM Bank/IDBI Bank/IIFCL

and
• Public Account Liabilities-
• All public money received by or on behalf of the Government of India,
other than those for credit to the Consolidated Fund of India, are
credited to the Public Account of India.
• The receipts into the Public Account and disbursements out of it are
generally not subjected to vote by the Parliament.
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• In the case of Public Account Liabilities, the Government gm
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Banker or Trustee and refunds the money i n gh
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• It includes-
• NSSF- The gap between total liabilities and investments of NSSF is the
net liability of the Central Government towards NSSF in public account.
The investment of NSSF includes Special Securities issued to NSSF by
the Central Government, State Governments and investments of NSSF
in public agencies.
• State Provident Funds- includes accumulated Provident Fund
contributions of Central Government employees.

• Other Accounts- include items such as special deposits of

non-Government Provident Funds with the Central Government,
securities issued in lieu of subsidies, other deposits o m
and
accounts, insurance and pension funds, 9postal @
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• Reserve Funds and Deposits

• Advances- Government occasionally makes advances to public

and quasi-public bodies and to individuals, under special laws
or for special reasons. These majorly fall in the heads of civil,
defense, railway, postal and telecom.
• Extra budgetary resources liabilities are defined as those
financial liabilities of the Govt. that are raised by public sector
undertakings but which are fully serviced, in respect of
principal and interest, by the Govt. of India through the
Union Budget.

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• General Government Debt represents the indebtedness of
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the Government sector (Central, State tsin
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• This is arrived at by consolidating the liabilities of the Central
Government, State Governments and UTs with legislature and
netting out inter-governmental transactions viz.,
• (i) investment in T-Bills (14-day ITBs and Auction Treasury Bills
(91/182/364-day T-Bills) by States/UTs with legislature which
represents lending by States/UTs to the Centre; and
• (ii) Centre‟s loans to States and UTs.
• State Government Debt
• The Constitution of India under Article 293(1) empowers State
Governments to borrow only from domestic sources.
• Further, Article 293(3) of the Constitution states that, “A State may not
without the consent of the Government of India raise any loan if there is
still outstanding any part of a loan which has been made to the State by
the Government of India or by its predecessor Government, or in
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• The financing pattern of fiscal deficit of State Governments has
exhibited a tilt towards market borrowings in the recent period.
• Pursuant to the recommendations of the Fourteenth Finance
Commission, all States/UTs, barring Madhya Pradesh, Kerala,
Arunachal Pradesh and Delhi, have opted to exclude themselves
from borrowings from the National Small Savings Fund with effect from
April 1, 2016.
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• FPI investments in G-securities-

• With an objective of having a more predictable regime for investment

by the foreign portfolio investors (FPIs), the Medium-Term Framework
(MTF) for investment by FPIs in Central Government Securities and
State Government Securities (SDLs) was introduced in October 2015.
• Under this framework, investment limits for FPIs o m
were specified as a
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percentage of outstanding stock of G-Secs and @
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• A separate scheme called the O‘Voluntary
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Retention Route‟
(VRR) was introduced on March 1, 2019 to encourage Foreign
Portfolio Investors (FPIs) to undertake long-term investments
in Indian debt markets.
• Under this Route, FPIs have been given greater operational flexibility
in terms of instrument choices besides exemptions from certain
regulatory requirements.
• Fully Accessible Route-

• In the Union Budget 2020-21, it was announced that certain specified

categories of Central Government securities would be opened fully
for non-resident investors without any restrictions, apart from being
available to domestic investors as well.
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• Accordingly, a separate channel called Fully g h 98 Accessible Route (FAR)
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was introduced by the Reserve Bankrasof ha India in consultation with the
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Government on March 30, 2020 Oton ly foenable
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non-residents to invest in
specified Government of India dated securities.

• Non-resident investors (FPIs, Non-Resident Indians (NRIs),

Overseas Citizens of India (OCIs) and other entities) can invest in
specified Government securities without being subject to any
investment ceilings.
External Debt- Status Report-2021-2022
• India’s external debt, at US$ 620.7 billion as at end-March
2022, grew by 8.2 per cent over US$ 573.7 billon as at
end-March 2021.
• External debt as a ratio to GDP fell marginally gm
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to 19.9 per
cent as at end-March 2022 from 21.2 i n g h 9 8per
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• Foreign currency reserves as a ratio to external debt stood slightly
lower at 97.8 per cent as at end-March 2022 than 100.6 per cent a year ago
•.
• Commercial borrowings (CBs), NRIs deposits, short-term trade credit and multilateral
loans together accounted for 90 per cent of the total external debt. While NRI deposits
marginally contracted during end-March 2021 and end-March 2022, CBs, short-term trade
credit and multilateral loans, on the other hand, expanded during the same period. The rise
in CBs, short-term trade credit and multilateral loans together was significantly larger than
the contraction in NRI deposits.
• As at end-March 2022, sovereign external debt (SED) amounted to US$ 130.7 billion,
increasing by 17.1 per cent over the level a year ago, reflecting a il . cothe additional allocation of
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SDRs by the IMF during 2021-22. SDRs rose to US$ 22.9 @billion gm from US$ 5.5 billion as
at end-March 2021. FPI holding of G-Sec, on the other hhand, 0 9 slid to US$ 19.5 billion from
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US$ 20.4 billion a year ago. nts
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• Non-sovereign external debt, estimated at US$pr490.0 h a billion as at end-March 2022, posted
as
a growth of 6.1 per cent over the level a year lago.
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o r CBs, NRI deposits, and short-term trade
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credit accounted for about 95 per cent of non-sovereign debt., The short-term trade credit
rose substantially by 20.7 per cent to US$ 117.4 billion as at end-March 2022 on the back
of a surge in imports during 2021-22.
• The long-term debt estimated at US$ 499.1 billion, constituted
the largest chunk of 80.4 per cent, while the short-term debt, at
US$ 121.7 billion, accounted for 19.6 per cent of the
total.
• The short-term trade credit was predominantly in the form of
trade credit (96 per cent) financing imports.mail.com
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• The US dollar continues to be the leading currency of
denomination accounting for 53.2 per cent of the total as at-end
March 2022

• Deposits in Non- Resident (External) Rupee Accounts

(NR(E)RA), NRO accounts and FPI investments il . co
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and corporate bonds are among the components 0 9@
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of India’s
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external debt, denominated in Indian an
tsi n g h9 rupees. Indian rupee is

the second leading currency of denomination

f o r pra
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with a lower share
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of 31.2 per cent of the total as Oat end-March 2022 than 33.3 per
cent a year ago

• Following the US dollar and the Indian rupee are the SDRs (6.6
per cent), the Japanese Yen (5.4 per cent) and Euro (2.9 per
cent)
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• Sovereign debt includes

• (i) external debt outstanding on account of loans received by

Government of India under the ‘external assistance’ programme, and
civilian component of Rupee Debt;
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• (ii) other Government debt comprising borrowings i n g h 98
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from IMF, defence
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debt component of Rupee debt as well pra
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debt and FII investment in Government
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• Non- sovereign includes the remaining components of external

debt.
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• OGD rose to US$ 44.1 billion as at end-March 2022 from US$
27.1 billion a year ago.
• The SDRs, accounting for a share of 51.9 per cent, emerged as
the leading component of OGDas at end-March 2022, following
the additional allocation of SDRs by the IMF during 2021- 22.
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• FPI investment in G-Sec was the second@largest gm
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OGD with a share of 44.3 per cent. tsingh 9 80
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• Glossary-

• Trade credits/Export credits refer to loans and credits

extended for imports directly by overseas supplier, bank and
financial institution to sovereign and non-sovereign o m
entities.
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• Depending on the source of finance, such 8 0
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suppliers’ credit or buyers’ credit. ashantsi n

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• Suppliers’ Credit: Such credit is extended by the overseas supplier of

goods in the form of deferred payments.

• Buyers’ Credit: Such credit is provided by a bank or financial

institution and is generally governed by OECD consensus terms and
carries insurance from export credit agency of the concerned country
• Non-Resident Indian (NRI) deposits are of three types:
• Non Resident (External) Rupee Account {NR(E)RA}-
• Deposits were introduced in 1970. Any NRI can open an NRE account with funds
remitted to India through a bank abroad.
• A NRE account maintained in Indian rupee may be opened as current, savings or term
deposit.
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• The amount held in these deposits together with the interest
a il . co accrued can be repatriated.
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• Foreign Currency (Non Resident) (Banks) Deposits {FCNR (B)}
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• were introduced with effect from May 15, 1993.

• These are term deposits maintained only in Pound Sterling, U.S. dollar, Japanese Yen,
Euro, Canadian dollar and Australian dollar.
• From July 26, 2005, banks have been allowed to accept FCNR (B) deposits up to
maximum maturity period of five years against the earlier maximum limit of three years.
• Non-Resident Ordinary Rupee (NRO) Accounts –

• Any person resident outside India may open and maintain NRO account with an
Authorised Dealer or in authorised bank for the purpose of putting through
bonafide transactions denominated in Indian Rupees.
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• NRO Accounts may be opened/maintained in the 9@ 0 form of current, saving,
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recurring or fixed deposits. NRI/Persons ofanIndian tsin Origin (PIO) may remit an
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amount not exceeding USD 1 million per o r pra financial year out of the balances held in
NRO Accounts. ly f
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• Official Debt- External debt from multilateral and bilateral
sources of finance, export credit component of bilateral credit,
export credit for defence purposes and rupee debt, etc. is called
as official debt.

• Private Debt- External debt from private creditor . c o m denotes

sources of loans raised under ECBs, NRI9@gdeposits, ma
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export
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credits (other than those included under tsi n g h9 official creditors), and
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• Debt Service Ratio

• Debt service ratio is measured by the proportion of total debt
service payments (i.e. principal repayment plus interest
payment) to current receipts (minus official transfers) of Balance
of Payments (BoP)